“Following the money” leads you to the convergence between criminal groups and terrorist organizations. The convergence touches our everyday lives.
PROFITABLE BUSINESS
Although the Mexican cartels have gotten a lot of media play these past few years (because of their brutality), Mexico’s supply of drugs into the US is nothing new. The country was a source of marijuana and heroin in the early twentieth century, particularly from the Sinaloa region. By the 1940s Mexican drug smugglers had become notorious in the US.3 Now, three-quarters of a century later, the Sinaloa cartel controls 40 to 60 percent of Mexico’s drug trade, earns about $3 billion a year, controls crime in at least five Mexican states (Baja California, Sonora, and the “Golden Triangle” of Sinaloa, Durango, and Chihuahua), and distributes to fifty countries.4 Cellular telephone SIM cards from Michoacán have been found in Singapore,5 highlighting the cartels’ criminal reach. Drug trafficking is a resilient business.
In order to effectively counter drug trafficking and all other forms of illicit trade—and understand where criminal networks might move next—we must understand the business drivers and develop strategies that address them. The corruption and payoffs and transportation expenses in a high-risk illicit trade like drug trafficking add significant costs at every border crossing between point of production and point of sale. A study done by the London School of Economics Expert Group on the Economics of Drug Policy compared the economics of narcotics with those of other commodities from the same region. Per unit of measurement (troy ounce for silver, pound for coffee, and gram for narcotics), from source country to single-serving retail to the end consumer (not wholesale or bulk retail), silver has a 9 percent markup; coffee, 635 percent; cannabis resin, 1,047 percent; heroin, 3,745 percent; and cocaine, 6,427 percent.6
In 1996, drug trafficking organizations employed 730,000 people—more than the Mexican state-owned oil company, Pemex. In 2000, despite the fact that business was booming, that number dropped to 364,000, due to better plant genetics that required less manpower per square meter of production.7 Plus, after 9/11 border security tightened, causing domestic consumption to increase: the cartels had to create a new market for their product on their side of the border, and pushed to increase domestic consumption and distribution.
Diversification can be viewed as a sign of organizational strength and growth: once you have the pipelines, the connections, and the territorial control, you expand (as many large businesses do) into additional revenue streams. On the other hand, diversification can be viewed as a sign of desperation, because drug profits are being hampered by interdiction or changes in drug consumption patterns, including the growing legalization of marijuana.8 Famed Mexican journalist Carlos Loret de Mola said at a talk at the Americas Society in New York on November 23, 2015, that his guide through the Sinaloa cartel had told him that the worst thing that could happen to the cartels is the legalization of drugs.
Under the administration of President Felipe Calderón (2006–12), the Mexican cartels’ finances changed. First, the cartel monopolies extended down through local groups that had previously been independent, in what might be considered a brilliant success in branding. Second, they expanded into other illicit trades, including kidnapping, extortion, and human smuggling. Third, they expanded beyond marijuana and cocaine into other drugs that were gaining popularity in the US, such as heroin and methamphetamine. Mexico’s Gulf cartel, under Mario Cárdenas Guillén—“El Gordo”—was the biggest importer of heroin into the United States. The major changes since 2012 (the expansion of designer drugs and human smuggling) have been in reaction to the threat of marijuana legalization in the US.
According to the journalist Don Winslow, who has been covering the US War on Drugs from the front lines for over twenty years (he even knew the Sinaloa cartel boss, El Chapo Guzmán, when he was just a cartel errand boy), the partial legalization of marijuana eroded cartel profits, so they had to diversify into heroin. Seeing that America was getting hooked on prescription opioids like OxyContin and Percocet, they saw a market opportunity to expand into heroin.
The Sinaloa cartel went into direct competition with the pharmaceutical companies: Mexican heroin production increased by almost 70 percent and the cartel imported Colombian cooks to create “cinnamon” heroin (also known as “Dark Horse”) to compete with the product coming into markets dominated by the Asians. According to a former agent, the Drug Enforcement Administration knows cinnamon heroin as an “intermediate” product that enabled the transition from black and brown to Colombian white heroin, and there are only a couple of markets with really high purity levels (greater than 75 percent); in most markets purity runs 40 to 60 percent.
The Mexicans have adopted Colombian processing techniques to create their own white heroin from homegrown resources. Asian or Afghan heroin is not really a player in the overall US market; it is a more significant player in Europe. Addicts are steadfast about their heroin: they like what they like. Much like Diet Coke versus Diet Pepsi, there are not many converts to the other brand. In heroin’s case, the loyalty is to color, not source. So even if consumption patterns stay the same, supply chains may not.
Then the Mexican cartels made another classic move of market economics: they dropped the price. A kilo of heroin cost $200,000 in New York City around the start of the decade; in 2013 it cost $80,000, and by 2016 it had dropped to around $50,000. More of a better product for less money translated into greater market share.9 No wonder America is in the grip of an opioid and heroin epidemic: the transition makes perfect sense from the point of view of the consumer, in this case the addict. Pharmaceutical companies aggressively seek market share by pushing their opioid painkillers on patients via their doctors. Patients like them and get hooked. Then they realize that for a bit more money, they can get a much better high, so they move to heroin. In short, as cartels lose US market in marijuana (due to increasing legalization) and cocaine (because of its falling out of favor), the pharmaceutical companies are acting as entry points for the cartels’ share in the heroin market.
