Financial Transparency Coalition

This post is the second in a three-part series on policy solutions to confront trade mispricing from Mexico and the War on Drugs. It is adapted, with permission, from this feature article originally published by Policy Matters Journal. You can read the first post here.

In the United States, the War on Drugs has focused mainly on stemming the demand in the North and stifling the supply from the South. This effort has largely failed because the demand for illegal drugs is so large that narcotics dealers are willing to take significant risks to enter the North American drug market. A more effective method for fighting the War on Drugs would make it difficult for the cartels to hide or use the monetary proceeds from selling narcotics, thus making it unprofitable for them to do so.

In response to its challenges from trans-national money laundering, Mexico’s legislature passed a new anti-money laundering law in October of 2012, titled “The Federal Law for the Prevention and Identification of Operations with Resources from Illicit Proceeds.” Specifically, the law:

• Creates a new financial investigation unit that will answer to the Mexican Attorney General and will assist with investigations;
• Bans the use of cash or precious metals, jewels, and other items as payment for certain transactions such as real estate transactions or the purchase of cars, boats, planes, and other luxury goods;
• Provides a list of “vulnerable activities,” which include gambling, the issuance of loans, various services related to the real estate sector, and trading of jewelry, precious metals, watches, precious stones, and artwork, among other activities. Each transaction within these vulnerable activities, depending on its value, must be reported to the Ministry of Finance; and
• Requires that any entity engaging in these vulnerable activities carry a number of extra responsibilities, including stricter “Know-Your-Customer” rules and keeping all records on such clients for at least five years, on an ongoing basis.

This response and others like it fall far short of the necessary steps to control the problem. There are a number of reasons for this, but they boil down to one basic point: given the size of demand for drugs in the United States and the profitability of that trade, Mexico does not itself have sufficient capacity to prevent criminal organizations from conducting and profiting from their smuggling activities.

Mexico and the United States could make it more difficult for criminals to enjoy the proceeds of illegal activities. Yet these nations have not taken these necessary steps in large part because anti-money laundering policies do not affect only drug dealers and smugglers. They affect a wide range of individuals, some of whom are wealthy and engage in completely legitimate business activities. These individuals do not want to see the enactment of more powerful anti-IFF laws any more than the drug smugglers do, and have effective means of lobbying legislators.

Other observers have noted another possible reason that the Mexican government has not taken a more assertive stance against the drug cartels:

From Mexico’s point of view, interrupting the flow of drugs to the United States is not clearly in the national interest or in that of the economic elite… Certainly, [drug] money could corrupt the Mexican state, but it also behaves as money does. It is accumulated and invested, where it generates wealth and jobs.

In other words, from a purely economic perspective, some policymakers may see narcotics trafficking as a net-benefit that transfers wealth from the United States to Mexico. Any benefit to the economy, even if the source is masked behind a veil of legitimate business transactions, provides politicians with a short-term win they can bring to their voters. By contrast, strong and effective anti-IFF policies may not provide the kind of instant impact that politicians often want in order to demonstrate their leadership to voters.

We should not overlook this impediment. If narcotics were not so profitable for the drug cartels, they would not have the resources to wage war against each other, nor would they bother engaging in the risk of smuggling the drugs in the first place. While anti-IFF policies may not often garner attention from the press or voters, they can make a substantial impact on the War on Drugs, which would likely resonate with voters on both sides of the border.

Will Gray is a graduate student at the George Mason University’s School of Public Policy.

This article was edited by Ann Hollingshead and Jonathan Peterson.