Harris and Montgomery counties in Texas have become a favorite site for former Mexican officials who, through the purchase of real estate, laundered illicit money and are now accused of corruption.
What do these former Mexican public officials have in common in the United States: former secretary of Public Security Genaro García Luna (2006-12); former director of Petróleos Mexicanos (PEMEX) Emilio Lozoya (2012-16); and former governor of Veracruz Javier Duarte (2010-16), along with several members of his cabinet?
All of them are accused of corruption in Mexico and acquired real estate in Harris and Montgomery counties, Texas, between 2009 and 2018, with money allegedly of illicit origin. What makes Texas so attractive for Mexican public officials? And what could authorities in Mexico and the U.S. do to prevent these cases?
Mexico is the Latin American country with the highest number of public officials laundering money through the real estate purchases in the U.S., according to Global Financial Integrity, with data from 2015 to 2020. The list includes the former head of Public Security for Veracruz during the Duarte administration, Arturo Bermúdez Zurita, and the former secretary of Finance from the same administration, José Antonio Mansur, according to lawsuits in the U.S.
But there are also cases such as that of former federal congressman Carlos Lomelí, who is not accused of corruption in Mexico, but has been linked to the network of alleged drug trafficker Raúl Flores. Lomelí was detected as a business partner of the company “Servicios Educativos y de Negocios,” which, in turn, was listed by the U.S. Treasury Department as part of that network. In 2014, Lomelí bought an 882 m2 residence for almost 3 million USD in wealthy enclave of The Woodlands, north of Houston, Texas, according to his asset declaration.
Documents related to the U.S. Office of Foreign Assets Control (OFAC) investigation against the Flores Network are sealed, but the case made it into the spotlight in 2017 because it involved Mexican celebrities, including soccer player Rafael Márquez and musician Julión Álvarez.
“A main characteristic, which is not always the case, but is important to see, is the presence and existence of predicate offenses for money laundering. A very important one is drug trafficking,” says María Sofía Reiser, a researcher at the Royal United Services Institute for Defense and Security Studies in the United Kingdom, also known as RUSI.
She points out that organized crime has a greater presence in drug producing or trafficking countries, “which means a lot of money that must then be laundered.”
Genaro García Luna, for example, is being prosecuted in the U.S. for drug trafficking, accused of receiving bribes from the Sinaloa Cartel while he was a top Mexican public security official. In 2018, an associate of the same network that García Luna built to move money through accounts in 11 countries acquired a property in The Woodlands through the shell company Damari LLC, incorporated in Delaware, a tax haven.
Money launderers regularly hide their trails through the use of trusts, shell companies, and straw buyers, such as lawyers, friends, and family members. In the U.S. alone, 82% of money laundering involving real estate makes use of a corporate entity in order to hide the beneficial owner, according to Global Financial Integrity’s report, “Acres of Money Laundering: Why U.S. Real Estate is Kleptocrat’s Dream,” released in August 2021.
For example, Duarte, imprisoned for money laundering and criminal association, acquired properties in Harris, Texas, through straw persons and shell companies, according to cases 2018-09526 and 2018-06745 filed before the Harris County Judicial District Court. Through these lawsuits, the state of Veracruz requested the return of six properties located in The Woodlands, Spring, and Tomball, Texas.
“Duarte allegedly absconded with nearly 3 billion dollars of his state’s money. This stolen money was used to invest and purchase homes and luxury cars throughout the United States,” explains the first lawsuit, which was dismissed due to plaintiff inactivity in January 2020. The second lawsuit is pending appeal.
“It’s a complex issue because each country has a different jurisdiction and legislation despite the fact that money laundering prevention issues are quite common,” says Fausto Bañuelos, an expert in preventive law, certified in Money Laundering and Terrorist Financing Prevention by the National Banking and Securities Commission of Mexico (CNBV, in Spanish).
In many countries, including the U.S., companies are not required to disclose their owners, says the RUSI researcher. This adds to the complexity of investigating money laundering networks. Duarte, for example, acquired properties in Texas through the company Shallowford PL, LLC, whose registered agent – or legal representative – was in turn another company, Twoofficesuites, LLC, represented by Jose A. Bandin.
Between 2016-21, at least 2.3 billion USD was laundered in the U.S. through real estate transactions. In Mexico there are no similar estimates due to the lack of an official methodology to measure the volume of illicit assets, according to the National Risk Assessment 2020 of the Secretary of Finance and Public Credit (SHCP). However, the agency recognizes that these flows “have increased considerably in recent years and have a direct impact on a country’s development.”
“The amounts that were reported by the Financial Intelligence Unit (UIF, in Spanish) and the amount of blocked resources are known, and with this information it was possible to outline the volume of resources that were handled in the operations carried out by subjects reported for Money Laundering,” details the report. This document estimates an amount of 47.6 billion USD in illicit resources that are susceptible to money laundering, between 2016 and 2018, stemming from corruption, smuggling, and other organized crime activities.
Mexico was listed in 2019 as the third largest exporter of illicit capital in the world, surpassed only by China and Russia, according to the former head of Public Service, Irma Eréndira Sandoval. However, there are no estimates that track asset laundering through real estate transactions.
