Top bank executives in Mexico were warned by a US Treasury official about aiding drug cartels. Photo / Getty Images
Top bank executives gathered at a luxury resort off Mexico’s Pacific coast encountered an unexpected guest at an annual convention in May.
A high-level official with the United States Treasury Department had flown down to the soiree – where rooms ran as much as US$900 ($1480) a night – to deliver a firm warning.
President Donald Trump’s Administration wanted it known that it was no longer business as usual for banks suspected of aiding the country’s drug cartels, which Washington had recently designated as terrorists.
The official pulled representatives from Mexican lenders into a private meeting and told them that the US wouldn’t hesitate to cut off access to its financial system for any Mexican banks found laundering money for cartels, according to people who asked not to be identified discussing private conversations.
The message left banks across Mexico wondering if they could be next if they weren’t meticulous about rooting out cartel money.
Investigations now rocking Mexico’s banking system show the power of the Trump Administration’s aggressive use of a new enforcement method approved in last year’s Fend Off Fentanyl Act, which US officials knew would likely deliver a death blow.
It’s designed to cut off suspect banks from the US, effectively leaving them inoperable, without the need to hold a hearing, submit evidence to a judge or offer any official avenue of appeal.
Trump Administration officials say it’s a necessary step to confront the cartels whose fentanyl shipments have fuelled a US addiction epidemic that’s caused hundreds of thousands of deaths and ruined countless lives.
But it’s also part of the President’s unconventional arsenal of tools he’s used to bend perceived enemies to his will, ranging from civil-rights investigations designed to punish elite US universities and tariff threats against countries whose tax systems he doesn’t like to cajoling law firms into offering pro bono services for conservatives.
US officials had tipped off their Mexican counterparts about plans to take action against three financial firms, and the Latin American country began working with the US on the investigation by April, running its own audits of the companies.
By June, President Claudia Sheinbaum was made aware of the situation, and she asked the US to delay its actions to allow more time for Mexico to prepare, according to people familiar with what happened.
US officials were confident they could act without disrupting the Mexican economy.
Instead of a co-ordinated announcement from both countries, the Treasury last week unilaterally trumpeted actions against two banks and a brokerage – CIBanco SA, Intercam Banco SA and Vector Casa de Bolsa SA. All three of the companies have denied any wrongdoing, and Sheinbaum has said the US didn’t provide enough evidence to take such drastic action.
Now, those firms are on life support, with operations taken over by the Government in a bid to stem clients’ rush for the exits. They are likely to be split up and sold for parts.
Washington sent a message, and all of Mexico has heard it.
The US made it clear, “If you don’t listen to me, look what can happen, because this is just a little taste”, said Mauricio Basila, a lawyer and former official at Mexico’s banking regulator. “You could be wiped off the map.”
The actions by the Treasury Department’s Financial Crimes Enforcement Network mark the first deployment of the bank-busting legislation from the Fend Off Fentanyl Act.
FinCEN labelled the financial companies as “of primary money laundering concern”, a designation that lets it block all transfers between US financial institutions and the designated Mexican entities.
“It’s seen as the nuclear option, because it’s quite powerful,” said Kevin Carr, a financial policy expert and former US Treasury official and diplomat based in Mexico. “It’s a complete cessation of business. It’s a death sentence.”
Some former investigators say the US action looks extreme relative to the evidence made public so far.
“This a sledgehammer tool to use,” said Kim Donovan, who was a top FinCEN official during the first Trump Administration and the Biden Administration and is now at the Atlantic Council. “Based on what was publicly made available in the orders – I’m used to seeing more robust evidence.”
The US move risks inflaming tensions with Mexico and Sheinbaum, who had made efforts to demonstrate her willingness to work with Trump on his priorities.
This week, Mexican lawmakers approved a bill that was already in the works designed to clamp down on money laundering and the Senate approved several government-backed bills to fight crime by expanding investigation and intelligence capacities.
The Mexican President has also co-operated with US deportation efforts and used the military to discourage migrants from trying to enter the US.
In the case of the financial firms, authorities from Mexico’s bank regulator worked hand-in-hand with US counterparts to audit the same intelligence and found only administrative violations, not proof of money laundering, Sheinbaum said.
The country’s banking regulator imposed penalties on the companies the same day of the US announcement, according to people familiar with the decision. The Finance Ministry has said it assessed 134 million pesos (US$7.1m) in fines, but details won’t be public until they’re published in a database later this month.
US Secretary of State Marco Rubio spoke with his Mexican counterpart, Juan Ramon de la Fuente, yesterday to discuss transnational crime among other topics.
America’s relationship with Mexico remains “excellent”, said Tammy Bruce, the spokeswoman of the State Department. The press office for Mexico’s Finance Ministry didn’t return a request for comment. A presidential spokesman declined to comment.
The aggressive actions by the Trump Administration are spurring concern among other Mexican banks, according to Ilan Katz, a Mexico City-based criminal defence lawyer who specialises in financial crimes.
“The world’s largest criminal organisations operate in Mexico – it’s impossible to imagine that other banks aren’t affected by drug money,” Katz said in an interview. “It’s like adding a drop of poison to a pool. We don’t know who will swallow the contaminated water.”
In their announcement, US officials noted the three banks were small and the actions taken against them wouldn’t impact the wider banking system, an idea echoed by Mexican officials.
But across trading desks and executive suites in Mexico, the action unleashed chaos, the people said. While the US limited how American firms could interact with the three companies, Mexico’s entire financial community also cut them off en masse, the people said. Banks and brokerages rushed to reduce their exposure.
The three firms suddenly found themselves unable to access funds needed to cover obligations, their international and local transfers were disrupted and depositors rushed to withdraw funds, according to a letter sent to banks by the country’s banking regulator, seen by Bloomberg News. The regulator said the response was an over-reaction – there was no prohibition for local dealings.
Mexico’s banking lobby issued a similar statement, reminding members that there is no ban on local dealings with the firms.
But the fallout continues, ranging from Mexican students studying in the US stranded without credit cards to depositors wondering if their money is safe.
The biggest headache for Mexico’s financial system as a whole stems from CIBanco’s role as the trustee for most of the country’s financial issuances such as private equity certificates and real estate investment trusts.
Billions of dollars of local securities are caught up in the mess. The entire business may need to be sold to another bank, or every trust would have to be re-established with a new trustee – a cumbersome process. The deadline is 21 days after the June 30 publication of FinCEN’s order in the US Federal Register.
– With assistance from Alex Vasquez and Maya Averbuch.
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