 Another country where oil prices have an effect of Mexico, that is the focus of our next panel. I'd like to invite our panelists up, Dr. Duncan Wood, Dr. Concepcion Verdugo, and Eric Lacombe, will be our moderator. This is Eric with us. There he is. Hi, Eric. Welcome. It's good to be with you today. As Tom mentioned, my name is Eric Lacombe from Jubilee, USA. We've been working closely with global financial integrity over the last few years, as GFI has really done groundbreaking and truly revolutionary work on the issue of illicit financial flows. In terms of our organization, we approach the issue rather specifically. We cut our teeth as Jubilee in the early 2000s, late 1990s, looking at debt restructuring. But the reality of it is, is you can't address debt issues if you're not also dealing with revenue issues. And that's what brought us in the late 2000s into working more specifically on issues like illicit financial flows, trade misinvoicing, and also corporate tax avoidance. Because at the end of the day, these issues have a very specific impact on budgets. And from our perspective as a religious coalition working to end poverty, it has very powerful implications on the poor and the vulnerable. So today we're going to continue that conversation on illicit financial flows, looking specifically at Mexico, and we really couldn't have two better people with us to be able to help us frame and engage in this conversation today. I know you have their bios, but I'd like to introduce both of them, Dr. Duncan Wood, who's the director of the Mexico Institute at the Wilson Center. And we'll also be hearing from Dr. Concepcion Verdugo-Yepes, who's an economist at the International Monetary Fund. In a moment, Duncan's going to begin his comments and partly what he's going to share with us is really looking at how issues around money laundering in terms of Mexico need to be addressed and really in what context they should be addressed. We'll also hear some complimentary comments from Concepcion, who really is looking at the issues of mitigating risk, as well as some of the root causes of these issues we're looking at in the context of Mexico. So let me turn it over to Dr. Duncan Wood. Thank you, Eric. Good morning, everybody. It was a great delight to receive the invitation to come and participate at this event. It's an issue that we at the Mexico Institute have been following for a number of years. We've published a couple of papers over the years on the issue of money laundering and U.S.-Mexico cooperation on money laundering. Unfortunately, I am not the Mexico Institute's expert. I just happened to run the outfit. Eric Olson, who does some work on money laundering, is dashing out to the airport right now for a trip that I'll join him on later on to Mexico's southern border. So I'm afraid you'll have to do with sloppy seconds as far as we can. And I was quite happy to make the enormous journey from 1300 Pennsylvania over to here today. Some general comments, first of all, about how U.S.-Mexico cooperation on issues of security have developed in recent years. And I see that there are three defining factors for how that has worked. First of all is the trust factor. Traditionally, Mexico and the United States have structured their security relations in an environment or a climate of very, very low trust. The Mexicans don't trust the Americans because the Americans invaded Mexico and took half of their territory. That's the short version of the story, okay? U.S.-Mexico relations for dummies. That has begun to change in recent years, as there's been the rapprochement, of course, brought on by the NAFTA-integrated production systems, et cetera. And of course, the major step forward that happened under Felipe Calderón and his war against organized crime. The trust that was built up during the Calderón administration from 2006 to 2012, however, was severely cut back when the new Mexican administration came in in 2012 under Enrique Pena Nieto, which was a return to power of the pre, the revolutionary institutional party in Mexico. Still one of my favorite party names around the world. You can be revolutionary yet institutional at the same time. The only better one in my experience was when Canada had the Progressive Conservative Party. That was fabulous. But those trust levels were kind of scaled back, and all of a sudden the United States found itself in a situation where Mexicans once again were questioning U.S. motives. What is it that the Americans want? And how do we structure our official relations so that we, on the Mexican side, can centralize and control every information, every bit of information that flows between the two countries? Now of course, from the U.S. perspective, when there was the rapprochement in the early 2000s, and particularly under Calderón, there was a level from the U.S. side as well, which was we don't know who we're talking to. And time and time again in conversations with U.S. officials, you'd hear I don't really know how much information I want to share with my Mexican counterpart because I don't know whether they are in fact part of the problem rather than part of the solution. Over the period of the Calderón administration, that changed a great deal, and the United States agencies were able to identify reliable, trustworthy counterparts on the Mexican side. They went to the board, but they found key agencies and key individuals in those agencies that could be trusted. So trust is always going to be an issue. The second factor, which I think defines all of this, is capacity. Of course, Mexico has faced a real challenge in terms of building up the institutional capacity, as well as the expertise, the human capital, et cetera, that they need to really engage in a sustained fight against illicit financial flows and money laundering from organized crime in particular. And the United States and Mexico have worked