Security Implications for Multinational Corporations Operating in Mexico

Nov 28, 2012

Mexico is a significant economic and political player in Latin America. With the world’s 13th largest economy, sharing a large common border with the United States and benefiting from extensive free trade agreements, Mexico has developed privileged access to U.S. markets and integration into U.S. supply chains. Iconic American manufacturers have moved factories by the dozens to Mexico, particularly to Mexico-U.S. border towns. Mexican factories are exporting record numbers of televisions, cars, computers, and appliances. Mexico continues to be viewed as a prime location for U.S. companies seeking to establish value-based, cost-effective, high return on investment business operations.

Drug wars and street battles, extreme violence, kidnapping, extortion, endemic public corruption, and the looming specter of spreading pockets of outright criminal organizational takeover of municipal governments are consistent headlines highlighting the ongoing challenges for business operations. Mexican federal authorities, however, point to continued successes in arresting or killing key criminal leaders and the break-up of transnational criminal organizations and Drug Trafficking Organizations (DTOs), as well as recent decreases in drug-related homicides. It is also a common belief that most of the violence in Mexico is due to drug gangs killing each other, or  “bad on bad” murders. Multinational corporations continue to consider future investment, but have developed reservations and reluctance due to these concerns.

This article assesses the current security realities in Mexico, addressing the country’s overall security environment and identifying specific primary security risks likely to be encountered by multinational corporations operating in Mexico, including extortion and kidnap-for-ransom schemes.

Government Control and Attacks on Authorities
Despite historical denials from the Mexican federal government, current media reporting and public opinion consistently discuss “fallen cities” or “ungoverned” communities in various areas of Mexico. These communities are characterized by a general lack of governmental authority. They arise due to pressure from direct attacks, assassinations, intimidation, and public corruption perpetrated by all of the various organized criminal groups. These groups seek to retaliate against Mexican security forces and support the continued expansion and activity of major DTOs in Mexican communities. In February 2012, in what was widely reported as a break from standard government media policy on this subject, Mexican Defense Secretary Guillermo Galvan Galva acknowledged that some areas of Mexico are no longer under government control. “Clearly, in some sectors of the country public security has been completely overrun,” he admitted.[1] Galva said that organized crime has penetrated not only the country’s public institutions, but Mexican society as well.[2]

While there is no general consensus of what constitutes an ungoverned or fallen city, several conditions should be considered when assessing security risks for business purposes. In fallen cities, any or all of the following conditions may be present: lacks a mayor, city council, or police department; cartel convoys travel openly in the city; cartels regularly operate roadblocks; street battles occur several times per month; large numbers of drug-related homicides, or businesses or citizens routinely pay extortion fees; and retaliatory attacks related to extortion attempts are common.

In the most extreme instances, these communities have no governmental authorities at all; they do not have mayors, city councils, judges, police departments, or other government officials. Residents and businesses in these communities have no protection from organized criminal groups who operate in the area, and criminals have full run of the community and typically control access to it (e.g., roadblocks and surveillance).

In less extreme cases, municipalities may lack some elements of local government, but retain others. For example, they may lack mayors, city councils, chiefs of police, or even police departments, but they may have other governmental departments that function, such as public utilities, health services and schools. They are still able to provide basic municipal services, but in a limited form and one that is essentially controlled by organized criminal groups.

A third condition is also present where communities may have some or all elements of government, but they are largely ineffective in protecting residents from criminal activity due to corruption, collusion, intimidation, incompetence, or some combination thereof.

Due to variations in the level and type of criminal control over communities, and the fact that these levels are in flux over time, it is difficult to derive a definitive and current list of fallen cities in Mexico. Conditions change rapidly and a fairly stable community can quickly become ungoverned (often in a matter of weeks). In contrast, there have been instances where the conditions in ungoverned communities improved almost as quickly with the introduction of federal forces, such as the police or military. Several cities that exhibit a continuing pattern of security deterioration and indicators of fallen or ungoverned would be Apatzingan (Michoacan State); Ciudad Altamirano (Guerrero State); Coyuca de Benitez (Guerrero State); Meoqui (Chihuahua State); and Piedras Negras (Coahuila State).

Several municipalities that have had conditions improve with continued deployment and use of military forces against organized crime elements are Ciudad Juarez and Nuevo Laredo on the northern border. Although neither city can be considered “safe” and under complete control of legitimate Mexican authorities not influenced or intimidated by criminal elements, there have been clear indications of authorities regaining control and improving the security conditions in what were once considered lawless and uncontrolled cities.

