Syndicates of Terror

The recent designation of several Latin American drug cartels as foreign terrorist organizations (FTOs) and Specially Designated Global Terrorists (SDGTs) by the United States brings new compliance challenges for financial institutions and other companies that transact with business partners and clients in the region. The designations mean that foreign financial institutions face the risk of secondary sanctions if they’re found to conduct significant transactions with designated terrorists, and U.S. entities can face criminal prosecution for knowingly providing “material support” to an FTO. Economic sectors previously considered lower risk for illicit activities may expose financial institutions and other firms to direct or indirect transactions with newly designated terrorist groups.

Licit Economies, Illicit Finance

Cartels such as Sinaloa and the Cartel Jalisco New Generation (CJNG)—which were designated under the terrorism authorities—control certain geographic areas and ports in Mexico and are involved in multiple markets in the region. CJNG has diversified its activities into various economic sectors, including real estate, grocery stores, and gas stations. The group also is involved in the synthetic drug trade, importing precursor chemicals, producing the synthetic drugs, and disguising them as legitimate pharmaceuticals. Other cartels are involved in sectors such as internet services and agriculture.

• The U.S. Treasury in September 2024 designated senior CJNG member Ivan Cazarin Molina (a.k.a. “El Tanque”—meaning the storage tank) for, among other things, managing a network of ostensibly legitimate retail gas stations where he sells stolen fuel using family members and associates as front persons. El Tanque also sells stolen fuel to third parties in Mexico, who in turn sell it to the U.S. market, often in Texas.
• Avocado exports from Mexico to the United States are worth nearly $3 billion, according to press reports. Cartels regularly extort avocado growers in protection schemes, including—most notably—in the Michoacán region, which is dominated by CJNG and Cárteles Unidos, another major cartel designated under terrorism authorities.
• OFAC in 2007 designated Nueva Industria de Ganaderos de Culiacan S.A. de C.v. as part of the financial network of drug kingpin and Sinaloa cartel leader Ismael Zambada Garcia (aka El Mayo). The Sinaloa, Mexico-based cattle and dairy company was identified as part of Zambada Garcia’s network that helps him hide and launder drug proceeds.

Stakeholders in restaurant and food import sectors are at risk of transacting with FTO-linked entities should they unwittingly import avocados or other agricultural products from cartel-linked growers. Four companies supply avocados from Mexico to major supermarket chains in the United States, such as Kroger, Costco, Whole Foods, and others, according to nonprofit organization Climate Rights International. This trade exposes U.S. financial institutions that provide financing for these transactions, as well as grocery stores and other entities in the supply chain to potential liabilities and reputational risk.

Cartels in Honduras, Venezuela, El Salvador, and other Latin American countries are also involved in economic sectors, such as mining and road construction, judging by OFAC’s 2013 designation of businesses linked to the Los Cachiros drug cartel.

Mitigating Jurisdictional and Sectoral Risk

The designation of these cartels as FTOs and SDGTs presents additional compliance challenges for financial institutions and other companies transacting in Latin America. Transacting with Mexican and other Latin American businesses in the agricultural, fuels, minerals, and other sectors that generally may appear to be low risk for fraud, money laundering, and other illicit activities, can now potentially expose financial institutions to criminal liability for providing “material support” to terrorist organizations, present secondary sanctions risks, and even subject them to lawsuits by victims of terrorist acts. Licit businesses in Mexico are particularly vulnerable to cartel penetration and could expose financial institutions to regulatory risk, as well as threaten foreign financial institutions’ access to the U.S. dollar.

Monitoring developments in Mexico that could provide insights into these cartels’ activities and involvement in licit sectors of the economy is key to mitigating the risk of penalties or reputational damage that stem from transacting with a designated FTO.

Reviewing risk assessments and adjusting risk ratings for jurisdictions and economic sectors known for cartel activities can also mitigate exposure to designated FTOs.

Additional due diligence on customers or business partners in countries with known cartel presence—especially newly designated FTOs—and knowing and understanding supply chains and customers can also help diminish the risk of transacting—even indirectly—with terrorist organizations.

List screening alone will not be sufficient to ensure that organizations with exposure to FTOs and geographies controlled by them are complying with U.S. sanctions. Adverse media reports detailing cartel involvement in Latin American economies to assess jurisdictional and economic sector risk can help update the risk of exposure. Further research into ownership and control structures of businesses in the agricultural, fuel, and other risky sectors in Latin America can also help mitigate vulnerabilities. The use of internal block or monitoring lists based on location and economic sector may help avoid transactions with cartel-linked businesses.