The cost of doing business in Mexico

To date, it is estimated that the ongoing drug war in Mexico has claimed the lives of more than 70,000 people across the country as drug cartels battle each other, as well as government forces to stake their claim in the multi-billion dollar industry of illegal narcotics trafficking. This bloodshed has added an additional layer of risk that corporate security managers have had to incorporate into their enterprise risk management plans, which in Mexico, also have to account for a wide range of other crimes such as kidnapping, extortion and cargo theft. Despite these risks, Mexico remains an attractive country to do business in for many large, multi-national corporations.

However, as the risks change, security executives and the organizations they work for have to remain nimble enough to adapt to the changing threat landscape. For example, according to a story published by CBS News, the Mexican government in January decided to legalize various vigilante groups and integrate them into quasi-military units called the Rural Defense Corps. Many analysts suspect, however, that these so-called “self-defense groups” are actually being supplied and funded by the drug cartels. In fact, Samuel Logan, director at Southern Pulse, a strategic advisory group that helps organizations understand how the security, political and economic landscapes of Latin American countries will impact them, thinks that this a “very dangerous” decision that the Mexican government has made.

“The cyclic history in the Mexican criminal underworld is that you start out as vigilante community protection group, but eventually you’re co-opted by these bigger groups because they don’t want to fight you anymore and they just buy you,” said Logan. “I guess it’s a politically expedient way to sublimate the presence of these groups in Mexico in a way that makes it more digestible for the public and it makes it easier for them to make a media spin and play off of it. And it buys them some space and some time to figure out what the heck is really going on. Meanwhile, in other communities that have suffered from a lack of (government) services, they’re looking around saying, ‘what happens if we start a local vigilante group? Chances are we have a pretty good chance of being legalized and getting money and support from the government.’”

Charlie LeBlanc, vice president of security services for FrontierMEDEX, believes that there has been some consolidation of power among the cartels and that people can’t discount the involvement of rival drug gangs in these vigilante groups.

“It would make a nice movie to assume that wasn’t the case – that this was truly a grassroots uprising to the violence that these people have seen over the years - but the reality is there’s a lot of connecting the dots to rival cartels in arming these groups and empowering these groups,” said LeBlanc. “The problem, which started in the very beginning with the war on the cartels, is that it’s a war on many fronts. You’ve got a government that does not have anywhere near the sheer numbers needed to disable the cartels, you’ve got a citizenry that has been the victims of these cartels, you’ve got no true localized law enforcement or justice capacity or capabilities, and then you also have a rising drug use problem within the middle class in Mexico. I hate to use the term ‘perfect storm,’” but it does add up to the cartels to continue to run large parts of Mexico without the government being able to hold what we would consider basic justice reforms. There’s absolutely no fear of justice in Mexico when it comes to the cartels.”   

Looking at how the security landscape has changed in Mexico over the last several years, Logan said that as of six months ago, much of the big, high-level conflicts among the cartels over various territories and logistical routes had died down somewhat. However, Logan believes the trend could be headed back towards increased violence depending on the rise and prevalence of these vigilante groups.

According to Logan, the Mexican government under President Enrique Pena Nieto has been much more focused on economic reforms, rather than security. “Firefights continue to happen, pineapples continue to hit fans as it were, but there’s just less talk about it, there’s much less of a focus on it,” explained Logan.

As a part of this continuing de-emphasis on drug violence in the country, Logan said that Mexico is not working as closely with the U.S. as it once did – not allowing federal officers  to enter certain secure environments and also not sharing as much information.

“Things that they are going to do is make decisions on where they’re going to focus at the risk of almost abandoning other areas. So, they may want to focus on the Coahuila-Durango area in northern Mexico and then really not even spend much effort or time in Michoacán,” Logan said.    

Don Wright, president and CEO of ISIS which provides guard services and secure transportation services for government agencies and corporations around the globe, also said he felt that the violence level had been getting better in Mexico, but has ticked up again recently.

“What we find is that (the violence) moves around the country depending on obviously cartel actions, movements and different crimes,” Wright said. “We have a fairly good inside look. We prepare and share any intel we get with the appropriate agencies and with our clients on a confidential basis, but certainly there’s still violence in certain areas of the country and our clients are aware of it and we provide services accordingly.”