very closely in recent years on trying to strengthen that institutional capacity. That's a factor I'll come back to later on. And lastly, of course, the changing security agenda. The changing security agenda between the two countries that, you know, back in the 1970s, 1980s, was very much looked at as being, well, we need to keep the gringos out of Mexican territory because look what happened last time to, oh my God, we need the gringos' help to actually fight organized crime so now we have organized crime which is the major security threat to our country. It's no longer about territory. It's no longer about national security. It's about trying to deal with internal threats. And that, I think, has been a defining factor and we'll continue to see that marking the relationship over illicit financial flows. So that historical enmity and anti-Yanquismo, as they call it in Mexico, has been transformed under Calderón to a focus on the war on organized crime. Obviously, the Merida Initiative in that, which has four main pillars. One is disruption of organized crime. Second is institutional strengthening. Third is building resilient communities. And I'll talk a little bit about that later on. And fourthly, a focus on the border, building a 21st century border. And of course, some of the bulk cash transfers that we see in the U.S.-Mexico relationship actually occur right there at the border and efforts to try to shore that up. Hurricane Katrina was also a major factor in strengthening trust levels between the two countries, as Mexican troops crossed over into the United States for the first time in many, many years, but on a disaster relief mission. The factor that we saw under Enrique Pena Nieto at the beginning of the administration, the centralization, trying to make all security flows intelligence flows go through one central window, a single window for intelligence sharing, has loosened in the past 12 to 15 months. And in fact, we're seeing a great deal more intelligence sharing. Now, we saw, of course, the great coup of capturing El Chapo, which was a major step forward for the bilateral relationship because it depended upon U.S. sharing intelligence with Mexico. And then we saw the escape of El Chapo, which is a huge blow. And once again, U.S. authorities are saying, well, who can we really trust in the Mexican government? There's a great deal of uncertainty over the scale of drug money going to Mexico. I think it's one of the things that Concepcion's going to talk about. Some Mexican officials have estimated $50 billion a year. Others have said, some analysts have said between $19 billion and $39 billion. The NDIC says that Mexico is the primary placement country for U.S. dirty money. The State Department estimates $19 to $29 billion a year from drugs money. We see, of course, the Wacovia case from a few years ago where there was a forfeiture of $110 million. Now, that was over a number of years, but it gives you an idea of the scale of money that is moving from the United States to Mexico. And, of course, it moves in multiple ways. You have electronic transfers, bulk cash, in kind, et cetera. And, of course, you have the extra added complication of the massive amounts of remittances from migrant communities in the United States back to their home communities in Mexico. And, you know, latest estimates put in the low $20 billion a year. Most of that is, of course, legal, but it complicates the relationship while I'm trying to understand the scale just by, because we don't know how much of that is not legal. How much of it is sort of through a straw-transfer system of many small transfers? U.S.-Mexico anti-money laundering efforts in recent years, well, of course, they're both signatories to major international agreements. We've seen a close cooperation between the Financial Crimes Enforcement Network in the United States and Mexican authorities. In fact, Mexico is the only other country, according to my sources in the Mexican government, where the Financial Crimes Enforcement Network has an attaché. And, of course, the Unidad de Inteligencia Financiera, which is the Mexican counterpart, has attachés in the United States. A Financial Crimes Enforcement Network also has the Southwest Border Executive Steering Group, which focuses on financial, illicit financial flows across the Southwest border. We've seen increased training and technology transfers through the Merida Initiative. We've seen agreements between state attorneys general, as well as the Financial Crimes Enforcement Network, and the Mexican version of the SEC, the CNBV, or the Comisión Nacional Bancaria de Valores, which is the regulatory authority in Mexico. And we've seen a close cooperation on criminal investigations. The Wacovia case was a result of a cooperation between the Mexican Attorney General, the Unidad de Inteligencia Financiera, and DEA. Mexico itself has passed three major pieces of anti-money laundering legislation in recent years, 2010, 2013, and 2012. And the Finance Ministry, the Asienda in Mexico, and the Bank Regulator have put in place a new Know Your Customer regulations and standards. I'll just say a couple of comments to close, and then hopefully we can come back in the Q&A. One of the reasons why it's so difficult to understand the extent of the impact of illicit financial flows in the Mexican economy is because the scale of the bilateral economic relationship between Mexico and the United States, not just the remittances that I mentioned earlier on, but now, of course, trade levels between the two countries are up over half a trillion dollars a year. That's a massive growth from the origins of the NAFTA. We're now seeing, you know, more than a billion dollars a day flying between the two countries. We also have to put in the factor that the Mexican economy is much, much bigger than it used to be. And so these illicit financial flows, although