Introduction

The U.S. Department of State recently designated Tren de Aragua (“TdA”), Mara Salvatrucha (“MS-13”), Cártel de Sinaloa, Cártel de Jalisco Nueva Generación (“CJNG”), Cártel del Noreste (“CDN”), La Nueva Familia Michoacana (“LNFM”), Cártel de Golfo (“CDG”), and Cárteles Unidos (“CU”) as Foreign Terrorist Organizations (“FTOs”) and Specially Designated Global Terrorists (“SDGTs”). These designations have introduced significant legal and compliance challenges for companies operating in Mexico and Latin America. This move, aimed at curbing the influence of powerful cartels, has far-reaching implications for businesses that must now navigate a complex landscape of anti-terrorism regulations. This alert explores the risks associated with the cartel terrorist designation and provides strategic recommendations for companies to mitigate these risks.

Background on Cartel Terrorist Designation

On his first day in office, President Trump issued an Executive Order (“EO”) pursuant to the International Emergency Economic Powers Act creating, “a process by which certain international cartels (the Cartels) and other organizations will be designated as [FTOs], consistent with section 219 of the INA (8 U.S.C. 1189), or [SDGTs], consistent with IEEPA (50 U.S.C. 1702) and EO 13224 of September 23, 2001 (Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism), as amended.” These instructions to designate cartels as terrorist organizations is part of a broader strategy to combat the influence of these criminal groups, which are involved in drug trafficking, human smuggling, and other illicit activities. The EO aims to disrupt the financial networks of these cartels and enhance the enforcement capabilities of U.S. law enforcement agencies.

The EO is also meant to work in conjunction with the “Day One Memo” issued by the U.S. Department of Justice (“DOJ”) calling for the Total Elimination of Cartels and Transnational Criminal Organizations. The Memo realigns DOJ priorities and resources to aggressively target cartels and removes bureaucratic impediments to doing so.

Legal Risks

The designation of cartels as FTOs significantly increases the legal and compliance risks for companies operating in affected regions. Under U.S. law, providing material support to a designated terrorist organization is a serious offense that can result in severe penalties, including significant fines and imprisonment. 

Companies operating in areas controlled by these cartels, or doing business with them, face increased risks of U.S. sanctions violations, potential criminal investigations, and civil liability and asset forfeiture. Simply paying fees to a designated organization for protection, to operate in an area they control, or selling them goods or services can constitute material support subject to criminal penalties. For example, paying a designated cartel fees to transport goods through, or be allowed to operate in, a certain territory or providing financial services to, or conducting financial transactions for, a cartel-owned business exposes a company or financial institution, and its employees, to criminal enforcement risk, including but not limited to criminal investigation by U.S. law enforcement, civil lawsuits, sanctions designation and enforcement, and asset forfeiture. 

The reach of the Anti-Terrorism Act (“ATA”), 18 U.S.C. § 2339B(d) is explicitly extraterritorial, meaning these restrictions are intended to regulate the actions of non-U.S. entities. While Specially Designated Nationals (“SDNs”) restrictions have allowed the United States to sanction extra-territorial actors in limited circumstances, they primarily target U.S. entities and transactions involving U.S. entities or U.S. dollars (“USD”). The ATA has no such limitation and is unbounded by U.S. nexus. In short, a non-U.S. company doing business with an FTO in Latin America can be prosecuted through the extraterritorial reach of the ATA without having a presence in the United States. 

Economic Sanctions Risks

Each of the eight organizations listed above has been added to the Office of Foreign Assets Control’s Specially Designated Nationals List (“SDN List”). This means that any property or interests in property of those organizations that is in the United States or in the possession or control of U.S. persons, including U.S. financial institutions, is blocked. 

U.S. persons, and non-U.S. persons subject to U.S. sanctions jurisdiction, risk violating U.S. sanctions regulations and facing civil and criminal liability if they engage in virtually any activity, directly or indirectly, involving these organizations. In the case of non-U.S. persons, the United States may bring enforcement actions where transactions (i) are directly or indirectly prohibited as to U.S. persons (e.g., involve SDNs or other blocked persons such as these organizations or their property and interests in property), and (ii) have a direct or indirect U.S. nexus (e.g., the use of USD).

Whether or not there is a U.S. nexus, the U.S. government may impose blocking sanctions (i.e., secondary sanctions) on non-U.S. persons determined to have provided "material support" to any of these organizations. The U.S. government may also impose correspondent account/payable through account (“CAPTA”) restrictions on non-U.S. financial institutions determined to have knowingly conducted or facilitated a significant transaction on behalf of an SDGT. 

Criminal Liability for Providing "Material Support" to an FTO

Importantly, in addition to the sanctions risked involved with dealing with the designated entities described above, U.S. persons, and non-U.S. persons subject to U.S. jurisdiction as set out in the ATA, that knowingly provide “material support” to FTOs may face criminal liability. The definition of “material support” broadly encompasses “any property, tangible or intangible, or service.” The term excludes, medicine and religious materials but includes currency, monetary instruments, financial securities, financial services, lodging, training (i.e., instruction or teaching designed to impart a specific skill), and expert advice or assistance (i.e., advice or assistance derived from scientific, technical, or other specialized knowledge), among others. 

The ATA also provides another robust mechanism for the U.S. government to combat terrorism: the use of asset forfeiture, which allows for the seizure of assets belonging to individuals or entities that provide material support to FTOs. This includes funds, property, and other tangible or intangible assets.

Case Study

Background

A European multinational company faced serious allegations of complicity in human rights violations and financing terrorism in a Middle Eastern country. Between 2012 and 2014, the company’s subsidiary continued operations at its facility despite the escalating conflict in the region.