Although the Mexican government has had some success in rounding up several high-profile cartel leaders recently, problems like kidnappings persist. According to a story published last month by the Associated Press, kidnappings in Mexico were at a 16-year high in 2013.

“Corruption, kidnapping and just overall crime levels are just off the charts and those are levels that are actually being reported and measured,” said LeBlanc. “The reality is probably 80 percent of crimes that occur in Mexico never get reported, if not higher. That’s probably a conservative number. Corporations that are doing business in Mexico are providing very high levels of executive protection, around-the-clock coverage for their key employees and key management personnel.”

LeBlanc said his company has a lot of clients who are based on the border and going back and forth each day to conduct transactions, which is problematic in and of itself due to time lost and things of that nature.

When it comes to risks facing companies in Mexico, Logan said that “violence is not necessarily a symptom of a threat.” More than likely, Logan said you know who is fighting, where they are fighting and who it is impacting. When there’s not fighting, it doesn’t mean that these criminal groups have gone away, but that they’ve reached some sort of accommodation and can now allocate more resources to their illicit enterprises – drug trafficking, kidnapping, extortion, etc.

“In a town like Monterrey, Juarez, Laredo, Mexico City or elsewhere in the region, when you have groups that are well-established, are not going anywhere and are not being violent, I think they are much more threatening and much more dangerous,” Logan explained. “They’re looking at penetrating your logistics chains; they’re maybe setting up kidnapping rings and kidnapping operations. When there’s less violence, the impact is more subtle. I think it’s deeper over time.”  

In addition, Logan said criminal syndicates are making millions of dollars a month in the mining sector by stealing and selling various minerals such as iron ore and that the government can’t do anything about it.

“The tough part is that the guys that are doing this to (these mining companies) are not only well-equipped criminal organizations, but they’re politically protected and they’ve got all the right business boxes checked,” Logan explained. “They’ve got export licenses, incorporation documents and all of that, so again, as violence diminishes, these groups are able to become more ingrained in the illicit economy, ultimately using illicit funds to fund licit economic endeavors.”  

LeBlanc says that companies have had to factor security into the cost of doing business in Mexico for a while now; however, a lot of those costs have become very expensive.

“When factored in, the benefits of doing business in Mexico continue to be weighed upon,” LeBlanc said. “We’ve had, I would say over the last 10 years, five major corporations that are clients of ours shutdown their facilities in Mexico and move them back to either Canada or the U.S. It’s a large concern for corporations because they don’t want to put their employees at risk, they’re very concerned by overall lack of law enforcement capacity and capability and they’re able to factor all of that in on a scale of whether or not the obvious gains of the labor force of producing in Mexico now get outweighed by the security concerns.”

Logan advises companies to keep a certain level of situational awareness on the ground in Mexico if they have operations in the country and to do their homework with respect to conducting due diligence on employees and third-party vendors.

“Increasingly, what looks like a legitimate company could be a front company for a criminal organization,” said Logan. “I think Mexico remains a fantastic investment opportunity, especially if you look at the energy sector, but I think apart from that there’s going to be a disconnect between the attractiveness of the investment and the complicated nature of realizing your ROI. Mexico is becoming more of a complicated place to operate.”

Wright also emphasized how important it is for security executives to be cognizant of insider threats, especially as it pertains to their Mexican operations.

“We do some K&R (kidnap and ransom prevention) and we also do some investigative services, so I think (organizations) are always looking for the outside threats, which are a little more obvious in some cases, but they’re also looking to the inside threat to make sure they don’t have product issues or products going out the backdoor and things like that,” explained Wright. “I think the screening of their employee base, the background checks, we encourage our clients to do as much as they can at the front end of the hiring process to make sure you know who you’re hiring and you know their involvements.”

In the near future, Wright said he doesn’t really see violence or other criminal activity being perpetrated by the cartels going strongly in either direction. “We don’t see huge movement up or down the scale, it seems to be a bit status quo right now,” he added.   

Although he would like to be optimistic, LeBlanc said he’s seen a massive amount of aid poured into the country to fight organized crime over the last 10 years that has failed to even make a “dent” in the problem.

“The fate of Mexico will be watched very closely and success of (the Nieto) administration will be watched very closely as well, since this president has taken a very different tact in some ways than his predecessor, but so far the outcomes have been the same,” concluded LeBlanc. 

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