The Sinaloa Federation’s International Presence
Apr 29, 2013
During former Mexican President Felipe Calderon’s six-year term that ended in 2012, the Mexican government took an aggressive stance against the many drug cartels operating in the country. “Calderon’s War,” as some in Mexico have come to call it, continues to simmer as the remaining transnational criminal organizations (TCOs) seek accommodation with rival groups. Smaller “tier-two” groups grow in strength, while mostly rural vigilante gangs that form to protect communities from drug traffickers and corrupt police alike reflect society’s lack of patience with a slowly evolving government solution. Yet of all the criminal organizations in Mexico, one group remained largely unscathed during Calderon’s six-year war: the Sinaloa Federation.
The Sinaloa Federation, led by Joaquin “El Chapo” Guzman, has suffered its share of setbacks, including a recent multi-ton drug bust in Baja California. Yet compared to Los Zetas, La Familia, and the Gulf Cartel, Guzman has not suffered the dissolution of critical elements within his organization. His strategic position promotes deal-making over bloodshed and business over violence. From an absolutist perspective, his organization is one of the bloodiest in operation today, but compared to his enemies the Sinaloa Federation has perhaps been the least violent relative to its large size. Guzman’s current expansion strategy rests on the same pragmatic decision-making that led to his resilience during the Calderon administration. He sees Mexico as a sturdy foundation, and the rest of the world—Africa, Asia, Australia, Central and South America, the European Union, and the United States—as pieces in a strategy of “deviant globalization.”
This article explains the sources of the Sinaloa Federation’s drug production, its international expansion, and the role Chicago plays in the cartel’s operations.
International Expansion: Supply
Central America was the first stop along Guzman’s business plan for international expansion. It was a logical move to control relationships and territory in Guatemala and later Honduras that secured upstream access to one of his primary products: cocaine. From the coca bush plantations in the Andes in South America, cocaine travels from the leaf to the nostril, passing through Central America, often through Honduras or Guatemala, before landing in Mexico, where it may be warehoused for a period of time before a final leg of shipment to the United States, or to Europe through Africa.
When the Mexican government complicated Guzman’s plans in 2006 and 2008 for acquiring precursor chemicals for another principal product, methamphetamines, Central America served as a temporary source as he searched for options in Argentina, before settling on sources in Asia, where he worked with three criminal organizations based in China.
Pushing south from Central America, Guzman focused on Colombia, the “farm gate” source for cocaine. In a twist of fortuitous consequence, the Revolutionary Armed Forces of Colombia (FARC) have again entered into peace negotiations with the Colombian government. A key point for the government in the talks, which have been ongoing since November 2012, will be the FARC’s de facto removal from the regional drug trade. As the insurgents pull out of the drug trafficking business, local groups in Colombia are likely to benefit from the windfall in captured market share, but the Sinaloa Federation is arguably the only Mexican group that will capture a similar benefit. Further consolidation of Guzman’s network in Colombia facilitates supply logistics and transport, reducing transaction costs as he moves the product north from Colombia to Mexico. A strong presence in Colombia allows him to capture more value as he consolidates purchase power at the highest end of the upstream supply chain of cocaine, maximizing profit for every kilo purchased in Colombia and delivered inside the United States.
Yet as the Colombian government moves beyond the FARC to focus on other trafficking networks, the Sinaloa Federation may find itself in need of other options. As Colombia becomes a more difficult “market” to source cocaine, Guzman will likely respond by increasing his presence in Peru, Bolivia, and Ecuador, where he has already made significant inroads, possibly as a contingency plan to his focus in Colombia. In total, Guzman’s Sinaloa Federation subsidiaries have a presence across 16 countries in the Americas, according to the Mexican Department of Justice.
Meanwhile, the Sinaloa Federation has been actively pursuing supply control strategies across the Pacific Ocean. Since the 2007 discovery of some $205 million in cash in the house of Mexican-Chinese businessman Zhenli Ye Gon, law enforcement has explored the Sinaloa Federation’s sourcing of precursor chemicals in China.
More recently, however, various news reports offer anecdotal evidence of the Sinaloa Federation’s continued interest in Asia-based supply control. Malaysian officials charged three Mexican brothers from Sinaloa for operating a meth lab there in June 2011. The bricklayers from Culiacan, Sinaloa, were thought to have been members of the Sinaloa Federation, and were found with $15 million in methamphetamines at the time of their arrests in 2008.