Allegations and Charges

The company was criminally charged by the United States Attorney’s Office for conspiring to provide material support and resources to two designated FTOs. The specific conduct involved:

• Payments to Terrorist Groups: The company allegedly paid these groups to ensure safe passage for employees and goods. This included direct payments to terrorist organizations to secure the safety of their operations.
• Purchasing Raw Materials: The company allegedly bought raw materials from suppliers who were controlled by or affiliated with terrorist groups. This enabled the subsidiary to continue its production activities.
• Revenue Generation: By maintaining operations and securing raw materials through these means, the subsidiary was able to generate millions in revenue during the period in question.

Legal Proceedings

In October 2022, the company, in a first-of-its-kind agreement, pleaded guilty to a one-count criminal information charge of conspiring to provide material support to FTOs. The U.S. District Court sentenced the company to probation and imposed financial penalties, including criminal fines and forfeiture, totaling hundreds of millions of dollars.

Impact and Implications

This case underscores the intersection of corporate crime and national security. It highlights the severe consequences for companies that operate in specific regions, especially in high-risk environments. The case serves as an example of the importance of investing in robust compliance programs, paying vigilant attention to national security compliance risks, and conducting thorough due diligence.

Civil Liability Under the Anti-Terrorism Act

Financial institutions and other companies that interact with FTOs may also face civil lawsuits under the ATA. The Act provides a private right of action for U.S. citizens injured by an act of international terrorism to claim treble damages, costs, and attorney’s fees. Liability extends to those who materially supported, aided and abetted, or conspired with the FTO to commit the act of terrorism creating an extremely inclusive regime of liability.

Numerous plaintiffs have filed lawsuits in the United States against various entities, including banks, telecom providers, social media companies, and state-owned enterprises, accused of aiding and abetting or supporting FTOs. The Supreme Court clarified that aiding and abetting liability requires a defendant to have knowingly provided substantial assistance to another person in committing the act of international terrorism. 

In multiple lawsuits in the Southern District of New York and around the country, plaintiffs who were victims or representatives of victims of various terrorist attacks by FTOs brought claims under the ATA. The plaintiffs have alleged multiple theories, including that financial institutions provided financial services to these designated FTOs, which substantially contributed to the attacks. In recent cases, Courts have denied motions to dismiss in similar cases finding that plaintiff’s had adequately alleged that financial institutions were generally aware that they were playing a role in the FTOs overall terrorist activities, and that the defendants provided knowing and substantial assistance with respect to terrorist attacks.

Companies must ensure that their operations do not inadvertently support these organizations, either directly or indirectly.

Impact on Companies Operating in Mexico and Latin America

The designation of cartels as FTOs poses several challenges for companies operating in Mexico and Latin America:

1. Increased Due Diligence Requirements: Companies must conduct thorough due diligence to ensure that their business partners, suppliers, and customers are not affiliated with designated cartels. This includes implementing robust screening processes and regularly updating risk assessments.
2. Heightened Regulatory Scrutiny: U.S. regulatory agencies are likely to increase their scrutiny of companies operating in regions affected by the cartel designations. This may result in more frequent audits, investigations, and enforcement actions.
3. Operational Disruptions: Companies may face operational disruptions if they are forced to sever ties with business partners or suppliers linked to designated cartels. This can impact supply chains, production schedules, and overall business continuity.
4. Reputational Damage: Being associated with designated terrorist organizations can cause significant reputational damage. Companies must proactively manage their public image and communicate their commitment to compliance and ethical business practices.

Strategic Recommendations for Companies

To mitigate the risks associated with the cartel terrorist designation, companies should consider the following strategic recommendations:

1. Enhance Compliance Programs: Companies should strengthen their compliance programs to address the specific risks associated with the cartel designations, including anti-money laundering and counter-terrorism financing and sanctions controls. This includes updating policies and procedures, providing training to employees, and implementing robust monitoring and reporting mechanisms.
2. Conduct Comprehensive Risk Assessments: Regular risk assessments are essential to identify and mitigate potential exposure to designated cartels. Companies should assess their entire value chain, including suppliers, customers, and third-party intermediaries.
3. Strengthen KYC and Third-Party Due Diligence: Implementing strict know-your-customer (“KYC”) and third-party screening, background checks, and management procedures is critical to identify and remediate active risks. The identification of third-party risk is essential to identify and avoid the most likely source of liability to the company.
4. Engage with Legal and Compliance Professionals: Given the complexity of the legal and regulatory landscape, companies should seek guidance from legal and compliance professionals with experience in anti-terrorism regulations. This can help ensure that their compliance programs are effective and up-to-date.
5. Develop Contingency Plans: Companies should develop contingency plans to address potential operational disruptions resulting from the cartel designations. This includes identifying alternative suppliers, diversifying supply chains, and establishing crisis management and dawn raid protocols.
6. Foster a Culture of Compliance: Building a strong culture of compliance is critical to ensuring that employees understand the importance of adhering to anti-terrorism regulations. Companies should promote ethical behavior and encourage employees to report any suspicious activities.

Conclusion

The designation of drug cartels as FTOs by the U.S. government has introduced significant challenges for companies operating in Mexico and Latin America. By understanding the risks and implementing robust compliance measures, companies can navigate this complex landscape and mitigate potential legal, operational, and reputational risks. Proactive engagement with legal and compliance professionals, comprehensive risk assessments, and a strong culture of compliance are essential components of an effective strategy to address the challenges posed by the cartel terrorist designation.