Mexico City’s downtown and Palacio de Bellas Artes building at twilight

Last week, the Financial Action Task Force (“FATF”) issued a report concluding that Mexico needs to “step up efforts in pursuing money launderers.” The report, which summarized the FATF’s findings from its on-site assessment in early 2017, identified three particularly weak areas in Mexico’s AML regime:  preventative measures; investigation and prosecution; and confiscation.  This post summarizes the report’s findings, and observes that Mexico is not the only nation needing to “step up” its efforts.  Further, given the strong financial and geographic ties between Mexico and the U.S., the AML challenges of Mexico can be the challenges of the U.S.

The Financial Action Task Force (“FATF”), about which we previously have blogged (here, here and here), is an independent inter-governmental body that develops and promotes policies to protect the global financing system against money laundering and terrorist financing.  The FATF’s 40 Recommendations are recognized as the gold standard of anti-money laundering and counter-terrorism financing (“AML/CTF”) efforts.  The FATF routinely performs Mutual Evaluation Reports (“MERs”) to assess compliance by various countries with the international standards promulgated by the FATF’s Recommendations.  We previously have blogged about the FATF’s MERs in 2006 and 2016 regarding the United States and its compliance with international standards.  While the FATF gave the U.S. high marks generally, both evaluations found the U.S. “non-compliant” in gatekeeper and entity transparency.

For the first time since 2008, the FATF has conducted an on-site assessment of Mexico’s AML/CTF regime. The assessment team consisted of seven financial and legal experts and an economist from organizations including the FATF, its regional counterpart the Financial Action Task Force of Latin America (“GAFILAT”), the International Monetary Fund (“IMF”), and the U.S. Department of Treasury. The team’s assessment took place in early 2017, and its findings were adopted by the FATF at its November 2017 Plenary meeting.  The full Mutual Evaluation Report (the “Report”) was published on January 3, 2018, and can be found here; the executive summary is here and the Spanish version of the full Report is here.

Although the FATF noted that Mexico has demonstrated much improvement since 2008, the Report identified low effectiveness in Mexico’s preventative measures, as well as its investigation and prosecution of money laundering. Mexico’s problems with stemming money laundering can become the downstream problems of U.S. financial institutions (and vice-versa), as the Lone Star National Bank in Texas discovered when FinCEN imposed a $2 million civil penalty for allegedly maintaining an insufficient due diligence and AML program and allowing a Mexican bank “to move hundreds of millions of U.S. dollars in suspicious cash shipments through the U.S. financial system in less than two years” through correspondent bank accounts.

Preventative Measures

First, the Report identified weaknesses in preventative measures taken by financial institutions and Designated Non-Financial Businesses and Professions (“DNFBPs”) to combat money laundering and terror financing. DNFBPs include public notaries, lawyers (about whose potential AML duties we have blogged repeatedly, including here), accountants, real estate agents, gambling and lottery entities, and precious metals and stones brokers.  The Report indicated that one serious concern is that both financial intuitions and DNFBPs fail to employ sufficient know-your-customer (“KYC”) procedures.  Even though financial institutions are required to identify beneficial owners, the Report found that these institutions “unduly rely on customers’ self-declaration.”  (note that the U.S. Customer Due Diligence regulations enacted by FinCEN in 2016 and scheduled to take effect on May 11, 2018 specifically allow financial institutions to rely on customers’ certifications regarding each individuals’ status as a beneficial owner). The takeaway here is that financial institutions need to dig deeper to find out their customers’ true identities (and purpose for opening an account) to protect themselves from liability caused by domestic and international money laundering threats.

The Report also found that Mexican financial institutions are having difficulty understanding their obligations to report suspicious transactions under the current legal framework. Mexican law requires financial institutions to file “unusual transaction reports” (“UTRs”), which must be filed within 60 days of the transaction, and “24-hour reports” (“24h reports”), which must be filed within 24 hours of the transaction.  Whether a UTR or 24h report is appropriate depends on the level of certainty the financial institution has that the transaction under scrutiny in fact represents criminal conduct.  24h reports should only be filed when there is “evidence or concrete facts” available to the bank alerting it to the criminal nature of the transaction.  Despite legal guidance indicating that this really means that the client is on a sanction list, more than 95 percent of 24h reports were based on “wrong scenarios,” like unverified anecdotal evidence and media reports.  UTRs typically are triggered by an automated system that monitors transactions based upon aggregate data about the customer and the customer’s demographics.  The Report found that the transaction monitoring systems in place generate either too many or too few alerts, causing inconsistency in what prompts a UTR to be filed.  These problems are not dissimilar to those encountered in the United States with suspicious activity reports (“SARs”), as discussed here.  However, it appears that over-reporting in the U.S. is attributed to financial institutions practicing defensive reporting for fear of facing civil or criminal penalties, whereas Mexican financial institutions suffer from a lack of sophistication in monitoring techniques and understanding of what the law requires.

Investigation & Prosecution

Second, the Report found that Mexican law enforcement agencies experience “various shortcomings” in the way in which money laundering cases are investigated and prosecuted.

Mexico’s Ministry of Finance and Public Credit has established a Financial Intelligence Unit (the “FIU”), which was created as a central governmental body responsible for receiving, analyzing, and disseminating financial information concerning transactions suspected of being related to money laundering or terrorist financing. Before the Procuraduría General de la República (“PGR”), i.e., Mexico’s Attorney General’s Office, can initiate a prosecution for money laundering, the FIU must first file a complaint under the Federal Civil Code.  This procedural requirement impedes the PGR’s ability to prosecute independently.  Consequently, less than ten percent of money laundering investigations were triggered by the FIU’s identification of cases.  These same statistics cited by the Report suggest that the PGR identifies most money laundering cases from information sent by its national customs or federal police authorities, and foreign authorities—the latter group almost entirely composed of  U.S. agencies including the DEA and ICE.

These statistics highlight the importance of information sharing, and the impact trans-national information sharing can have on money laundering prosecutions. We have discussed the importance of AML information sharing in our discussion of U.K. think tank RUSI’s study (and in regards to FinCEN, here), which further provides examples of the most effective information-sharing systems in the trans-national context.  The RUSI Study concluded that governments should establish formal channels of inter-governmental information sharing, and the U.S.-Mexican information-sharing relationship evidenced by the Report reinforces that conclusion.

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