Mexico and the World
Vol. 2, No 2 (Spring 1997)
http://www.profmex.org/mexicoandtheworld/volume2/2spring97/mexicosundergroundeconomy.html

PROFMEX Web Journal: Mexico & the World

Issue 3 (May 1997)

TIES BETWEEN MEXICO'S UNDERGROUND ECONOMY

AND DRUG TRAFFICKING

By Marvin Alisky

Professor Emeritus, Political Science,

Arizona State University, Tempe, Arizona

S. Wilkinson's editorial-page cartoon from the June 9, 1997,editionof the ARIZONA REPUBLIC, Phoenix morning daily newspaper

I've seen weekend markets for every type of consumergoods sold openly in daytime in Satellite City (a Mexico City suburb).These goods were brought there without any import or other taxes beingpaid. Not just poor working-class shoppers looking for basic items on theirpurchasing power, but obviously upper-class and middle-class bargain hunters.

Guillermo X. González,

in EL NORTE (Monterrey, December 1988)

Considering that the contrabandistas who furnishedthe inventories were paid in the countryside sometimes in bags of marijuanarather than cash, the shoppers at those Satellite City stalls have beencontributing not only to the livelihood of smugglers but also of drug pushers,though obviously unwittingly. Similarly, U.S. buyers of drugs from Mexicomust bear the guilt of providing a market.

Given the above situation, it is ironic that U.S.and Mexican citizens both have been continuing to debate the pros and consof possible decertification of Mexico as a cooperating partner in the U.S.War on Drug Trafficking and that some U.S. congressional critics fear Mexicois moving towards the narcodemocracy status that has almost destroyed lawand order in Colombia.

After studying Mexicoâs public life for 50 yearsand having first been NBC network correspondent in Mexico and then professorof Latin American politics at two major universities, I feel that Mexicohas not reached the Colombian level of disaster. Despite the economic shockof the December 1994 devaluation of the peso and the subsequent economicheadaches, Mexicoâs economy now shows signs of health in many sectors.Yet the optimists who think that narcotics cartels represent only non-vitalsectors of the Mexican economy are mistaken.

There are discernible ties between the Mexicanunderground economy and the drug cartels, and both deal with the moneylaunderers, as trials in U.S. District Courts this year have proved. TheWall Street Journal covered the trial in the U.S. District court inHouston, Texas, of former Mexican Deputy Attorney General Mario Ruiz Massieu.On March 15, 1997, the jury in this civil trial found Ruiz guilty of beingpaid US$7.9 million by drug traffickers, as Texas Commerce Bank accountsindicated. The verdict allowed the U.S. government to keep the drug money.

The six-day trial made Ruiz Massieu former coordinatorof Mexicoâs anti-drug war in 1993 and 1994, the most senior Mexican governmentofficial ever convicted inside the United States of complicity in narcoticssmuggling. Some trial documents had broader implications about corruptionthan simply drug smuggling. References in the court implied that bribesfrom the drug cartels had been laundered within the U.S. banking system.

Some explosive allegations came from MagdalenaRuiz Pelayo, a Mexican citizen convicted of cocaine trafficking in 1992in Newark, N. J., and sentenced to serve 17 years in federal prison. Accordingto court documents published by the Mexican news magazine Proceso, Ms.Ruiz Pelayo has been prepared to testify that Ruiz Massieu was part ofa drug protection racket that used his brother, Jose Ruiz Massieu, formerdeputy head of the ruling Institutional Revolutionary Party who was assassinatedin 1994, to shield drug smugglers. Mexican daily newspapers REFORMA,

EL UNIVERSAL, and the news weekly SIETEDIAS reportedbriefly that smugglers of electronics appliances into Mexico are sometimespaid off not in cash but in narcotics, by cartel agents who also are involvedin complicated investments in both Mexico and the USA which yield laundereddollars, not easily traceable to drug sales.

