Emerging Legal Exposure for Businesses in Mexico: Local Supplier Relationships Can Trigger Enforcement of U.S. Financial Crime Laws

Until the start of the second Trump Administration, companies doing business in Mexico and other Latin American countries likely felt reasonably comfortable with their existing compliance programs around their supply chains. Nowadays, it is a whole new ballgame. Simply maintaining the status quo with respect to your locally established supply chains can put your company in the cross-hairs of U.S. authorities due to growing risks created by the Treasury Department’s heightened enforcement priorities.  

The Treasury Department has recently focused on money laundering, fentanyl production and, most importantly, the designation of several (mostly Mexican) drug cartels as Foreign Terrorist Organizations (FTOs). The equivalence of drug cartels to groups such as Al-Qa´ida, Hezbollah or some Taliban factions under certain U.S. laws, opens a whole new risk area to your day-to-day operations in Mexico. 

If your company is one of many that run manufacturing operations in regions like the U.S.-Mexico border, the Bajio in Mexico (Aguascalientes, Guanajuato, Queretaro, and San Luis Potosí) or other with similar circumstances with the intention to export to the United States, it is imperative to avoid, even inadvertently, providing material support to an FTO through any potentially cartel-influenced local supplier that touches your supply chain. By simply continuing to do business with a local supplier that is forced to interact with cartels, or that modifies its daily operations in response to cartel pressures, your company could be seen as materially supporting such terrorist organizations. This violates the U.S. Anti-Terrorism Act, and carries significant civil and criminal penalties, as well as a risk of private litigation.  

As the Treasury’s enforcement is criteria-based, entities doing business in Mexico should take immediate and proactive measures to mitigate risks and shield, to the extent possible, their local supply chains from legal and reputational risks, both of which could do tremendous economic harm.

Recommended strategies and measures include the following:

1. Perform a comprehensive risk evaluation by mapping your local supply chain exposure.
2. Enhance and document due diligence protocols through robust Know Your Customer (KYC) and onboarding procedures.
3. Revise supply chain and vendor contracts to include provisions related to FTOs, Specially Designated Global Terrorists (SDGTs), Specially Designated Nationals (SDNs), and Transnational Criminal Organizations (TCOs) as deemed relevant with the addition of automatic termination triggers for compliance breaches.
4. Reevaluate existing relationships, especially when there are changes in beneficial ownership, expansion into new sectors, or sudden demands for modifying long standing practices.
5. Monitor financial behavior by flagging cash-intensive transactions and sudden shifts in payment methods or beneficiaries.
6. Invest the time to get to know and document your suppliers´ current operations and their respective supply chains.
7. Create a heat-map of vulnerable industries within your suppliers, i.e. logistics and transportation, construction, maintenance, and labor-intensive industries.
8. Institutionalize internal- and supplier-training, establish secure and anonymous whistleblower channels, encourage early reporting.
9. Define precisely what type of activities your supply chain should be reporting to your company.
10. Designate a senior risk officer or task force, establish escalation protocols, and develop a crisis response plan.
11. Document incidents and promptly file suspicious activity reports as required.
12. Consider proactively engaging with regulators on a non-attribution basis.

As we face a new U.S. enforcement climate, the longevity of your business requires a serious look at your supply chain. Failure to do so could result in a rude awakening via a government enforcement action, whether through a subpoena, or the authorities knocking on your door unannounced.

Foley’s Government Enforcement Defense & Investigations (GEDI) team has prepared a more in-depth analysis of recent relevant orders and U.S. government measures that can be found here.

The team is available to assist in the implementation of any of the above-listed recommendations or to provide guidance as needed. Please do not hesitate to contact us with any questions or concerns.