they're big in absolute terms, they're very small in relative terms compared to the bilateral relationship and to the Mexican economy. And lastly on that, the Mexican informal economy is enormous. I mean, by some estimates, it's as much as 60% of GDP. So we actually don't know how big the informal economy is. It's very difficult to actually work out how illicit financial flows play into that. And when we're talking about trying to stop the flows, how do you actually distinguish between money laundering activities and the spending of that money as it comes back into Mexico? How do you, and maybe other panelists have dealt with this, but how do you actually seize monies that are being spent, let's say, on a night of drinking with your friends in the organized crime group or a couple of hours with some Eastern European dancers in a Mexican strip club? How do you actually deal with that kind of money laundering which is going through the informal economy? And of course the last factor which is most of the profits from drug money get reinvested into the operation. Mexican drug cartels are sophisticated organizations. They're businesses. They're transnational criminal businesses. And so they're investing not just in product, but they're investing in new communication transportations. They're investigating in human capital. I mean, if you look at the accounts of these drug organizations, it's fascinating. Some of them are paying therapy for their hit men. And you actually see this in their accounts. It's fascinating, you know, two hours with Dr. So-and-So, because this guy had post-traumatic stress after killing a few guys. That's the kind of thing which, you know, it really begins to complicate it when you think we try to shut things down. I will end there with just the question. If we're talking about organized crime and if we're talking about, you know, money laundering, is in fact stopping the money, the answer here. I know that the focus of the study has been on development issues, but I would say that both development issues and organized crime would be better served by an overall strengthening of institutions in the country. Thank you. Sorry about that. Thank you, Duncan. No, that's fine. Concepcion. Good morning. Thank you. First, let me thank Mr. Baker and his team for organizing this highly topical conference and for inviting me to participate. Today, I will talk about potential sources of illicit flows in Mexico and the integration of these flows in the financial system and the economy. Based on academic studies and official reports, let me give you a snapshot of how complex and dynamic potential illicit flows from and to Mexico can be. Mexico is a major drug-producing and transit nation. It has powerful drug cartels involved in the production and trafficking of drugs, including transshipment of cocaine from South America to the United States and Europe, which are the two main drug trafficking consumer markets. The largest source of money laundering and illicit funds in Mexico is believed to be associated with illicit drug trafficking. However, other illegal activities such as human trafficking, extortion, corruption could also be generating illicit flows. The complexity of money laundering in Mexico has increased as criminal organizations expand their influence and develop new methods to launder these illicit funds, including through linkages with other criminal groups based in other countries. According to the 2008 Mexico's Mutual Evaluation Report, no estimates are available of the level of money laundering in Mexico originating from drug trafficking and other proceeds generating crimes. We understand that attempts to generate such estimates may have been hindered by the difficulty to develop and appropriate methodology and by insufficient, reliable, empirical evidence. It is not possible to obtain reliable estimates on the amount of drugs proceeds generated in consuming countries that are transferred directly to Mexico. Money laundering in Mexico is believed to be carried out using a variety of schemes and institutions. In the placement, a stage of money laundering, bull cash smuggling from the United States, including through the use of personal carriers, malls, has traditionally been believed to be commonly used. However, provided Mexico has established and implemented regulations to limit the deposit of U.S. dollars in cash within the country's financial system, this scheme could become less attractive. For the specific case of illicit proceeds being sent in cash from the U.S. to Mexico, once they enter the later country, illicit funds can be structured and integrated into the local financial system and the economy in different ways. Some of these funds may be re-exported to other countries or two offshore financial centers. For example, in 2008, a case involved the seizure of millions of U.S. dollars in cash being exported from Mexico to Colombia via Panama. A major Colombian drug trafficker based in Brazil arrested and disclosed the use of a network of legal entities to launder U.S. source drug proceeds via Mexico. Operation TACO involved the laundering of 236 million euros in drugs proceeds from Spain to Mexico through the export of precious metals by a network of Spanish, Colombian and Mexican nationals. These cases illustrate the magnitude of illicit resources controlled by criminal organizations as well as the complexity of their international operations. Money laundering affects a number of financial intermediaries including foreign currency operators. Licensed cash as a cambios, as netroscambiarios, money remittance firms and banks. While the transfer of remittances through established financial intermediaries can reduce the incidence of cash smuggling, the volume and speed of these electronic transfers also create important money laundering risk and management challenges for financial institutions. Criminals