Latin American Organized Crime’s New Business Model

Beyond Dope…and More Dangerous

by | Dec 28, 2012

A Guatemalan boy eats ice cream next to a bus where driver and helper were murdered. Photo by Jon Lowenstein/Noor



Human heads rolling in the street alongside affluent homes. Gory stories of mass graves unearthed in Tamaulipas and Durango. Kidnapping and ransoming of migrants. Paying protection just to transit roads or run a business. Money laundering as dirty money becomes the backbone of the informal economy’s banking system. Oil product thefts amounting to three quarters of a billion dollars per year and growing at a yearly rate of 50 percent.

This is the new face of Mexican organized crime, which has become an unprecedented threat for Mexico and the United States. Organized crime is no longer just the drug business. And as the U.S. drug market slowly but surely changes toward prescription drugs and legalized marijuana, organized crime is much more than the business of shipping drugs to the United States. It is morphing away from Colombia’s Cali-cartel style narcotics organizations and into something far more pervasive, far more local and far more dangerous for Mexico and its neighbors.

My focus is on Mexico because the situation there is the more profound and dangerous example of a larger trend throughout Latin America. As a key regional economy with a long democratic tradition, Mexico has outsized importance for the future of Latin America. Throughout the region organized crime, with its tentacles in vast areas of governance and the economy, threatens to undermine the social order. In nations with a weak central government, organized crime, aligned with rogue elements in the military and corrupt officials, threatens to become a state within a state. In Guatemala, the central government has lost control to such an extent that it invited the United Nations to undertake organized crime investigations, an unprecedented partnership by a sovereign nation. Other Latin American nations, also desperate, are reportedly considering a similar arrangement. Recently, according to New York Times reports, the U.S. Drug Enforcement Administration has deployed commando-style squads to assist local law enforcement in nations, including Honduras and Guatemala. Originally, this program, called FAST (Foreign-deployed Advisory Support Team), was designed to investigate drug traffickers linked to the Taliban in Afghanistan, but the mission has been expanded to Latin America.

In some ways, the shift in the operations of organized crime has gone unnoticed in the larger debate. The terms “organized crime” and “drug-trafficking organizations” are often used interchangeably on both sides of the border. This mistaken terminology obscures an important new reality, one that will be discussed in this article.

Eduardo Guerrero Gutiérrez, a leading Mexican scholar of public policy, refers to the “fragmentation” of criminal organizations. He calculates a ten-fold increase in criminal organizations from 2007 to 2010 with a dramatic dispersion throughout Mexico. These organizations have taken hold in virtually every state. Guerrero’s research tracks the explosion in murder rates, which has accompanied this fragmentation. In all, more than 47,000 people have been killed in the past four and half years.

Organized crime has become an increasing part of all aspects of Mexican life.

Pemex, Mexico’s state-owned oil company, has reported that it has lost up to 40% of production at times, stolen from its pipelines in areas controlled by criminal groups. Earlier this year, Pemex sued nine oil companies accusing them of buying and selling stolen natural gas.
Ranchers in the state of Michoacán report that local criminals tell them when they can bring produce to market and are threatened with violence if they do not comply. Experts speculate that criminal groups are splitting up control of the roads on certain days. Mechanics in Guerrero are assaulted by criminal gangs and/or corrupt local police in what appears to be a battle over local control of the stolen auto parts trade. 
Migrants transiting Mexico from Central America are subject to kidnapping. The Mexican Human Rights Commission reported that more than 11,000 migrants had been kidnapped in one six-month period during 2010.

Money laundering is also changing dramatically. In his 2010 Wilson Center study, Douglas Farah outlines the path of bulk cash transfers from the United States to Mexico. What is most interesting for the local pattern of crime, however, is how the informal economy is increasingly becoming reliant on these informal sources of financing. Traditional financial crime enforcement has focused on electronic systems, but these new informal networks elude financial regulators and often function completely in cash or barter. Although narcotics proceeds may start the circle, they quickly create an alternative banking system that suits the informal economy.

As criminal groups have multiplied, corruption at local levels has burgeoned. If in the past corruption was relatively top-down as large organizations made grand bargains to ship drugs across Mexico, these more diversified organizations are seeping into the informal economy and governance structure at many levels and without the same level of control. As a result, businesses find themselves confronted by a myriad of local groups seeking payoffs.