The Mexican government disbanded its discreditedanti-narcotics agency, the Instituto Nacional para el Combate a las Drogas(INCD). In its place now is a new agency, Fiscalía Especial de losDelitos Contra la Salud (FEDS--Special Prosecutor's Office for Crimes AgainstHealth), under direct control of the Federal Attorney General's office(Procurador General de la República or PGR). Mexican President ErnestoZedillo replaced PGR Antonio Lozano with the current Attorney General,Jorge Madrazo. Lozano from early 1995 to late 1996 received public praisefrom the media and the general public because as a member of the oppositionNational Action Party (PAN or Partido de Acción Nacional) he didnot carry any personal political ties to the ruling Institutional Party(PRI). But gradually his direction over the INCD director became less intense.By contrast, PGR Madrazo has shown direct input with the new FEDS drugagency and its director, Mariano Herrán Salvatti. (See MANCHESTERGUARDIAN, Latin American Weekly satellite journal issue of May 6, 1997.)

The U.S. anti-drug program czar, retired Gen.Barry McCaffrey has stated several times during the spring of 1997 thathe believes that Mexican President Zedillo is a fundamentally honest manfighting a corrupt system he inherited. Perhaps the new FEDS agency willfare better than its predecessor agency.

Helping Mexican reformers are trials in the USAwhich reveal information about drug dealing in Mexico. Beyond the Houstoncase mentioned about which convicted Ruiz Massieu, also important is thecase of Carlos Enríque Cervantes. Carlos Enríque (a civilian,not to be confused with General Enríque Cervantes, Mexico's DefenseMinister, no relation) was a respected engineer and nuclear expert wholost his job as an administrator at Mexican National Institute of NuclearInvestigations following a scandal in which he was accused of misusingfunds. Banned from working in the public sector for 10 years, Carlos Enríqueattended a dinner in New York that turned out to be a Drug EnforcementAgency sting. The DEA arrested Cervantes and hurried him into a U.S. federaltrial. Although he is a cousin of former Mexican President Carlos Salinasde Gortarí , Cervantes did not try to use that connection at histrial. In a U.S. District Court documents are released that have not beencirculated publicly inside Mexico. Included at the Cervantes trial wasa memo on Magdalena Ruiz Pelayo, who had been convicted in 1992 of cocainetrafficking in the USA. The memo alluded to laundering of drug money bycooperating wholesalers of the underground economy in Mexico who evadetariffs on various consumer goods smuggled into Mexico and sold retailat mobile street stands by those who pay no taxes on their sales, but dopay bribes to municipal officials to keep the stalls or sidewalk displayscontrary to municipal regulations.

Forlorn 60-year-old Carlos Enríque Cervantesis now an inmate in the La Tuna Federal Penitentiary on the Texas-New Mexicoborder. In an interview with the WALL STREET JOURNAL on April 15, 1997,he said he has been impoverished and that his family lives in a small apartment,unable even to pay for telephone service. His son had to leave collegeand now works at a Burger King. Cervantes' former elite friends shun himand do not publicly admit being his former associates.

Thanks to another federal grand jury in the UnitedStates, Rigoberto Gaxiola Medina was indicted on charges of running a traffickingorganization that distributed more than 2,200 pounds of Mexican marijuanain the USA. The Gaxiola Medina family is a prominent clan in the Mexicanstate of Sonora that runs a wood import-export business among other things.A U.S. DEA official said in a March 20, 1997 interview that narcotics fromthe Gaxiola Medina cartel would be loaded on trucks in Tucson, Arizona,then delivered throughout the USA as far away as Michigan. Proceeds fromsales were wired from Michigan, Illinois, and Arizona to Mexican banksBanco Mexicano and Banco Serfín. After the U.S. officials made suchoperations public, the Mexican press and law enforcement entities belatedlylaunched their own investigations of the Gaxiola Medina operations.

In April 1997 a court in Texas sentenced MarcoEnríque Torres to 25 years in prison as a drug dealer. On May 12,Mexico's Attorney General Jorge Madrazo pressured U.S. Attorney GeneralJanet Reno into allowing Mexican investigators to question Torres, whohas knowledge about drug traffickers and money launderers. The May 13,1997, MIAMI HERALD covered the Torres story.

