STRATFOR 700 Lavaca Street, Suite 900 Austin, TX Tel: MEXICO: A Security and Business-Risk Assessment

Transcription

1 STRATFOR 700 Lavaca Street, Suite 900 Austin, TX Tel: MEXICO: A Security and Business-Risk Assessment April 26,

2 MEXICO: A Security and Business-Risk Assessment Executive Summary Johnson Controls asked STRATFOR to provide a security and business-risk assessment focusing on threats the company is likely to face doing business in Mexico, specifically in the cities of Reynosa, Ciudad Juarez and Monterrey. The Mexican government currently is facing the most severe security challenge it has experienced in nearly a century. At the heart of this challenge are three basic battles: one between the government and the drug cartels, one among the various cartels themselves and the violence being inflicted by organized-crime groups against the country s civilian population. The mission President Felipe Calderon launched against the cartels in December 2006 has steadily escalated over the last four years, and while there is no denying the government is making progress fracturing the largest and most powerful cartels, one result has been a steadily deteriorating security situation nationwide. The general crime threat in Mexico also is at a critical level and getting worse. Mexican authorities have their hands full fighting the cartels and have not had the resources to focus on other criminal activity, and this has allowed criminal groups unrelated to the drug trade to thrive. Such an environment presents a range of security implications to Western multinational corporations (MNCs) doing business in Mexico. As organized-crime groups expand their targeting, it seems all but inevitable that MNC personnel and facilities will become part of that growing target set. The violence in Mexico actually is reaching a saturation point, politically and socially. Innocent civilians caught in the crossfire are growing increasingly angry and vocal, and protests have been staged in Monterrey, Juarez and Mexico City that have drawn tens of thousands of people. With the 2012 presidential election approaching, Calderon and his National Action Party are trying to find a way to reduce the level of violence and restore the balance of governmental and cartel power in the country s most embattled regions. Eventually, over the next two or thee years, companies looking to expand operations in Mexico could find themselves operating in a less volatile security environment. At present, however, the security situation in Mexico has never been worse, and it is likely to deteriorate even further before the violence begins to subside. This will force all business operations in Mexico, foreign and domestic alike, to continue to invest large portions of their budgets in security measures to protect their personnel and other corporate assets. Security Situation Mexico-Wide The escalating cartel war in Mexico, which has created the most severe security crisis that the country has seen in nearly a century, consists of three fronts: the government s battle against the drug cartels, the battles among the various cartels themselves and the violence being inflicted by the cartels and other criminal groups against the civilian population. The campaign that President Felipe Calderon launched against the cartels in December 2006 has steadily escalated over the last four years, and while there is no denying that the government is making progress in fracturing the largest and most powerful cartels, one result has been a steadily deteriorating security situation nationwide. One measure of this growing insecurity is Mexico s homicide rate related to organized crime. In 2009, the number of organized crime-related killings was approximately 8,200, making 2009 the country s deadliest year yet since Calderon launched his campaign. Today, three and a half months into 2010, the death toll has already surpassed 2,900, putting the country on pace to see many more than 9,000 organized crime-related deaths for the year, suggesting the brutal drug violence has yet to reach its 2

3 peak. Of course, the violence cannot continue to increase indefinitely, but there is little reason to believe it will taper off within the next two or three years. One reason for this grim outlook involves the ongoing turf battles among rival criminal groups, battles that have only intensified over the past several years. Territorial disputes among drug cartels have long been the norm in Mexico, but Calderon s offensive against the country s most powerful cartels has severely disrupted the criminal balance of power, leaving power vacuums other criminal groups seek to fill. This conflict is especially visible in border cities such as Ciudad Juarez, Tijuana and Nuevo Laredo, which the cartels use as drug-smuggling corridors into the United States. But the conflict also affects other parts of Mexico that fall along the drug supply chain, such as ports in southern Mexico and areas along the Guatemalan border. This cartel power struggle is far from over, and until a lasting balance of power has been solidified, the bloody warfare will continue and perhaps even intensify. It is this situation that confronts foreign businesses, which are forced to conduct daily operations in an increasingly volatile environment. This threatens not only the personal safety of their employees but also the profitability of their business operations. The threat of violence has forced some companies to close their doors and others, including several maquiladoras in Reynosa, to develop exit strategies should the violence become too intense. Another reason the violence is escalating is the increasing friction between the Mexican government and the cartels. One indication of how badly Mexican government policies have disrupted drugtrafficking operations is the violent response that the cartels have directed at law enforcement and other high-ranking government officials. Several have been assassinated in retaliation for government 3

