FinCEN invokes new Section 2313a authority against three Mexican financial institutions: The who, what, when, where, why, and what-to-do-now

This client alert answers the Who? What? When? Where? and Why? – and also What to do Now? – regarding these Orders.

Who? 

Who?  (Part One)  Who did this?

The Financial Crimes Enforcement Network (FinCEN), is a component of the U.S. Department of the Treasury, and oversees anti-money laundering rules and enforcement for the U.S. government. The agency is roughly the equivalent of the Unidad de Inteligencia Financiera (UIF) in Mexico.

Who? (Part Two) Who are the targets?

There are three separate orders, directed to three distinct Mexico-based financial institutions: (1) CIBanco S.A., Institución de Banca Múltiple, a commercial bank; (2) Intercam Banco S.A., Institución de Banca Múltiple, a commercial bank; and (3) Vector Casa de Bolsa, S.A. de C.V. (Vector), a brokerage firm. (Collectively, we will refer to CIBanco, Intercam, and Vector as the “Affected Mexican Institutions”).

Importantly, those orders only concern the banks themselves, as well as the offices, branches, and subsidiaries of CIBanco, Intercam, and Vector in Mexico; they do not affect branches, subsidiaries, and offices outside of Mexico (including those in the U.S.).

The Orders do not directly attempt to penalize or charge the Affected Mexican Institutions; rather, the Orders prohibit United States financial institutions from transferring funds to, or receiving funds from, these Affected Mexican Institutions. In other words, the U.S. financial institutions are the entities that are restricted by the Orders, and will be penalized for violating them. The statute also allows penalties against individuals, such as managers, officers, directors, and employees of such U.S. financial institutions. Moreover, “U.S. financial institutions” is a broad category: it includes not only banks, but also brokers and dealers in securities, casinos and card clubs, money services businesses (such as money transmitters, foreign exchange dealers, and check cashers), futures commission merchants and introducing brokers in commodities, and a host of other financial service companies.

What?

What? (Part One) What do the Orders do?

The Orders make certain factual findings and determine that CIBanco, Intercam, and Vector are each “financial institutions of primary money laundering concern.” For instance, the CIBanco Order found that CIBanco processed transfers that benefited the Gulf Cartel, Beltrán-Leyva Organization, and Cartel Jalisco Nueva Generación (CJNG). According to the Order, CIBanco also handled payments for precursor-chemical importers and exporters. Regarding the Intercam order, FinCEN concluded that the bank facilitated several transactions tied to CJNG and other opioid-related laundering activities, and had a long-standing history of noncompliance. Among other things, Intercam allegedly facilitated millions of dollars of funds transfers related to shipments of fentanyl precursors from China and elsewhere. Finally, the Vector Order alleged that Vector had provided various services to facilitate the laundering of proceeds for the Sinaloa and Gulf Cartels.

When the Orders become effective (in approximately 21 days), U.S. financial institutions will be prohibited from sending or receiving transmittals of funds (including crypto transactions) to these Affected Mexican Institutions.

Therefore, even though the Affected Mexican Institutions are not directly prohibited from doing anything—again, the Orders place restrictions on U.S. financial institutions—the practical effect is that the Affected Mexican Banks, and their clients, will be severely impacted. As a result, the Orders may prevent the Affected Mexican Institutions from engaging in dollar-denominated transactions, including redeeming any dollar accounts of account holders (or dollar accounts of the Affected Mexican Institutions themselves). Effectively, the Orders make the Affected Mexican Institutions radioactive to the U.S. financial system.

Moreover–although not a formal part of the Orders–as a practical matter other financial institutions may decide to avoid transactions with the Affected Mexican Institutions, even for ex-U.S., non-dollar transactions. This would likely affect the ability of the Affected Mexican Institutions to transact in other currencies (such as Euros or Yen). Historically, foreign financial institutions subject to analogous orders have become significantly distanced from the international financial system, even when subject to (somewhat) less severe special measures imposed under the statute.

What? (Part Two) What happens to a U.S. Financial Institution that violates the Orders?

Treasury may impose civil penalties of up to twice the amount involved in the transaction, capped at $1,776,364, for each violation; the government may also seek a court injunction to prevent further violations. For criminally willful violations, criminal fines and imprisonment may also be imposed. The government may also penalize directors, officers, partners, and employees of such institutions for violations.

When?

When? (Part One) When do the Orders come into effect? 

The Orders technically come into effect 21 days after publication in the Federal Register; this publication has not yet happened, and often takes a few days. (Hogan Lovells will continue to monitor when the Orders are officially published.) So it is likely that the official “Effective Date” will be in mid-July. As a matter of practice, however, many U.S. financial institutions will begin to scrutinize their processes and update their screening tools, and may discontinue transactions with the Affected Mexican Banks immediately.

