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Why Are the U.S. & Mexico Intensifying Financial Scrutiny?

Janet Yellen and Rogelio Ramirez de la O U.S. Treasury Secretary Janet Yellen and Mexican Finance Minister Rogelio Ramírez de la O met last month in Mexico City to discuss closer cooperation on screening investments. // Photo: @SecYellen via X.

The United States and Mexico agreed on Dec. 7 to work together to enhance the screening of investments in order to lower risks to national security. The announcement came during a visit to Mexico City by U.S. Treasury Secretary Janet Yellen, who also discussed integration of cross-border payment systems with Mexican Finance Minister Rogelio Ramírez de la O. What are the main reasons for the United States and Mexico to work more closely on investment screening? What are the most important ways in which the two countries should enhance cooperation in this area? In what ways will the two countries integrate cross-border payment systems? What could that accomplish, and how will financial services providers be affected?

Raúl Benítez Manaut, professor at the National Autonomous University of Mexico (UNAM): “U.S. Treasury Secretary Janet Yellen’s visit with Mexican Finance Minister Rogelio Ramírez de la O was due to an intense flow of capital that is entering Mexico. The Mexican peso has strengthened against the U.S. dollar. At the beginning of 2022, the peso was worth 22 to the dollar. In December 2023, it was worth 17 pesos to the dollar. More dollars are entering Mexico than leaving it, and there is a growing U.S. national security concern. Heavy investments are being made from China, for example, in the construction of the Mayan Train, in the automobile sector and in mining companies, such as ones that produce lithium. The United States is concerned about the large influx of dollars into Mexico, such as in supply chains for high-tech products. Likewise, this year there have been major disagreements between China, Mexico and the United States, as the U.S. side has argued that chemicals are imported from China to produce fentanyl and are causing a large number of deaths in the streets. The Chinese embassy in Mexico maintains that no shipments of chemicals have been confiscated in Mexico and that this accusation is unsubstantiated. In Mexico, control of the financial resources that are laundered in the country as a result of drug trafficking is weak. But money is also laundered on the streets of the United States, and the U.S. Treasury and the IRS do not have full control of illegal money. Hopefully, with these agreements, the control of financial resources tied to illegal products will be strengthened so that the security of both countries is strengthened.”

Sarah Messer, head of operations at Owl Consultancy Group: “The United States and Mexico have a complex historical relationship, especially around their shared border. U.S. Treasury Secretary Janet Yellen and Mexican Finance Minister Rogelio Ramírez de la O announced a plan to implement a more robust investment screening process. As Yellen stated, these new measures are intended to allow for increased ease of trade across the border, heightened security measures and more open investment policies that, together, could prevent illicit activities such as drug and weapons trafficking and/or cartel involvement. What Yellen did not say but other parties have suggested is that these investment screenings could also limit access to sensitive technologies manufactured in Mexico by other countries, namely China. In recent years, Mexico has become central in the movement for ‘nearshoring’ or ‘friendshoring,’ with many products and materials being exported from factories in Mexico across the border to the United States. U.S. companies, as well as those in many other countries, have invested in establishing factories inside Mexico. Yellen says there would be a screening body established in Mexico similar to the Treasury-run Committee on Foreign Investment in the United States (‘CFIUS’). In the United States, CFIUS has reduced Chinese investments as it has increased security screenings. One of the ways that the countries could enhance cooperation is by designing systems for digital payments and reducing costs to send remittances. All of these measures could accomplish a stronger trade relationship between the United States and Mexico, creating a bond that would take priority over other trade relationships. In the race to make investments in factories in Mexico, the United States is not the only global power making moves, with China announcing investments in the billions as well. As these measures are more clearly defined and implemented, financial service providers will have to adapt by staying in compliance with any new screening policies with regard to potential investors as well as establishing systems for accommodating digital payments and the cybersecurity required.”

James Gerber, professor emeritus of economics at San Diego State University: “The discussion of foreign investment screening by the United States and Mexico is part of a broader U.S. strategy to modernize the national security role of the Committee on Foreign Investment in the United States (CFIUS), as outlined in the Biden Administration’s executive order 14083. The order emphasizes inspection of foreign investment in several areas, including supply chain resilience, cybersecurity, critical technologies such as microelectronics, artificial intelligence, biotech, quantum computing, clean energy, rare earths and products that have implications for food security, among others. Consultations with Mexico are consistent with the U.S. Treasury Department’s efforts, since the passage of the Foreign Investment Risk Review Modernization Act in 2018, to harmonize actions and reviews of foreign direct investment with other countries. One of the main concerns for the United States relates to state-backed investors whose investment interests may not be commercial. A separate but related issue is the process of cross-border payments. The 1970 Bank Secrecy Act is the primary law covering money laundering, but its lack of clarity has significant impacts on cross-border banking and money transfers. The uncertainty surrounding activities that are allowed and disallowed has resulted in increased surveillance costs for banks and other financial services companies, led to the closure of some bank branch offices and denied financial services to individuals and firms. Clearer rules for cross-border payments would reduce the uncertainty surrounding international payments, reduce banking costs and increase financial inclusion, particularly in the border region.”

Nicolás Mariscal, chairman of Grupo Marhnos in Mexico City: “The screening of investments has not been at the center of U.S. policy, although such screening has existed for decades. Nevertheless, it has reached new levels of importance in recent years, finally reaching Mexico, and with due reason. Several reasons explain the change. First is a more fractured world and a rising China. The geopolitical rivalry with the Asian giant is growing, and Chinese firms with ties to the state are looking for investments in Western technology that could have military use. Second is the power of transnational crime in general, and of Mexican cartels specifically. Remittances to the country from the United States have reached new highs $64 billion last year, a 10 percent increase from 2022. The question lingers over how much is tied to money laundering. Third is the Inflation Reduction Act. As the law created numerous economic opportunities inside the USMCA, several countries are trying to take advantage, notably China. It is important to point out that, as the United States puts restrictions on Chinese investments, China could very well use the USMCA to bypass them and get ahold of certain technologies, like semiconductors. So far, there have been no complaints from providers of financial services. But there is no doubt that everyone will have to adapt, as this is a policy that seems necessary and in the interest of both countries.”

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