Mexican banks say US regulatory clampdown has damaged legitimate activity

Before the 2008 financial crisis, Mexican banks had a big problem: too many dollars. Tourism and businesses in the northern border areas near the US, as well as remittances, brought greenbacks flowing into Mexico. This left Mexico awash with dollars — a massive US$14bn in surplus US bank¬notes — which had to be returned to the US Federal Reserve, reports the Financial Times.

As one senior Mexican banker recalls, this so-called bulk cash business required “a lot of aeroplanes” to fly the cash back to the US.

“It’s about the tail-end risk, the possibility of making one mistake,” says a US banking official. “There is zero tolerance so it’s just not worth it. A lot of Mexican banks are frustrated because they are losing access to the US banking system.”

Many banks in Mexico are part of international groups: Banamex belongs to Citi; BBVA Bancomer is Spanish-owned; HSBC is British; Scotiabank is Canadian. Clearing services are no problem for them. It is the smaller, national banks, some of which cater to lower-income individuals, that have been hurt the most. The likes of Monex, Sí Banco and Banco Azteca do not have the ability to clear dollars themselves and need global banks for that service. According to industry sources, more than 50 correspondent accounts held by Mexican banks have been closed over the past five years by about a dozen US banks.

The crackdown on money laundering has not necessarily curtailed the practice, but instead may simply have pushed it further underground. The up to $10bn in illicit cash that used to flow through the system is still going to the US, the senior Mexican banker says: “It’s just no longer on the radar.”

“Unfortunately, this is a prime example of policy that was intended to reduce illicit activities that is pushing legitimate businesses to operate in unregulated grey markets,” says a Banco Azteca spokesperson. “What is lost is important information regarding the origin and destination of cross-border currency that banks provide, but informal money changers don’t.”

The pressure began in 2012 when the US Senate released a scathing report about HSBC’s alleged role in laundering Mexican drug money. The report also accused its federal regulator, the US Office of the Comptroller of the Currency, of tolerating the bank’s weak anti-money laundering protocols for years. Late that year, HSBC was hit with the US$1.9bn penalty — the largest bank fine in history at the time.

This year, Citigroup reported that several federal and state authorities were investigating Banamex USA, which is related to its Mexican unit Banamex and provides services to clients in the US and Mexico. The US Attorney’s office in Massachusetts and the Federal Deposit Insurance Corporation issued subpoenas to Banamex USA last year inquiring about money laundering.

The HSBC case helped create a “sanctions paranoia on the part of US authorities”, says the senior Mexican banker, which led to a “brutal form of de-risking  . . . and a refusal to do trades that Mexican banks had done with US banks for decades”.

“Given the recent penalties, given the difficult of truly knowing your customer when you are on the border, it’s hard to say that the large banks are overreacting given the regulatory environment,” says Peter Skinner, a former federal prosecutor who worked on money laundering cases. “The risk is that instead of banks that have robust compliance efforts taking this money, it may now move to the ones that don’t.”

Bankers and officials from Mexico and the US have met to thrash out the problem, and banks have beefed up the “know your customer” or KYC concept. US officials have told bank executives they are overreacting and that mitigating risks does not mean getting out of certain businesses and services completely.

Operations in Mexico are seen as particularly vulnerable because it is hard for a clearing bank to know where the funds in such a transaction came from, and those kinds of services do not produce much profit. The problem will be resolved, the Mexican bank chairman says, “when Mexican banks are as strict as the US banks, or stricter on these issues . . . It’s not even know your customer. It’s know your customer’s customer.”

For now, dollar clearing transactions attract extra attention by regulators and their bank examiners, leading many global banks to conclude that offering certain services in Mexico is just not worth the risk. “Any operation with Mexican banks [for US banks] is like raw meat for a shark — they’re [the regulators] going to go after it,” the senior Mexican banker says.

The US Treasury says it is working with Mexican authorities and banks to boost bilateral integration and transparency. “The financial relationship between the US and Mexico remains strong,” a spokesperson said.

Heading for the exits

JPMorgan Chase has been one of the most far reaching in its response. The bank closed the accounts of many businesses operating along the US-Mexican border, and also shut down accounts for current and former non-US government officials. Predictably, this decision was unpopular with many customers — including José Antonio Ocampo, Colombia’s former finance minister. He was told that his bank account at Chase would be closed by May 30, 2014 because of the bank’s decision no longer to open or maintain accounts for current or former non-US officials, their immediate families or close associates.

After Prof Ocampo fired off angry letters to the bank and filed a complaint to the US Consumer Financial Protection Bureau, he says Chase found a solution for him, for which he is grateful. (He declines to say exactly what that was.) Prof Ocampo, a Columbia University professor in New York, also opened an account at a credit union.

But he said the problem goes beyond just one bank and is the result of overreaction by financial institutions facing tough penalties, and the regulators who have imposed them.

“Something has to be done that is more sensible,” says Prof Ocampo, who was undersecretary-general for economic and social affairs at the UN. “I support tough regulation but it has to reasonable and not overextended.”

He said he knows others in the diplomatic community, including the son of a former diplomat who became a US citizen, who have had their accounts closed at various banks. “These people have a very clean background, just like me.”

Local Mexican banks have been forced to look for alternative clearing partners, mainly in Europe. One Mexican bank chief says he had heard some operations were sent through Panama too, because US dollars are used there.

Some US banks, including Fifth Third Cincinnati and CBW Bank, have had niche clearing businesses in Mexico that they have reined in. Fifth Third is no longer clearing for Azteca, for example.

“It is fair to say we don’t deal with as many [Mexican] banks as we used to,” says a Fifth Third spokesperson. “The regulatory environment is a factor. It’s included in the consideration.”

Bank officials in Mexico say the situation has improved as companies on both sides of the border learn how to operate under the legal environment, although the presence of dozens of banking regulators in the US has made the issue very complex. More onerous compliance requirements have also pushed up costs.

“The fundamental problem is that US authorities are putting very heavy pressure on banks,” says the Mexican bank chief executive. “If we reached a situation in which we couldn’t get clearing, our business would virtually be wiped out. But it’s not as bad now as it has been.”

The Mexican bank chief says he had not lost business because of the crackdown “because we stopped serving some segments so that our clearing banks would not be worried. We have had to increase our KYC requirements. The fear is of seeing ourselves limited in the services we can go for.”