Designation of cartels as FTOs creates heightened risks for companies operating in Latin America

LATINVEX SPECIAL
Miller & Chevalier

On January 20, 2025, President Trump issued Executive Order (E.O.) 14157, “Designating Cartels and Other Organizations as Foreign Terrorist Organizations and Specially Designated Global Terrorists.” The order provides that the Secretary of State, in conjunction with other agencies, will have 14 days to recommend the designation of specific cartels and other organizations as Foreign Terrorist Organizations (FTOs) or Specifically Designated Global Terrorists (SDGTs). Such designations will increase the penalties and other consequences for companies and individuals providing “material support” to the designated entities. This development will impact the legal and compliance risks companies face when doing business in Mexico, Central America, and other parts of Latin America where cartels are active.

Severe consequences for “material support.” While we do not yet know what specific entities will be designated, it is likely that many of them are already sanctioned parties, including Specially Designated Nationals (SDNs) under the U.S. Department of Treasury’s Office of Foreign Asset Control’s (OFAC) regulations. This means that companies are already prohibited from engaging in transactions with them. Most U.S. sanctions regimes also hold the potential for additional sanctions for the provision of material support, although that provision is invoked sparingly. Penalties can be both civil and criminal in nature for those who violate or conspire to violate measures imposed under the applicable sanctions regimes.

The difference of an FTO designation is that it now implicates companies and individuals with new and specific criminal law provisions for material support of the designated entities that do not currently exist under an SDN designation. “Material support” is broadly defined in 18 U.S.C. § 2339A as providing an FTO with any property (tangible or intangible) or services, including currency, financial services, lodging, personnel, and transportation. Those providing material support to the FTO may face criminal sanctions under 18 U.S.C. § 2339B.

Restrictions extended to non-U.S. entities. The FTO restrictions may apply not only to U.S. companies and individuals but also to non-U.S. companies and individuals, dramatically changing the reach of the SDN restrictions. The sanctions regime currently in place normally applies only to U.S. persons or transactions in which U.S. persons are involved in some way. The current regime does have components that would enable the U.S. government to sanction non-U.S. actors without any U.S. connection to the transaction, but these have been rarely pursued and do not involve criminal or civil penalties. In contrast, with an FTO designation, the government may be positioned to crack down on Mexican and other Latin American companies that make payments or provide other support to the cartels, even if those transactions have no U.S. nexus.

One should expect to see more criminal prosecutions in the U.S. against non-U.S. companies and individuals. These prosecutions will not be without their challenges–they will need to overcome the practical challenge of getting a non-U.S. defendant before a U.S. court and there are potential challenges to the government’s position as to jurisdictional reach. Still, they herald a new chapter of enforcement and related risk for U.S. and foreign businesses.

Civil forfeiture now in play. Under current sanctions laws, the government can freeze assets linked in any way to sanctioned parties without any court process whatsoever. However, it cannot obtain title to those assets through the civil forfeiture process without proving in court that the assets are linked to an actual criminal offense, which requires proof of the crime and generally requires some discrete nexus to the U.S. An FTO designation and related material support statutes generally make it easier for the government to prove a crime, therefore gaining title to assets of non-U.S. FTOs and arguably reducing the need to show any meaningful U.S. nexus. One recent case (currently on appeal) even suggests that any argument that the sector in question can be linked to the U.S. – for a commodity such as oil – can create a sufficient U.S. nexus even if that transaction itself has no arguable connection to the U.S. In the case of Mexican or other Latin American FTOs, this line of reasoning could be used to support an argument that the drug trade generally affects the U.S. so any transaction related to the international drug trade triggers U.S. jurisdiction, thereby enabling forfeiture, even if the transaction has no rational connection to the U.S.

Currently, if a company makes a payment to a cartel for protection in pesos entirely within Mexico, OFAC or a bank might not even be able to block the payment since no nexus to the U.S. exists. Now, the U.S. government could use the FTO designation to argue that the payment constitutes criminal material support, despite the lack of any apparent U.S. nexus, and thus claim forfeiture of the payment. It could use this same route to try to seize any assets with any arguable connection to one of the cartels, despite the lack of any apparent connection to the U.S.