are also believed to use offshore financial centers to launder illicit funds. They transfer cash using personal couriers. In some cases, according to Mexico's mutual evaluation report, funds originated from the U.S. are transported directly to Panama, Venezuela, Ecuador and Colombia. Some investigations include cases against political exposed persons, accused of corruption and who have invested large sums of money in the coastal zone of some Mexican states. Some political exposed persons have been used from men and trust to hold their property. The integration of illicit funds in the Mexican economy and the financial sector take many forms. This includes, for example, the purchase of book studios, automobiles and real estate. Criminals also use bank accounts to launder their funds, including through structuring transactions and make significant investments under the names of family members, adopting methods and structurers similar to those used in the business and industrial sectors. What I have described in general shows the complexity of the sources, drivers and patterns of illicit flows in Mexico and the difficulty to get a clear understanding of the scale, the direction, the motivation and the impact of illicit flows from and to Mexico. In this regard, I want to emphasize that the complexity of calculating the flows associated with illicit and criminal activity should not be underestimated. In this context, in 2011, Peter Pedroni and I analyzed the illicit drug trade in the case of Peru. This pointed to the transnational nature of most illicit drug transactions, the difficulties we found with attributing profit shares to individual jurisdictions and, in general, how difficult it was to implement the methodology and to manage the data that we are using in Peru. All of this was hampering the assessment of the size of the flows and their economic impact. In particular, available methodologies are unable to disentangle, to unpackage the flows associated with these interrelated and criminal activities. Drug production is related to arms trafficking, money laundering, smuggling and corruption. And they take place across one or more multiple borders, which is the case of Mexico and the case of Peru and the case of Colombia. This inability to isolate these specific flows results in significant levels of double counting. Of these categories, the outflow of the proceeds of corruption would appear to be the closest to the core concept of illicit financial flows and indeed represents a serious problem of significant negative development impact. However, conflating that with the proceeds of drug trafficking deriving from transactions in criminal markets and outward capital flows, some from legitimate economic justifications, in my opinion, raise a lot of analytical difficulties. In the case of Mexico, we should welcome the finalization of the National Risk Assessment, which is an important tool that help countries to assess their money laundering and the financing of terrorism risk. A critical component involves estimating money laundering threat being the proceeds of crime that need to be laundered. You may ask why it's important. As we all know, the implementation of regulatory standards, global regulatory standards and economic and trade sanctions has been enhanced in recent years, including, due to major economies interested in increasing the transparency of financial transactions to prevent money laundering and terrorist financing risks. The implementation of the risk-based approach to IML measure is a key feature of the FATA standard revised in 2012. This requires countries to establish what the countries risk and context are to understand risk and build their system on that basis. Mexico will be evaluated against the new FATA standard in 2016. This is a great opportunity for Mexican authorities to show the level to which they have identified, assessed and understood the money laundering and terrorist financing risk for their country. Based on this IMLCFT National Risk Assessment, in terms of which countries identify and rate higher or lower their risk, to ensure that their IMLCFT regime adequately prevents and mitigates such risk. Such an IMLCFT National Risk Assessment which I understand is in process of being finalized and without prejudging the results of the National Risk Assessment could help Mexico in the following. First, to implement further effective measures to dissuade the cross-border transportation of cash, illicit, origin and use. Could also help to implement supervisory and other control mechanisms in place for preventing the financial institutions that provide money services, cash businesses to banks, like banks, monitor meters, casas de cambia, centros cambiarios, casas de bolsa that are used for illicit cash movements are improving. In particular, to discuss the supervisory arrangements for the thousands of centros cambiarios. Also, the country, after the National Risk Assessment, should fully implement IMLCFT risk-based supervision frameworks across all financial sectors based on money laundering terrorist financing risk identified by Mexican authorities. The country should also take steps to subject domestic political exposed persons to enhanced customer due diligence and require financial and non-financial institutions to take reasonable measures to establish the source of funds and wealth and to subject political exposed persons who have been entrusted with public functions to the same enhanced due diligence measures as foreign political exposed persons. Thank you, Concepcion. So, we'd like to open it up for questions and comments for our two panelists. And actually, while we're starting to pass that around, I do have a question I want to throw out to both of you. You know, I was struck by some common themes in both of your presentations. In particular, I know, Concepcion, you noted how complex the situation