According to Loret, there are two basic business models for Mexican drug trafficking organizations, each with a different risk profile. The model of the Sinaloa cartel under El Chapo Guzmán is limited to drugs, so the local population not only did not mind El Chapo’s drug trafficking activities, but actually viewed him as a Robin Hood hero, as Pablo Escobar was in his heyday. The Sinaloa cartel, for instance, is renowned for its brutal violence and its corruption of government officials, but it has largely stayed away from the “extractive” crimes of kidnapping and extortion, focusing instead on maintaining its majority control of the drug business and keeping a low profile otherwise. This helps the Sinaloa cartel garner the support of local populations,10 who are content to allow the drug business to flourish as long as they are not subject to violence or victimization by kidnappings and extortions.
The other model is that of the Knights Templar under Servando Gómez, known as “La Tuta,” which took over all economic activity in its territory, controlling peasant farmers, governors, and the port of Lázaro Cárdenas. Mexico provides 50 percent of the global supply of avocados.11 The Knights Templar cartel also extorts avocado and lime growers in Michoacán, reaping 13 percent of the farmers’ profits. La Tuta’s predilection for giving press interviews raised the cartel’s visibility, making it more of a target for government intervention, while its move into the illicit trade in avocados and lemons, and illegal mining, means that the locals it “taxes” find them oppressive. This made them less protective of La Tuta (who was captured in February 2015 and has none of the Robin Hood aura of Pablo Escobar or El Chapo) and less supportive of the cartel’s activities.
The Mexican cartels rose by adapting from the disruption of the Colombian cartels: an unintended second-order effect of well-meaning interdiction efforts. The White Triangle of cocaine is comprised of Colombia, Bolivia, and Peru, the world’s primary producers of the drug. In the 1990s, US military and law enf
orcement (US Southern Command and DEA, primarily) began shutting down the direct land and sea routes from the White Triangle to the US, particularly those that traversed the Caribbean. In response, smuggling networks shifted to overland routes through Central America into Mexico and onward into the US. Estimates are that now 60 and 90 percent of the illegal cocaine entering the United States travels through Central America and Mexico.12
As the powerful Colombian cartels were forcibly broken up by the violent and multipronged actions of the US-backed Plan Colombia, the Mexicans gradually took over the profitable cocaine traffic into the United States. Greater interdiction of the trans-Caribbean routes used by the Colombians and other Andean producers forced them to shift their routes into Central America through to Mexico. Initially subcontractors who were paid in cocaine rather than cash, the Central Americans and Mexicans evolved from couriers to traffickers for themselves. To convert the narcotics to cash, they had to find new buyers and distribution channels and to encourage local consumption. That meant creating new points of sale and fighting each other for points of sale that had been dominated by others. Both of these factors translated into a spike in violence.
As their dominance increased and they started controlling distribution into the US, the cartels became more vertically integrated. As will any business that makes its cost structure more efficient, it became more profitable. This raised the stakes for control over the routes, erupting in violent competition and turning Mexico—and particularly the border-crossing towns into the US—into war zones.13 At its height, between 2008 and 2011, Ciudad Juárez had ten murders a day.14 Former journalist and expert on Latin American gangs Doug Farah holds the view that President Felipe Calderón’s decision in 2006 to attack the Mexican cartels led to the ascendance of the transnational organized crime groups in Central America and the expansion of their territory and power.15 The Mexican cartels were under siege by the government and simultaneously brutally fighting each other in intra-cartel warfare. Those cartels that had the capacity wanted to protect the critically important Central America drug routes. So the biggest cartels, Sinaloa and Los Zetas, spread south into Central American gang territory, putting the gangs and the Mexican cartels into more direct cooperation by integrating the gangs into the cartel supply networks.
There is an inherent risk to adopting measures to winnow the size of the major cartels, as we saw in the case of Colombia—namely, the unintended consequence of splintering: the creation of a greater number of groups, which then further compete with one another and work to marginalize the state on even more fronts. Also as in Colombia, mass killings have led to the emergence of paramilitary vengeance squads in Mexico.
Chief among these is the Zeta Killers group, which announced in July 2011 via a YouTube video that it would rid the Mexican state of Veracruz of Zeta criminals. Mexican authorities, however, are skeptical—and probably rightly so: they think that the Zeta Killers group is simply another organized crime gang battling the Zetas for supremacy and territory.16 Ultimately, though, the sad truth is that as long as there are high margins and big markets and borders and enforcement disparities that offer the opportunity to arbitrage them (make a profit by buying an asset in a market where it is cheap and selling it in a market that will pay more for it), there will be violent clashes for territory.
COMBAT OR ACCOMMODATE?: THE KINGPIN STRATEGY VERSUS PAX MAFIOSA
The brutality of “Calderón’s War” was the result of the militarization of what is known as the “Kingpin Strategy.” In fighting transnational criminal networks, politicians have two options: the Kingpin Strategy or a Pax Mafiosa. In the Kingpin Strategy, enforcement takes out the leaders of the various groups. A Pax Mafiosa, on the other hand, is exactly what it sounds like: the government makes its peace with one mafia group so that there is no criminal power vacuum that prompts violent competition.
