It seems obvious that companies should avoid engaging with cartels designated as foreign terrorist organizations or specially designated global terrorists. In practice, however, this can be challenging without adequate compliance controls in place.
The Trump administration’s recent actions highlight an issue that will become increasingly important for companies operating in Latin America that potentially are linked to cartels designated as FTOs or SDGTs.
One of Trump’s executive orders, as part of his “war” on drug cartels in Mexico, stated that cartels operate in certain regions of Mexico as “quasi-governmental entities.” To eliminate them, he said, the Secretary of State should recommend whether to designate any cartel mentioned in the executive order as an FTO and/or an SDGT.
The State Department on Feb. 20 designated eight international cartels as FTOs and SDGTs, noting that seven of them operate in Mexico. This action will greatly affect companies operating in Latin America, particularly in Mexico and other areas identified by the State Department.
The law, 18 USC Section 2339B, says whoever “knowingly provides material support or resources” to an FTO, or attempts or conspires to do so, faces fines or imprisonment of “not more than 20 years, or both.” The statute broadly defines material support or resources as any “property, tangible or intangible, or service.”
Activities prohibited by the statute apply extraterritorially, meaning persons and companies are exposed regardless of whether the violation occurs within US jurisdiction. And a 2001 executive order authorizes blocking sanctions to be imposed on parties that provide services to or in support of persons designated under the order.
Companies operating in regions where these designated cartels are active must enhance their due diligence because, as illustrated by the following examples, routine exports from Mexico may expose US and non-US companies to violations:
- The State Department notes that one cartel operates in Sinaloa, Mexico, a significant exporter of agricultural products, particularly tomatoes.
- In Jalisco, Mexico, a cartel operates and reportedly extorts agave farmers and poultry companies.
- Michoacan, Mexico, where two cartels operate, is a major exporter of agricultural products, responsible for approximately 80% of avocados imported into the US.
These are just a few examples, but they highlight how companies can become entangled in complex compliance issues that can lead to civil and criminal penalties.
In 2007, Chiquita Brands International Inc., a US-based multinational corporation, pleaded guilty to engaging in transactions with a designated FTO and SDGT, Autodefensas Unidas de Colombia, related to its banana-producing operations in Colombia. At the time, the AUC’s leader implied that Chiquita’s employees and property could be harmed if the company didn’t compensate the cartel.
This led Chiquita to pay the AUC by check through various intermediaries. Chiquita’s counsel succinctly advised that companies “cannot do indirectly what you cannot do directly.” Chiquita’s sentence included a $25 million criminal fine, a mandated compliance and ethics program, and five years of probation.
To avoid similar penalties, companies should regularly assess their risk exposure to ensure that all parties in their supply chains aren’t directly or indirectly associated with cartels designated as FTOs and/or SDGTs. This includes ongoing training for employees and establishing clear reporting mechanisms for suspicious activities or potential violations.
To implement these efforts effectively, companies should consider the local environments in which they source their products, recognizing that connections to designated cartels may be indirect and difficult to identify.
Financial institutions processing related transactions face similar risks as the companies. However, these institutions can implement similar measures to ensure they don’t engage in transactions involving designated cartels.
They also should ask for complete counterparty information from their customers, including the names and addresses of these counterparties, a detailed description of the purpose of the transaction, and certifications requiring customers to affirm that the transaction doesn’t involve any designated FTO or SDGT or any persons or entities acting for or on their behalf, directly or indirectly.
While such certifications provide an added layer of assurance, establishing clear organizational policies for employees to report suspected violations is essential, as these certifications don’t absolve companies if they know about cartel involvement.
Considering the influence of cartels designated as FTOs and SDGTs on specific exports, companies and financial institutions operating in Latin America, especially in Mexico, must reevaluate their exposure across all aspects of their supply chain considering the State Department’s FTO and SDGT designations.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Charlie Lyons is counsel at Ferrari & Associates focused on economic sanctions programs by the US Treasury Department’s Office of Foreign Assets Control.
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