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Cablegate: Mexican Bankers Discuss Anti-Money Laundering

VZCZCXRO5876
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #1779/01 1622111
ZNR UUUUU ZZH
P 102111Z JUN 08
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 2191
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUEABND/DEA HQS WASHINGTON DC
RUEAHLA/DEPT OF HOMELAND SECURITY
RHEHNSC/NSC WASHINGTON DC
RHMFIUU/CDR USSOUTHCOM MIAMI FL
RHMFIUU/CDR USNORTHCOM
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 05 MEXICO 001779

SENSITIVE
SIPDIS

STATE FOR A/S SHANNON
STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA, S/CT FINANCE
STATE FOR EB/ESC MCMANUS AND IZZO
FINCEN FOR CARA BROADHEAD
TREASURY FOR IA (RACHEL JARPE, LUYEN TRAN)
TREASURY FOR TFFC (RACHEL FEDEWA)
DOJ AFMLS FOR ROBERT STAPLETON
DHS/PLCY/OIA
CBP/OIA AC MULLEN
ICE/OIA M VANACORE
NSC FOR RICHARD MILES, DAN FISK
STATE PASS TO USTR (EISSENSTAT/MELLE)
STATE PASS TO FEDERAL RESERVE (BORA DURDU)

E.O. 12958: N/A
TAGS: EFIN KTFN PTER MX
SUBJECT: MEXICAN BANKERS DISCUSS ANTI-MONEY LAUNDERING
EFFORTS

REF: A. MEXICO 1097
B. 07 MEXICO 5793
C. 07 MEXICO 1119

1. (SBU) Summary. During roundtable discussions with Embassy
officials, bank compliance officers said their institutions
base their anti-money laundering (AML) and combating
terrorism financing (CTF) practices on international
standards. They commented on how difficult it can be to stop
illicit flows without harming legitimate businesses. Mexico
is a particularly challenging environment given the
pervasiveness of organized crime, tax evasion, and informal
economic agents; the fact that Mexico is a cash intensive
society; and the lack of both public information on companies
and a universal identification card. A Finance Secretariat
official acknowledged that complying with AML/CTF regulations
is costly for financial institutions, and remarked that new
regulations might make it even more expensive. The bankers
said recent events involving regulated money exchange houses
would shift cash flows to less regulated institutions, and
they have seen a few cases of terrorism financing. The
participants expressed a desire to work more closely with
U.S. authorities. End Summary.

------------
Introduction
------------

2. (SBU) Embassy Mexico City held two roundtable discussions
with bank compliance officers from several major banks in
recent months to discuss their institutions' anti-money
laundering (AML) and combating terrorism financing (CTF)
efforts. ECON, FinCEN, NAS, ICE, IRS, OFAC, and DEA were
represented. The Finance Secretariat's Financial
Intelligence Unit (FIU) and Banking and Savings Unit also
participated. (Note: Due to pressure from GOM authorities,
the compliance officers would not meet with us unless we
invited GOM representatives. End Note.)

------------------------------------------
An International Perspective on Compliance
------------------------------------------

3. (SBU) The bank compliance officers cast a positive light
on their internal controls against money laundering and TF.
The representatives -- all of whom were from banks that are
subsidiaries of major foreign-based international banks --
said their institutions base their AML/CTF standards and
practices on international standards and receive guidance
from their global parent organizations. Several participants
emphasized their thorough due diligence regarding clients
they deem to be high risk. HSBC highlighted how it takes a
"special look" at such entities as car vendors and jewelry
stores. Banamex remarked that Casablanca had a huge effect
on Mexican financial institutions, prompting them and the
government to improve AML policies and procedures. (Note:
Operation Casablanca was a U.S. Customs-led investigation
that targeted and caught dozens of money launderers,
including three Mexican banks, in the late 1990s. End Note.)

4. (SBU) Under Mexican law, banks have 30 days to report
suspicious transactions to the authorities, a timeframe that
is shortened to 24 hours if the bank compliance officer deems
it particularly important or if the names of the individuals
in question have appeared in the news. Banamex said it sees
these 24-hour reports often, and that these reports are
discussed during a monthly meeting of bank compliance
officers.


MEXICO 00001779 002 OF 005


----------------------------
Improved Information Sharing
----------------------------

5. (SBU) An official from the Finance Secretariat's Banking
and Savings Unit said the GOM is changing AML/CTF regulations
to allow Mexican banks to share information with each other
regarding suspicious activity -- something that was not
allowed previously because of bank secrecy laws.
Implementing regulations are required to specify what kind of
information can be shared. Banamex remarked that banks are
not sure what the new information sharing rules will look
like, but they will likely include a database where banks can
post information.

