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Mexican Violence Spills Into U.S. Banking

Money laundering is the biggest threat for U.S. banks tied to Mexico.
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) -- Violence in Mexico is having reverberations in the U.S. banking industry, with money laundering representing the greatest issue for investors, observers say.

Mexico is getting "harder and harder" for banks doing business there even as other Central American countries, such as Colombia, have cleaned up their act, saysEllen Zimiles, global head of investigations and compliance for Navigant Consulting, which advises banks on how to prevent money laundering.

However, Zimiles says banks that have had money laundering troubles in the past are often the least likely to get slapped with a fine.

"The ones that have had issues are actually the best ones to look at now because, you know, they don't spit on the sidewalk."



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's Banamex unit has the most direct exposure to Mexico among U.S. banks, the issue also affects banks with major operations near the U.S.-Mexico border, including

Wells Fargo

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JPMorgan Chase

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Bank of America

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American Express

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have been tied to drug traffickers in branches as far away as Oklahoma City and Miami, according to a



And earlier this year, Wells Fargo was forced to pay $160 million to settle Mexican money laundering charges brought against Wachovia, which it acquired in 2008.

A soldier takes pictures of weapons, seized from drug smugglers, prior to its destruction at the Secretary of the Defense headquarters in Mexico City on Wednesday.

Perhaps surprisingly, past periods of violence in Mexico have been good for banks' profits, says Noel Maurer, a Harvard Business School professor and author of

Mexico Since 1980


"It raises their costs, clearly, but they can push a lot of their costs on to their customers. They can raise net interest margins, they can cut back on lending and ration credit. They can--and I hate to say this--indirectly even help organized crime and provide services to organized crime."

Maurer argues banks may be involved with criminals unwittingly in many instances.

"It wasn't that every bank in Panama was dirty; it was simply that you couldn't bank in the eighties in Panama without engaging in money laundering unintentionally," Maurer says, noting that for retail banks in Mexico at the moment, particularly in the north, it is "becoming increasingly hard," to avoid doing business with criminals.

That could be a problem for banks if U.S. officials continue to bring big money laundering cases. A $298 million settlement by

Barclays PLC

appeared to be focused mostly on Cuba and Iran, but it suggests the Justice Department is aggressively prosecuting such cases. The fact that the judge who approved the settlement Wednesday criticized it as a "sweetheart deal," according to

The Wall Street Journal

, can hardly be comforting to banks with potential money laundering issues of their own.

Paulo Carreno, a Citigroup spokesman, says costs have not increased to the bank despite the recent violence. He says security measures used to protect bank executives from kidnapping or other violence have been in place for years, and remain sufficient. As for money laundering, he claims Citigroup and Banamex have a "longstanding culture of taking stringent steps to fight money laundering."


Written by Dan Freed in New York


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