An executive order making it possible to designate drug cartels as foreign terrorist organizations will saddle banks with complex due-diligence requirements and potentially raise their exposure to material support charges, analysts told ACAMS moneylaundering.com.
The order, which President Donald Trump signed alongside a flurry of other measures on Jan. 20, hours after his inauguration, paves the way for the State Department to blacklist certain drug cartels as FTOs despite their absence of a clear ideological or political stance.
Dealing with a specially designated national, or SDN—a label that the Office of Foreign Assets Control already applies to the Sinaloa, Gulf and Jalisco New Generation cartels and their splinter groups—is a comparatively straightforward process for financial institutions, as the agency simply defines which persons or entities will have their bank accounts and other U.S. assets frozen.
“OFAC generally makes determinations of ‘control’ and ‘acting for or on behalf of,’ which are reflected in its derivative designations,” said Jeremy Paner, a former investigator for the agency. “However, U.S. financial institutions are responsible for making these determinations when deciding whether to block the funds in which a potential FTO may hold an interest.”
Financial institutions serving legal entities linked to individuals on the SDN list must already determine whether any blacklisted person owns a majority stake in them pursuant to OFAC’s “50 percent rule.”
If so, the financial institution in question must block and report all assets or transactions associated with the entity to OFAC. Absent such a link, the institution can still flag the entity to OFAC if they suspect influence by an SDN.
FTO designations potentially represent a far greater burden, in that they require financial institutions to also determine whether any funds they hold or transactions they facilitate—even indirectly or unintentionally—could benefit a designated party. Banks could also face criminal liability if they fail to detect material support for an FTO.
In addition to reporting blocked transactions or assets to OFAC, they must also report them to the Justice Department or FBI.
Designating cartels as FTOs, even those already named SDNs, in other words, could place institutions on the hook with the Justice Department should they fail to navigate through their networks of shell companies, front companies and other intermediaries to identify them as the true originators and beneficiaries of the underlying transactions.
“It will be a significant burden on U.S. banks if they are to be responsible for making determinations on which individuals and entities qualify as agents of the cartels,” Paner, now a partner at Hughes Hubbard & Reed, said.
Pursuant to the executive order, the State Department, with input from the Treasury Department, Justice Department, Department of Homeland Security and Office of National Intelligence, must identify which cartels they will designate as FTOs, by Monday, Feb. 3.
Material support
Legal similarities and differences of the two designations aside, the reputational impact of being caught dealing with an FTO is of far more concern to a global bank than that of being caught dealing with an SDN, said John Smith, a former director of OFAC.
Trump’s executive order thus carries “enormous implications” for banks that either operate—or interact with other banks that operate—in regions tied to FTOs, and could exacerbate the global de-risking phenomenon, said Smith, now a partner with Morrison Foerster in Washington, D.C.
Financial institutions caught knowingly handling funds for FTOs could draw unwanted congressional and executive scrutiny, not to mention federal charges of material support for terrorism and potentially crippling monetary penalties.
The Justice Department to date has gone after several major financial institutions for providing material support to FTOs.
BNP Paribas paid a record $8.9 billion in fines and forfeitures to the U.S. government for sanctions violations in June 2014 after the French lender pleaded guilty for “deliberately and secretly” processing $8.8 billion in transactions for blacklisted entities in Sudan, Iran and Cuba, including for groups with links to al-Qaeda. It was also banned from processing transactions in U.S. dollars for a year.
The second-highest penalty related to FTOs landed in April 2019, when Britain’s Standard Chartered Bank paid more than $1 billion to U.S. state and federal agencies and the U.K. Financial Conduct Authority for processing hundreds of millions of dollars in payments for individuals and entities in Iran, Syria and other sanctioned countries.
The broader ecosystem of entities and individuals linked to cartels, whether directly or indirectly, is particularly complex given the depth of their influence in countries like Mexico, where countless companies, many of them American, must pay for “protection.”
U.S. officials could view protection payments, which small businesses and international companies along all areas of the supply chain have made, as a provision of material support to terrorists, “even if the individual or business did not want to pay, or if they did under threat,” said Yussef Nunez, a global affairs professor at Anahuac University in Mexico City.
Financial institutions caught handling funds for FTOs could also expose themselves to terrorism-related lawsuits from victims of cartel violence under the 1996 Anti-Terrorism Act, which allows U.S. nationals to pursue civil damages against any individual, organizations or nations found to have supported terrorist groups.
With SDNs, OFAC can issue licenses that permit financial institutions to handle certain, otherwise-prohibited transactions to facilitate deliveries of food, medicine and other humanitarian aid, for example.
OFAC can similarly permit limited sets of transactions that may inadvertently result in support for FTOs, such as for humanitarian groups in sanctioned jurisdictions, but only with limited effect, as the agency’s licenses do not shield financial institutions from federal statutes against material support for terrorism.
When the Trump administration designated the Houthis, an Islamist political and military organization in Yemen, as an FTO in January 2021, dozens of global financial institutions exited the country, about 80 percent of which falls under the group’s control. Their departure prevented much-needed aid from reaching Yemen, stopped payments for imports and halted remittances.
“Banks treated any and all activities in Yemen as potentially bringing material support to an FTO, and … simply did not engage in any banking activities or process any transactions,” said Jason Prince, former chief counsel to OFAC. “Humanitarian organizations appealed to OFAC, but it could do very little because it was the Justice Department’s determination.”
Trump reinstated the designation Wednesday, four years after President Joe Biden lifted it.
Blacklisting cartels as terrorists could have similarly far-reaching consequences as the “material support penalty is very nebulous,” said Prince, now an attorney with the Akin Gump law firm in Washington, D.C.
Migrants who pay smugglers to transport them through Mexico, relatives of kidnapping victims who pay a ransom and truck drivers forced to pay a toll to crime syndicates who themselves work for or kick up funds to the cartels could be viewed as providing material support to terrorists.
Trump could also theoretically designate entire swaths of a geographical region or population as potential members of an organization, said Smith, the former director of OFAC.
“It would be a stretch legally for him to do this, but he has already signaled that he plans to use the FTO authority in a way that’s never been done before.”
Contact Chelsea Carrick at ccarrick@acams.org
Topics : | Sanctions |
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Source: | U.S.: OFAC , U.S.: White House/U.S. President |
Document Date: | January 29, 2025 |