Civil liability might now be in play. An FTO designation implicates potential civil liability in a way that does not exist under the sanctions regimes. Additionally, there is an active plaintiffs’ bar of lawyers that look to develop cases against companies allegedly providing material support to FTOs, in part because prevailing plaintiffs are automatically entitled to treble damages and attorney’s fees.

Under the civil liability provisions of the Anti-Terrorism Act (ATA), 18 U.S.C. § 2333, a company can be liable under the direct liability provision (§ 2333(a)) for engaging in an act of international terrorism by providing material support to an FTO or under the aiding and abetting provision (§ 2333(d)) for knowingly providing substantial assistance to the perpetrators of an attack committed, planned, or authorized by an FTO. The courts are still defining the contours of ATA aiding and abetting liability, with the Supreme Court recently weighing in with the 2023 Twitter, Inc. v. Taamheh decision.

A wide range of multinational companies operating in Iraq and Afghanistan have been sued under these ATA provisions based on claims that they indirectly provided protection payments or other assistance to FTOs or organizations affiliated with FTOs. Designating a host of cartels as FTOs would create additional exposure for companies operating in jurisdictions where those cartels operate.

For a civil suit to be brought under the ATA, a U.S. national must be killed or injured. There must also be an “act of international terrorism” as defined by 18 USC § 2331. It remains unclear whether certain cartels are engaged in acts that meet this definition or whether a particular act that kills or injures a U.S. national meets the definition.

Managing enhanced risk. Since issuance of E.O. 14157, there has already been considerable discussion on the fallout effects of the FTO designations on the cross-border business community. Some speculate that the heightened risks will cause companies and financial institutions to shy away from business in Mexico and other places where cartels maintain presence given the extent to which cartels are currently intertwined with the local economy.

At the same time, many companies operating in Mexico and other high-risk areas of Latin America have already implemented compliance protocols to address the persistent risks of extortion demands and other security concerns associated with operations in regions where cartels have presence. Companies have developed compliance protocols to identify and avoid high-risk conflict areas and respond to payment demands when they arise, including situations involving extortion.

Given the impending potential for criminal penalties for material support, civil litigation, and forfeiture of assets that an FTO designation brings, analyzing these risks and mounting robust compliance strategies takes on a new level of importance. Companies can:

• Bolster intelligence and enhance diligence on geographic areas of company operations to identify signs of FTO presence, which could include utilizing qualified local diligence providers, establishing sector-wide intelligence sharing processes, and creating formal communication mechanisms with government security agencies
• Scale back operations to minimize presence in high-conflict areas, thereby avoiding the need to make security payments to FTOs
• Expand universes of counterparties for which due diligence is performed based on conflict-area risk while ensuring sufficient depth in diligence to understand any potential links to FTO designated partie
• Ensure appropriate contractual controls in counterparty relationships to address risks of FTO involvement or direct or indirect support of FTOs
• Ensure counterparties themselves have legitimate explanation for how they manage FTO risk
• Enhance background checks/due diligence on new employee hires to detect FTO links
• Enhance controls and periodically audit petty cash, expense reimbursements, and other potential sources of company resources that employees can access to obtain funds for derechos de piso (dues to operate) and other security payments
• Train employees to identify specific red flags associated with FTO activity, including counterparties that discuss operational or transportation risks in certain regions or signs that counterparties themselves are under the influence of cartels, laundering funds for cartels, or associated with fentanyl or other drug trade
• Ensure that investigations of allegations or indications of security incidences, misappropriation of assets or funds in high-security risk areas, or unusual transactions also consider FTO exposure.

This article is based on an alert from Miller & Chevalier written by Matteson Ellis, Laura G. Ferguson, Timothy P. O’Toole and James G. Tillen.

Republished with permission.

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