Anticipated designation of international cartels may lead to compliance and enforcement challenges for businesses connected to Mexico and surrounding region

A flurry of day one executive orders included President Donald Trump’s Executive Order, “Designating Cartels and Other Organizations as Foreign Terrorist Organizations and Specially Designated Global Terrorists” (EO). The EO creates a process by which international cartels (Cartels) and other organizations may be designated as Foreign Terrorist Organizations (FTO) or Specially Designated Global Terrorists (SDGT). It directs the State Department, in consultation with the Secretary of the Treasury, the Attorney General, the Secretary of Homeland Security, and the Director of National Intelligence, to make FTO and SDGT designation recommendations within 14 days of the EO, which would be February 3, 2025.

It is important to note what is new about the EO and what remains unchanged. The EO does not create a new designation category, as FTO and SDGT designations have existed for over 20 years. The US has designated hundreds of individuals and entities as FTOs and/or SDGTs, which are added to Office of Foreign Assets Control (OFAC)’s Specially Designated National and Blocked Persons (SDN) List. These designations trigger sanctions compliance and anti-money laundering (AML) measures designed to prevent transactions and dealings (directly or indirectly) with SDNs and their affiliates.

However, the EO contains sections that are unusually vague and that consequently create uncertainty – at least in the short term – about the scope of designations expected in early February. In short, the EO does not define “cartels” and only refers to “international cartels and other organizations….” This description on its face appears broader than the traditional designation of drug cartels. For example, the Foreign Narcotics Kingpin Sanctions Regulations (SDNTK), also administered by OFAC, define “specially designated narcotics trafficker” for purposes of designating individuals and entities under the SDNTK. In contrast, the FTO regulations lay out criteria for designating an entity as an FTO (ie, a foreign organization that engages in terrorist activity and the activity threatens US nationals or national security) but stop short of defining FTO. The SDGT regulations simply define “specially designated global terrorist” as “any person whose property and interests in property are blocked pursuant to” the SDGT regulations.

The potential breadth of the forthcoming Cartel designations will likely present unique and complex challenges for satisfying compliance obligations, including in connection with countering the financing of terrorism (CFT), Bank Secrecy Act (BSA), AML, and US trade and economic sanctions compliance obligations. Criminal exposure for providing material support or resources to FTOs may also play a role in raising risk to companies. Depending on the scope of designations, there may also be potential civil liability arising from activities of the Cartels that injure US persons, their property, or business interests. Consequently, the expected designation of the Cartels will likely present difficult tests for sanctions and AML compliance programs maintained by businesses engaged in commercial activities throughout the world, particularly those with operations in Latin America.

BSA, AML, CTF, and sanctions compliance challenges

The EO describes the Cartels as engaging in activities that converge “between themselves and a range of extra-hemispheric actors, from designated foreign-terror organizations to antagonistic foreign governments;” infiltrate foreign governments; and engage in campaigns of violence and terror that destabilize countries. The Cartels’ influence reportedly spans across industries, including agriculture, chemicals, mining, financial services, transportation, and communications and technology. The Cartels’ corresponding financing activities may make it more difficult to determine the source or destination of funding and may require different and more labor-intensive strategies and compliance controls to detect and prevent.

Specifically, although terrorist financing and money laundering laws both target financial crime, they differ in focus and methods due to the nature of each, and Cartels may display elements of both money laundering and terrorist financing.

Additionally, FTO and SDGT designations are added to the SDN List and present unique complications for financial institutions and companies in the supply chain alike.

Like other sanctions programs, designations of Cartels may take effect immediately, and OFAC imposes civil penalties for violations based on strict liability. Given the Cartels’ “convergence” with other hemispheric actors and quasi-government function in Mexico, according to the EO, financial institutions and other companies will need to ensure their sanctions screening procedures are current, assess risk relative to existing AML and sanctions compliance programs, and, if necessary, nimbly adapt controls. For example:

• Financial institutions may need to conduct enhanced due diligence from disparate sources, including through public-private partnership intelligence gathering to identify Cartel affiliates.


• Financial institutions will need to identify owners of Cartel-connected entities whose collective ownership is at or above 50 percent, as OFAC’s 50-percent rule will apply to these designations.


• Financial institutions will also want to ensure they have appropriate controls to comply with detailed regulatory requirements for blocking or freezing funds involving the Cartels pursuant to any FTO or SDGT designation.

Increased criminal exposure

Non-US financial institutions conducting US dollar denominated transactions through US correspondent banks could also face criminal liability. To strengthen national security and protect the US financial system, the US government has focused on using the powerful statutory tools at its disposal, including bank fraud, International Emergency Economic Powers Act (IEEPA), and the BSA. Using these, they have investigated and prosecuted financial institutions for sanctions and BSA violations for failures to develop and implement effective AML programs.

These statutory tools provide a wide jurisdictional net because a single dollar-denominated transaction by two foreign entities through a US correspondent bank could give rise to criminal liability in the US. The current administration will continue this trend, using a whole-of-government, cross-agency approach. For example, on January 22, 2025, a Dubai-based money services business (MSB) operating in the UK resolved a criminal bank fraud investigation by the Drug Enforcement Agency and IRS Criminal Investigations for lying multiple times to its US correspondent bank about the MSB’s AML program. The conduct ended in 2018 and had since been remediated. In announcing the resolution, the US Attorney for the Eastern District of New York stated: “My Office is committed to holding foreign actors accountable for abusing our financial system and ensures that we protect the integrity of US banks.”