4 counternarcotics operations, including Edgar Millan Gomez, the acting chief of the Federal Police, who was killed in May Charged with leading federal law enforcement counternarcotics operations, Millan had been involved in a high-speed pursuit during a Federal Police operation to capture former Beltran-Leyva Organization (BLO) kingpin Arturo El Jefe De Jefes Beltran Leyva (who escaped). Later that night, as Millan returned home, he was ambushed by a group of assassins hired by the BLO, who shot Millan multiple times before he died. More recently, several high-ranking local and regional law enforcement and elected officials have been executed throughout the country, apparently an effort by the cartels to show that no government official is immune from cartel violence. In February, the mayor of Guadalupe y Cavo, in Chihuahua state, was executed by unknown gunmen in Chihuahua city, and in March the local police chief of Zacapu, Michoacan, was gunned down by armed men in ski masks. Reynosa The border between Texas and Tamaulipas state handles the largest volume of legitimate trade between the United States and Mexico, which is the United States third largest trading partner. This particular border region, which provides easy access to the U.S. Interstate 35 and Interstate 10 smuggling corridors, is also the point of entry for the largest amount of drugs going into the United States, making it extremely valuable territory that is highly sought after by enterprising criminal organizations. Reynosa, the Tamaulipas border city just across the Rio Grande River from McAllen, Texas, is certainly no stranger to violence. The Reynosa area was previously under the control of the Gulf cartel and its enforcement arm, Los Zetas. Between 2004 and 2007, the Sinaloa cartel attempted to take control of the Tamaulipas border region, including Reynosa. The ensuing conflict brought running gun battles to the streets of Reynosa and the surrounding areas before the Gulf cartel and Los Zetas were able to push the Sinaloa cartel back. Today, the Tamaulipas border region is the front line of a conflict between the New Federation, a newly formed alliance of the Gulf, Sinaloa and La Familia Michoacana cartels, and Los Zetas, the Gulf cartel s former partners. Reynosa is caught right in the middle. The U.S. State Department went so far as to restrict the travel of U.S. diplomatic personnel to the Reynosa area for three days in March due to the rapid degradation of the security environment in the area caused by the feuding criminal groups. In addition to the running gun battles, skirmishes between the Mexican military and the cartels have paralyzed the city for hours at a time. The competing criminal groups have been known to deploy their own checkpoints in the area in an effort to catch rival cartel members. Another tactic seen more recently has been setting up roadblocks to impede the response of Mexican soldiers and police to cartel activities. On March 30, members of the New Federation hijacked tractor-trailers, taxis and other vehicles and disabled them along a busy street in Reynosa while the group conducted operations against Los Zetas and the Mexican military. Ciudad Juarez Farther upriver, just across the border from El Paso, Texas, the Juarez Valley in the state of Chihuahua is a strategic point of entry for both legitimate commerce and illicit goods. Ciudad Juarez is the only major Mexican metropolitan area on the border with quick access to the U.S. interstate system within several hundred miles in either direction, making this area also extremely valuable to Mexican cartels. U.S. Interstate 10 runs directly through El Paso, where it also intersects with U.S. Interstate 25. This makes it easy to traffic drugs and other illicit goods east, west and north from Juarez. With the highest concentration of murders per 100,000 inhabitants due to a raging turf fight between the Sinaloa and Juarez cartels, the Juarez Valley is now considered the most violent region in the world (outside of active war zones) by the Citizen s Council for Public Security. This region also happens to be where the Mexican government is most active in employing its new counter-cartel strategies and where it has deployed the largest concentration of security forces in the country. The conflict in Juarez has evolved into three different layers of violence. The first layer is the streetlevel violence between local Juarez-based street and prison gangs backed by both the Juarez and Sinaloa cartels. The second layer is the more traditional conflict between the enforcement wings of the Sinaloa and Juarez cartels, Nueva Gente and La Linea, respectively. The third is the Mexican security 4

5 forces battling gangs and cartel enforcers. The first two layers are the primary reasons for the high levels of violence in the Juarez area. Members of La Linea have burned down several nightclubs and bars that refused to pay their extortion demands, while members of Nueva Gente have demonstrated superior tactical skills in targeting members of the Juarez cartel-aligned street gang Los Aztecas. These three layers of violence often overlap, and combined they have produced unprecedented levels of violence throughout the region. Recently, however, according to a U.S. intelligence report, the Sinaloa cartel has gained control of the majority of the Juarez Valley. This may help stabilize the region eventually, but the remnants of the Vicente Carrillo Fuentes organization (VCF) are not expected to quietly fade away, and the violence likely will continue for some time. On April 