Overall, however, evidence suggests that organized crime has increased its control over Mexican cities in the past decade. Research completed by the Institute of Citizens’ Action for Justice and Democracy (IAC) shows that organized crime’s control over Mexican municipalities has gone from 34% in 2001, to 53% in 2006, to 71.5% in 2011.[3] The president of IAC stated that the infrastructure of organized crime in Mexico is “apparent, open, and notorious,” and that in many cases there is complicity between political leaders and these groups.[4]

Contributing to the deterioration of government control for security of business operations are the daily attacks on government authorities that plague more than half of the Mexican states. Government officials are the target of daily attacks perpetrated by organized criminal groups in many areas of the country. The attacks include ambushes of police or military patrols, attacks on government buildings such as police stations, courts and municipal buildings, assassinations of political figures, and executions or kidnap-executions of police officers. These attacks are in contrast to street battles between government forces and sicarios (cartel gunmen).

The frequency and character of armed attacks directed against Mexican authorities provide insight on the ability of the Mexican government to combat organized crime and maintain control. The number of police officers killed during ambushes jumped from approximately 625 in 2010 to 817 in 2011, a 130% increase.[5] The number of assassinations dropped 8% in 2011, although that number remains quite high at approximately 125 for the year.[6] In most instances, the victims were municipal level government officials, followed by state level officials.[7]

Since January 2010, there has been a steady increase in not only the numbers of attacks on government authorities, but also a spread in the geographic pattern of attacks. In 2010, there were an average of 15 Mexican states per month experiencing attacks on government authorities.[8] In 2011, the average increased to 18.[9] For most of 2012, the number of states with attacks on government authorities was 20.[10] States most recently hit hardest by attacks on authorities have been Chihuahua, Coahuila, Guerrero, and Michoacan.

There has been a steady increase in the number of monthly attacks since January 2010.[11] Attacks on Mexican security forces occur on a daily basis throughout most of the country. The families of elected officials are also routinely targeted. Data from 2010-2012 reveals an increase in ambushes since January 2010.[12] Although the pattern of political assassinations from January 2010 to July 2012 suggests they are decreasing, political leaders and government officials remain routine targets of Mexican organized crime and drug trafficking groups, with an average of five to 10 assassinations of elected officials in the first seven months of 2012.[13] These statistics suggest continued challenges by Mexican authorities to maintain control of many areas of the country.

Another useful variable in assessing government control and the level of security risk to business operations in Mexico is the number of street battles or firefights between Mexican authorities and cartel gunmen.[14] There has been a continuing increase in the number of such battles during the first seven months of 2012. In January 2012, there were approximately 25 street battles, with the number rising to 67 in April.[15] In July, the number of street battles reached 71.[16]

There has also been a slight increase in the geographic dispersion of these battles; they appear to be taking place across a larger number of cities and states. This pattern, which might not yet reflect a fixed trend, may still indicate a geographic expansion of threats to public safety and business operations.

In addition to the number and geographic pattern of ungoverned cities, attacks on authorities and street battles, other variables provide insight into the current security risks to business facilities, personnel, and operations. These include violent criminal activities such as extortion, kidnapping, and cargo theft. Reliable statistics do not exist on any of these crimes, but media reports and releases by various human rights organizations and think-tanks suggest an increase and spread in each of them.[17] Certainly, the continuing decline in the effectiveness of law enforcement agencies in many areas of the country due to direct attacks, assassinations, intimidation, corruption, poor training, lack of equipment, and weak leadership contribute to the increase and spread of these crimes. As a result, opportunistic, small-scale criminals take advantage of the disorder in local communities as well. Burglary and theft, armed robberies, kidnapping, and extortion all tend to increase as law enforcement personnel direct their attention to more significant matters, including their very own survival.

Extortion
Since 2008, extortion in Mexico has increased and spread across the country. The National Citizens’ Observatory, an organization that compiles statistics on crime, calculated that Mexico extortion cases of both nationals and foreign nationals have increased more than 180% since 2006.[18] A 2011 study by the Bank of Mexico found that more than 60% of Mexican businesses reported that they were victims of crimes such as extortion.[19] One of the deadliest attacks on a private sector business during the recent drug violence came as a result of extortion. In August 2011, gunmen reportedly working for the Los Zetas cartel set fire to a casino in Monterrey because its owners refused to pay them protection money.[20] The fire killed 52 innocent civilian customers and employees, most of whom were middle-aged and elderly women who came to the casino to play bingo.

