Los Zetas and the Smuggling business. A tale of mergers

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Los Zetas and the Smuggling business. A tale of mergers

redlogarythm
Hi everyone. Here´s something based on an extremely interesting paper written by Mexican anthropologist Efren Sandoval Hernandez about the symbiotic relationship between the drug cartels and the smuggling sector in the northeast of Mexico. His essay is titled Economy of the fayuca and drug trafficking in Mexico´s northeast. Extortions, concussions and solidarities in cross-border economies, I´m afraid it´s only available in Spanish but anyway I´ll leave it at a link description at the end of the post. Hope you all enjoy.

We have all heard stories about smuggling/contraband in the border between Mexico and the States. We all know the humble origins of the Gulf cartel patriarch Juan Nepomuceno Guerra smuggling alcohol and other goods through Matamoros to Brownsville in the middle of the Prohibition during the 1930´s. Nevertheless there´s in my opinion a lack of information about the current symbiotic relation between the smuggling of goods from the US to Mexico and organized crime. In an atmosphere at which the cartels have permeated each lay of the local economy bootlegging couldn´t be, and in fact isn´t an exception.
In Mexico you can buy oil stolen, refined and offered by criminal organizations. You can hire the services of prostitutes which are controlled by the so-called padrotes which in turn are part of networks affiliated to organized crime. You can buy guns, fake DVD´s and even change your dollars/euros for pesos at Casas de Cambio directly managed by the criminal organizations.
In most of the cases in other economies these products integrate what is called the grey-economy, a sector of the market which is invisible or opaque to the taxation of the State. In some cases the grey economy represents a great deal of a country´s GDP. In southern European countries and Latin America it can even reach 40% of national Gross Domestic Product.
Among the endless catalogue of grey-economy products we can find what in Mexico are called Pulgas (fleas) or Tianguis, some kind of street market at which local merchants offer daily use products such as food, raw materials or clothing. In most parts of Mexico the Tianguis represent a very important source of resources for the middle Mexican since they offer cheap/affordable products which can´t be found at the same price levels at the local/official stores. Why? Because they come from the US, have been smuggled and do not pay taxes. That´s the reason for being so cheap (at least in comparison to the local products, always connected to the state of the Mexican economy, being constantly altered by inflation or other costs)
Let´s analyze the structure of the smuggling sector importing products from the US to Mexico. In the past Mexico was a country directed by a clan of politicians totally convinced by the virtues of a closed economy. Although sharing an extensive border with the world´s richest country the Mexican Government traditionally imposed bans or restrictions to the importation of several products (this was not an exception but the rule at a time when international flow of capital and goods was a chimera) During these years (50´s, 60´s and 80´s) in the Mexican border states thousands of people became involved in the illegal importation of goods from the US. Products such as jeans, cars, washing machines or electric devices were brought by Mexican citizens from the American border towns into the Aztec country (most of the times bribing the authorities in the Mexican side) In most countries of Latin America the word for such products is contrabando, but in the border States of Mexico these products are referred to as Fayuca and represent a formidable amount of the grey economy supporting literally tens of thousands of people in the border States of Coahuila, Tamaulipas and mainly Nuevo Leon (in fact the Metropolitan Area of Monterrey receives most of the Fayuca entering Mexico from where it is distributed to the whole country)

Fayuca seized in a truck at border post.


 Several decades were needed to develope a fully well oiled network of importers that today can be divided into two categories:
- Comerciantes tiangueros or chiveros: they are little-size merchants travelling through buses and sometimes in their own cars or vans which buy products at the US selling them later in Mexico at the tianguis street markets.
- Fleteros/Pasadores: they´re a second category of smugglers much more organized than the chiveros. Organized as little transport unions, each group of pasadores owns at least several vans/little trucks which are used to carry products purchased in great quantities in Texas to Mexico. They´re not simple haulers but owners of the products they smuggle through the border selling them later to the chiveros or local merchants through the whole region.
Where do the chiveros and the pasadores get their products from? From Texan wholesalers stablished on the cities of Laredo and Mc Allen. Laredo contains 175 wholesale warehouses and Mc Allen accounts for 109. Most of the products stashed in these facilities are cheap Asian imports, but there´s also plenty of second-hand US products. The portfolio bought by the Mexican smugglers can be divided into two great sectors:
1.- Saldos: the saldos (bargain sales) are merchandise which wasn´t sold or have become obsolete/out of season from big retailers such as Wal Mart, Sears, etc. They are acquired by one third of their value (or even less) and stashed in the Laredo/Mc Allen warehouses where they are later sold to the chiveros/pasadores already packed and accommodated in wooden palets.
2.- Used clothes: acquired by the American businessmen who then sold it in the form of pacas to the smugglers who will supply them to local markets on Mexico. The city of Mc Allen concentrates most of this business.