Also, it is possible–but by no means certain--that Treasury will extend the period to 30 days, or will consider a longer implementation period after further consideration or discussions with outside parties (such as U.S. banks, the Mexican government, or others).  Additionally, each Order provides that FinCEN may grant exemptions—allowing certain transactions to occur, potentially with certain conditions (such as transaction limits, additional recordkeeping, or enhanced due diligence).

When? (Part Two)  When do the Orders Expire?

As drafted, each Order expressly states that it has “no cessation date,” so there is no expiration period.  It is possible that Treasury will later modify or otherwise rescind one or more of the Orders. However, in analogous circumstances, the U.S. government has rescinded a final rule in unusual circumstances (for instance,  when the “primary money laundering concern” goes out of business, or as the result of litigation). It is also possible that one or more affected parties may file litigation to delay or permanently enjoin the implementation of the rule. And because the Orders are quite significant and using a relatively new authority—this is the first time that Treasury is using this particular statute—it is certainly possible that a court would issue an injunction to either modify or strike down one or more Orders.

Why?

Why? (Part One) Why is FinCEN/Treasury doing this?

In 2024, the United States enacted the FEND Off Fentanyl Act, which authorizes the Treasury Department to target money laundering associated with fentanyl trafficking (and the trafficking of other opioids), including by drug cartels. The new law is similar to an older provision (a part of the USA PATRIOT Act), which allows Treasury to deem certain foreign institutions, foreign jurisdictions, or types of transactions as “primary money laundering concerns” and to require U.S. financial institutions to take certain actions, including discontinuing financial transactions with them. The new statute, which focuses on money laundering in connection with illicit opioid trafficking, allows Treasury to perform these actions by unilateral finding and order, rather than by a proposed rule (which is subject to notice-and-comment rulemaking, generally a more slower and more cumbersome process).

According to the announcement, the U.S. Treasury Department found that the Affected Mexican Banks “played vital roles in facilitating money laundering activities of Mexico-based cartels engaging in illogic opioid trafficking, including facilitating payments for the procurement of precursor chemicals.” Importantly, some of the cartels were recently designated earlier this year as Foreign Terrorist Organizations. Each Order lists particular findings regarding CIBanco, Intercam, and Vector, respectively.

Why? (Part Two)  Why is the Mexican Government allowing this?

Historically, actions such as these (or their analogues) have resulted in government-to-government discussions, often with efforts to address the underlying concerns with approaches other than cross-border enforcement. The Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público (SHCP)) and the Financial Intelligence Unit (Unidad de Inteligencia Financiera (UIF)) confirmed receipt of FinCEN's notifications but report that the United States has not provided evidence linking the institutions to illicit activity. SHCP clarified that the only information provided by the Department of the Treasury were transfers made through the Affected Mexican Institutions with legally established Chinese companies.

Mexican regulators have also conducted their own reviews, issuing administrative sanctions totaling MXN 134 million for compliance shortcomings. The SHCP states it will “act with the full force of the law” should compelling proof emerge, emphasizing cooperation with the U.S. on the basis of “shared responsibility without subordination.”

So, what now? What should I do?

As noted above, although these Orders name the three Affected Mexican Institutions, the directly prohibited parties are the U.S. financial institutions – banks, money services businesses, casinos, virtual currency exchanges, and others – that are engaged in the transfer of funds with the Affected Mexican Institutions. U.S. financial institutions engaging in transactions with an Affected Mexican Institution should promptly identify their exposure, including accounts and transactions (ACH, wire, trade finance, SWIFT, foreign exchange, and crypto transactions). They should also update their screening tools, due diligence measures, and blocking lists (including for crypto wallets), prepare client notifications regarding discontinuation of transactions to these Affected Mexican Institutions. United States financial institutions should also strongly consider other forward and backward-looking compliance measures.

On the Mexican side, the SHCP nor UIF have issued similar order for Mexican financial institutions but given their interaction with US banks, will likely activate crisis protocols. The Affected Mexican Institutions could still bring action against defaulting parties.

Customers of the Affected Mexican Institutions will likely be required to find alternative means of transferring funds: the parties may need to amend ongoing contracts, establish new banking relationships, or ensure that installment-payment, chargebacks, or refund provisions are not disrupted.

Finally, given the significant adverse effects that such Orders may involve, one or more parties—including perhaps one of the Affected Mexican Institutions—may decide to challenge the Orders in Federal District Court. FinCEN and Treasury have had to litigate analogous Section 311 matters (Hogan Lovells has been involved in some of these matters). The current 2313a Orders are potentially even more vulnerable to challenge. No matter what, these new Orders, involving us of Section 2313a authority for the first time, raise a host of issues that a litigant and a court may decide to test.

Conclusion

These Orders from FinCEN invoke a yet-untested statutory authority, and will have significant effects upon the three Affected Mexican Institutions, the U.S. financial institutions required to comply with the Orders, and customers of these financial institutions on both sides of the Mexico-U.S. border. Please reach out to any of the contacts below if you need assistance in navigating these challenges.

Authored by Greg Lisa, Guillermo Larrea, and Juan Quinzanos.