Extortion has spread to businesses in areas of the country previously considered largely untouched by crime. The state of Quintana Roo, which is home to the popular tourist cities of Cancun and Playa del Carmen, has now started to experience business extortions. A local newspaper reported in 2011 that the Los Zetas drug cartel was gradually infiltrating businesses throughout the region, including businesses that work with the tourism industry. Quintana Roo trade associations have reported that an increasing number of businesses are simply closing down, in large part due to the ongoing threat of extortion and other organized criminal activity. The trade groups claimed that 70 businesses closed in 2009, 120 in 2010, and 300 in 2011.[21] A government official in the city of Playa del Carmen told the local newspaper Por Esto that reported extortion threats against local businesses jumped 150% in 2011.[22] He further said about 99% of the businesses along one main commercial street in the city were paying protection fees to cartels.[23]

The cities along the dangerous U.S.-Mexico border are also major business extortion areas. Most extortion attempts here, as well as elsewhere in Mexico, seem largely directed at small, more vulnerable local Mexican companies that cannot afford to invest in adequate risk and security mitigation and management measures.

While most extortion attempts are directed at local companies, there have been increasing incidents targeting large multinational corporations. One of the most well-known potential extortion cases affecting a multinational business occurred in late May 2012 against the Mexican subsidiary of Pepsico snack and beverage company, Sabritas. The attack was viewed as the worst attack on a multinational company in Mexico in recent years. Members of the Knights Templar, an offshoot of the La Familia cartel, set fire to warehouses and more than 30 trucks belonging to the firm in Guanajuato and Michoacan states.[24] In total, the attacks and fires at five distribution centers across the two states significantly damaged company infrastructure, trucks and goods. In most media reports, the criminal organization claimed the attack was due to the company’s cooperation with authorities, however the circumstances point to indications of attempted extortion.[25] The attacks required significant coordination to hit multiple locations and inflict a tremendous amount of damage without causing any loss of life. Arson is a common method of intimidation and retaliation in attempted extortions.[26]

The mining industry in particular has become a popular target for extortionists, mostly because the industry is highly profitable and the work sites are remote. According to Mexico’s Attorney General’s Office, drug cartels commonly pressure multinational mining companies to pay from $11,000 to $37,000 a month in “taxes” for the right to operate in the cartel’s territory.[27] If the “security tax” is not paid, the company’s directors, family members, and the miners themselves are attacked or kidnapped. The Attorney General’s Office has opened 12 investigations into extortion threats faced by some 300 mines across the country and has created an inter-agency investigative team aimed at protecting the mining industry in response to the rise in extortion.

In one example, a multinational mining company in Reynosa reported in August 2012 that it had received several threats from unknown individuals who demanded that they be permitted to steal copper from a warehouse owned by the company.[28]

Separately, in August 2011, two miners of a multinational mining company were intercepted on a road near their mining facility in a remote area of Chihuahua State by a group of 12-14 men in bulletproof vests, carrying automatic weapons, with bandanas over their faces. The two miners were blindfolded, handcuffed, and transported to the group’s operating “base.” They were taken on a short tour of the location and shown a roomful of automatic weapons, grenade launchers, and explosives. A laptop with the company’s website loaded on the internet browser was also shown to the men. The assailants told the miners how the company’s website bragged about the successes of the Chihuahua gold mining operation and that to continue the operation the company would be required to pay a monthly “tax” to the group.[29]

Kidnap-for-Ransom
Mexico is among the top five countries at risk for kidnap-for-ransom schemes. The Mexican government’s statistical information about kidnap-for-ransom is highly inaccurate and likely manipulated for perception purposes. The reality is that the exact numbers of incidents, types of victims, or average ransom demands are nearly impossible to accurately determine because only a fraction of incidents are reported to authorities or other organizations. This is mostly due to fear that corrupt local and state police officers collude with kidnappers.

A Mexican human rights group, the Council for Law and Human Rights, claimed that 17,889 kidnappings occurred in 2011, up approximately 32% from the 13,505 abductions in 2010.[30] The figures did not include kidnappings where the victim was released within 24 hours, known as an “express kidnapping.” In 2011, a separate Mexican think-tank reported that 1,847 kidnappings were recorded in the country in 2010. Some 209 of these incidents resulted in the death of the hostage.[31] The think-tank, however, admitted these figures were likely only a fragment of the real kidnapping rate due to underreporting and the manipulation of statistical data by local governments. The think-tank’s 2010 figure was twice its 2009 numbers. Meanwhile, between October 2010 and September 2011 there were 1,016 incidents of kidnap-for-ransom, as noted in a report by the National Public Security System.[32] According to a 2011 Mexican congressional report, kidnapping in Mexico has risen 317% in the last five years.[33] The report estimated an average of 3.72 kidnap cases are reported every day. Although kidnap-for-ransom incidents occur throughout the country, high numbers of incidents are concentrated in eight states: Mexico, the Federal District, Guanajuato, Michoacan, Guerrero, Chihuahua, Baja California and Tamaulipas. Other primary trouble spots include Nuevo Leon, Tabasco, and Veracruz states. The municipalities in the Yucatan Peninsula seem relatively less prone to kidnap incidents.[34]

