How Can Banks in Mexico Rebuild Trust?

Tags: AMLBankingKYCTruliooWorld - Latin America
Mexico trust

Due to its proximity to the U.S., it’s hardly surprising that Mexico’s biggest trading partner is its northern neighbor. However, that relationship has been showing signs of strain, particularly in the financial sector.

In order to process payments, Mexican financial institutions depend on global banks for dollar clearing, which is the conversion of pesos to U.S. dollars. Because of a U.S.-led crackdown on money laundering, Mexican banks are finding it increasingly tougher to gain access to dollar clearing services. These services are vital for Mexico in order to continue doing business with the U.S.

Why is it so difficult to obtain clearing services in Mexico?

According to a Financial Times article, Mexico’s dangerous and highly-organized illegal drug trade has been making far more money than legitimate sources. Each year, an estimated $10 billion is being laundered through Mexican banks, compared to $4 billion to $8 billion brought in through trade, tourism, and remittances.

After the U.S. Senate released a damaging report in 2012 about the part that global banks played in laundering money from Mexican drug cartels, a record-setting $1.9 billion fine was levied against a large multinational bank for its alleged involvement. As a result, global banks, especially those based in the U.S., have grown wary of dealing with Mexican banks due to the risk of being hit with heavy financial penalties by regulators.

A common response to the strict U.S. regulatory actions by non-Mexican banks is to stop doing business within Mexico altogether. This drastic measure, commonly known as de-risking, is a method that has become very popular with banks looking for ways to quickly reduce their exposure to risk. While de-risking helps manage risk in the short-term, the long-term implications are serious, in particular for Mexican banks and businesses.

“The situation is really, really critical [for some banks],” said a senior Mexican banker to the Financial Times. “It’s ridiculous that between major trade partners they are not allowing free movement.”

How is de-risking impacting Mexico?

For many of the larger banks operating in Mexico that are part of international groups, de-risking has had little effect, since they can easily obtain clearing services through their own networks. On the other hand, small national banks that often serve lower-income clients have suffered the most. Mexican-based banks such as Monex, CIBanco, and Banco Azteca depend on global banks because they cannot clear dollars themselves.

Over the past five years, U.S. banks have closed over 50 correspondent accounts that smaller Mexican banks used for dollar clearing. Because American financial institutions have closed their doors, Mexico’s local banks have had to resort to dealing with institutions primarily in Europe for clearing services.

Not only banks and businesses are being hurt by de-risking. Average Mexicans receiving remittances from family members in the U.S. are finding it more difficult than ever to convert dollars to pesos.

José Manuel Ripa Wehber, vice-president for Mexican foreign exchange association Centros Cambiarios Asociados, pointed out the problems faced by money changers.

“I think they’re more afraid of the US banks than anything else,” said Mr. Ripa Wehber. “So people are just crossing the line — not just to buy things but now to buy things and to change money. Even a taco vendor here handles dollars.”

What can be done to rebuild trust?

Much work needs to be done on both sides of the border to rebuild trust. There are decisive actions that can be taken by both American and Mexican bankers and regulators.

Strengthen Mexican Regulations

To restore global confidence, greater emphasis on combating money laundering is needed from Mexico’s regulators. Historically, the country has implemented know your customer (KYC) rules, but the focus has been mostly on management of customers and businesses rather than anti-money laundering (AML) measures.

Although the Mexican government brought in new AML rules in 2013, some areas, like politically-exposed persons and requiring a risk-based approach, still need to be addressed. By doing so, Mexico will bring the nation’s compliance regime more in line with international standards, such as the Financial Action Task Force guidelines and European Union directives.

Better Collaboration between Mexican and Global Banks and Regulators

When banks and regulators from both Mexico and other countries work together toward the goal of safer dollar clearing transactions, the fear of severe fines by global banks will diminish. Already, Mexican and American financiers and officials have been meeting to work on this issue, and the U.S. Treasury has said that it working with its counterparts in Mexico to improve integration and transparency between the two countries.

According to a Mexican bank chairman, the problem will be resolved “when Mexican banks are as strict as the U.S. banks, or stricter on these issues… It’s not even know your customer. It’s know your customer’s customer.”

“Increased regulation combined with the increased adoption of traditional and alternative data through effective and frictionless technologies will help create the right environment for legitimate customers to prosper while prohibiting criminals from succeeding,” said Jon Jones, President at Trulioo. “As Mexico continues to create a stronger AML compliance regime that aligns to international standards, the trust and confidence of global banks will start to be restored.”

What do you think Mexico should do to regain the trust of global banks?

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