Navigating US Currency Restrictions in Mexico: Understanding Funnel Accounts and Trade-Based Money Laundering

The flow of Us Currency To Mexico has faced increasing scrutiny and restrictions, leading to complex financial maneuvers by both legitimate and illicit actors. For businesses and financial institutions operating between the US and Mexico, understanding these restrictions and their consequences is crucial. This article delves into the impact of limitations on US dollar cash transactions in Mexico, specifically focusing on the rise of “funnel accounts” and their connection to trade-based money laundering (TBML). We will explore how these schemes operate and what red flags to watch out for, providing essential guidance for navigating the complexities of cross-border finance.

The Backdrop: Mexican Regulations on US Dollar Transactions

In June 2010, the Mexican government initiated regulations to limit the deposit of US cash in Mexican banks. This measure was expanded to include exchange houses (casas de cambio) and brokerages (casas de bolsa) months later. These restrictions were put in place to combat the influx of illicit US dollars, often proceeds from illegal activities, into the Mexican financial system. By limiting the amount of US currency that could be deposited, Mexico aimed to curb money laundering and enhance financial transparency.

These restrictions, while intended to combat financial crime, have inadvertently led to the evolution of money laundering techniques. Criminal organizations have adapted by employing alternative methods to move illicit proceeds, with funnel accounts and trade-based money laundering becoming increasingly prominent.

What are Funnel Accounts?

A funnel account is defined as an individual or business account, typically in one geographic area, that exhibits a pattern of:

• Multiple Cash Deposits: Receiving numerous cash deposits, often in amounts deliberately kept below the reporting threshold (under $10,000 in the US).
• Geographic Disparity: Deposits are made in a different geographic area from where the account was opened.
• Rapid Withdrawals: Funds are withdrawn shortly after deposits, often from a different geographic location.

This pattern of activity resembles a “funnel,” where cash is poured in from various sources and quickly withdrawn, often obscuring the origin and destination of the funds.

The Rise of Funnel Accounts Post-Currency Restrictions

Following the implementation of Mexican restrictions on US currency transactions, financial authorities observed a surge in funnel account activity. Criminals began exploiting these accounts as a way to bypass the new regulations and continue laundering illicit proceeds. Law enforcement data and Suspicious Activity Reports (SARs) indicate that Mexico-related criminal organizations are actively using funnel accounts for two primary purposes:

1. Moving Illicit Proceeds: Funnel accounts serve as conduits to transfer drug trafficking profits and other illegal gains out of the US.
2. Financing Trade-Based Money Laundering (TBML): These accounts are used to purchase goods that are then shipped to Mexico and sold, effectively converting US drug money into Mexican pesos through seemingly legitimate trade.

Alt text: Anonymous individuals making cash deposits, highlighting the lack of knowledge depositors often have about the account’s purpose in funnel account schemes related to US currency movement to Mexico.

Funnel Accounts and Trade-Based Money Laundering: A Closer Look

The combination of funnel accounts with trade-based money laundering represents a sophisticated method for criminals to clean illicit money. Here’s a breakdown of the typical steps involved:

1. Account Setup: A US or foreign business owner, sometimes in collusion with criminal elements, opens an account at a bank or credit union that facilitates cash deposits across multiple states.
2. Cash Deposits: Individuals working for criminal organizations deposit cash from narcotics sales into these accounts at various branches, often in different states and in amounts under $10,000 to avoid reporting requirements.
3. Purchase of Goods: Once sufficient funds accumulate, the account holder initiates wire transfers or issues checks from the funnel account to businesses in the US or abroad to purchase goods.
4. Goods Shipment and Sale: These purchased goods are shipped to Mexico or other countries, where they are sold. The proceeds from these sales, now in local currency (like Mexican pesos), are transferred back to the criminal organization, completing the laundering cycle.

Through this process, criminal organizations effectively exchange US dollar cash earned from illegal activities in the US for Mexican pesos in Mexico, using legitimate-looking trade transactions to disguise the movement of illicit funds.

Red Flags: Identifying Funnel Account Activity

Recognizing potential funnel account activity is vital for financial institutions to comply with regulations and prevent money laundering. Here are key red flags to watch for:

• Out-of-State Deposits: An account opened in one state, especially along the Southwest border, receives multiple cash deposits under $10,000 from unidentified individuals at branches outside the account’s domiciled region. This applies to both individual and business accounts.
• Geographic Discrepancy for Business Accounts: Deposits into a business account occur in regions far from where the business operates. For instance, a local Southern California produce company receives small cash deposits in Midwest states.
• Lack of Depositor Knowledge: Individuals making deposits may lack detailed information about the account holder’s business, the nature of the business, or the source of the cash, indicating they are simply acting as intermediaries.
• Unrelated Debits: Debits from a business account receiving out-of-state deposits do not align with the stated business activity. For example, a produce company’s account shows payments to a leather goods business or wire transfers to a textile manufacturer in China.
• Check Irregularities: Checks from accounts receiving out-of-state cash deposits may show different handwriting for the payee/amount lines compared to the signature line. This suggests pre-signed checks are being used by criminal organizations to make payments.

Alt text: Example of a check with handwriting discrepancies, indicating potential manipulation in funnel account schemes involving US currency transfers related to Mexican restrictions.

• Transactions Involving Mexican Banks: Wire transfers or checks from funnel accounts are deposited into or cleared through the US correspondent account of a Mexican bank. In some cases, checks may even name a Mexican bank as the payee and are processed through their US correspondent account.

Guidance for US Financial Institutions

While some of these red flags may occur in legitimate financial activities, financial institutions must consider these indicators in combination with other factors and the expected transaction patterns of the customer. No single indicator definitively points to TBML.

Financial institutions should:

• Evaluate Context: Assess potential TBML indicators alongside other red flags and the customer’s typical transaction behavior before determining suspiciousness.
• Refer to Previous Advisories: Utilize past FinCEN advisories on TBML, high-intensity drug trafficking areas, and the impact of US currency restrictions in Mexico for comprehensive risk assessment.
• Manage Non-Customer Deposits: Be particularly vigilant about the risks associated with accepting deposits from non-customers or unidentified parties.
• File Suspicious Activity Reports (SARs): If a financial institution suspects a transaction involves illegal funds, disguises illicit funds, evades Bank Secrecy Act regulations, or lacks a legitimate purpose, filing a SAR is mandatory.

FinCEN encourages financial institutions to include specific keywords in SARs to highlight potential connections to Mexican currency restrictions and funnel account activity. Using terms like “MX Restriction,” “Funnel Account,” and “TBML” in the Narrative and Suspicious Activity Information sections of SARs is crucial for effective reporting and analysis.

Staying Vigilant in Cross-Border Finance

The restrictions on US currency transactions in Mexico have created a complex landscape for cross-border finance. While these regulations aim to combat money laundering, they have also driven criminal organizations to adopt sophisticated techniques like funnel accounts and TBML. For financial institutions and businesses operating in the US-Mexico corridor, vigilance, awareness of red flags, and adherence to reporting requirements are essential to mitigate risks and ensure compliance in this evolving financial environment. By understanding these schemes and staying informed, stakeholders can contribute to a more transparent and secure financial system.