Former Mexican president Felipe Calderón’s Kingpin Strategy was similar to the one the DEA implemented in 1992 in pursuit of Pablo Escobar and the other Colombian cartel capos. Rather than pick up the distributors or street dealers, the strategy was designed for upstream disruption, by attacking the organizations at their most vulnerable nodes: at the chemical labs needed to process the drugs, plus their finance, transportation, communications, and leadership infrastructure, particularly in the United States. “The Kingpin program essentially controlled investigations from DEA headquarters and selected a finite number of targets for intensive investigative activity.”17
Mexico, however, has a very decentralized political system, which is one of the factors Calderón proffered as an explanation for why Mexico has been more resistant to the strategy, and why its implementation triggered a fragmentation of the cartels. This escalated the violence, with vicious battles of succession and turf wars, due to the multiplication of new and more violent gangs and their rapidly shifting alliances.18 Cartels are organized for stability. When they fracture and become small, they become fiercely competitive, fighting constantly with the others and then joining forces with some to try to regain some market power. Then they shift and try to join another group, triggering fighting with their previous allies, and so on.
The other argument against a Kingpin Strategy is that the convergent networks analyzed in the Combating Terrorism Center study19 show that taking out the kingpins does not dismantle the network. That was the observation with the second capture (of three) of El Chapo Guzmán: the Sinaloa cartel continued its narcotics exports almost unabated. The explanation comes from analyzing the network interconnections (domestic and transnational, high-level and mid-level) and studying their number and redundancies. Even though the network may have global reach, its social connections are built from the bottom up. Kingpins are the people clearly atop the global illicit market: they have operational control and the most money and connections to other networks. Via money launderers, weapons traffickers, and lawyers, they connect South American cartels with Middle Eastern terrorist groups.
However, the greatest network connectivity redundancies (overlaps) in the network structure are mostly among mid-level individuals. While these individuals have less power than the kingpins, removing the kingpins will not crash the network. The redundancies in middle to upper-middle management of the network help the dark network reconstitute its activities quickly when its leader (the kingpin) gets taken out by arrest or assassination. So, while taking out the kingpin leads to a period of uncertainty, fracturing, and consolidation as underlings compete for leadership, historical evidence shows this plays out relatively quickly and that the network resumes business as usual in short order.20
Taking out the kingpin, as the security agencies like to do, is not as effective in the long term as having a more comprehensive approach of targeting the mid-level operators. This is, in fact, what the CIA has done against drug trafficking organizations and Al Qaeda: focused on disrupting both the money flows and the middle to upper-middle management of the organization. This strategy is effective, because organizations need to pay bills and vet their workers. The dual prongs of disrupting financial flows and taking out middle management cause substantial chaos in the organization for a long enough period of time for enforcement agencies to gain the advantage. According to a former spy who spoke to me confidentially: “Knock out the middle and upper-middle management. Big guys are replaceable; money and management guys are very disruptive.”
The other side of the coin of a Kingpin Strategy is a Pax Mafiosa. Cartels are about market domination and stability. There is always an argument in the background as to whether it is better to allow one crime group, one warlord—one hegemon—to remain in power than to fight them all. That one group can then be managed or boxed in—or maybe not, but it certainly reduces the body count.
The price of a Pax Mafiosa, however, is a loss of state legitimacy: the hegemon becomes the ruler, supplanting the government. Various Mexican cities under cartel control provide vivid examples. Peace has reportedly been restored to Ciudad Juárez;
the government has claimed victory (particularly since it instituted violence reduction programs there). But some observers have claimed this “peace” is illusory, and that the government has given up the fight and the Sinaloa cartel reigns supreme. Tamaulipas and Michoacán are both calm: there is no fighting; organized crime won, and the state lost. Michoacán has a crime rate lower than that of Canton Vaud in Switzerland. Now, Loret claims, Jalisco Nueva Generación is the wealthiest cartel, and the people in its territory get on with their lives. As a child, my mother lived on a street in Brooklyn where mob bosses lived. No one ever burgled a house or robbed a car on the street. Residents left their doors open. Pax Mafiosa indeed.
Mexico’s biggest mistake, Calderón says, lay in not having combated the drug traffickers and criminals early enough. People did not realize what was happening. NAFTA (the North American Free Trade Agreement) made Mexico a middle-income country, which made it a consuming country—a consumer of drugs, cell phones, and banking, all of which are integral to the drug business. Calderón also takes a dim view of the Venezuelan government under Chávez and his successor, Maduro. “We need to convince Obama that part of his legacy needs to be change in Venezuela.” But Obama left office with little impact on the hemisphere’s biggest drug and terrorist facilitator or on the lives of Venezuela’s thirty million citizens.
CORRUPTION, ILLICIT TRADE, AND VIOLENT EXTREMISM
Sitting on a panel at the OECD in Paris during its Integrity Week 2016, I was asked: “What is the connection between corruption and illicit trade?”
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