Kidnap groups in Mexico range from well-organized and professional kidnapping rings and drug cartels to opportunistic street criminals. Both types of groups generally operate in urban areas or along rural highways. These groups often kidnap employees commuting to and from work, or in transit from city to city. Mexican nationals are believed to make up the vast majority of victims, but foreigners are also targeted. Although all business sectors are victimized, energy and mining sector workers are particularly at risk due to their isolated and rural work sites and transportation routes.

Drug trafficking gangs, such as Los Zetas, La Familia, and the Knights Templar, engage in retaliation and intimidation kidnappings against rivals, government authorities, public officials and private sector companies. They also kidnap-for-ransom employees and managers of successful high profile businesses and multinational corporations to boost their finances. While the vast majority of ransoms are relatively small, high profile senior managers and executives of multinational firms and local Mexican citizen business owners can fetch ransoms in the millions of dollars. A U.S. businessman abducted in Tijuana drew $5 million in 2011.[35]

In most cases, after the ransom is paid, the victim is safely set free. Kidnappings in Mexico are rarely investigated or prosecuted due to a lack of adequate resources, as well as corruption and competence issues. In addition to traditional kidnap-for-ransom operations, there are a number of other kidnapping methods used in Mexico, including:

Express Kidnapping: Abduction based on a 24-hour time limit with emphasis placed on forcing victims to withdraw funds from a number of ATMs, as well as handover cash, valuables, and other possessions. In other cases, the victims are quickly released after paying a small ransom.

Virtual Kidnapping: Criminals call their victims from unregistered mobile phones and claim to have kidnapped a family member or friend. These criminals may use sound effects or information gathered on the internet to convince a victim that a kidnapping has occurred. The criminal then demands a ransom. Criminals often claim to be members of one of the large drug cartels when making such calls, knowing these groups’ reputation for brutality will scare victims. These incidents are actually elaborate extortion attempts since no one is actually kidnapped.

Since extortion and kidnapping are closely linked to the drug trade and the ungoverned municipalities and unsecured areas of the country, the cartels’ ability to operate with impunity have left businesses and their employees, managers, and executives vulnerable. This has resulted in significant economic and social damage, as well as scaring away some businesses looking to invest in Mexico.

A 2011-2012 survey by the U.S. Chamber of Commerce in Mexico found that 87% of the surveyed companies had increased security measures or contacted authorities due to incidents of extortion or kidnapping, and more than half of the companies increased their investments in security during 2011.[36] A June 2012 article in the Financial Times, however, reported a more optimistic scenario; foreign direct investment totaled $18 billion in 2011 and was expected to reach similar levels in 2012. While extortion and kidnapping affects multinational corporations, in most cases criminals rarely know which key leaders to kidnap due to the sheer size of many companies operating in Mexico. In fact, in many incidents involving employees or managers of multinational corporations, the threat and demand are directed toward the families and not the companies, although most multinational corporations do accept varying levels of ownership of the incident and associated support and assistance to the victim’s family. The prospects for smaller, local companies may be darker. Many small Mexican businesses close rather than face the continued threat of violence, kidnapping, or ever-increasing extortion payments to gangs or cartels.

Conclusion
The security environment for businesses in Mexico will see no significant overall change for many years to come. Crime, corruption, and the resulting insecurity for business operations, employees, and executives will remain a consistent risk for business. Real change will require the Mexican government to radically reduce the corruption within law enforcement and significantly restructure the criminal justice system.

Businesses considering future operations or maintaining current operations in Mexico must acknowledge and take steps to actively manage these security risks to be successful and profitable. Regardless of the severity, business security risks can be managed using a continuous and systematic risk assessment and mitigation process. Access to and use of current continuous intelligence reporting on the evolving threat environment and how a Mexico-based business’ employees, facilities, operations, and supply chain may be vulnerable to security risks is the first step to developing and implementing effective security practices and policies.

Although Mexico will remain dangerous for the foreseeable future, multinational companies operating there can limit the frequency and severity of security related incidents through implementing a successful operational risk management program.