9, the Mexican Federal Police officially assumed all law enforcement and security operations in the city of Juarez from the Mexican military, which will take up positions outside of the Juarez metropolitan area, in the more rural areas of the region, where military skills are better suited. This changing of the guard does not mean much in terms of immediate security improvements in the city. The main difference is that the Federal Police are legally allowed to investigate civilian crimes (which include all cartel-related activities), whereas the military is constitutionally prohibited from conducting such investigations. The Federal Police are empowered to detain serious cartel and drug offenders in the city, but their conviction and incarceration will depend on the evidence gathered and skill demonstrated by the prosecutor s office (arrested suspects often are released without punishment due to discrepancies in evidence collection and detainee handling). The effects of the Federal Police takeover have yet to play themselves out, but the move likely will have little effect on the security environment in Juarez. Monterrey The greater Monterrey metropolitan area, in Nuevo Leon state, is the third largest population center in Mexico and the country s industrial and manufacturing hub. In addition to being a commercial powerhouse, Monterrey is a well-known stronghold for the Los Zetas organization. Strategically situated about 150 miles south of the Texas-Nuevo Leon border, the Monterrey metro area is a key transshipment point for legitimate commerce and illicit goods headed to northern Mexico and South Texas, largely because of the highway infrastructure that connects it to the important Reynosa and Nuevo Laredo border crossings. The current conflict between Los Zetas and the New Federation has spread westward into the Monterrey area, which also is seeing running gun battles in the streets, though the level of violence has not been nearly as intense as the conflict to the east along the South Texas-Mexico border. On March 7, Mexican marines arrested four alleged members of Los Zetas after they reportedly ambushed the marine patrol on the outskirts of Monterrey. And on April 18, Los Zetas engaged members of the New Federation in a running firefight that lasted some 20 minutes in the streets of Monterrey. In Monterrey, Los Zetas have employed tactics similar to those seen in Reynosa. The groups will hijack and disable large tractor-trailers and other vehicles to block major thoroughfares throughout the city, stalling traffic for hours. Los Zetas typically use this tactic while conducting operations against rivals or moving large quantities of drugs through a particular part of town in order to hinder a response by Mexican security forces. Due to the economic importance and size of Monterrey there have long been significant numbers of troops and Federal Police agents in the city, and there have yet to be significant federal deployments to augment these forces. They are currently positioned throughout the Monterrey area at checkpoints and as quick-reaction forces to thwart possible cartel activities or operations. Should anyone associated with Johnson Controls encounter a military or law enforcement checkpoint, the person should stop and follow the directions of security personnel. Failure to do so could result in security forces firing upon the vehicle. Several innocent civilians have lost their lives when they have tried to avoid these checkpoints or disobey directions. 5

6 Criminal Threat Mexico-Wide The general crime threat in Mexico is at a critical level and has been for more than a decade. Changes in the security landscape over the past year, however, have led to an expansion of criminal threats in the country. Three recent developments in particular illustrate this growing problem. First, Mexico's rampant corruption and general breakdown in law and order have created an environment in which other criminal organizations, unrelated to the drug trade, can operate with impunity. Mexican authorities have their hands full with the cartels and have not had the resources to focus on other criminal activity. While Mexican police have always had a reputation for corruption, the extent of the problem is not fully understood. Over the past two years, several high-ranking officials have been arrested on charges of cooperating with organized crime. By far the most noteworthy was the country's drug czar, Noe Ramirez Mandujano, who allegedly disclosed classified information to the Beltran Leyva Organization (BLO) for monthly payments of $450,000. In October 2008, Calderon launched a massive reform effort with the goal of uniting the two primary law enforcement agencies at the national level -- the Federal Investigative Agency and the Federal Preventive Police -- into one Federal Police organization. The reform process also was aimed at making the national police force a more professional organization. Agents were subjected to a thorough vetting process and their salaries were increased, along with their educational requirements. Many agents already in the federal ranks failed this vetting process. Those who did pass muster, along with newly minted agents, were deployed throughout Mexico beginning in January, but it remains to be seen if these agents can withstand the corruptive temptations of the cartels, which are known to bribe or kill police officers and government officials (more on the concept of plata o plomo below). Second, many drug-trafficking organizations have begun to turn to other criminal activities to supplement their incomes. Previously, drug traffickers generally focused their attention solely on the lucrative drug trade. This meant drug traffickers rarely crossed paths with civilians not associated with the