Finally, multinational companies with supply chains in Mexico may be particularly susceptible to influence, coercion, or extortion by Cartels. This presents a unique challenge given OFAC’s strict liability standard applied to sanctions violations. Further, companies that have lax sanctions compliance programs or knowingly transact with Cartels or their agents could also face criminal exposure under, among others, the drug trafficking laws, IEEPA, and the material support (for terrorism) statute.

Increased civil liability

Additionally, designating the Cartels as FTOs or SDGTs presents significant civil litigation risk to financial institutions and other companies. Under the Anti-Terrorism Act (ATA) and its amendment through the Justice Against Sponsors of Terrorism Act (JASTA), US nationals who have been “injured . . . by reason of an act of international terrorism” may sue for damages. 18 USC § 2333(a). In addition to authorizing direct actions against the terrorists themselves, the ATA “imposes civil liability on ‘any person who aids and abets, by knowingly providing substantial assistance, or who conspires with the person who committed such an act of international terrorism.’” Twitter, Inc. v. Taamneh, 598 US 471, 478 (2023). Accordingly, following an FTO or SDGT designation, US companies in Mexico, Mexican companies operating in the US, and any company operating in Mexico could be exposed to liability for knowingly providing substantial assistance to the Cartels whose actions injure US nationals. Victims may be well situated and empowered to sue financial institutions that support Cartel-connected entities, as well as other companies in the supply chain.

Takeaways

Given the significant involvement and presence of the Cartels in Mexico’s economy (the EO observed that, “[i]n certain portions of Mexico, [the Cartels] function as quasi-governmental entities, controlling nearly all aspects of society . . .”), anticipated actions by executive agencies will likely impact businesses with personnel or operations in the US and that do business in, have customers, supply chains, distribution networks, or engage in financial transactions with Mexican counterparties. Acutely high-risk supply chain touchpoints are present where local government approvals for ongoing operations and/or transportation of goods and products are required. Traditional cartels have connections and operations throughout the world, including in areas and with countries that are under US sanctions, such as Venezuela. This leaves open the possibility that the Cartels may be sanctioned under multiple sanctions programs. The breadth of the EO also leaves open the possibility that the US will increasingly rely on secondary sanctions to deter and punish non-US entities that continue to engage in transactions with the Cartels.

Given the complexities the Cartels will present for sanctions and AML compliance, the addition of possible civil remedies under the ATA and JASTA for victims of terrorism may raise civil exposure for businesses. While the scope of civil liability has been limited to a degree by the Supreme Court’s Twitter decision, the Cartels reported embeddedness in the Mexican economy could, in certain cases, give rise to allegations that a defendant business was already doing business with the Cartels and therefore “generally aware” of its involvement with the Cartels.

To minimize the risk of civil and criminal liability for “knowingly” providing support to an FTO or violating SDGT-related regulations, business professionals and companies are encouraged to implement a risk-based know your customer (KYC)/due diligence program tailored for their respective industries, locations, products, and services, and reasonably designed to prevent the institution from facilitating or supporting Cartel activity. These organizations are also encouraged to develop procedures to mitigate and remediate any inadvertent violations. By contrast, financial institutions, which ignore obvious red flags indicating that a customer is involved in terrorist financing, face an elevated risk that a court will find it liable for aiding and abetting terrorism. Jury awards in civil cases can vary widely.

Finally, an organization that can credibly provide evidence that it had a risk-based, reasonably designed compliance program in place at the time of a violation, undertook prompt remedial actions after learning of the violation, and (where appropriate) voluntarily self-disclosed the violation to the government, among other steps, will be well positioned to advocate for a more favorable outcome under OFAC’s strict liability regime.

How DLA Piper can help

DLA Piper's cross-jurisdiction National Security and Global Trade, White Collar Defense, Global Investigations, and Government Enforcement teams collaborate to provide guidance on sanctions and AML situations and, together with our colleagues in DLA Piper Mexico, comprise a rapid response task force available at all times for clients who may face high-risk AML and sanctions situations related to FTO and SDGT designations. DLA Piper’s rapid response team can, among others, assist with:

• Providing time-sensitive guidance, compliance controls, and potential proactive planning. Once designations are made, companies will be expected to comply with the strict liability regime, and we anticipate swift and aggressive subpoenas and enforcement actions even for companies who inadvertently violate the sanctions. Services we offer include:


• Reviewing and updating contractual provisions allowing for due diligence around this and reps and warranties for banks and other customers.


• Risk assessment to provide to clients depending on the industry, size, and US contacts (including the use of US correspondent banks).


• Assessing the effectiveness of current customer onboarding and transaction monitoring tools and procedures in light of new threats.


• Collaborating with on-the-ground compliance and investigations lawyers for real time input about how to identify potential Cartel reach and involvement, and suggestions for mitigating contacts and transactions.


• Working in public-private partnerships where appropriate to gather and use intelligence to drive related process improvements and business and compliance efficiencies.


• Assisting AML and compliance staff by conducting privileged reviews of potential red flags of terrorist financing, evaluating whether under local regulations a suspicious transaction or activity report (SAR) is warranted, and engaging with law enforcement (proactively or reactively).


• Coordinating with US and Mexico law enforcement and OFAC in the event of Cartel extortion or ransom demands: The situations that may ensue after FTO and SDGT designations are announced may involve some degree of coercion or extortion given how the Cartels operate and their embeddedness in the Mexican economy. These situations may warrant close and continuous collaboration among white collar defense, government investigations, and regulatory trade attorneys.

For further information, please contact the authors.