Charles Regini is Managing Director of Crisis Response and Planning for Kroll Associates Inc. Mr. Regini oversees the day-to-day activities of Kroll’s crisis management planning and response services, particularly the Kidnap for Ransom and Extortion response program and associated risk assessments, prevention, preparation, and planning services. Mr. Regini joined Kroll in 2011 after working as an independent consultant and program/project manager in the U.S. Intelligence Community. He retired from the Federal Bureau of Investigation in 2009 after spending more than 21 years of distinguished service in a variety of investigative, intelligence, and management positions. Mr. Regini was one of the hand-picked full-time hostage negotiators in the FBI’s Critical Incident Response Group, where he led the FBI’s international hostage/kidnap program, and became recognized as a subject matter expert in crisis-hostage negotiation.

[1] Geoffrey Ramsey, “Mexico Official Admits Some Areas Out of Govt Control,” InSight Crime, February 10, 2012.

[2] Ibid.

[3] The IAC did not define how they measure “control.” See “Mexico: Situation of Organized Crime; Police and State Response Including Effectiveness; Availability of Witness Protection,” Immigration and Refugee Board of Canada, September 11, 2012.

[4] Ibid.

[5] “Mexico Annual Security Review 2011,” Harary Security Consulting, 2012.

[6] Ibid.

[7] Ibid.

[8] “Mexico Monthly Security Summaries in 2010, 2011, and 2012,” Harary Security Consulting, 2012.

[9] Ibid.

[10] Ibid.

[11] “Mexico Annual Security Review 2011.”

[12] Ibid.

[13] Ibid.

[14] The majority of these conflicts are running street battles during which bullets are fired indiscriminately in mostly urban settings often resulting in the injury or death of innocent bystanders. Fragmentation grenades were also used in a significant number of these battles resulting in injuries to innocent bystanders and property damage.

[15] “Mexico Annual Security Review 2011.”

[16] Ibid.

[17] “Mexico’s 2012 National Survey on Victimization and Perception of Public Security,” Mexican National Institute of Statistics and Geography, 2012; Luisa Blanco, The Impact of Reform on the Criminal Justice System in Mexico (Santa Monica, CA: Rand Corporation, 2012); Gary J. Hale,  A ‘Failed State’ in Mexico: Tamaulipas Declares Itself Ungovernable (Houston: James A. Baker III Institute for Public Policy, 2011); “Security and Criminal Justice in the States: 25 Indicators of our Institutional Weakness,” Mexico Evalua, 2012.

[18] Tracey Wilkenson, “In Mexico, Extortion is a Booming Offshoot of Drug War,” Los Angeles Times, March 18, 2012.

[19] Ibid.

[20] Daniel Hernandez, “Who is Responsible for the Casino Tragedy in Mexico?” Los Angeles Times, August 29, 2011.

[21] Edward V. Byrne, “300 Businesses Close in Cancún, Riviera Maya Due to 2011 Narco Extortion, Threats,” Mexico and Gulf Region Reporter, December 24, 2011.

[22] “El crimen organizado expande su radio de acción,” Por Esto, October 24, 2011.

[23] Ibid.

[24] “Sabritas Target of a String of Attacks in Mexico,” CNN, June 2, 2012.

[25] “Arson Attacks Against U.S. Multinational Subsidiary,” U.S. Overseas Security Advisory Council, 2012.

[26] The criminal organization claiming responsibility for the arson attack was the Knights Templar, a relatively small splinter criminal group of the La Familia cartel that routinely relies on extortion revenues, unlike the larger cartels that primarily rely on drug trafficking revenues.

[27] Edward Fox, “Mexico Mining Ops Pay Hefty Extortion Fees to Cartels,” Insight Crime, May 8, 2012.

[28] Charles Regini, “Kroll Critical Incident Case Studies and Statistics,” Kroll Associates, 2012.

[29] Ibid.

[30] “49 Kidnappings Per Day Occurred in Mexico in 2011,” Borderland Beat, January 2, 2012.

[31] Elyssa Pachico, “Study: 2010 Record Year for Kidnappings in Mexico,” InSight Crime, February 7, 2011.

[32] Ioan Grillo, “No Reduction in Mexico Kidnappings,” Global Post, November 20, 2011.

[33] Damien Cave, “In Mexico, a Kidnapping Ignored as Crime Worsens,” New York Times, March 17, 2012.

[34] There is not one definitive reason why the Yucatan Peninsula is less prone to kidnap incidents.

[35] Regini.

[36] “The Impact of Security in Mexico on the Private Sector (Fourth Edition),” American Chamber of Commerce of Mexico, 2011.