drug trade. However, due to the government offensive against the cartels and U.S. efforts to interdict drug shipments from South America over the past two years, cartel turf battles have intensified, as have feuds within the organizations. As a result, many drug traffickers are becoming increasingly involved in crimes such as extortion and kidnapping for ransom (KFR). It is important to note that accurate statistics regarding the kidnapping and extortion threats in Mexico do not exist, since the vast majority of kidnappings are not reported to authorities. However, one inquiry by a Mexican legislative committee estimated there are some 4,500 kidnappings per year in Mexico, only one-third of which are reported to police because families fear reprisals from the kidnappers and because the police often are involved in such crimes. Nevertheless, Statistics available from the Mexican Public Security Secretariat show reported cases of kidnappings in Mexico rose by 40 percent from 2008 to 2009, increasing from 838 to 1,181 incidents. While these reports should not be considered comprehensive, they do provide a useful baseline. Several KFR groups operate throughout Mexico with varying degrees of sophistication. The more professional groups employ several teams with members assigned to specialized roles such as surveillance, countersurveillance, snatch and ransom negotiation. On the other end of the spectrum, so-called express kidnapping gangs flourish in major metropolitan areas. These gangs snatch people off the street and take them on a tour of banks and ATMs where the victims are forced to withdraw cash from their bank accounts. Due to the nature of express kidnappings, these gangs do not have to be tactically skilled. Another kidnapping trend in Mexico is the phenomenon known as the virtual kidnapping. In one such scheme, the kidnappers position themselves at a mall or other youth hangout claiming to offer young people a chance to enter a contest for prizes such as ipods or Xboxes. The youths then fill out entry blanks, unwittingly offering up personal information such as addresses, home phone numbers and the names of parents. Afterward, the kidnappers follow the potential target until he or she enters a place where cell phones cannot be immediately answered, such as a school or movie theater. This provides the kidnappers with a window of opportunity to call the target s parents, 6

7 claim that they have abducted their child, describe details of authenticity such as what the person is wearing or where he was going, and demand that a ransom be paid immediately. While we are not aware any cases of kidnapping or extortion reported by U.S. manufacturers operating in the auto industry in Mexico, the exposure of companies such as Ford and GM in Monterrey and Mexico City means they likely have had to deal with these issues, at least in terms of taking preventive security measures. Third, with Mexican security forces tied down in the cartel battle, common criminals not involved in the drug trade have flourished. Car thefts, robberies, muggings and pick-pocketing have long been staples in the Mexican crime scene, and such crimes have increased throughout the country in recent years. Indeed, these more common crimes are much more likely to affect Johnson Controls operations and personnel in Mexico than the cartel-related violence dominating the headlines. The obvious risk associated with these developments is that, while the government continues to make it difficult to traffic drugs, very capable drug-trafficking organizations and other criminal groups will continue to target businesses and citizens throughout Mexico for abduction and extortion. These trends can be expected to persist at least for the next two or three years, until the country s security situation stabilizes. Reynosa While the Reynosa and northern Tamaulipas region boasts arguably the highest volume of drug traffic in Mexico, the conflict that recently erupted between Los Zetas and the New Federation along the Tamaulipas-South Texas border has prompted both groups to venture into other criminal activities to help fund the conflict. Home and business invasions have increased dramatically. For example, on the night of April 9, a group of armed men raided a facility in Reynosa owned by Schlumberger, a global oil services company, making off with five company trucks and several uniforms, perhaps to be used in future break-ins at the facility or other Schlumberger installations in Mexico. Extortion of businesses is widespread in Mexico, and a refusal to meet extortion demands has led to several business owners being kidnapped and held for ransom. Threats and extortion attempts against the gambling industry in northern Tamaulipas state have caused at least 12 such businesses to close their doors. (At least two deaths in the area are thought to be related to businesses that failed to pay protection fees to criminal groups.) Due to a high level of impunity in the Reynosa region and the relative ease of access to the United States, residents of South Texas are being kidnapped in increasing numbers and brought to Reynosa where they are held captive while ransom payments are negotiated. More often than not, these cross-border KFR cases result in the death of the victim when businesses or family members refuse to pay the ransom or simply cannot come up with the amount of money demanded. Moreover, firefights between Los Zetas and the New Federation as well as with the Mexican military in the Reynosa area have prompted many businesses to cancel shifts and/or send workers home early. Some workers even have refused to leave their homes for work after a firefight has taken place in the city for fear of being caught in the crossfire. Cargo theft is also a serious concern for