Already packed packaged of second-hand clothing. Known as pacas.


After crossing the border the merchandise is sold at low prices by the chiveras in this street markets, konwn as tianguis.

After purchasing the products in Laredo or Mc Allen the chivero/pasador must cross the border. This can be done in two ways: first, through the already stablished border points at the cities of Nuevo Laredo and Reynosa (and other secondary locations) or second, through the countryside trying to avoid the patrols (this path isn´t followed too much since its routes are monopolized by the cartels and the smugglers try to avoid contact with these organizations)
The most common thing is to bribe the authorities at the border in order to avoid paying taxes. Strictly the activities of the smugglers are semi-legal until they reach this point. They have bought the products legally to stablished American businessmen and all they want is to introduce them into Mexico. Since the implementation of the NAFTA in 1994 this is legally, IF YOU PAY TAXES, of course. The thing is that the smuggling benefits are based on the taxes: importing goods but not paying taxes at the border enables you to sell your product at a relatively low price and still obtaining a good profit level.
The chiveros for example when returning to Mexico on a bus filled with dozens of bags full of fayuca contribute $5 or $6 dollars each in order to gather $300 dollars or so in order to bribe the personnel waiting in the entry point, just for not revising the bags full of undeclared imported goods that should be taxed.
The pasadores must face greater bribe fees since their operations are bigger than those of the chiveros, but since they are quite good organized they are able to negotiate in a much better position with the Mexican border agents (the Zetas started taxing both the border agents and the pasadores at a certain point between 2009 and 2010 as we´ll see later)
The interactions between the chiveros and the pasadores are very fluid. They´ve realized that collaborating can be far more productive than competing for the one who smuggles the most. For example, a chivero who doesn´t want to cross the border in order to get the merchandise by himself/herself could contact a network of pasadores and subscribe a purchase order for let´s say $2,000. The better organized pasador network would go to Mc Allen, contact a local wholesaler and purchase $2,000 of old jeans. When crossing the border, the non-taxing fee could be of another $200. Once in Mexico the pasador handles the merchandise to the initial chivero who would repay the principal ($2,000), the fixed costs ($200 bribe) and a certain amount of interest (the pasador´s profit)
By December 2009 this system was torn apart by the Gulf cartel and the Zetas (we must remember that at the time they where operating independently but the Frontera Chica war hadn´t start yet) The Zetas, in their predatory business strategy implementation started imposing a tax to the border agents (demanding a certain percentage from each bribe payment done by the chiveros and the pasadores) and to the pasadores also. As a result the border agents started asking for higher and higher fees until the chiveros and the pasadores weren´t able to obtain any kind of profit since, paradoxically, the effect they were searching for when smuggling (avoiding import taxes and selling cheap) was overturned by some kind of private tax which would equal the quantity they would be paying if legally introducing their products into Mexico.
In the case of the pasadores the situation worsened when the Zetas started assigning wholesalers and making mandatory to buy them the products that would be later smuggled into Mexico. Efren Sandoval illustrates this new business stsrategy with a real example that reflects the great ability of Mexican organized crime to bend economic basic rules into their benefit: at a certain point the zetas started controlling the illegal import of two goods to Mexico (Sandoval, for security reasons refers to these two products as being dolls and quilts) The zetas started forcing the pasadores to buy these two products from a single Texan wholesaler linked to the cartel. Since eventually every single smuggler ended up buying (for fear of retaliation if they didn´t) from the same wholesaler this guy started selling massive quantities of the two products and was able to get the products he was selling at a very low price (for volume reasons) from supermarkets and other sellers in Los Angeles. Even after transporting the goods from California to Texas they where even cheaper than those of the rest of Texan wholesalers.
In the case of the much smaller chiveros, Sandoval talks about how one of these poor guys told him about the scheme made up by the zetas in order to obtain their cuota: after being smuggled through the border he bought second hand luxury clothes from a pasador in a border town in the State of Tamaulipas. Nevertheless, after closing the deal he was redirected to a man who asked him for the quantity of clothes he had bought, the mean of transport he would use to get the merchandise to Monterrey (where he would be selling it) and the number of people he would be travelling with. After answering to the questions the man would make the calculations and ask for a certain amount of money which of course was duly paid. After paying the poor chivero would be granted with a pass accrediting he had paid to the organization and letting him to sell the clothes. This taxation system is even far more effective than those implemented in national an State-runed modern economies. Such was the power, capacity and business discipline of the Zetas
As they did with the rest of economic areas they exploited through their aggressive business model, the Zetas penetrated a classical, socially-accepted and traditional market which had been functioning for several decades, becoming the designers of the market trends and draining profits from each of the participants.: the pasadores would buy from a cartel-related business the products for whose smuggling they would pay a bribe, part of which was taxed by the cartel and finally there would be a second tax for the chivero who should pay a fee to the cartel for being able to trade with the products he had bought from the pasador.
In the end the whole system re.structured according to the Zetas business model would be like this:




There´s a second side of the coin. In addition to the monopolization of the fayuca market the zetas would use it for importing other illegal but far more dangerous and lethal products: drug money and arms. Although it´s an oversimplification it´s a fact that the current major illicit flows between the US and Mexico are drugs to the north and guns and money to the south. Sandoval talks about a chivera from Monterrey who was offered $5,000 just for driving her van to the US in one of her daily trips and waiting in a parking lot until some showed up to recover the drugs stashed in the vehicle. If the criminal organizations used (and use) the fayuca system not only for obtaining profit through extortion but to export drugs minimizing the risk of losing men/women on their payroll or resources couldn´t it be that the fayuca system is used in order to introduce into Mexico guns purchased to US arms dealers and money resulting from their businesses in the States?
In this case we would be talking not only about perverting an old-time business through extortion and racketeering, but also re-shaping it to the convenience of criminal organization which would use it a transmission mechanism to facilitate and minimize the risk of obtaining assets continuously needed in Mexico through a structure so firm, vast and stablished that its disruption is almost impossible in the short term.
Most of these reasoning is just theory. As always the absence of checked facts results in a vague network of ideas which could be partly true or not true at all. Nevertheless it´s a fact that the fayuca system had been a way of life (quite safe and dignified in my opinion) for thousands of people until the zetas entered the business.

Again, for the Zetas was (and still is) business as usual, and business must follow a simple logic: obtain funds quickly and use available structures for your benefit.
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Re: Los Zetas and the Smuggling business. A tale of mergers

redlogarythm
MM
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Re: Los Zetas and the Smuggling business. A tale of mergers

MM
Thanks for another insightful post.  It is amazing how not even the smallest endeavors can bypass organized extortion.
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Re: Los Zetas and the Smuggling business. A tale of mergers

canadiana
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This post was updated on .
In reply to this post by redlogarythm
Yes insightful post.Redlogarythm you fill a niche on here like nobody else that's unique when it comes to the financials of organized crime!
MX
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Re: Los Zetas and the Smuggling business. A tale of mergers

MX
In reply to this post by redlogarythm
Fantastic post, redlogarythm! I did some copy editing and uploaded it to the main page.
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Re: Los Zetas and the Smuggling business. A tale of mergers

Slappy
In reply to this post by redlogarythm
Love articles/papers like this.  We constantly get news of the action, but no analysis of what is really happening under the hood.  Thanks man!
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Re: Los Zetas and the Smuggling business. A tale of mergers

redlogarythm
Thank you everyone guys. Sandoval´s paper was mostly centered on the sociologic aspects of the trade, I added the economic details. But his research at the field is ashtonishingly clear and relevant. Bytheway Slappy, your post about Mexico´s out of control criminal market is magnificent, pretty revealing, and its sources impecable.
MX, as always, thanks for your support.