DRUG SMUGGLERS AND MONEY LAUNDERERSDUTCH TREAT

The Netherlands government still controls foreign-policymatters in the semi-autonomous Dutch Caribbean entities of Aruba and Curaçao.In early May this year, a conference was held in Curaçao, on moneylaundering in Latin America. The sponsors of the gathering included theAssociation of International Bankers of the Netherlands Antilles. Thesebankers have not been consistently rigorous in action against money laundering.In 1989, Manhattan District Attorney Robert Morgenthau stated the investigationthat led to prosecution of Bank of Credit Commerce International (BCCI)for irregularities. A BCCI subsidiary, First American Bank Shares of Washington,D.C., was a wholly owned subsidiary itself of the Credit & CommerceAmerican Investments of the Netherlands and of Curaçao. Three yearslater Morganthau had broken some of the bank secrecy in the Netherlandsand in its Antilles dependencies. A former Dutch prosecutor told the Curaçaoconference that drug traffickers had penetrated the government institutionsin Aruba. The conference heard that the powerful Mansur family, whose membersown Marlboro cigarette factories in Aruba and liquor stores, were linkedto money laundering. The U.S. indicted cousins Eric and Alex Mansur forusing Interbank to launder money from Colombian drug sales in the USA.Now the U.S. Justice Department is trying to find what parallel operationsfrom Mexican drug cartels involve Netherlands Antilles entities.

The Aruban Attorney General is always a Dutchnational, the appointment of whom must be approved by the government atThe Hague. New York journalist Lucy Komisar reported on May 29, 1997, thatthe Dutch government helping the U.S. probe the Caribbean connection, soDutch banks will continue to be welcome to operate in New York. Aruba andCuraçao banks do have depositors who are Mexican nationals but sofar we have no details on any of them in terms of money or drug trafficking.But the Colombian-Antilles connection has been firmly established, boththe WASHINGTON TIMES and the WALL STREET JOURNAL have reported. Further,Bogota newspapers in 1996 charged that someone from the Mansur family ofAruba funneled US$500,000 in campaign cash to Colombian President ErnestoSamper through the wife of a Cali cartel boss. Samper denied it vigorously.After such charges, the Mansurs were awarded a monopoly on managing Colombiangambling, but then the government suddenly canceled that monopoly withoutexplanation.

OPTIMISM OVER DRUG TRAFFIC IN ROADS

INTO MEXICO'S ECONOMY IS NOT ON TARGET

Several academic and journalistic observers ofMexico are optimists who think that narcotics cartels and money launderersrepresent only non-vital sectors of the Mexican economy, But that is notthe case. For example, Luis Rubio of the Center of Research for Developmentin Mexico City typifies such well-meaning well-wishers for Mexico. Rubiois indeed knowledgeable about Mexicoâs public life but too optimistic aboutthe ability of its economy to withstand the threats of the drug cartels,who invest in legitimate businesses as a cover and to make additional money.Rubioâs essay "Country's Drug Trade Overblown, Occupies Small Partof [Mexicoâs] Economy" (ARIZONA REPUBLIC, March2, 1997) cites figures to show that narcotics profits inside Mexico representonly a small percentage of Mexicoâs annual US$350-billion GDP. However,the U.S. Department of the Treasury last November estimated those profitsat US$10 billion for funds for which it could account, with the stern warningthat there are unknown billions of dollars more for which it still hasno verification but which are also part of the drug profits. Rubio seemsto deal only with drug profits but not related expenses.

If expenses are factored into the analysis ofMexicoâs gross drug income, the dollar amount that remains inside Mexicoafter profits may be as high as US$100 billion, which covers bribes toMexican politicians, police, soldiers, judges, and salaries for guards,informants, processors, packers, sellers, and transporters. Drugs constitutethe only truly freely traded item in the Americas.

What is now needed is an in-depth probe of theties between the narcotics traffickers cartels and the undocumented amorphousunderground economy, which in Mexico is extensive. In my own analysis "Tappingthe Resources of Mexico's Underground Economy," written for editorialpage of the WALL STREET JOURNAL (December 30, 1988), I summarized my threemonths of summer research in Mexico City at the Center for Economic Studiesof the Private Sector (CEESP). At CEESP I consulted research on illegalbusiness activities that had never showed up on Mexican tax returns orannual reports. Veraâs data included but went far beyond narcotics dealingsto cover embezzlement. Investigations of many legal economic endeavorsrevealed the everyday hindrances of Mexicoâs over-taxed and over-regulatedeconomy. These hindrances encourage an underground economy and the regulatoryburdens placed upon legal economic activities are not stated in officialTreasury Ministry records. They do not get discussed in the Gross NationalProduct reports either.

