Mexico: As Violence Spreads, Money Flees

January 6th, 2011

Forthcoming Global Financial Integrity Report Finds Mexican Economy Lost Over US$460 billion between 2000 and 2008

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Mexico is struggling with some serious economic and political threats to stability. Drug cartels, corruption, and lower confidence in Mexican markets are eating away at prospects for economic growth. As Mexico teeters closer to a failed state, threats to U.S. national security rise commensurately.

Mexican efforts at improving governance are falling short, and billions of dollars in illegal money are flying out of the country each year. In August of 2010, Mexican authorities fired almost 10 percent of the federal police force trying to halt the bribery and widespread corruption that has been nurturing the country’s drug trade and violence. According to a government report, 22,700 people have been killed in drug violence since President Calderon launched an anti-drug-cartel initiative in December 2006. On top of that Mexico’s wealthy tends to evade taxes that are as high as 70% for professionals and small businesses, and 40% for larger businesses. The cross-border transfer of funds is a primary means of evading taxes depriving the government of tax revenues crucial for providing public goods like domestic security. Illicit outflows also drain capital needed for various investment projects, poverty alleviation, and economic growth.

And, if that’s not enough for the government to deal with, the people of Mexico recently decided to take the law into their own hands. Last September, in the Northern Mexican city of Ascension, two teenage attackers were lynched by an uprising of desperate and infuriated locals after the attackers attempted to abduct the cashier of a restaurant.  In other similar events bodies have been left along highways or hanging from bridges with handwritten notes exposing the dead as “extortionists” and/or “kidnappers.” A citizen group in Ascension has formed to provide continued communal security against kidnappings and drug-related violence. The group’s elected leader, Fernando Saenz, says “It’s time for the people to take over, because the government isn’t doing its job. We have to take care of ourselves.”

As Mexican stability is deteriorating, billions of dollars are being sent illegally out of the economy undermining genuine efforts at reform and growth. Findings from a forthcoming Global Financial Integrity update on Illicit Financial Flows from Developing Countries show that between 2000 and 2008 cumulative illicit flows from Mexico were over US$462 billion. That is over $50 billion per annum. The illicit flow model is composed of two parts – capital leaking from the balance of payments (which captures illicit transfers of the proceeds of bribery, theft, kickbacks, and tax evasion) and capital transferred through trade mispricing. The study finds that much of the illicit flows out of Mexico from 2000-2008 were in the form of trade mispricing with huge outflows in import-overpricing offsetting illicit inflows in export-underpricing. Cumulative illicit outflows due to trade mispricing are estimated at US$385 billion. On average over the nine years, illicit financial flows were 24.5% of exports of goods (f.o.b.). Mexico ranks third in the world for largest average illicit outflows.

The model is not able to capture illegal, cash-only transactions and smuggling related activates, so the negative economic impact of illicit flows from the country is almost certainly understated. Illicit outflow peaked in 2007 at US$ 89.5 billion before the initial impact of the financial crisis began to take hold. The financial crisis has restricted capital flows as well as trade volumes, thereby limiting opportunities to misprice trade as well as reducing the pool of illegal cash to be generated and transferred abroad. The IMF’s Article IV Public Information Notice (PIN) on Mexico for 2010 expects economic activity to accelerate in the near term with a projected growth of 4 percent for the country. We can be sure that unless governance is improved and the people of Mexico regain political and judicial control of their state, this economic growth will largely fuel more violence and a larger volume of illicit capital flight.

As I stated in an earlier piece on the assassination of Tamaulipas gubernatorial candidate, Rodolfo Torre, the inverse relationship between corruption and violence in a country and that country’s ability to climb out of poverty and disorder is demonstrated consistently. As corruption goes up, sustainable growth and security of the state goes down. The monetary incentives to be corrupt are strong. Curbing illicit financial flows through transparency and multilateral international policies is a tangible affront to such violence and corruption.

In order to stop the flow of illegal money out of Mexico and also the flow of illegal drugs and firearms across the U.S.-Mexico border, the Mexican government needs help. Sharing information on cross border financial activity is necessary to address the issue. Mexican Finance Secretary Agustin Carstens, aware of this issue, sent U.S. Treasury Secretary Tim Geithner a letter stating that “[t]he exchange of information on interest paid by banks will certainly provide us with a powerful tool to detect, prevent and control tax evasion, money laundering, terrorist financing, drug trafficking and organized crime.”

It is in America’s best interest to provide and foster financial transparency and information exchange. Summarizing comments made by Gerónimo Gutiérrez (former Mexican deputy secretary in the ministry in charge of domestic security), United States ambassador to Mexico, Carlos Pascual, wrote in a recently released cable “He expressed a real concern with ‘losing’ certain regions. It is damaging Mexico’s international reputation, hurting foreign investment, and leading to a sense of government impotence, Gutiérrez said.”

If Mexico falls apart in pieces or as a whole, security issues will spill over into the United States and drown out the logical preventive measures we could have been taking. Helping catch both U.S. and Mexican criminals/drug lords, which are hiding their money in U.S. banks and offshore secrecy jurisdictions, is one of the best things the U.S. can do to strengthen security measures… it will certainly do a lot more than U.S. plans to build a fence/wall between the two states. It will also help Mexico climb out of economic and political instability.

Editorial Note: On January 18, 2011, Global Financial Integrity will release its new report, Illicit Financial Flows from Developing Countries: 2000-2009, measuring illicit financial flows out of 160 different developing countries. Sign up here to receive notices when new GFI reports are released.

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Written by Karly Curcio

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