any company operating in Reynosa. There are some 140 maquiladoras in 11 industrial parks in the Reynosa area, and these industrial parks offer a concentrated target-rich environment for enterprising criminals. In 2009, three high-value shipments were hit by cargo-theft gangs in Reynosa, resulting in several million dollars in losses. Although it is a serious concern, the threat of cargo theft in Reynosa is not as great as it is in the more interior regions of Mexico. Proximity to the border mitigates the threat because the cargo has a shorter distance to travel before reaching the United States. The cartel tactic of hijacking large trucks and private vehicles and using them to block roadways is also a cause of concern in Reynosa, though these blockades do not occur frequently enough to warrant further precautions, nor do the vehicles involved appear to be targeted for their cargo. While there 7

8 have not been any reports of drivers being harmed in these incidents, armed gunmen taking over a Johnson Controls vehicle could pose a serious risk of bodily harm to employees. Other, more common crimes, such as pick-pocketing, mugging, car theft and carjacking, do occur in and around Reynosa, but they occur nowhere near as frequently as they do in larger metropolitan areas such as Mexico City. Many criminal groups that operate on both sides of the border in this region, such as Texas-based Tango Blast, specifically target the auto industry in stealing vehicles and auto parts. STRATFOR believes this kind of crime will increase in the Reynosa area over the next two to three years as the security situation worsens before it improves. Juarez Of all cities and regions in Mexico, the Juarez area has been hit perhaps the hardest by the dramatic increase in criminal activity. Kidnapping, extortion and corruption are rampant throughout the city and surrounding areas. Perhaps the strongest indicator of the level of corruption in Juarez is the fact that La Linea, the VCF enforcement arm, is comprised of current and former members of the Juarez police department, underscoring the concern that law enforcement personnel still on municipal and federal payrolls also are working actively for the cartels. La Linea has been one of the primary instigators of the escalating violence in the city, serving as hit men for the VCF and as muscle to force businesses and other entities to produce cuotas, or extortion payments. VCF and La Linea are not the only organizations in Juarez extorting businesses in exchange for protection. Nearly every criminal group operating in the Juarez area uses extortion to supplement their incomes, especially as the groups try to fund their operations against each other, from local street gangs like Los Aztecas and the Mexicles to the VCF and Sinaloa cartels. Kidnapping is also prevalent in the Juarez region, and it often is employed against persons or businesses that refuse to pay their cuotas. Also targeted are high-net-worth individuals or people portraying themselves as such. Again, the sophistication of kidnapping operations ranges from professional teams with specialized roles to amateur gang operations. Large corporations also fall victim to extortion attempts by criminal groups operating in Juarez. The degradation of the security environment in the city and the increase in extortion has prompted most MNCs and maquiladoras to spend more money on security at their Juarez facilities. While such measures aid in the protection of company assets and employees at work, criminal elements also have started targeting employees at their homes or while they are in transit. Management and executives who live and work in the in the Juarez area have been furnished armored cars and executive protection, so criminals have begun targeting lower-level employees. The impact on company morale becomes a kind of psychosis that spreads throughout the workforce and, in many cases, results in low employee attendance. STRATFOR sources involved in the computer industry in Mexico recently reported employees were being pulled off of company buses and later killed, presumably because the company refused to meet extortion demands. More common crimes are also prevalent throughout the city. Naturally, security forces are not nearly as concerned with more petty offenses as they try to stop targeted assassinations and kill or capture cartel enforcers, so little is done to detain and prosecute common criminals. While the more violent, headline-grabbing crimes involve those in the drug trade, common criminals target victims of opportunity and do not discriminate. Monterrey Corruption, while a pervasive problem throughout Mexico, is especially prevalent in Monterrey. Los Zetas have co-opted a large number of local, state and federal law enforcement personnel in the Monterrey metro area through the common ploy of plata o plomo, or silver or lead. This is the cartel reminder to public officials that they have two choices: They can cooperate with the cartels and receive plata (silver, or money) or resist the cartels and receive plomo (lead, or bullets). This message can be seen in the large number of targeted assassinations of law enforcement officials in the Monterrey area who likely did not respond appropriately to Los Zetas demands. Also, as part of its 8

