ANALYSIS: Designating Mexican drug cartels terrorists – everything you need to know to protect your organization

ONE of President Donald Trump’s first executive orders, E.O. 14157, directed the Secretary of State and other government agencies to recommend the designation of specific Mexican drug cartels as Foreign Terrorist Organizations (FTOs) or Specially Designated Global Terrorists (SDGTs).

While hundreds of entities have been subject to these designation categories over the past 20 years, these cartel designations promise to create new and unique AML, sanctions and compliance challenges for financial institutions and fintech providers, both in the U.S. and around the world.

New Criminal Exposure

As AML and compliance professionals well know, designating an individual or entity as an FTO or SDGT adds them to the Office of Foreign Assets Control (OFAC)’s Specially Designated National and Blocked Persons (SDN) List. This immediately prohibits financial institutions from conducting or facilitating financial transactions on behalf of SDNs.

However, unlike with other SDN designations, the cartels’ FTO designation now criminally proscribes providing them “material support,” which, pursuant to 18 U.S.C. Section 2339B, includes money, property and financial services. As a result, any payment made by a company – and processed by a financial institution – to a cartel-affiliated entity, can be construed as providing material support to an FTO.

This is not a theoretical concern: extortionate demands for protection and payments for permission to operate in cartel-controlled territory, called “derecho de piso,” are pervasive in Mexico.

Recording of these payments in a company’s books and records, or disguising them as legitimate business expenses, may expose the company – and the institutions they bank with – to U.S. criminal liability. A violation of 18 U.S.C. Section 2339B can result in huge fines, forfeiture and restitution penalties, and, in the case of individual defendants, 20 years imprisonment.

There is precedent for the U.S. prosecuting both U.S. and foreign corporations for material support of an FTO, and the same could apply to financial institutions. In 2007, Chiquita Brands International, a multinational corporation based in New Jersey, pled guilty in Washington, D.C. federal court for engaging in transactions with the Autodefensas Unidas de Colombia, a Colombian paramilitary organization that had been designated as an FTO and SDGT.

The payments at issue were protection payments that the company had previously disclosed to the U.S. Department of Justice, but then continued to make. The payments were booked as “security payments” and totaled over $825,000 over three years. The company was handed a $25 million fine, required to implement and maintain an effective compliance and ethics program, and five years’ probation.

More recently, in 2022, the French company Lafarge SA and its Syrian subsidiary pled guilty in federal court in Brooklyn, New York to conspiracy to provide material support to FTOs.

The company made payments to ISIS and the al-Nusrah Front to continue the operation of its cement plant in Syria and the ability of its workers and materials to safely transit areas controlled by these groups. Lafarge employees actively tried to conceal the payments and did not cooperate with the government’s investigation. The company was ultimately sentenced to $687 million in forfeiture and a $90 million fine.

Notably, the conduct at issue involved no U.S. persons or companies, and jurisdiction was predicated on the use of a U.S. correspondent bank account and the use of U.S.-based email providers.

Heightened Civil Liability

The AML and sanctions compliance community is familiar with OFAC’s strict liability standard for imposing civil penalties, but the new possibility of criminal enforcement carries with it a range of additional civil consequences.

Generally, given the breadth of what constitutes material support under the criminal statute and FTO designation, the government will have greater ability to freeze and ultimately gain title over assets and financial accounts than under typical SDN sanctions regimes. Under Section 2339B(a)(2), financial institutions that become aware that they are “in possession of, or [have] control over, any funds in which a [FTO], or its agent, has an interest, shall retain possession of, maintain control over, such funds,” and immediately report it.

Failure to comply with this provision can result in civil penalties of $50,000 per violation or twice the amount that should have been frozen, whichever is greater.

Additionally, even in the absence of criminal prosecution, several multinational conglomerates in Iraq and Afghanistan have been successfully sued under the Anti-Terrorism Act (ATA), 18 U.S.C. § 2333, for providing material support to FTOs, often predicated on protection or other payments.