Data from the Financial Intelligence Unit show that the use or enjoyment of real estate assets generated a total of 1,978,899 suspicious transaction reports between 2013 and 2021. These are reports that, by law, must be submitted to the authority by the agents involved in a vulnerable activity, each time they identify potentially risky transactions, for example, when the value of a property exceeds MXN 772,165 (equivalent to USD 36,797). The amount of suspicious transaction reports, for the real estate sector, was only surpassed by activities such as the transfer or custody of money, loans or credits, foreign trade services, and air, sea, or land vehicles.
“With real estate, all you need to do is buy the house and, if you sell it at the same price, that money is already clean. So you can integrate those funds into the legal economy and they can be legally declared,” says Reiser.
The Federal Law for the Prevention and Identification of Operations with Illicit Proceeds in Mexico (LFPIORPI), better known as the Anti-Money Laundering Law, serves to “regulate operations likely to be used to launder money,” such as casino gambling, the purchase of art and jewelry, and the purchase, sale, or rental of real estate. These activities are known as “vulnerable activities.”
“They are vulnerable because it has been detected, in the typologies or analysis of how crime is carried out, that they are some of the most common ways to launder money. Real estate is purchased with resources of illicit origin, which allows either layering or integrating [the money into the legal economy],” explains Bañuelos, the money laundering prevention specialist and managing partner of the consulting firm Nexum SAU.
In Mexico, all persons involved in a vulnerable activity are required by law to provide “notice” to the SHCP about a transaction when the payment is made in cash or simply when the amount exceeds the maximums established by the Anti-Money Laundering Law.
“If you carry out a vulnerable activity, you are subject to this regimen. The authority may presume that you are part of a scheme to make transactions with resources of illicit origin, and in that case you have to be careful, since omission places you under assumption for commiting a crime,” explains the money laundering prevention specialist.
However, in the U.S., real estate agents aren’t required by law to file suspicious transaction reports or “notices”; instead, this responsibility falls to financial institutions, according to the National Association of Realtors (NAR).
“It’s important to see which countries or regions offer the opportunity to launder money, how open is the financial sector, and how it works and, on the other hand, how well is the sector regulated,” says the RUSI researcher.
Harris and Montgomery counties are characterized by exclusive residential areas that are attractive to the Mexican upper class. Paradoxically, some of their residents explain that they moved to these neighborhoods to flee skyrocketing crime in Mexico resulting from the war on drugs, only to become neighbors of some of the same public officials who did business with Mexican drug cartels. In areas such as The Woodlands in Montgomery, the amount of Mexicans is so high that it has jokingly earned the title of “Little Mexico.”
In 2013, for example, Emilio Lozoya bought a 1,058 m2 mansion, valued at 14 million USD, in this same neighborhood. He was subsequently arrested in Spain, in 2020, on charges of money laundering and criminal association. Currently, his trial is pending.
What could Mexican and U.S. authorities do to prevent money laundering conducted through real estate transactions? Specialists consulted for this blog believe that the most important step is to establish a beneficial ownership registry, as discussed in one of Empower’s previous posts.
They also point out that it’s important to understand the contexts of each country, in terms of the presence of criminal groups that are constantly looking for ways to launder their proceeds, as well as to ensure that everyone involved in a vulnerable activity participates in risk identification and timely reporting to the relevant authorities.
“The more accurate information that’s available, the easier it will be to always identify red flags,” says Reiser.
As for the case of Mexico and its public officials, Bañuelos sees specific opportunities such as instructing obligated parties to monitor and file the appropriate “notices” when a case warrants it.
“Areas of opportunity are everywhere, both for authorities to improve their processes, as well as for the obligated parties, us, to use the anti-money laundering portal to appoint a representative in charge of legal compliance to integrate files, send reports of unusual operations, and professionalize the discipline,” says Bañuelos.
In November 2021, the Financial Intelligence Unit applied its first exam for certification in the prevention of operations with resources of illicit origin, aimed at professionals engaged in the vulnerable activities listed in the Anti-Money Laundering Law. A total of 1,105 participants registered for the exam, but only 372 passed, according to public information in the National Transparency Platform. In contrast, the anti-money laundering prevention portal reports more than 70,000 registered entities that are subject to the Anti-Money Laundering Law, though, as of today, it’s not mandatory to have this certificate to operate in Mexico.
In 2018, Empower published the results of an investigation conducted in collaboration with Mexican human rights organizations that provide accompaniment to victims of grave crimes in Veracruz and Coahuila. The project was called “The Money Trail: Corporate crimes, illicit flows, and violence in Mexico” and documented criminal networks comprised of public officials, businessmen, and Mexican drug cartel members.
Now, in 2022, Empower is preparing to launch three new investigations that dig further into the use of violence to obtain control over territory and illicit flows, particularly in Veracruz, where several former officials of the Duarte government (2010-16) entered into impunity pacts with organized crime groups to divert money through the allocation of public contracts and the purchase of real estate in places like Harris, Texas. These investigations will reveal economic transactions that occurred, in most cases, while those same officials were deploying security operations that resulted in thousands of missing persons in the context of the country’s War on Drugs.