Wednesday, June 16, 2010

Slowing Drug Violence — by Limiting Bank Deposits

Mexico’s new initiative to limit bank deposits of U.S. currency shows how difficult it is to single out criminal enterprises.

Under the rules, announced yesterday by Finance Minister Ernesto Cordero, bank deposits in U.S. dollars would be limited to $4,000 per month per household. The idea is to limit the flow of illegal drug money, and to limit banks’ ability to participate in money laundering.

Yet the same rules will also stifle the flow of U.S. tourism money into Mexico. Credit card transactions won’t be affected, but tourists may have some difficulty exchanging U.S. currency for Mexican currency or spending the U.S. currency directly. Inevitably, faced with a strict cash limit, some tourists will end up spending less freely.

Businesses that depend on U.S. customers may be forced to pay employees partly in cash — in U.S. currency. This will add further distortions to the flow of money in Mexico.

Yet the new rules may be necessary to limit the role of banks in funding drug cartels. Drug cartels are an especially serious problem in Mexico, where they, collectively, are better armed than the government and are involved in a hit-and-run campaign to weaken and overthrow the government. The violence associated with the drug business’s war on the government results in firearm deaths in every region of Mexico on a almost a daily basis.

Slowing the flow of money in the illegal drug business may force it to slow down its operations or reduce the size of its footprint in Mexico. That could give the government some breathing room in its efforts to restore law and order to the country.