9 offensive against Los Zetas, the New Federation has killed 25 Nuevo Leon police officers allegedly corrupted by Los Zetas and has vowed to kill 20 more. Widespread police corruption and the deteriorating security situation have led to a breakdown of law and order in northern Mexico, where other criminal groups are now able to operate more freely. The corruption can manifest itself in many ways, from having to bribe a police officer to get out of a speeding ticket to being detained unlawfully by a police officer and turned over to a criminal group and held for ransom. As elsewhere in Mexico, the increasingly chaotic and permissive environment in the Monterrey area has led to an uptick in petty crimes as common criminals take advantage of distracted security personnel. Although carjacking, car theft, pick-pocketing and mugging occur in the city, however, these crimes are still less common in Monterrey than they are in other large cities in Mexico. In Monterrey, pickpockets and street beggars are common in tourist areas and crowded parts of town, while muggers operate mainly at night in isolated areas. As the industrial and manufacturing hub of Mexico, Monterrey is ripe for cargo theft. While about 50 percent of such incidents occur in the Mexico City area, the Monterrey area is the second most active area for cargo theft in Mexico. Large volumes of everything from raw materials to high-end finished goods travel in and out of Monterrey every day, creating a target-rich environment for cargo thieves. Additionally, being about 130 miles from both the Nuevo Laredo and Reynosa border crossings, within the 200-mile border zone in which most cargo theft occurs, the Monterrey area provides criminals ample time to stalk, stop and interdict shipments. Mexico s two major highway corridors, Federal Highway 85 to Nuevo Laredo and Federal Highway 40 to Reynosa, are the lifelines that pump products from Monterrey into the United States. Since there are no alternative routes, these highways offer lucrative hunting grounds for Mexican cargo thieves, who are growing increasingly active. The threat of kidnapping also is increasing in the Monterrey area, even though the city has not experienced the same level of KFR cases that other regions in Mexico have seen. On April 21, for example, more than 50 armed men stormed two hotels in the heart of Monterrey and kidnapped seven individuals before fleeing the area. The group even went so far as to block major intersections with hijacked vehicles and a construction crane to impede the security response. Political Stability Mexico s campaign against the cartels is being waged as a joint effort between the military and federal law enforcement agencies. State and local law enforcement are often called upon to assist, though the federal government views them as far too untrustworthy and incompetent to play a serious role. While previous presidents have relied on the military for more focused counternarcotics missions, Calderon has deployed an estimated 45,000 troops around the country to conduct security operations, search for drug shipments, destroy drug production facilities and make arrests. General security operations have been a noteworthy addition to the military s role over the past two years. During 2007, such military operations resulted in a noticeable security improvement, but by early 2008 it became clear that the army was stretched too thin and no longer capable of deploying sufficient force to every embattled area. Still, the military has proved to be by far the most effective -- if controversial -- force for dismantling cartel operations. Meanwhile, as more and more reformed Federal Police agents get to the field, we will see them take the lead in counter-cartel security operations. As we recently saw in Juarez on April 9, the Federal Police are now able to take over the control of security operations from the military. Juarez, however, is a unique situation, and the military remains the primary security force used in counter-cartel operations throughout the rest of the country. Several factors account for the high rate of official corruption, and none of them can be easily resolved. For one thing, the billions of dollars that Mexican drug cartels make each year mean they have plenty of cash to bribe government officials (witness the case of the federal drug czar who was raking in $450,000 per month from the BLO). Second, low education requirements and poor salaries of police officers have traditionally made law enforcement a career of last resort. Given this reality, few police officers would refuse a bribe if offered one, especially when the alternative is death. Moreover, 9

10 there is also a historical culture of graft in Mexican police departments whereby street cops are expected to pay bribes to their superior officers. Being poorly paid, the street cops must get the money to pay their superiors from somewhere, hence their corruptibility. All of these issues mean foreign businesses in Mexico are forced to deal with security on their own, since the local authorities have proved to be unreliable (and at times malicious) partners. In addition, the tendency to employ retired law enforcement or military personnel in corporate security positions elevates the risk to businesses. In these cases, it is important to pay close attention to vetting procedures, which requires additional time and resources from both security and human resource departments. The violence in Mexico actually is reaching a saturation point politically and socially. Innocent civilians caught in the crossfire are growing increasingly angry and vocal, and protests have been staged in Monterrey, Juarez and Mexico City that have drawn tens of thousands of people. With the 2012 presidential election approaching, Calderon and his National Action Party are trying to find a way to reduce the level of violence and restore the balance of governmental and cartel power in the country s most embattled regions. Eventually, over the next two or thee years, companies looking to expand operations in Mexico could find themselves operating in a less volatile security environment. Impact on Business Operations The deteriorating security situation in Mexico presents a range of security implications to Western MNCs