New Executive Order Targeting Cartels Could Increase Enforcement Risks for U.S. Companies Operating in Mexico

Companies with operations in Mexico awaiting the announced 25% tariffs on their imports into the United States will also want to keep a close eye on a parallel Trump Administration initiative targeting drug cartels that will likely have spillover effects for legitimate businesses.  

Terrorist Designations for Drug Cartels

Executive Order 14157 creates a process to designate cartels and other transnational criminal groups as “Foreign Terrorist Organizations” (“FTOs”) or “Specially Designated Global Terrorists” (“SDGTs”). Consistent with the Trump Administration’s focus on the nexus between drug trafficking and illegal immigration, the Executive Order also requires the Attorney General and the Secretary of Homeland Security to “make operational preparations” for the president to invoke the Alien Enemies Act and remove designated cartel members.

The Executive Order prohibits U.S. companies from engaging in any dealings with persons or entities designated under the Executive Order (or entities in which they have a 50% or greater interest), and U.S. financial institutions and companies are required to block any funds or other property in which such designees have any form of interest.

Although the Executive Order is not limited to Mexico, it explicitly identifies cartels in that country as a threat to the security of the United States. It states that Mexican cartels “function as quasi-governmental entities” and “functionally control… nearly all illegal traffic across the southern border of the United States.” Such cartels are reportedly involved in many key sectors of the Mexican economy, making the Executive Order a challenge to even legitimate business interests in Mexico.

The Executive Order directs the Secretary of State to make recommended designations by February 3, 2025.

Implications

The U.S. Government has long-standing economic sanction programs that target narcotics traffickers and terrorists. U.S. companies, financial institutions and individuals are already prohibited from any direct or indirect dealings with designated narcotics traffickers and with organizations and entities designated as FTOs or SDGTs.

The new policy of designating cartels as terrorists carries potential additional legal, reputational and logistical risk for companies with U.S. ties that have operations in or source goods from Mexico. Knowledge of violations of these rules carries criminal penalties and even unwitting dealings with designated entities or individuals (and the entities that they control) carries substantial civil penalties. The provision of “material support” (a very broad term that includes the provision of any tangible or intangible benefit) to terrorist organizations is subject to potentially broader penalties.

Separate from legal exposure, any hint of dealings (however inadvertent) that benefit a terrorist organization carries significant reputational consequences. U.S. financial institutions generally have very robust policies to guard against supporting such business and will suspend any transaction where there is any question of such involvement.

The Treasury Department’s Office of Foreign Assets Control (“OFAC”) has jurisdiction over civil enforcement actions involving economic sanction measures and the U.S. Department of Justice (“DOJ”) is responsible for criminal enforcement. Both OFAC and DOJ have stated expectations that companies will undertake rigorous due diligence, particularly in higher risk jurisdictions like Mexico. Companies engaged in U.S.-Mexico trade should consider assessing whether they have sufficiently sound due diligence measures to guard against unwitting involvement with business partners with ties to cartels and other sanctioned parties.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Greta L. Nightingale, an O’Melveny partner licensed to practice law in the District of Columbia; Jorge deNeve, an O'Melveny partner licensed to practice law in California; David J. Ribner, an O’Melveny partner licensed to practice law in the District of Columbia and New York; AnnaLou Tirol, an O'Melveny partner licensed to practice law in California and the District of Columbia; Jim Bowman, an O'Melveny partner licensed to practice law in California; Mark A. Racanelli, an O'Melveny partner licensed to practice law in New York; Pamela A. Miller, an O'Melveny partner licensed to practice law in New York; Steven J. Olson, an O'Melveny partner licensed to practice law in California; Jennifer B. Sokoler, an O'Melveny partner licensed to practice law in New York; Meaghan VerGow, an O'Melveny partner licensed to practice law in the District of Columbia and New York; and Hannah V.L. George, an O'Melveny associate licensed to practice law in the District of Columbia, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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