is, you actually noted, Duncan, that when we're looking at Mexico there might not be as much of an illicit financial flow problem but an institution-building problem. I guess in terms of the money laundering situation and how that is unique or not unique to the Mexican situation, I'd like to ask you to perhaps reiterate if we are interested in curbing illicit financial flows, what are the one or two primary institution-building things that should happen right away within the Mexican context? Does that make sense? Yeah. Yeah, so I'm asking you just to prioritize, lay out what those one or two things are. Let me begin with a bright spot of what's happening in Mexico that gives us some hope on what can be built. And that is that right now conversations about the rule of law in general dominate the Mexican news, it dominates sort of the conversation about Mexico internationally, and it's not just about drug cartels now. Now it's about politically exposed persons. Now it's about governors of states in Mexico. It's about, of course, as high as the president himself. We had a very considerable conflict of interest scandal at the end of 2014 which is dragged on throughout this year involving the president's wife, her famous Casablanca, her White House in a very ritzy area of Mexico City, which appears to have been given to her or sold to her at a very, very low rate of interest by a major construction firm which has received huge contracts both from the state of Mexico where the president was governor beforehand and now from the government of the country of Mexico. We've seen other corruption scandals or conflict of interest scandals since then and we're all aware that there are many other scandals that are bubbling just underneath the surface and the information, the intelligence hasn't really been gathered yet. But what this has sparked off in Mexican society is a sense of outrage over corruption, conflict of interest and a desire on the part of civil society. And by civil society I mean both the protesters in the street and think tanks and NGOs who are working behind the scenes to really try to gather the information that we need to have a clear idea on corruption and the scale of corruption throughout Mexico. The recent successes of discovering or uncovering corruption first of all in Brazil the Petrobras scandal and now in Guatemala have caused a huge reaction in Mexico. Mexican civil society has said look, if a country like Guatemala can put their president in jail or their ex-president I guess why aren't we doing the same thing? When they saw what happened with the Petrobras scandal they said well we've got the largest national oil company in the Americas what's going on with that? We all know there's corruption within Pemex but we don't know the scale of it we don't know any of the details. There are corruption scandals all the time in Pemex and people are prosecuted and people are put away or they're not but there have always been small cases involving maybe a couple of million dollars nothing really big nothing like the Petrobras scandal and we're waiting to see what happens with that. So that's a real bright spot right now is that society is mobilized society is focusing on this and in particular civil society think tanks like Mexico Evalúa which is a very very important civil society organization which really tries to push the government towards higher levels of transparency Transparencia Mexicana which is the Mexican branch of Transparencia International also doing a good job and not just on the critical side of things Transparencia Mexicana is working with for example the national publicly owned electricity utility the CFE to try to increase the levels of transparency in contracts that are signed by the electricity utility this is a very positive thing and I think that if we can build that capacity within civil society and I know that that's certainly part of US Mexico collaboration is strengthening the community in civil society at the same time as we strengthen the enforcement side of things then we'll be making progress and just lastly before I turn it over to Concepción we had a research fellow with us this summer at the Wilson Center at the Mexico Institute who was trying to understand why anti-corruption efforts have been more effective in the United States than in Mexico and of course there's a myriad of reasons but after conversations with many different government and civil society organizations here he came down to sort of three factors he said one a strong and independent judiciary now Mexico of course is going through a massive judicial reform right now the deadline for that implementation is 2016 they're not going to make that deadline and the implementation has been very uneven across the country but that's one institution where we need to work more on second a strong and independent media or press so that you actually are able to harness the outrage of civil society and to really expose so you need investigative journalism and there's not a strong tradition of investigative journalism in Mexico in fact one of the scandals of this year was Carmen Aristegui the White House or the Casablanca scandal was forced out of her position at one of the networks and it's widely suspected there was pressure from the government the third factor which he points to Marco Fernandez points to is a professional public service this is one of the factors that I think we forget about a lot of the time when we focus on corruption and rule of law in general Mexico's public service especially on the chain is highly politicized and so you see massive turnover and you also see that those people are dependent or beholden to their superiors way up the line for their jobs which means that they are much less likely to turn against them they're much less likely to expose them and so work that has been underway in Mexico for over a decade