Meanwhile, in January 2011, Mexican media reported that Sinaloa Federation operatives were purchasing heroin in Afghanistan to supply cities in the United States, including New York and Chicago. According to Edgardo Buscaglia, the Sinaloa Federation used front companies in partnership with Turkish or Indian criminal organizations to purchase and ship the heroin.
International Expansion: Demand
The United States remains the most important demand market for Sinaloa Federation products—marijuana, cocaine, and methamphetamines. The European Union and Australia, however, have proven attractive due to the economics of price elasticity and their distance from the supply source. Drugs are a lucrative product because addicts are highly “elastic” when it comes to high prices. The farther a kilo of cocaine travels from Colombia, the more profit it produces for the merchant.
Prices from Colombia to Texas, for example, could jump from some $5,000 a kilo to $16,000 a kilo; to Paris, $25,000 a kilo, and further abroad to Australia could be as high as $250,000 a kilo. Economics demand that distance from the supply source in the Andean mountains results in a higher price at the local level. The nature of cocaine as a product adds a significant amount of risk during transport, and the price of this risk is then passed along to the final consumer.
For example, a route from Colombia to France increases the price for a pure kilo of cocaine significantly. There is a risk to move the cocaine out of Colombia and into Central America, likely Honduras, where it is stored until Guzman’s men are ready to move it to Mexico. Once the cocaine enters Mexico, it takes another jump in value due to the “market pressures” of government and rival action. The kilo then makes a significant jump in price when it moves from Mexico into the European Union through West Africa, or perhaps Spain, and finally again when the sales price is placed in euros, not dollars. In some cases, the exchange rate increases the value; in others, such as in Australia, the street price of a kilo of pure cocaine is so high that exchange rates have little impact on the business decision to transport cocaine across the Pacific.
As an entry point to the European Union, West Africa remains a key strategic goal for the Sinaloa Federation, where recent reports suggest that Mexican criminal organizations continue to expand—although with little to no violence compared to other routes. In Guinea-Bissau, reporting indicates that the Sinaloa Federation and possibly other Latin American criminal organizations work directly with the military in that country. The business model that Guzman most often employs, however, is one where he partners with local criminal groups and empowers them. He rarely uses force to push them out of the way. Due to this model, the Mexican media has begun to refer to the Sinaloa Federation as a “narco-holding,” or a holding company for several smaller subsidiaries located worldwide.
Australia, by comparison, offers the fantastic opportunity of a mark-up that at first glance seems unbelievable. Anything purchased at $5,000 and marked up to $250,000 is a good investment. According to one press report, the investment was so lucrative that “the drug ring also allegedly discussed in an unrecorded conversation using a plane to move millions of dollars a month in cash from Australia to the U.S. to buy cocaine to sell back in Australia, court records show.”
“Though there is no evidence that points directly to the Sinaloa Federation shipping cocaine from Chicago to Australia, I wouldn’t be surprised if it happened,” explained John Riley, special agent in charge of the Drug Enforcement Administration’s (DEA) Chicago Division.
U.S. cities, such as New York, Dallas, Atlanta, Chicago, San Diego, and Los Angeles, are integral parts of any drug trafficker’s downstream or distribution strategy. Since the 1990s, however, the number of major Colombian groups inside the United States has slowly diminished while the number of cities where drug trafficking “wholesale networks” operate has increased. Generally speaking, the downstream market for multinational groups such as the Sinaloa Federation stops at the wholesale level, where nodes of connected buyers in the United States create a wholesale network. The number of cities within these wholesale networks has grown steadily over the years due to the profuse demand for methamphetamines—a product that many observers believe has taken over cocaine as the number one demand product inside the United States, behind prescription pills. The increased demand for methamphetamines in the eastern states is largely responsible for this ranking.
As Colombian networks dried up, Mexican cartels replaced them. Through the early 2000s, as Mexico’s criminal organizations fought for control of border crossings, they naturally established routes inside the United States contiguous to the areas where they could cross product. The Arellano-Felix organization, based in Tijuana, developed a strong distribution network through California. The Gulf Cartel developed distribution networks east of Texas, along the I-10 corridor, and north through Oklahoma into Georgia and beyond.
The Role of Chicago in Sinaloa’s Operations
The Sinaloa Federation developed distribution networks into the United States initially through Nogales and into Phoenix, but as the criminal organization developed relationships with former rivals, it spread its influence into those areas of the United States where its rivals had operated. No other city was perhaps more fundamental to this strategy than Chicago.
