Drug traffickers launder billions through money transfers. Here’s how to stop them.

Forget corrupt banks. Drug cartels have a new favorite tool for money laundering: money transfers sent through services like Money Gram and Western Union.

Lax government supervision allows cartels to launder billions annually through money transfers. But it doesn’t have to be this way. Congress and U.S. embassies can take steps now to curb the practice and make it harder for fentanyl traffickers and others to refinance.

In 2023, Latin America received a record $155 billion in remittances, mostly from senders living in the United States. Most senders are hardworking families, and most remittances to Latin America – which have doubled in the past decade – are a positive factor, driving consumption in Central America and the Caribbean.

But as the money flows have increased, transnational organized crime groups (TOCs) have also learned how to exploit them – namely as a tool to covertly clean up the proceeds of their drug sales on American streets and bring them back to Latin America.

TOCs coerce or bribe U.S. citizens and residents without criminal records to mix drug proceeds with clean money intended for recipients in the region. These recipients then transfer the money to the local contacts of TOCs. This is major illegal trade. Signos Vitales, a Mexican NGO, estimates that money from criminal groups accounted for at least seven percent of the record $58.5 billion transferred to Mexico in 2022.

Although laundering money through banks has become more difficult in recent years, laundering money through money transfers remains all too easy. Most money transfers are sent through non-bank financial intermediaries known as Money Services Business (MSB), such as Western Union. MSBs are subject to virtually no regulation and require only basic, easily falsified personal information. And because they typically rely on financial and electronic funds rather than banks to make money transfers, they bypass the know-your-customer rules and money laundering alerts of the U.S. financial system.

All this makes money laundering through money transfers difficult to control, but it is not impossible. Here are four steps the U.S. government can and should take now.

Ensure the Risk Assessment of Transfers and Money Laundering Act

Introduced in 2019 by Senator John Cornyn (R-TX), this bill would address one of the biggest current hurdles: the lack of information about money laundering in money transfers. It directs the U.S. Treasury Department to report to Congress on TOC use of remittances and develop a government strategy to curb this practice. Days after its introduction, the bill was incorporated into a larger anti-money laundering bill, the Anti-Money Laundering, Terrorist Financing and Counterfeiting Act. Senators Cornyn, Klobuchar (D-MN), and Grassley (R-IA) reintroduced that bill in 2022, and again in January 2024, but it has not yet made it past the Senate Judiciary Committee.

Lawmakers, including that committee, should do what is necessary to pass the bill in the next Congress. They should also pass the Establishing New Authorities for Businesses Laundering and Enabling Risks to Security (ENABLERS) Act, which would subject non-bank businesses and professions, including third-party payment services, to the same anti-money laundering rules and procedures as banks. Bipartisan support for the Corporate Transparency Act of 2021 proves it can be done.

Continued money laundering based on transfers

Second, state and federal prosecutors should increase costs for money launderers through targeted investigations. Prosecutors have handed down money laundering convictions in at least seven money laundering cases since 2017. That’s about one case per year – not much when you consider the enormous amount of illicit financial flows.

Some US states, such as Colorado, send particularly large amounts of remittances despite having a relatively small Mexican immigrant population. Without criminalizing the majority of money transfer senders who do not commit wrongdoing, federal and state prosecutors should be alert to these types of warning signs.

Criminal investigations may also prompt money services companies to do more to prevent money laundering. In 2017, Colorado-based Western Union – the largest MSB in the world – reached a nearly $600 million settlement with the US Department of Justice and the Federal Trade Commission, admitting to turning a blind eye to money laundering and promising improve its compliance procedures.

Increase funding for the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

This year, the Treasury Department’s new rule went into effect, making it harder for money launderers and kleptocrats to funnel their illicit profits into anonymous, U.S.-based shell companies. Now all companies doing business in the United States are required to disclose their owners to a federal government registry.

But FinCEN, which is allocated less than $200 million a year and has just 300 employees, doesn’t have nearly enough resources to review the more than 32 million beneficial ownership filings it expects to receive in the coming year. Limited resources are likely to hinder the country’s ability to share information with law enforcement, security and intelligence officials and financial institutions. Congress should increase funding for FinCen in the FY 26 appropriations bill.

Build a coalition with Latin American partners

The United States should not and cannot tackle the problem alone. Latin American partners can also help. The United States could use its 2020 Memorandum of Understanding with Panama – which helped that country set up a US-trained anti-money laundering and anti-corruption task force – as a framework for future cooperation (similar MOUs already exist with Colombia and the Dominican Republic). ). Once enough partners sign on, the United States could use these agreements as a foundation for a broader regional effort to combat money laundering at all levels, including through MSBs. U.S. embassies can use their convening power to push the issue to the top of the agenda. In June 2024, the U.S. Embassy in Belize brought together private and public sector actors to share anti-money laundering best practices. More should follow.

The transfers should benefit hardworking families in the United States and Latin America, and not drug cartels. It is time for the US government and its regional partners to tackle the problem seriously.

Mariana Fernandez Rubach is a Latin America policy intern at the Council on Foreign Relations. Mariana is a graduate student at the George Washington Elliott School of International Studies, where she focuses on security policy studies, organized crime, and money laundering.