now to try to professionalize the public service in fact has achieved very very little but the public is a little bit more attentional sorry for my stand up I fully agree with Duncan I will propose three types of measures first of all to stress the IMLCFT regime to stress and to make the system effective the second will be to take action on the anti-corruption side and the third is to finalize the judicial reform that the Mexicans are undertaken in June 2015 we published a working paper on the crime and the economy on Mexican states that they have co-authored with Peter Pedroni and Shin Wei Hu and we have recommended the country to undertake the judicial reform because this is very important if you want to be effective in your fight against crime in the country I'm very brief but I mean these are the key the key messages for the country but I'm not sure whether having a strong IML regime anti-corruption measures and judicial reforms are enough I think that you need to have strong institutions and to improve the national coordination among institutions in Mexico I think this is key for Mexicans to be all in the same path thank you I think we have a few questions from the audience so we're here first thanks very much and thanks obviously to Concha and to Dr. Wood for their presentations my name is Jose Luis Tain I'm from the National Council at the IMF but I would like to speak with my previous hat as a representative of the Mexican government for AML-CFT issues both at the Calderon and the Peñanito administrations so Dr. Wood is obviously a very well informed person and he has provided a very comprehensive and clear picture of a part of the situation with regards to Mexican and U.S. authorities I would only like to focus on the AML-CFT efforts in particular which is the area of which I'm aware of and in that regard highlight that as Dr. Wood has explained the relationship during the Calderon administration was very strong but in that particular topic during the Peñanito administration I can tell you that it has actually strengthened and I can give just a few examples the amount the number of policy initiatives has increased the amount of information sharing has increased and for the first time under the Peñanito administration there was actually joint investigations and successful prosecutions and that was actually recognized by the Ecumen Group which is the one that assesses a few cases per year and determine that there was a joint case Mexico-U.S. which was the best case for the 2013 another issue was raised by Concha in the sense that governments have to focus and this includes the Mexican government on the institutions and in that regard I know that there has been a strong attempt to keep a public civil service within the AML-CFT areas at least if not at the first level at the second and third levels there is also a big effort and recommendations and that includes working on comprehensive national risk assessment and which should be finalized soon last I would only like to highlight important work that is being done by global financial integrity there might be some objections towards the methodology by some parties but the reality is that they have taken a very complex and important task which is trying to understand in numbers which is the impact of money laundering and therefore the importance of addressing that issue I think the microphone is coming down what Defcar chief economist GFI what we found that in the case of Mexico is one of the major drivers of illicit flows to what extent since trade based money laundering is a concern to what extent I am not sure about the details the AML-CFT to what extent does the AML-CFT regime address this issue of trade based money laundering as far as Mexico is concerned can you enlighten us on this issue um the AML regime has a number of recommendations that the country needs to be compliant against um in my understanding and you can correct me if I'm wrong but I think there are some recommendations in place like know your customer that need to be implemented not only in financial institutions but also on non-financial institutions and in particular the recommendation 5 what was the previous recommendation 5 where everybody doing a transaction in a with a financial institution or non-financial institution needs to provide some information about what the person is doing, what's the origin what is the source and I think this is the most important recommendation to help fighting the trade based money laundering maybe Jose Luis you want to add something and I apologize because I didn't hear the full question but I understand it's related to trade based money laundering I mean in that in that regard what Concha was mentioning there's definitely know your customer due diligence regulations in place in terms of the FADF and there has been an important effort for what I understand from the different supervisors to make sure that the regulated entities are implementing them and I can also say from an operational side that there's a very close communication between the relevant authorities such as the FIU and the tax authority to address trade based money laundering because indeed it is one of the main typologies that is being observed in the country IMF provides technical assistance the IMF provides technical assistance on customs reform if trade is and I'm sure it is a major problem in Mexico could not the IMF take a more proactive approach and say that there are gains to be made from Mexico implementing comprehensive customs reform in order to attack this problem of illicit flows so the fund is directly involved in this area well I think that in 2016 the fund will be evaluating Mexico and if this problem is raised during the conversation of the discussion of the evaluation of the country probably the IMF or the assessors will raise these recommendations and if it's needed the IMF could