In the words of Sir Winston Churchill, “Those that fail to learn from history are doomed to repeat it”. That’s what came to my mind when I read yesterday’s Bloomberg article about how Banxico (Mexico’s central bank) will work with local Mexican banks that have ‘justified difficulties’ getting rid of bulk U.S. currency.
In the late 80’s and early 90’s, Colombia’s central bank had a different plan that accomplished the same end. Through what was commonly known as “The Sinister Window”, the bank bought U.S. dollars from anyone in Colombia willing to exchange dollars for Colombian pesos. The bank very kindly offered this service anonymously to anyone who could drag their blood-stained U.S. dollars to the central bank. This was shocking, since Colombian law at the time prohibited anyone from transacting business in U.S. dollars. Under this veil of secrecy, Colombia’s central bank collected pallet loads of cash a month from people who were obviously exchanging narco-dollars. Colombia’s central bank put mountains of cash on wooden pallets, shrink-wrapped it, and flew those narco-fortunes to the U.S. Federal Reserve (Fed). Oddly, no one at the Fed blinked or asked a single question about how a central bank that banned its citizens from transacting in U.S. dollars could feed hundreds of millions to them.
When I read this recent proposal enabling Mexico’s central bank to buy dollars from banks in Mexico that can’t find a U.S. correspondent willing to take the cash, I immediately thought of a famous quote from baseball legend Yogi Berra – “It’s déjà vu all over again”. It is simply another play to achieve what was obviously done through Colombia’s Sinister Window decades ago.
In the late 80’s and early 90’s, Colombian cartels smuggled a lot of their cash from the U.S. to Colombia to avoid the emerging vigorous enforcement of the Bank Secrecy Act in the United States. One need only look at the testimony in U.S. courts during the past year or so by cooperating traffickers to know why Mexican banks now find their arms full of U.S. dollars. It has far less to do with U.S. migrant workers sending funds to family members in Mexico and a hell of a lot more to do with the likes of “El Chapo” Guzman routinely sending four jets per month to the U.S. to retrieve tens of millions in cash drug proceeds.
Of course, this move by Banxico is wrapped in an excuse of trying to help migrants who otherwise pay high exchange rates because Mexican banks are facing difficulties finding U.S. correspondent banks to take their dollars. The reality is that correspondent banking in the U.S. has finally started to follow rules. Hand slaps previously given to the likes of Wachovia Bank that repatriated $14 billion in currency from its correspondent clients in Mexico during less than three years now face consequences much stiffer than the $160 million fine enjoyed by Wachovia. The ante has been upped to include many billions in fines and real fears of prison sentences. There’s a reason Mexican banks can’t sell U.S. cash to U.S correspondents. It has to do with the million question marks around the source of the cash Mexican banks and houses of exchange possess.
So when this proposed new law is passed by the Mexican legislature, the central bank of Mexico will accept a river of U.S. currency and then sell it to the Fed, with no questions asked because they’ll have an excuse. They simply followed the law in their country and bought excess cash from many banks. If this is going to happen, I think the Fed should require Banxico to maintain and provide the Fed and U.S. law enforcement with detailed documentation about the date and amount of each purchase of cash they make, as well as the names of the individuals and institutions involved in each transaction. Absent that, the Fed shouldn’t buy those dollars because the money laundering trail will be lost.
One might question the wisdom of Mexico’s legislature proposing this type of law, but then again this is the same legislature that recently clipped DEA’s wings within their borders. First, they demanded that U.S. trafficking charges against Mexico’s corrupt former Defense Minister, Retired General Salvador Cienfeugos, be dismissed. Then, they required DEA to share any and all information they pursued in Mexico with leaders of the Mexican government, including those leaders accused in U.S. courts of having received hundreds of millions in bribes from Mexican cartels.
I wish Sir Winston Churchill was still alive and now in charge of the Fed. Only then would it be likely that the Fed would see this plan for what it is and prevent the Mexican government from putting new curtains on another “Sinister Window”.