Average Mexicans are hit very hard by organized crime throughout the country. Urban areas experience levels of violence previously unknown. Many remote rural areas seem to have a complete lack of government authority. Even the traditional language of social protest and human rights advocacy falls short. “Organized crime is, of course, responsible for so much violence,” said one human rights lawyer working in Tlapa, Guerrero. “Still, how can we protest that? How can we act against that?”

As Brookings Institute Scholar Vanda Felbab-Brown points out, there is much debate in Mexico about President Felipe Calderón’s decision to attack the large cartels and speculation about whether that alone is responsible for the fragmentation and expansion of criminal groups. In part, it surely is, as local governments were not ready to cope with the onslaught of mini-cartels, but there is another factor that is potentially more important: a slow, but sure change in the U.S. drug market.

Marijuana legalization in the United States may reduce revenue to the cartels at roughly 20%, and recent studies by the Substance Abuse and Mental Health Services Administration also indicate that cocaine abuse among young people has been declining since 2006.

It is enormously difficult to come up with a profit-and-loss statement for the business lines of organized crime. The assessment of the value of narcotics shipments varies from a low of $6 billion (Rand Corporation data) to a high of many, many times that. The same is true for other lines of illegal business. Pemex may have accurate data when it points to close to $750 million in fuel theft. Other figures are less reliable. The total value of ransom for migrants may equal roughly $200 to $500 million per year, based on the total number of people kidnapped and reports of ransoms paid. With so few crimes reported in Mexico, it is hard to come up with accurate numbers.

As Jaime López-Aranda, a prominent Mexican scholar now with the Federal government, points out, there is no doubt that narcotics trafficking to the United States is an efficient illegal enterprise, and few organizations had any incentive to abandon it. The Sinaloa cartel continues to ship large-scale amounts of drugs to the United States and other smaller organizations do so as well. Still, the real point is that the business is moving away from monolithic cartels toward a series of mercury-like mini-cartels. Whether diversification is a growth strategy or a survival strategy in the face of shifting narcotics consumption patterns, it is clear that organized crime is pursuing a larger, more extensive agenda.

Looking at the situation from this perspective, today’s strategy to fight crime appears incomplete. Given Mexico’s federal system with 32 separate states, the government effectively lacks the resources to manage the explosion in organizations. The United States, too, has an enforcement and security paradigm largely based on a large cartel model. With narcotics shipments into the United States making the core domestic impact, it has made sense to focus on organizations that target the United States from Mexico. Still, even if the fight against the largest cartels makes gains, in many ways it is yesterday’s fight. As Felbab Brown argues, there is no going back to an earlier period when narcotics trafficking was largely a problem of Mexican shipment and U.S. narcotics use, where the worst effects tended to bypass Mexico itself. The security policies have to evolve to face this new reality.

Today, Mexican state and local governments find themselves on the front lines. In other parts of Latin America, particularly in Central America, relatively weak central governments have been unable to confront organized crime, which has sometimes managed to infiltrate the highest levels of the central government. So far, this is not the case in Mexico. Rather, criminal organizations are targeting local governments, which are the weakest links in Mexican governance.

The United States confronts a security problem in Mexico that has become considerably worse, but which is oddly less relevant to the day-to-day concerns in the United States. As organized crime organizations attack local Mexican institutions, the traditional rationale for U.S. strategy becomes much more murky. Up until now, law enforcement and border security have had a leading role because fighting global drug trafficking was the threat. U.S. assistance was designed to enable Mexico to stop drugs flowing into the United States, which meant targeting the largest organizations. Nowadays, however, it is weapons flows from the United States to Mexico that are a serious concern, and border enforcement models are not really equipped to confront this problem.

In U.S. policy circles you hear rumbles of dissatisfaction with the current strategy and even calls for a completely different direction in strategy. Shannon O’Neill of the Council of Foreign Relations has written of Congressional interest in approaching the challenges in Mexico as a counterinsurgency challenge rather than a law enforcement challenge. She highlights the comments of Congressman Connie Mack calling for this shift. There is also a push to classify Mexican drug-trafficking organizations as terrorist organizations by Representative Michael McCaul.
Putting aside all the policy and diplomatic implications of such a shift, it, too, misreads the problem in Mexico. Mexico’s problems have everything to do with crime and increasingly less to do with a few dominant criminal organizations.