As a major Midwest city, Chicago presents distribution advantages as well as a strong local demand market. It connects several major interstate systems that offer distribution across the United States, and it is the final point along a hardened logistics route that passes from Juarez to Chicago through Oklahoma City and St. Louis. Arguably, Juarez is the Sinaloa Federation’s strongest border crossing point given the amount of daily vehicle traffic that crosses the border there compared to other border crossings used by the group.
The focal point for the Sinaloa Federation in Chicago is the city’s “Little Village” neighborhood, which is part of the South Lawndale Community Area. From this strategic point, Guzman’s men distribute their product at the wholesale level to literally dozens of street gangs—as much as two metric tons a month. Chicago ranks with Los Angeles as a street gang mecca, with over 100,000 street gang members. According to Special Agent Riley from the DEA, “There are some 120,000 documented street gang members in Chicago. El Chapo’s people have ventured into obvious business relationships with surrogates for street gangs; it allows Sinaloa to stay on the sidelines where they can be much more fluid with their movement.” He signaled that the Gangster Disciples are one of the local gangs most actively working with the Sinaloa Federation.
From this centralized distribution point, Guzman’s distribution channels may spread to points east and west. The presence is so strong that local DEA agents based in Chicago remarked in late 2012 that law enforcement operates as if they were on the U.S.-Mexico border. Less than three months later, the city declared Guzman as public enemy number one, the first individual to receive the infamous title since Al Capone.
Underscoring the organization’s position of strength inside the United States, the Sinaloa Federation has made some inroads into the East Coast, previously considered dominion of the Gulf Cartel, Los Zetas, and Colombian criminal organizations. On the back of an increase in demand for heroin, the Sinaloa Federation has captured market share due to their strong smuggling and distribution networks and long-time control of the black tar heroin trade.
Even as Mexican TCOs expand their presence inside the United States, the amount of reliable information available to the public is relatively limited, presenting an unclear picture at times illuminated by a high-profile arrest or flutter of media coverage based on interviews given by high-level law enforcement operatives.
One salient point remains clear: operatives of the Sinaloa Federation communicate better than the disparate state, local and federal organizations and agencies tasked with stopping their growth. The criminal operator’s ability to hide in plain sight and keep a low profile exacerbates complications formed by the necessary limitations of sharing actionable intelligence across state lines or between agencies in the same city.
Can the Sinaloa Federation Be Stopped?
Osorio Chong, Mexico’s new interior minister who oversees the country’s current public security challenges, remarked in late February 2013 that capturing Guzman is his most important objective. Yet Guzman’s location has remained a mystery—several Mexican analysts and reporters have argued that the Mexican government has purposefully avoided his capture in favor of other targets, possibly because of Guzman’s ability to provide actionable intelligence on other, high value targets from rival cartels. Whether true or not, Guzman remains free—largely because of his constant adherence to a principal of pragmatism over violence.
Throughout Guzman’s history, well covered in The Last Narco by British-American reporter Malcolm Beith, examples abound of Guzman’s penchant for using intelligence and his networked connections to facilitate his preferred outcomes. He may have shared information with Mexican authorities to facilitate the arrest of his former ally, Alfredo Beltran-Leyva, who he thought had become too brazen. Rather than prolonging battles for Tijuana and Juarez, which were prosecuted by his proxies, Guzman decided to reach a business agreement with the leaders of the Arellano-Felix Organization in Tijuana and the Carrillo-Fuentes Organization in Juarez—agreements that may help explain the precipitous drop in violence among cartels in both cities. These agreements were based on two basic premises: each side would order their respective groups to stop fighting, and the formerly rival groups would establish a system of rents or “usage fees” that would allow for the free passage of product as long as the rents were paid. Guzman’s decision to enter Guatemala by solidifying relationships with local criminal organizations, such as the Chamale gang, to support methamphetamine production, rather than forge a bloody path of dominance like Los Zetas, is a clear sign of this strategy.
As careful as Guzman is in Mexico, where he has the most latitude to kill with impunity, he has demonstrated only increased levels of caution as his organization distances itself from its base of operations in western Mexico. This is the primary reason why observers will likely not identify violence attributed to the Sinaloa Federation outside of Mexico, especially inside demand markets in Australia, the European Union, and the United States. In these destination markets, layer upon layer of proxy organizations, such as street gangs, provide insulation from his immediate employees when corrupt law firms, front businesses, and politicians cannot.
As the Sinaloa Federation deepens its roots in countries outside of Mexico, it will rely ever more on the strength of its foundation inside that country. No amount of DEA, FBI, local or state police investigations in the United States or abroad will systemically disrupt the Sinaloa Federation as long as it remains untouchable inside Mexico. Although U.S. authorities at the federal, state and city levels are making headway in Chicago, Special Agent Riley commented that he is focused on “getting people on a regional basis to understand what we’re up against.”