During the last weeks of President Miguel de laMadrid's administration, the government stepped up its efforts to privatize50 state-owned enterprises before leaving office December 1, 1988. Thateffort culminated in the October 1988 sale of AeroMéxico to a groupof Mexican businessmen for US$350 million.

Given the political pressures from the leftistNational Democratic Front Cuauhtémoc Cárdenas, the innercircle of the ruling Institutional Revolutionary Party wanted to let theoutgoing chief executive take the criticism from statists. With those privatizationsales accomplished or being finalized, Mr. Salinas could come into officeas the inheritor of the policy, rather than the initiator.

Thus, there is one area of privatization thattouches virtually all Mexicans and that the new president may well pioneerin a very open way: unlocking the hidden potential of Mexico's vast undergroundeconomy. Thankfully, those, who govern Mexico at last are listening tomarket economists such as those at the Center for Economic Studies of thePrivate Sector. Economist Vera, then, is helping government leaders confrontthe economic morass responsible for the underground economy.

In 1986 CEESP published Veraâs pioneering study"The Underground Economy in Mexico" (LA ECONOMIA SUBTERRANEAEN MEXICO), which revealed the enormity of economic activities not on thetax rolls. Not just in the borderlands (near U.S. sources of supply) docontraband vendors ply their trade, but in every state and within evermajor city, including the national capital of Mexico City. Quality electronicgoods at bargain prices. Retailers who pay honestly all their taxes cannotmarket at the price level of the underground merchants. The main overheadexpense of the latter are the bribes paid to police and treasury personnelto look the other way. Now, with the detailed computer printouts of Mr.Vera any would be reformers will have some specifics with which to modifyforces that drive these entrepreneurs underground.

One would presume that a government in deep financialcrisis would not impede successful entrepreneurs providing new Jobs. Yetin Mexico, a labyrinth of regulations encourages many legitimate businessinnovators to remain in the underground. The alternative can mean monthsor years of delays and costly legal assistance, if such legal help canbe obtained at all. And the "informal sector" alternative isnot limited to city folk. Rural underground entrepreneurs abound, as well.

The rural population is too often Îforcedâ intothe illegal and/or underground economy in two ways: government failureto meet peasant needs and the growth of informal markets outside the taxsector. In the first example, let us recall that the so-called Sonora caseof 1984 in which the federal government held an undeveloped plot of desertland in the Cajeme region in the state of Sonora. With roads to potentialmarkets and irrigation water from established canals lying only a half-kilometerfrom the tract in question, a group of peasant-farmers (campesinos)organized by the Cajeme Campesino League decided to petition for communaltitle to the land. They obtained the services of a young attorney, whoin turn recruited two of his law students to perform the volume of paperwork required by the Ministry of Agrarian Reform in Mexico City, some 2,000miles to tile south. Their original petition pointed out that the groupincluded farmers who are skilled in carpentry and could construct theirown low-cost housing and barns.

The Mexican Ministry of Agrarian Reform is supposedto offer guidance on filing procedures, but none was forthcoming. So thepetition from the Sonora group languished in layers of red tape in thefederal capital for two years. Nevertheless, in early 1986, a terse letterreached the Cajeme group, saying the petition was being denied becauseof lack of corroborating documentation. Some 35 pages of details apparentlydid not satisfy certain federal bureaucrats. No wonder campesinos are drivenby such bureaucratic obfuscation to informal land seizures and/or to growingmarijuana. With the agrarian reform law revised by President Salinas inthe early 1990s, the government may grant lands to communal farmers butis not Îrequiredâ to do so, this fact increasing the potential for bribe-takingby government officials. Hampered by rules, costly permits, and licenses,enterprising Mexicans in the tens of thousands opt to pay bribes to bypassdelays and heavy-handed governmental restrictions so that they can work.

In the case of tianguis (unregulated markets wheregoods are traded and sold), anthropologists have often pointed out thatin the rural areas village Indian markets operate today much as they didwhen the Spanish first invaded the Aztec empire in 1520. Such markets donot easily lend themselves to government regulations. In additionto not paying taxes, the Indian merchants ignore municipal orders for basicsales procedures. Some 50,000 tianguis exist in the remote recesses ofMexico, the taxing of which would be complicated by trading of goods andwork for food.