provide technical assistance to the country in this area but I think the discussion needs to be taken place during the mutual evaluation report I mean probably the assessors will see that the trade based money laundering is one of the major drivers and then they will discuss whether the country has the meteons in place to address this and it's the moment also the assessors will see whether in the national risk assessment trade based money laundering is included and what's the scale of the problem so I think it's the moment it's up coming so very ignorant question about the trade misinvoicing and the figure that you have for 2012 is $80 billion out of and that's money that's inflows into Mexico yeah this is on page 59 I'm just looking at it $80 billion of trade misinvoicing out of a total export Mexico's total exports are what around $70 billion I'd say globally so that's we're looking at which figure so I'm looking here on table 2 page 59 2012 inflows trade misinvoicing $79.839 billion yes so that's almost 20% of Mexican trade sorry Mexican exports 0.4% of GDP exports would be yes I would export plus imports I'm just looking at the inflows it seems like a huge figure if it's 20% of all Mexican exports are misinvoiced or rather surprise me because the thing is that you see after what we found is that after after misinvoicing is in fact gone up before and after because I'm thinking that that's why I raised the question of customs reform it could well be the fact that the volume of trade has taken off exponentially like you yourself have noted but I'm wondering whether customs resources and training have kept pace with that huge increase in trade between the United States and Mexico so it's entirely possible that they are not able to keep pace with the increasing demands of a globalized trade right but again what I think it's very important is to have this in the agenda I mean that this is considered one of the risks in the country so the national risk assessment should be including this as an important risk and this will help the assessors to understand whether the country has the mitigants in place to fight this problem I think we have a question over here Hi Hello I'm a zoologist and I look at all of the stuff that's been talked about today from an ecological perspective Duncan did you say something about the amount of money going into Mexico illicitly flowing into Mexico is about an additional half trillion dollars in the last certain period of time but you can catch that? No, what we've seen is that bilateral trade between Mexico and the states has increased to over half a trillion dollars a year that's formal trade between the two countries Okay, did you say what the illicit amount going into it? The problem is we don't really have a good estimate they vary from around 19 billion dollars a year up to some Mexican authorities have quoted 50 billion dollars a year State Department says between 19 and 29 billion dollars a year but they're not sure, that's a pretty big range there and it's just it's very very difficult to get a handle on it now that that's based upon the value of drugs that come from Mexico that are sold in the United States and this is why I think we have to take those numbers with a little bit of caution because let's say that the money that's coming back is around let's be generous, let's say it's 30 billion dollars a year that money of course is then spent on a lot of things it's spent upon your human capital, your human resources it's spent upon product so a lot of it, as Concepcion indicated goes not to Mexico but goes to a third country either which is the source country of cocaine for example, or to an offshore financial center which is then redistributed to pay for the product and then we think about all of the other costs that are involved I mentioned this earlier on but if you look at an organization like the Sinaloa Cartel it's a very very sophisticated organization they put a lot of money and planning into things like building tunnels not just to get El Chapo out of jail but more importantly to get the product underneath the U.S. border another reason why walls don't really work because you get long ladders and deeper tunnels but that's these are businesses and they're constantly looking at ways to reinvest the profits to make more money in the future so what kind of alternative can you offer if you're going to stop a flow this big and you're dealing with a place where the income, the average income is so low and you're talking about taking away what is a major source of income you're talking about killing a big employer I think the point that you made there is a very very good one now nobody would want to say that the cartels are the answer to development but what you do find in places like Sinaloa and if you go to the city of Culeacan okay and you hear all of the great stories about people are in the restaurant Los Arcos and you know a local drug lord comes in the owner of the restaurant takes away his cell phones locks the doors and says you're not allowed to leave until he's finished his meal when he leaves he pays everybody's bill and everybody has a great story to tell when you go to the local communities the local community says we don't actually want to do illicit work but it pays a hell of a lot better than growing corn you know when you go up to the mountains of Guerrero and you speak to the campesinos up there they can grow poppies up there which is a much much better cash crop for them than anything that they can sell legally and so when you talk to people and I mean after the El Chapo escape people were saying we're glad he's out of jail this guy did more for us than the Mexican government has ever done and that you know you don't want to exaggerate that but yes if you begin to interrupt the flow of money then are you actually going to have a negative impact particularly at the local