President Trump’s “America First Trade Policy” is creating new sanctions compliance risk for financial services institutions and companies in an area that historically has not received as much enforcement attention: drug cartels, with a particular eye toward Latin America.
One executive order that has garnered significant attention is Executive Order 14157, “Designating Cartels and Other Organizations as Foreign Terrorist Organizations (FTOs) and Specially Designated Global Terrorists (SDGTs).” Alongside this was the issuance of Attorney General Pamela Bondi’s “Total Elimination of Cartels and Transnational Criminal Organizations (TCOs),” which describes the Criminal Division’s new focus on prioritizing Foreign Corrupt Practices Act cases that facilitate cartels and TCOs.
“The focus on cartel activity in the United States and the aim of completely eliminating all cartel activity…has emerged as a top priority of this administration,” White & Case partner Nicole Erb said on a recent economic sanctions webinar held by the American Conference Institute.
Banks and insurers, in particular, are “trying to understand how to navigate these designations, what their compliance obligations are, and how they can stay out of the crosshairs of providing indirect support to these designated cartels,” Erb said.
“Some institutions are building upon AML protocols to address the type of compliance burden that this now imposes,” Erb added. Typically, AML compliance involves looking at source of funds, whereas sanctions compliance involves looking at destination of funds. “But, here, they really do seem to be converging in a lot of the compliance systems that we are seeing at banks, insurance companies, and others,” she said.
Secondary sanctions
The U.S. Department of Treasury’s Office of Foreign Asset Control (OFAC) has added numerous criminal organizations to its Specially Designated Nationals and Blocked Persons list (“SDN List”) over the years, blocking assets within the control of U.S. persons. However, their designation as FTOs and SDGTs brings enforcement risk to a whole new level.
“Foreign financial institutions that knowingly facilitate transactions on behalf of an SDGT would face secondary sanctions exposure,” said Britt Mosman, partner and co-chair of the Global Trade and Investment practice group at Wilkie Farr & Gallagher, who also spoke on the ACI webinar.
Combining an FTO designation with the SDN List “inevitably” will result in major derisking by foreign financial institutions and others to reduce the high risk of dealing with these criminal organizations, Mosman added.
“Without really knowing how the administration is going to prosecute these crimes and how far they’re going to cast their net, and what that policy is actually going to look like, it does create a lot of concern in the financial and insurance communities for how they need to manage their risk, because the criminal exposure is elevated,” Erb said.
High-risk regions
On Feb. 20, State Secretary Marco Rubio designated eight new organizations as FTOs and SDGTs. A State Department Fact Sheet provided further insight into the regional activities of each of these organizations’ criminal activities.
For example, Tren de Aragua (TdA) has connections in Venezuela, Colombia, Peru, Chile, Ecuador, Bolivia, and Brazil. Mara Salvatrucha (MS-13) operates “primarily in Central America and North America, including El Salvador, Honduras, Guatemala, Mexico, and the United States,” the Fact Sheet stated.
The other six cartels are active in Mexico: Cártel de Sinaloa, Cártel del Noreste (formerly known as Los Zetas), La Nueva Familia Michoacana (LNFM), Cártel de Golfo (Gulf Cartel), and Cárteles Unidos. Cártel de Jalisco Nueva Generación (CJNG) is said to have connections across the Americas, Australia, China, and Southeast Asia, in addition to Mexico.
Mitigating cartel-related risk is a complex undertaking, given that many cartels have embedded themselves within many sectors’ operations. In addition to financial services, other high-risk sectors prone to cartel activity include agriculture, manufacturing, and transportation. Companies may want to refer to the State Department Fact Sheet to help inform their due diligence efforts.
Sanctions enforcement
Under the Trump administration, Cuba will remain on the State Sponsored Terrorism (SST) list. Additionally, State Secretary Rubio restored the Cuba Restricted List, which prohibits certain transactions with companies under the control of, or acting for or on behalf of, the Cuban military, intelligence, or security services or personnel. On March 10, Orbit SA, a state-owned remittance processing company that the U.S. government determined was operating for, or on behalf of the Cuban military, was added to that list.
In a sign that Venezuela is also a sanctions target, OFAC, through General License 41A, has given Chevron until April 3 to cease its joint venture operations in Venezuela. This prohibits the oil company from exporting or selling Venezuelan oil to the United States.
Sanctions enforcement is also carrying over into the enforcement activities of the Department of Justice. On Feb. 6, the DoJ announced the seizure of a Dassault Falcon 2000EX aircraft used by Petroleos de Venezuela, S.A. (PdVSA), the Venezuelan state-owned oil and natural-gas company.
“Asset forfeiture is a powerful law enforcement tool, which we will continue to use aggressively to deter, disrupt, and otherwise combat criminal activity,” said U.S. Attorney Hayden O’Byrne for the Southern District of Florida.
Sanctions compliance takeaways
Gibson Dunn partner Adam Smith described the current geopolitical and sanctions environment as “fluid,” but not a new issue relative to sanctions compliance. A similar scenario unfolded in 2022 when companies had to navigate new and increasingly complex Russian sanctions and export control restrictions in response to Russia’s attack on Ukraine, as ACI Insights previously reported.
The difference with the sanctions environment under the Trump administration is that “there is a lot of attention on cartels in a way that there was not before,” Smith said. “This requires increased vigilance by companies.”
When conducting due diligence on customers, vendors, and employees, white-collar experts advise screening against not only the SDN List, but also against touchpoints in high-risk Latin American regions – including Mexico, Cuba, and Venezuela – to ensure that the business is not unwittingly providing material support or services to an FTO.
White-collar experts further recommend shoring up areas where more compliance monitoring or resources may be needed, or where the business may need to derisk certain customers or entire business lines that are too risky to pursue under the current enforcement environment.
“The whole idea behind sanctions is that they are foreign policy tools directed by the government but exercised by the private sector,” Smith said. “The private sector is on the front lines of interpreting these restrictions, implementing them in practice, and facing the consequences if they get them wrong.”
He concluded, “Private companies need to stay on their toes, need to engage internally – and, potentially, externally with the government – to figure out what these sanctions mean or don’t mean for them, and proceed accordingly.”
