U.S. Arrests in Bank Probe a Black Eye for Mexico

Mexico’s banking leaders are confronting an embarrassment so major that an equivalent case in the United States is hard to imagine. It’s as if branch managers from America’s 12 biggest banks had been arrested in a sting operation and charged with laundering drug money.

That’s precisely what happened to Mexico’s banking industry Monday, when the U.S. government not only indicted 26 employees from 12 Mexican financial firms, but brought charges against three major banks--one of which had just been bought by Citibank.

Atty. Gen. Janet Reno, in announcing the three-year operation, called it the biggest money-laundering investigation ever and a major blow against narcotics traffickers. Pointedly, the U.S. did not inform Mexico of the probe ahead of time, and Mexican officials were left to explain that they knew nothing more than what they had read in the official U.S. announcement.

Mexican banking authorities and government officials sought to downplay the potential impact of the indictments and arrests, saying the case appears to involve rogue individuals rather than systemic corruption. There was also indignation at the U.S. operation.

The daily newspaper Reforma said in an editorial: “The gringo authorities . . . threw some bait of $30 million to bribe these officials and, yes, they managed to launder money. As if American bank employees wouldn’t succumb to the same temptations.”

Further, officials noted that the alleged offenses occurred before Mexico, in April, implemented what are widely acknowledged to be world-class money-laundering regulations, which require disclosure of all suspicious financial transactions.

Yet Mexico’s banking leaders could not disguise their discomfort at the revelations, which were all the more painful in the context of recent banking scandals and the costly bailout of the banking industry amid the crisis that followed the peso devaluation in 1994.

“It’s a very serious embarrassment, of course,” said a senior Mexican banker, who asked not to be identified. “I think this will prod the banks into taking faster action [against money-laundering]. This should be a sort of warning call for people to speed up and implement the new policies more energetically.”

Stocks of major banks continued to plunge Tuesday, dropping as much as 8.7% on the heels of similar tumbles Monday as news of the probe spread. Mexico’s main stock index fell 0.5%, to 4,624.45, after diving 2.9% on Monday. But most banking analysts said they don’t expect the charges to inflict long-term harm on the Mexican financial system.

“There won’t be serious damage if it turns out that these are isolated people at a lower managerial level, with no one higher up being aware of it, and they were able to beat the system--and I’m sure that’s what this is,” said a foreign banker with many years of experience in Mexico.

“I’m sure there’s no complicity from the institutions. But in time, it may well show there were lapses in security measures that have to be rectified.”

Brokerage Merrill Lynch told clients, “We view this news as negative, but of a somewhat limited effect on banks’ financial fundamentals.”

The arrests came as a major financial-reform package is debated in Mexico’s Congress. Among other actions, it would shift control over bank supervision from the Finance Ministry to the Bank of Mexico, the country’s central bank, following complaints that the current authority has been unable to impose sufficient discipline on the banking system.

Mexico’s banks were nationalized during the 1982 debt crisis and then hurriedly privatized in the early 1990s. Many banks had to be bailed out in 1995 and ’96 as overdue loans soared in the brutal post-devaluation recession. The government now holds $65 billion in high-risk bank assets.

Among the many crisis-plagued banks was Confia, whose director, Jorge Lankenau, is in custody facing charges of defrauding customers. Citibank has just completed its purchase of Confia. Former directors of two other banks also are facing criminal fraud charges.

Finance Minister Jose Angel Gurria said the U.S. indictments “are not a judgment against the Mexican banking system but against a few employees, the majority of them of low level.”

The indictments, unsealed in U.S. District Court in Los Angeles, charge three banks--Confia, Bancomer and Serfin--as well as individual employees of a dozen banks, including several branch managers and account executives.

“The bottom line is that [Mexico] is riddled with corruption, all the way through the government, through the military,” said Allan Castle, a United Nations consultant on money-laundering at the International Center for Criminal Law Reform in Vancouver, Canada.

“If the Mexican government is sufficiently embarrassed--and mind you, the threshold is high--then something like this can have significant impact,” Castle said.

The indictment came just two months after Mexican authorities acknowledged that members of the Juarez drug cartel tried to buy control of a relatively small banking group, Anahuac, in 1996. Officials said they uncovered the plan and stopped it.