As much violence and tragedy as the expansion of crime has engendered, there are also the seeds of hope for a much more coherent strategy to be elaborated between Mexico and the United States. Most important, this is a problem of crime and corruption, which can be fought using traditional law enforcement means. Mexico is not a failed state, but needs to rally at both federal and local level to reassert control.
What should be done?

First, there is an urgent need for institution building in Mexico. Potentially the biggest flaw in the Calderón government’s focus on military efforts has been that other institutions have atrophied. Despite a significant legal reform effort, including a constitutionally mandated change to a more modern legal system in 2008, enabling legislation has lagged, being introduced only in 2011. At the state level there has been more progress, with 7 of the 32 states having adopted more modern legal codes, but the implementation has been spotty, with some states almost giving up on the new codes because of difficulty implementing them. Without a functioning justice system, no amount of military intervention will work.
Second, there is an urgent need for increased state and federal cooperation. The debate over the federal government’s strategy has obscured the fact that controlling crime and regaining control over public security in Mexico is not an either/or proposition. Joint federal and state task forces will be necessary to overcome the shifting criminal pattern. The very nature of organized crime is its ability to find the weak points in a system and exploit them for profit.

Third, there is a need for a more vigorous response from civil society in Mexico. For too long, Mexican elites largely saw the problem of crime and corruption as removed from their day-to-day lives. That is changing as well. The spike in violence in Monterrey, Mexico’s industrial heartland, has caused leading Mexican businesses to realize that there is no simple way to deal with the chaotic criminal pattern. Even if it was not desirable or legal, the old top-down systematic corruption worked in the past to enable smooth operation of business. Now, even that mode is not available, since the groups are too disparate.

Fourth, U.S. policy has to recognize the implications of this shift in business models and criminal structures. Although they are far more violent, the local criminal groups are in many ways easier to deal with as a law enforcement problem, as they are unlikely to have the central command and control structures that characterized traditional cartels. The focus on large-scale multinational investigations, as important as they are, will only be part of the solution. Our models for both financial crime and cyber-enforcement need to change as criminal groups find less centralized ways to communicate, or build altogether alternative financial and communication networks. Imagine the communication flexibility displayed in the protests of the Arab spring turned on its head for evil purposes. Clearly, Mexico’s capacity to address local corruption will require a different set of tools.

The last years in Mexico have been a painful and confusing time. President Calderón’s strategy of taking on the large cartels, including deploying the military when necessary, was designed to smash their fire power. Partly as a result, overwhelming violence has plagued Mexico. Yet it would be a terrible tragedy if the people of Mexico backed away from a commitment to fight organized crime.True, the current strategy is incomplete and fails to take into account the enormous fragmentation and increasing business diversity of organized crime. The changes in organized crime in both Mexico and throughout Latin America will require a move away from cartel-based thinking. Local criminal organizations are threatening to eat Mexico from within. The assumptions that have driven close to 20 years of enforcement strategy are giving way to a new and in many ways far more dangerous world. The need to adapt new, effective means to combat these dangers is urgent.

Spring 2012Volume XI, Number 3

Morris Panner, a former Federal Organized Crime Prosecutor, is a Senior Advisor at the Harvard Law School Center for International Criminal Justice.

Related Articles

Haiti After The Quake

Haiti After The Quake

There is always movement in Haiti. The political, social and ecological terrains are ever-shifting, yet they remain intrinsically connected. Thus the island’s tropical ecology once lured…

Investigating Organized Crime

Investigating Organized Crime

Medellin, Colombia, February 2009. Two journalists, with more than twenty years of experience between them covering Latin America, were engaging in a familiar lament over a couple of beers. Nobody was paying for serious investigation of organized…

Keys to Reducing Violence in Mexico

Keys to Reducing Violence in Mexico

Some regions of Mexico now seem like war zones. Nineteen out of the 50 most violent cities in the world are expected to be found in the country by the end of 2011. Yet severe violence is…

Print Friendly, PDF & Email