doing business in Mexico. As organized-crime groups expand their targeting, it seems all but inevitable that MNC personnel and facilities will become part of that growing target set. In most cases, the situation will likely warrant increased spending on security measures. Cargo theft typically costs the private sector in the United States more than $30 billion each year in insurance, replacing and reshipping lost cargo and preventative security measures alone. Dedicated cargo-theft gangs number into the hundreds in Mexico, and though these gangs vary in sophistication, each gang usually has at least one or two members with some level of operational experience. There are even cargo-theft gangs (like the Texas-based auto-theft gang Tango Blast) dedicated to targeting specific business sectors such as the automotive industry, which has direct implications for Johnson Controls. The Los Pumas gang is a criminal group operating out of the central Mexican state of Mexico, just west of Mexico City. Several members of the group were arrested April 6 for kidnapping a truck driver and stealing auto parts, which are a profitable commodity in the thriving black markets of both Mexico and the United States. This threat has led some companies to hire armed escorts for shipments of high-value merchandise. However, other companies feel armed escorts attract too much attention to the shipment and to the company and can cause more problems than they solve. As the security situation in Mexico continues to deteriorate, the costs of doing business will continue to go up. Neither approach -- enhancing visible security or maintaining a low profile -- is completely effective, and incidents of cargo theft in Mexico likely will increase over the next two to three years. As criminal threats continue to increase, more companies are seriously considering the possibility that their personnel could be targeted as well. Executives and employees who have not received protective services may begin to demand them for themselves and their families. Expenses related to these services, which may include armored vehicles and armed security personnel, can quickly add up. And while executives are perhaps most at risk during their workday routine, the deteriorating security situation in many parts of the country could make it necessary for some companies to provide personal protection during business travel, also at a considerable expense. The host of threats facing MNCs operating in Mexico will require many corporate security teams to reassess several aspects of their security programs. Increasing protective services for employees, for example, not only will require hiring executive protection teams but also could require employing additional corporate security managers to oversee enhanced programs. These security managers will 10

11 also find themselves busy preparing and updating other programs, such as reliable communications systems, business-travel protocols and contingency plans. Deciding where to focus security spending will depend on the particular situation and threat. For Johnson Controls, two principal areas of interest are cargo theft and personnel safety. And, while understanding the cost of an armed escort or security camera is fairly straightforward, there are other, less obvious costs involved in adopting an appropriate security posture in Mexico. For example, there are redundant features required to secure a single shipment of goods effectively -- from multiple GPS devices to track the cargo to sophisticated locking mechanisms for shipping containers to effective countersurveillance programs in and around cargo-staging areas. There is no denying the fact that many of these security measures pose difficult financial decisions for many companies. At the same time that companies search for ways to reduce costs, they must now address whether to increase spending on security measures (assuming they have or can obtain the funds to do so). But while these costs may be uncomfortable, many companies will find them necessary to maintain business operations and ensure employee safety. Forecast Mexico As we look ahead two to three years, which is the time it will take for the Mexican government to even begin to stabilize the security situation, Mexico will continue to face some extraordinary challenges. The current cartel conflict has led to unprecedented levels of violence that the Mexican government has been unable to control. The Mexican government has exhausted vast amounts of national resources to try to reduce the violence to politically acceptable levels, but violence has continued to increase steadily throughout the country. While it is difficult to forecast the security environment for a particular city or region, indicators of broader trends in violence in Mexico lead STRATFOR to believe there is hope. As previously mentioned, violence in Mexico is reaching a saturation point politically and socially. As politicians try to save face and citizens fed up with the violence become more vocal, Mexico is reaching a point where something must change. And something certainly will; it is just the form of that change that is still uncertain. As we see it, there are two possible scenarios: One involves the eventual involvement of the United States in the conflict. There is mounting pressure for Mexico s northern neighbor to take a more active role in counternarcotics efforts, but political and social sensitivities in Mexico have prevented a significant U.S. presence on the ground in Mexico. However, there are indications that this sentiment in Mexico is beginning to change. The president of the Mexican War College recently said Mexico cannot handle the cartel problem on its own. Even more indicative of this changing sentiment was the recent decision