Given these factors, it is no wonder that theMexican Federal Government's total GDP is undervalued by 15 to 25 percent,as has been suggested in the finding of a 1995 report from professors atthe Instituto Tecnológico y de Estudios Superiores de Monterrey(ITESM) . Unfortunately the report did not circulate nationally in anymass publication or learned journal, its authors Îdecidingâ to merely duplicatexeroxed copies among researchers known to be skeptical about the government'sofficial data. One copy found its way to Hernando De Sotoâs Instituto deLibertad y Democracia del Perú (ILD), internationally known forfocusing brilliantly on the informal or underground economies of LatinAmerica and the Third World. (See De Sotoâs book THE OTHER PATH, New York:Harper & Row, 1989.) It was my good fortunate that a staffer at theILD gave me a copy of the ITESM Report, which helps to support my viewthat for Mexicans, Peruvians, and other Latin Americans the "informaleconomy" (or "underground economy") involves drugs--eventhough it has usually been thought of as outside the drug problem.

Although black-marketers have been thought ofas pushers of unregistered consumer goods and services and operators ofillegal industries and companies that pay no taxes (thus merely competingunfairly with businesses and industries that obey the law, register sales,and do pay their taxes), in the 1990s they must also be considered as linkedto the dangerous sector of narcotics traffickers. Contrabandistas and traffickersthat cooperate inside and outside Mexico also fuel the phenomenon of moneylaundering. (Now that Mexican and U.S. banks are under the spotlights ofinvestigation for handling laundered cash, Mexican and U.S. banks are increasinglyfinding themselves under scrutiny--if not in legal trouble).

In 1994 I retraced the steps of the CEESP staffersof 1988 and found an even higher volume of underground business in MexicoCity than they had earlier reported. A doctoral classmate of mine fromyears ago at the University of Texas gave me confidential information thathe himself cannot publish because he does not want to compromise his positionwith the Mexican government. He found former associates of convicted narcoticskingpin Juan García Abrego had invested in companies turning outelectronics products, machines tools, and trucking services.

IS THERE HOPE FOR MEXICO TO FIGHT DRUGINFLUENCE?

Yes, there is some such hope, but it may not comefrom the U.S. government threat to de-certify Mexico as a "cooperatingnation in the anti-drug war" so long as the U.S. Government can becriticized for failing to stop the rise of consumption. Critics of U.S.policy note that until U.S. drug use is decriminalized, U.S.-Mexican drugprofits are so high that the U.S. War on Drugs cannot be won--there isno "light at the end of the tunnel."

Although by mid-1997 Mexican Attorney GeneralJorge Madrazo purged the federal police force (900 officers being firedfor accepting bribes from narcotics sources) and new officers are to becarefully selected, undergo polygraph testing, and be specially trainedas well as earn fair pay, in my view Mexico will need positive help frombusiness.

My own suggestion is to help Mexicoâs legal economyis to draw upon the role of the U.S. private sector which invests in Mexico.Since 1986 major U.S. industries have employed industrial intelligenceagents openly looking into contraband problems in Mexico. (In that yearthe Society of Competitive Intelligence was established and began publishinga quarter journal, the COMPETITIVE INTELLIGENCE REVIEW.) These industrialprivate-sector intelligence agents from top corporations have considerableinfluence at the U.S. corporate board level, effecting management's decisionsin investments abroad.

Building upon the above U.S. private-sector intelligence,I propose the reactivation of President Ronald Reaganâs Foreign IntelligenceAdvisory Board, which was created to advise the U.S. Presidency. AlthoughReagan and George Bush utilized that board, Bill Clinton has not convenedit. If the Board were to be reactivated, it could help advise U.S. corporationleaders on how to work with their Mexican partners to assure that infusionof millions of dollars of investment is not contaminated by the sale ofeven tiny minority shares of stock to known narcotics cartel leaders.

Anti-drug actions by either private-sector orgovernmental leaders involves monetary or political risks. The only unthinkableposition, however, is to continue to only fund the failed U.S. War on Drugs.In an age of TV sound bites and slogans, perhaps the cry should be "Thestatus quo has got to go."