Companies in cartel-controlled areas, and the financial institutions that bank them, could face similar civil suits if the cartels are found to have engaged in an “act of international terrorism” under 18 U.S.C. Section 2331 that results in injury or death to a U.S. national.

Potential Compliance Challenges

Managing these new FTO designations are resulting compliance risks will prove to be a difficult task. While there is some precedent for criminal organizations being added to the SDN list, none are as entrenched as the cartels, whose influence in Mexico transcends a variety of industries and penetrates high levels of regional and national government.

As such, it will be increasingly difficult to determine the source, destination or purpose of a financial transaction. Beyond this, because the cartels do not fit within the traditional definition of an FTO, their financial activities will display characteristics of both traditional money laundering and terrorist financing.

The immediate compliance burden on banks and businesses in the financial sector will be substantial. For example, the mere process of identifying cartel affiliates will require enhanced due diligence – both strategic and transactional – and likely involve synthesizing information from a variety of public and private sources.

This is particularly critical given OFAC’s “50-Percent Rule,” which will apply to these designations and implicate any cartel-connected entity whose collective ownership is above 50 percent. As such, the number of potential entities to avoid is sizeable and uncertain.

Dependance on even the best Know Your Customer and sanctions screening software is likely to be insufficient in the near term, and a more manual, labor-intensive review may be necessary. The result is a need for an ongoing series of risk assessments and frequent reevaluation of client and customer relationships.

Conclusion

With the impending designation of Mexican cartels as FTOs, and given the extraterritorial application of U.S. law and the DOJ’s willingness to assert jurisdiction over entities and conduct abroad, even non-U.S. businesses and financial institutions need to be mindful of their potential criminal and civil exposure.

A single U.S.-dollar denominated transaction by two foreign entities through a correspondent bank, cryptocurrency exchange or other payment processor could give rise to criminal or civil liability.

THE AUTHOR: Artie McConnell is a decorated former federal prosecutor and highly regarded trial lawyer. He is a partner on BakerHostetler’s White Collar, Investigations and Securities Enforcement and Litigation team and serves as the co-leader of the firm’s National Security Investigations and Litigation Task Force. Artie represents companies and individuals – both in and out of the courtroom – in high-stakes criminal and civil enforcement actions, cross-border regulatory proceedings, internal investigations and compliance matters.

Before joining BakerHostetler, Artie was an Assistant United States Attorney in the Eastern District of New York for 10 years. While in government, Artie tried complex, high-profile cases as lead counsel in nearly every practice area, including securities fraud, public corruption, cybercrime and national security matters. He has tried nearly 50 cases to verdict during his career and handled numerous appeals before the Second Circuit.

Artie also held several leadership positions with the U.S. Attorney’s Office, most recently as the Deputy Chief of the National Security and Cybercrime section, where he supervised and handled some of the most sensitive and complex terrorism, espionage and cybersecurity cases in the nation. Artie also served as the head of the Office’s global sanctions and export control enforcement program, where he focused on dual-use technologies and the energy sector. In that capacity, he led many of the Justice Department’s first and most significant prosecutions coordinated through Task Force Kleptocapture and the Disruptive Technology Strike Force.

He is an authority on working across the highest levels of law enforcement, the intelligence community and regulatory agencies, as well as with foreign officials regarding parallel actions, extraditions and access to evidence abroad. Artie’s cases in this area are frequently cited by government agencies in compliance guidance issued to the private sector, and he is regularly asked to speak on these topics by both governments and private sector entities around the world.

In recognition for his work, Artie received numerous accolades from various U.S. and foreign government agencies.  He twice received Attorney General awards, including the John Marshall Award for his trial advocacy, and the Distinguished Service Award – the DOJ’s second-highest honor – for his sanctions and export control work. He also received the Charles E. Rose Award for Outstanding Performance by an AUSA from the Eastern District Association.

Before joining the DOJ, Artie served as an Assistant District Attorney in the Manhattan District Attorney’s Office, where he investigated and tried homicides, sex crimes and other serious felonies.

---