Regardless of whether or not the current Mexican administration is focused on Guzman, as Minister Osorio Chong purports, Mexico’s public security policies are still taking shape, and may not reach required levels of efficacy until 2015 when the proposed Gendarmerie is expected to be operational. Mexican President Pena Nieto is ripping out the old public security apparatus before the new one is entirely formed, a decision that may be politically motivated.
Meanwhile, Guzman continues with his structure intact, expanding through mergers and partnerships, and improving the quality of his product. After six years of “Calderon’s War,” the Sinaloa Federation remains secure in its home base, and Guzman confident in his ability to alter the political landscape as necessary, so much so that he has embraced a global strategy for expansion and domination.
Samuel Logan is the Founder and Managing Partner of Southern Pulse, a field-based investigations firm focused on security, politics, energy, and business in Latin America. From 1998 to 2009, he lived and worked in Central and South America as an investigative journalist. Mr. Logan is the author of This is for the Mara Salvatrucha (Hyperion, 2009), co-author with Dr. George Grayson of The Executioner’s Men (Transaction, 2012), and is working on a third book that focuses on the business and culture of weapons smuggling in the United States and Mexico.
 The idea of accommodation stems from an analysis that rival TCOs almost always reach a business savvy agreement rather than an alliance when they decide to stop fighting.
 A “tier-two” group is one that has demonstrated strength and capability at the city or state level, but has not yet reached beyond those limitations. La Linea in Juarez or the New Generation Jalisco Cartel are two examples of tier-two groups.
 “Criminal Technology Transfer,” Southern Pulse, March 2013, available at www.vimeo.com/57382082.
 “Mexican Army Seizes 5 Tons from Chapo in BCS,” Borderland Beat, April 5, 2013.
 Three men run the Sinaloa Federation: El Chapo, El Mayo, and El Azul. Compared to Los Zetas, which lost Heriberto Lazcano, or the Gulf Cartel, which lost Osiel Cárdenas Guillen, his brother Antonio, and most recently El Coss, the Sinaloa Federation has not suffered the loss of high-level leaders, whose removal would certainly produce disruption through the entirety of the organizational system, from supply to transport, protection to intelligence, and offensive to weapons and communications procurement.
 As explained by Malcolm Beith, “There is a level-headedness about the [Sinaloa] leadership that the other groups lack. To the authorities, first priority always has to be quelling violence. When other groups throw grenades into a crowd of innocents or behead[s] people, it’s obvious what needs to be done. Sinaloa has perpetrated its share of violence, but by and large it did not cause disruption to the general well-being of the population.” See Jan Albert-Hootsen, “How the Sinaloa Cartel Won Mexico’s Drug War,” Global Post, February 28, 2013.
 Bruce Sterling, “Deviant Globalization,” Wired, May 5, 2010.
 The production of methamphetamines requires the pharmaceutical product pseudoephedrine or its derivatives. Also known as “precursor chemicals,” this white powder forms the base of the product that through a chemical process becomes methamphetamine. Countries such as India and China are well known for loose export controls for these chemicals while being two of the world’s most active producers of pseudoephedrine. Mexico complicated methamphetamine production in 2006 by implementing tight controls over precursor chemicals and again in 2008 by banning the sale of pseudoephedrine altogether.
 Rafael Croda, “El de El Chapo, un ‘narcoholding,’” Proceso, January 5, 2013; “3 Asian Organized Criminal Groups Supply Chapo with Precursor,” Borderland Beat, January 12, 2013.
 “Colombia, FARC Rebels Say Peace Talks Making Progress on Land Reform,” Reuters, March 21, 2013.
 Iván Ventura, “Tentáculos del Chapo alcanzan a las FARC,” Excelsior, March 28, 2013.
 Croda; “Chapo’s Multinational Mafia,” Borderland Beat, January 6, 2012.
 Elyssa Pachico, “Mexico Cartels Operate in 16 Countries: Report,” Insight Crime, September 19, 2013.
 “Chinese-Mexican Businessman Found with $205M Cash Says he Sold Black Market Meth Chemicals,” Associated Press, October 23, 2009.
 “Investigan las operaciones de El Chapo Guzmán en Asia,” Associated Press, April 25, 2011; Patrick Corcoran, “‘Sinaloa Cartel’ Operatives Face Death Penalty in Malaysia,” Insight Crime, June 3, 2011.