micro level well can I follow up on these questions on our paper the paper we published on the impact of crime on the economy we found that in some states the impact was negative in some impact in some states the impact was positive and negative so there are many nuances what we found is that in those Mexican states where the construction so the construction versus GDP was higher the impact of crime was less important but if we think about what is involving construction we also have money from criminal activities going to the construction GDP so just to understand a little bit how it goes at the state level at the Mexican state level and it was very interesting for us to understand that we could isolate the response from crime in the economy on the construction sector interesting question Raymond Baker John Casara who was with us yesterday and is a former customs agent last week in a different context made an estimate to us that our attempts to get cash that is moved from the United States to Mexico arising from the drug trade is estimated to succeed only to the extent $0.25 on the $100 that's a quarter of 1% success rate I've thought about that figure ever since then and I can only imagine that level of failure is it intentional on the part of the United States is it are we making a minimal effort to curtail this for some political reason I don't know how you operate a program with that low level of success rate and pretend that you have a program in place at all how do you explain this? this is a really interesting point I think I've got the figure from 2012 the United States seized $2.5 billion okay now that's a tiny percentage of all of the illicit financial flows the United Kingdom in the same period seized around 317 million pounds okay and it was estimated to be exponentially much much bigger than that so if you think about what countries with functioning institutions can do they're only capturing a tiny percentage of it what can we really expect from countries like Mexico and remember Mexico is not Guatemala Mexico is a country where things work pretty well when I moved to Mexico in the late 1990s I like any other obnoxious expat we're saying oh my god there's so many things that don't work in this country and a Mexican colleague of mine came up to me and said Duncan the question is not why isn't Mexico more like the United States is why isn't it more like Guatemala and he said we are doing very well here given the circumstances and he was absolutely right so you begin to go down and say well is this a battle that we're fighting and dedicating significant resources to we have no chance of winning it's kind of like the battle against or the war against email you know you're never going to win that war but you keep fighting it day after day and in many cases it's a war of attrition in many cases you try to minimize your losses and maybe that's what it's about but yeah I mean ultimately they're going to find ways of doing it in the same way but in the same way that financial institutions legal financial institutions will always find a way around regulations because that's the nature of the beast it's about business it's about making money just one question just one comment I want to make you can reconcile your figures with our figures simple fact that these numbers here are derived from worldwide sources not just US so there you go I mean so there are two different numbers so I know we're close to closing but we did start a few moments late maybe we can just get one last round of questions or comments from the audience and then we'll ask Concepcion and Duncan to give us their final comments we had it great well is there anything you'd like to add in terms of the conversation yeah I think here there is missing a point Mexico so the homicides rates in Mexico are lower than in other Central American countries I think it's very important to raise this issue to put things in context the second is in flows illicit flows going to Mexico are also originating in other countries I mean you have the chocks to the economy in Mexico are originated at different points so you have two different kinds of chocks created internationally and the ones created internally because of the changes in policy wars against cartels and everything so I mean it's not only Mexico that needs to take action I think other countries need to take action to fight illicit flows and just to build on what you were saying on Iran I think that the strengthening of the judicial system in Mexico is going to be the single most important reform we can talk about the energy reform in Mexico we can talk about telecoms reform but the judicial reform is the single most important one across the board I mean even including economic development I would say in the country ultimately it's about guaranteeing contracts in many cases and you look at the challenges of that and you look at the way that that sort of applies directly to cases of corruption it's amazing that when Walmart committed its acts of corruption in Mexico it was not prosecuted in Mexico it's been prosecuted in U.S. courts and has paid the prices going through the hell of the review process Governor Yarrington from Tamalipas has not been convicted, has not been accused in Mexico but he's under indictment in the United States for receiving drug money and the fact is until you can begin to see these kind of cases being tried within Mexican courts we're not even close to getting there and that's again why the judicial reform matters so much Well thanks again to Global Financial Integrity for pulling this conversation together today and let's have a round of applause for Dr. Concepcion and Dr. Duncan for what they shared Thank you very much I want to quickly thank our panelists again Dr. Verdugo Dr. Wood and Eric Lacompe for moderating the panel we're going to break one hour for lunch, we'll start again at 2.20 Thanks