6. (SBU) Bank compliance officers in the Mexican Banking
Association (ABM) meet once a month to share experiences,
discuss best practices, and talk about the regulatory
environment. They are prohibited, however, from discussing
individual cases. One participant, who was the head of the
ABM's Compliance Committee, remarked that the ABM plays a key
role in strengthening relations between private banks and the
government. He added that banks talk regularly with GOM
authorities about ways to avoid defensive reporting,
regulations in the pipeline, etc.

7. (SBU) All participants indicated they would like to share
more information with their parent organizations. Banamex
noted that it can access transaction information on customers
from its parent company (Citigroup), but it can only
reciprocate on specific transactions with permission from the
GOM because of Mexican privacy rules. In Banamex's case,
they can see Citigroup's negative and black lists of clients,
but not the actual suspicious activity reports. Santander
indicated that its situation is similar. Another participant
remarked that auditors from its parent company can see
information if they sign a confidentiality agreement, but
they cannot take copies of records with them.

----------------
KYC is Essential
----------------

8. (SBU) The bankers stressed the importance of "know your
customer" (KYC) policies. One of the participants
highlighted the need to know about the provider of the funds.
That is, if a housewife or student wants to open an account,
the bank needs information about who provided the individual
with the funds. The participants lamented that this can
hinder their ability to bank the unbanked. A FIU official
said the GOM will issue new regulations that will follow
Basil II methodology for low-risk accounts, meaning that
banks would not have to collect as much information if the
client is determined to be low risk under preset criteria.

9. (SBU) Banks are seeing increased public awareness about
KYC. For example, if someone sells their house, they are
more likely to bring a deed to confirm the transaction, while
in the past they were more likely to protest that the bank
had no right to such personal information.

----------------------------------------
Challenges to Combating Money Laundering
----------------------------------------

10. (SBU) The bankers highlighted several obstacles they face
in combating illicit transactions. They noted how
transactions can be routed through any number of legitimate
businesses, and how it is difficult to find public

MEXICO 00001779 003 OF 005


information that helps them verify a firm's legitimacy.
Banks regularly see the smurfing of cash deposits at
different branches. (Note: Smurfing is jargon used to
describe the act of splitting a large financial transaction
into smaller ones to avoid deposit-reporting requirements.
End Note.) The trend now is for cash to move to gatekeepers
such as car dealers and commercial entities. BBVA Bancomer
said the cash is still flowing -- if you close one account,
the money simply finds another way into the system.

11. (SBU) Myriad informal economic agents and the fact that
Mexico is a cash intensive society make banks' task even more
difficult. Pervasive tax evasion also presents a problem
since, as one banker stated, it would be impossible to refuse
to do business with those who evade taxes. This
representative added that his compliance department tries to
focus on serious crimes (e.g. drug trafficking and
kidnapping) instead of tax evasion.

12. (SBU) Banamex remarked how the lack of a single
identification number in Mexico (like the U.S. Social
Security number) and the ease with which people can get a
fake identification make it more difficult to follow an
individual's activity. HSBC stressed the importance of
assigning all customers a number, rather than simply
assigning account numbers. This makes it easier to track the
transactions of clients who have multiple accounts.

---------------------------
Widespread Use of U.S. Cash
---------------------------

13. (SBU) The movement of U.S. cash is prevalent in Mexico.
To address this issue, banks have developed a registry to
keep a record of cash intensive clients; created a policy
that requires senior management approval for large U.S. cash
transactions; and taken additional steps to help manage risk.
For example, some banks will not accept cash when settling
on a home purchase.

14. (SBU) When asked if the amount of U.S. cash in Mexico
that cannot be accounted for by legitimate means is roughly
USD 1 billion per month, the Banamex representative replied
that the figure was too high. He said this figure may have
been accurate in the first quarter of 2007, but banks have
taken steps to reduce these flows. Some of the large U.S.
cash transactions come from legal businesses that are U.S.
cash intensive. It can be difficult to distinguish between
licit and illicit transactions because Mexico is a cash
intensive society. One representative remarked that the vast
majority of money is smuggled in the form of physical U.S.
dollars. The bankers have not seen an increase in euros.