 Doris Gómora, “Cárteles mexicanos compran droga en Afganistán, alertan,” El Universal, January 4, 2011.
 John Burnett, “Mexican Drug Cartel Targets Australia,” National Public Radio, March 2, 2012.
 “Spain Fights to Lose Status as Drug Gateway to Europe,” Agence France-Presse, April 22, 2013.
 Because European Union ports—sea and air—are so well protected in northern Europe, there are only a few entry points to be exploited in the south. The two most common are between Tangiers and Italy, and Morocco and Spain. Apart from simply “muling” the product into the European Union, which remains an option, larger quantities may be introduced into Africa, where local groups are paid to transport the product north. Guinea-Bissau in West Africa is the most strategic point due to the tacit acceptance of local authorities, including the military, as well as its geographical proximity to South America. For details on Guinea-Bissau, see “Guinea Bissau Armed Forces Chief Charged with Narcoterrorism,” U.S. Drug Enforcement Administration, April 18, 2013.
 Alexander Smoltczyk, “Africa’s Cocaine Hub: Guinea-Bissau a ‘Drug Trafficker’s Dream,’” Der Spiegel, March 8, 2013.
 Ibid.; “Guinea Bissau Armed Forces Chief Charged with Narcoterrorism.”
 Adam Shand, “Dollar Draws in Mexican Cartels,” Australian, February 12, 2013.
 Steve Schmadeke, “High-Flying Cartel Planned to Smuggle Drugs Through Small Suburban Airport, DEA Says,” Chicago Tribune, February 13, 2013.
 Personal interview, John Riley, special agent, U.S. Drug Enforcement Administration, April 26, 2013.
 Colombian groups are seen as having pulled out of downstream markets due to pressure at home. Once Plan Colombia—the U.S.-Colombia regime to fight cocaine production and criminality in Colombia—took shape, the government was able to hit the Colombian criminal syndicates harder and faster than they could reconstitute themselves. They left downstream markets to the Mexicans as a calculated retreat, focused on survival not profits.
 For a visual of the methamphetamine demand expansion, see the maps in this report: Michael Kelly, “16 Maps of Drug Flow into the United States,” Business Insider, July 8, 2012, available at www.businessinsider.com/16-maps-of-drug-flow-into-the-united-states-2012-7?op=1.
 Nathan Jones, “Captured Tijuana Cartel Boss Confirms Sinaloa Truce,” Insight Crime, December 12, 2011.
 Ricardo Ravelo, Osiel: Vida y Tragedia de un Capo (Mexico City: Grijalbo, 2009).
 Marc Lacey, “76 Arrested as Officials Break Up Mexico-to-Arizona Drug-Smuggling Ring,” New York Times, October 31, 2011.
 “Mexico’s ‘Chapo’ is Chicago’s New Public Enemy No. 1,” Agence France-Presse, February 15, 2013.
 Sari Horwitz, “U.S. Cities Become Hubs for Mexican Drug Cartels’ Distribution Networks,” Washington Post, November 3, 2012.
 Personal interview, John Riley, special agent, U.S. Drug Enforcement Administration, April 26, 2013.
 James Bargent, “Drug Investigation Links Sinaloa Cartel to Canadian, US Mafias,” Insight Crime, January 16, 2013.
 Doris Gámora, “Cártel de Sinaloa se expande en la Costa Este de EU: DEA,” El Universal, April 1, 2013.
 “Mexico’s ‘Chapo’ is Chicago’s New Public Enemy No. 1.”
 “Outsmarted by Sinaloa,” Economist, January 7, 2010.
 For a more detailed discussion of the Sinaloa Federation, the Arellano-Felix organization, and the Carrillo-Fuentes organization, see Samuel Logan, “Tijuana Criminal Environment,” Southern Pulse, December 2012; Samuel Logan, “Juarez Criminal Environment,” Southern Pulse, October 2012.
 For a review of the Sinaloa Federation’s methamphetamine production and partnering strategy for Guatemala, see E. Eduardo Castillo and Sonia Perez, “Mexican Gang Seen Ramping up Meth in Guatemala,” Associated Press, December 13, 2011. For a review of Los Zetas’ strategy for Guatemala, see Jason Beaubien, “Mexican Cartels Spread Violence to Central America,” National Public Radio, May 30, 2011.
 Personal interview, John Riley, special agent, U.S. Drug Enforcement Administration, April 26, 2013.
 Simon Gardner, “Mexico’s New President to Reset Drug War, Push Reforms,” Reuters, November 29, 2012.