to embed U.S. intelligence analysts and operatives in the Juarez Intelligence and Operations Fusion Center to better facilitate information sharing. However, STRATFOR believes the trigger for a dramatic increase in U.S. involvement will be the targeting of a U.S. elected official or high-net-worth individual on U.S. territory by Mexican drug cartels. With an increase in U.S. involvement, the situation in Mexico could become similar to the situation in Colombia, where U.S. advisers trained and sometimes led Colombian troops and law enforcement personnel in counter-cartel operations as part of Plan Colombia. It would also mean an increase in aid to Mexico in addition to the $1.4 billion Merida initiative already in place, in which U.S. federal drugenforcement agents provide equipment and limited training to their Mexican counterparts. A significant increase in U.S. assistance, including more hands-on involvement by U.S. advisers in conjunction with the ongoing Merida initiative, would give Mexican security forces a distinct advantage in combating cartel power throughout Mexico. 11

12 Once Mexican security forces are able to reduce drug-related violence to politically acceptable levels with more direct U.S. assistance, Mexican security forces can then divert excess resources to focus on other crimes, such as kidnapping, extortion, cargo theft and other more common crimes that permeate the security landscape throughout Mexico, affecting both Mexican nationals and foreign business operations. The second scenario would be to restore the balance of power among the cartels and the Mexican government, which conceivably could be achieved over the next two or three years. In order for this equilibrium to be achieved, an agreement must be reached between the cartels and the Mexican government that does not necessarily involve President Calderon shaking hands with Sinaloa cartel leader Joaquin El Chapo Guzman. A unified drug-trafficking group that is able to consolidate and prevent itself from fracturing would be the most likely candidate to enter into such an agreement. And it is not unreasonable to assume that sometime between now and the end of 2012, one cartel will have co-opted and/or destroyed most of its competitors and emerged as the dominant drug trafficking organization in all of Mexico s embattled regions. Today, the Sinaloa cartel appears to be the most likely choice, given the geography it controls and the upper hand the organization seems to have in various conflicts throughout Mexico. The Sinaloa cartel is engaged in just about every region of Mexico, giving it a geographical advantage compared to more isolated organizations like La Familia Michoacana, which controls only the state of Michoacan. While many of the regions the Sinaloa cartel is engaged in are considered disputed territory, the cartel is often on the winning side. The New Federation, an alliance between the Gulf, Sinaloa and La Familia Michoacana cartels, is a testament to how the Sinaloa cartel might co-opt willing organizations while destroying rival organizations like Los Zetas. Going forward, if the Sinaloa cartel were able to consolidate its power and gain hegemony in the world of Mexican drug trafficking, the cartel would be able to divert some of it enforcement resources to quell the activities of other criminal organizations that have risen up in the chaos. This is not to say that crime in Mexico would disappear, only that the crime that did occur would run the risk of Sinaloa blowback or be heavily regulated by the cartel. However, this kind of transition would take time, and the security situation in many parts of the country would remain chaotic. Should the Sinaloa scenario play out, businesses operating in Mexico would likely have to deal with the cartel in some form or fashion, and whether this would involve extortion payments is unclear. In any case, as the dominant cartel authority in Monterrey, the Sinaloa cartel likely would be interested in any expansion plans by Johnson Controls in the area. In both scenarios, the level of violence would get much worse before it improved. Both situations represent a single entity essentially taking over control of geography that presently is controlled by multiple actors. As we have seen time and again, the cartels will defend their turf ferociously. But the eventual domination of the geography by a single entity will force the weaker groups away from traditional methods of generating income, primarily drug trafficking, to other criminal activities. We already have begun to see indications of this in the current conflict. While still active in drug trafficking, Los Zetas have begun to engage in extortion and kidnapping in Tamaulipas state. Additionally, the Arellano-Felix Organization (AFO) in Tijuana, Baja California, was relegated to kidnapping and other non-drug related crimes after bearing the brunt of an offensive by the Mexican government and the U.S. Drug Enforcement Administration. Meanwhile, as Johnson Controls looks to expand its operation in Monterrey, it must consider appropriate security precautions to protect its investments, assets and personnel. Any increase in operations in Monterrey will lead to an increase in exposure to the city s degrading security environment, and it is simply a matter of when, not if, organized crime will in some way affect Johnson Controls operations. Over the next two to three years, common crimes such as kidnapping and cargo theft will continue to increase, and the addition of an auto-parts manufacturing plant likely will draw some degree of criminal attention. But if the company can prudently persevere through the next two or three years of continuing turmoil in Mexico, it could be rewarded with a more secure and predictable operating environment. 12