The Banco de Méx­ico deals in dol­lars to foil the car­tels

The cen­tral bank is set­ting up its own sys­tem for trans­fer­ring cash A start—but not “a sil­ver bul­let in the heart of the drug car­tels”

Bloomberg Businessweek (Asia) - - CONTENTS - −Ben Bain and Alan Katz

In Tu­lum , Mex­ico, you can pay for just about ev­ery­thing with dol­lars. That makes it easy for Amer­i­cans flock­ing to white sand beaches to es­cape the win­ter cold, but it can also be a headache for lo­cal mer­chants in this Caribbean strip about an hour and a half south of Cancún.

At Ziggy Beach Tu­lum, a bou­tique ho­tel com­plex that hosts wed­dings, about 80 per­cent of rev­enue comes in dol­lars, some of which is used to pay, in turn, lo­cal ven­dors from DJs to florists. To pay in dol­lars, the ho­tel’s bank may trans­fer money to a ven­dor’s bank. “Some­times it’s a bit com­pli­cated,” says Roberto Ol­guin, the head of sales and spe­cial events at Ziggy. “It seems to me like it’s as if you were mak­ing an in­ter­na­tional trans­fer, to the de­cline in world­wide oil prices. (Mex­ico is a ma­jor ex­porter.) That’s also led to sharp pro­duc­tion cuts in the nearby Ea­gle Ford shale basin, one of the fields be­hind the surge in U.S. oil out­put in the past half-decade. Guerra’s fam­ily is im­pacted by that, too: Her hus­band re­cently lost his job leas­ing drilling equip­ment for Weather­ford In­ter­na­tional. “The news hit like a bomb,” she says.

Most of the 115 mil­lion peo­ple who legally cross the bor­der into Texas from Mex­ico ev­ery year are on shop­ping ex­pe­di­tions. They buy ev­ery­thing from jeans to smart­phones to toys to toi­let pa­per. Now there’s a lot less in­cen­tive to make the trip. A yard of Guerra’s pop­u­lar turquoise-col­ored crepe satin, but in­side the same coun­try.”

Small trans­ac­tions are com­plex enough. Sev­eral for­eign banks, un­der pres­sure to pre­vent money laun­der­ing, have re­duced their ties with some Mex­i­can coun­ter­parts in re­cent years. Now the coun­try’s cen­tral bank, Banco de Méx­ico, is set­ting up a dol­lar trans­fer sys­tem, says Banco de Méx­ico spokesman Ri­cardo Me­d­ina. The idea is to sim­plify com­pli­ance for U.S. banks.

It’s one re­sponse to the way even rou­tine trans­ac­tions have been af­fected by the car­tel prob­lem and the added scru­tiny that’s come from U.S. au­thor­i­ties. Banco de Méx­ico’s new elec­tronic trans­fer net­work will let busi­nesses send dol­lars through a clear­ing­house over­seen by the cen­tral bank, via a U.S.-based bank, says an of­fi­cial fa­mil­iar with the pro­gram, which is set to be in­tro­duced in April. In turn, the cen­tral bank will de­mand that banks us­ing the sys­tem do more to vet cus­tomers.ust

The il­licit cit drug­dru trade in the U.S. gen­er­ates $64 bil­lionon a ye year, ac­cord­ing to an es­ti­mate by the U.S.. De­part Depart­ment of the Trea­sury. But il­licit drug rev­enue pales in com­par­i­son with the priced at $8.50, cost Mex­i­cans 127 pe­sos last year; it’s 152 pe­sos to­day.

On Con­vent Street, a short walk from the Gate­way to the Amer­i­cas In­ter­na­tional Bridge, Kush Sam­tani is strug­gling to keep his 27-year-old elec­tron­ics shop open. Many store­fronts along Con­vent are boarded up or braced with metal grids over their win­dows, and land­lords have started leas­ing space to cur­rency-ex­change kiosks hawk­ing dol­lars for pe­sos at rel­a­tively cheap prices. At least 50 of the out­fits have sprung up down­town in the past year, ac­cord­ing to lo­cal mer­chants.

“They bring in ex­tra in­come,” says Sam­tani, who rents a cor­ner of his store to a kiosk. He says he has no choice. Al­most all his pa­trons are from Mex­ico, and many will likely re­sell the tablets and Blue­tooth speak­ers they buy from him at the Tepito street mar­ket in Mex­ico City. “Now, with the peso, my cus­tomers aren’t com­ing any­more,”

says Sam­tani. $531 bil­lion in le­gal trade be­tween the two coun­tries. “You don’t want to wipe out that fi­nan­cial flow—you want trans­parency,” says Robert McBrien, a for­mer as­so­ciate di­rec­tor at Trea­sury’s Of­fice of For­eign As­sets Con­trol.

Bank trans­fers in dol­lars that be­gin in Mex­ico, go through U.S. banks, and then re­turn to Mex­ico ac­count for about one-third of the funds mov­ing be­tween the two coun­tries. Busi­nesses in Mex­ico have paid high fees for such trans­ac­tions, which are of­ten slowed by ex­tra over­sight. At the same time, laun­der­ing is a source of risk for for­eign banks do­ing busi­ness in Mex­ico. In 2012, HSBC agreed to pay the U.S. a then-record $1.9 bil­lion fine for is­sues in­clud­ing Mex­i­can money-laun­der­ing lapses.

The next year, JPMor­gan Chase re­stricted some trans­ac­tions tied to

a Mex­i­can bank, ac­cord­ing to peo­ple fa­mil­iar with the de­ci­sion. Banco de Méx­ico Gov­er­nor Agustín Carstens, in a meet­ing later that year with JPMor­gan CEO Jamie Di­mon, called the move a threat to Mex­ico’s fi­nan­cial sys­tem, ac­cord­ing to two peo­ple with knowl­edge of the meet­ing. JPMor­gan and the cen­tral bank de­clined to com­ment on the meet­ing.

The Mex­i­can govern­ment’s mea­sures aren’t “a sil­ver bul­let in the heart of the drug car­tels,” says Daniel Glaser, the U.S. Trea­sury’s as­sis­tant sec­re­tary for ter­ror­ist fi­nanc­ing. “But it com­ple­ments other steps we’re tak­ing to un­der­mine car­tel fi­nances.”

The bot­tom line Money laun­der­ing makes for­eign banks anx­ious about do­ing busi­ness in Mex­ico and com­pli­cates life for le­git­i­mate busi­nesses.

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