------------------------------
Cost of Compliance Significant
------------------------------

15. (SBU) The Finance Secretariat official acknowledged that
complying with AML/CTF regulations is costly for financial
institutions, and remarked that new regulations might make it
even more expensive. (Note: Later this year the Banking and
Securities Commission will gain the power to fine banks that
fail to comply with regulations. The GOM also plans to
harmonize due diligence rules among banks and regulated and
unregulated exchange houses. End Note.)

16. (SBU) Banks have found the following regulations to be
particularly costly: 1.) Identifying and reporting on wire
transactions greater than $3,000; 2.) Identifying the

MEXICO 00001779 004 OF 005


provider of funds; 3.) Updating customer profiles (because of
the lack of a universal identification card); and 4.)
Verifying a firm's legitimacy (because of a lack of publicly
available information on companies). That said, the Banamex
representative remarked that "the only way to be careful" is
to invest in controls. He added that while niche banks that
are not heavily involved in these activities need solid
compliance programs, they do not need "an army of people"
like the larger financial institutions.

----------------
Some Signs of TF
----------------

17. (SBU) While he did not provide details, one of the
participants said his bank has seen a few cases of terrorism
financing. He admitted that his bank is more reactive than
preventative on this issue. He added that OFAC's Specially
Designated Nationals and Blocked Persons list is standard for
the industry, but people with common names like "Jose Garcia"
make their job more difficult. The bankers said they report
these cases to the Mexican authorities immediately.

-----------------------------------------
Money Exchange Houses a Source of Concern
-----------------------------------------

18. (SBU) The bankers expressed concern about events
involving regulated money exchange houses called "casas de
cambio" (CCs) since the Casa de Cambio Puebla case. (Note:
Puebla used its correspondent accounts with Wachovia and
Harris Bank to launder money on behalf of Mexican cartels.
End Note.) One representative posited that there will be
only four or five regulated CCs by yearend because reciprocal
banks in the U.S. are ending relationships with Mexican CCs.
Several participants remarked that as CCs close, cash flows
will shift to less regulated institutions such as centros
cambiarios (unregulated money exchange houses).

19. (SBU) One of the participants stressed the importance of
distinguishing between CCs and centros cambiarios. Most
large banks do not deal with centros cambiarios if they know
it is a centro -- something that can be difficult to
determine because the centros do not always advertise
themselves as such. Mexico's Tax Administration Service
(SAT) has 2,400 registered centros cambiarios, but industry
representatives say they have 8,000-10,000 points of sale.
Centros cambiarios are supposed to report large transactions
to the SAT, but one banker noted that "they largely do as
they please." That said, another participant acknowledged
that the regulatory framework for CCs needs work -- adding
that some CCs deal directly with centros cambiarios.

20. (SBU) Overall the banks have seen a tightening in the
market since the Casa de Cambio Puebla case. They remarked
that Mexican banks are being less tolerant of large U.S. cash
transactions. Moreover, new regulations require banks to
maintain a registry of cash intensive customers; banks have
increased efforts to only accept cash from entities that can
prove sources; and banks have become more adverse to large
cash transactions with CCs.

------------------------------------------
Eager for Closer Cooperation With the U.S.
------------------------------------------

21. (SBU) The participants expressed a desire to work more
closely with U.S. authorities. They want to build channels
of communication so they are not taken by surprise when U.S.

MEXICO 00001779 005 OF 005


organizations issue advisories or warnings about certain
institutions or regions. One representative remarked that
bankers see what has occurred in the casa de cambio industry
and do not want their institutions to become an "example" in
the news.

-------
Comment
-------

22. (SBU) The meetings with compliance officers show that
Mexico is taking concrete steps to tighten its AML/CTF
regime. It was heartening to see some of the measures banks
have implemented to fight ML and the increased cooperation
between banks and GOM authorities. Nonetheless, serious
shortcomings remain, as significant amounts of money (usually
narcotics-related) are still smuggled across the border.
Additional work is needed to examine bank secrecy laws so
they do not hinder Mexico's AML/CTF system, improve the
system for reporting suspicious transactions, increase
efforts to control bulk cash smuggling, improve Mexico's
ability to prosecute and convict money launderers, better
control the situation at money exchange houses, and fight
corruption.
Visit Mexico City's Classified Web Site at
http://www.state.sgov.gov/p/wha/mexicocity and the North American
Partnership Blog at http://www.intelink.gov/communities/state/nap /
GARZA

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