2025 Executive Order on Cartels: What Every Compliance Leader Needs to Know

Overview

A new Executive Order (EO) will designate certain cartels as Foreign Terrorist Organizations (FTOs) under Section 219 of the Immigration and Nationality Act (8 USC 1189) or as Specially Designated Global Terrorists (SDGTs) under the International Emergency Economic Powers Act (50 USC 1702) and Executive Order 13224 (Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism).

The full list of designated cartels is yet to be announced, but seems likely to include Tren de Aragua (TdA) and La Mara Salvatrucha (MS-13). 

The implementation plan is expected on February 3, 2025, 14 days after the EO’s announcement on January 20, 2025. This designation marks a significant shift—it’s the first time that criminal organizations with a material and known operational presence in the U.S. may be classified as terrorist entities.

Impact on Financial Institutions

Blocking Transactions is a legal requirement

Engaging in transactions on behalf of designated terrorist organizations is illegal – a federal criminal offense. Financial institutions must:

• Block the property of any individual or entity operating for, as, or on behalf of a designated cartel.

• Move the funds into a blocked asset account, where they remain until the designation is lifted or successfully appealed.

Additionally, financial institutions are recommended to:

• Conduct Anti-Money Laundering (AML) investigations when blocking transactions to determine if they require a Suspicious Activity Report (SAR).

Risk of Compliance Failures

If a financial institution fails to block transactions involving designated cartels occurring after the designation, it is recommended to:

• File a Voluntary Self-Disclosure (VSD) outlining the failure and remedial action taken.

• Ensure that repeated VSDs don’t accumulate, as they could lead to enforcement actions.

Historically, financial institutions rarely (relative to their total processing volume) processed transactions for terrorist organizations due to their geographic and ideological distance from U.S. financial systems. However, these new designations involve groups deeply embedded in U.S. criminal markets – especially in drug trafficking, human trafficking, human smuggling, and other offenses – raising the likelihood of compliance breaches.

Furthermore, cartels are known to move their illicit proceeds through a variety of industries such as: art, counterfeit and gray market goods, electronics, high-value goods, precious metals, real estate, and others. The upcoming designation of cartels increases financial institutions' exposure to industries where cartels operate, and subsequently raising the level of due diligence required to appropriately mitigate their risk. 

Key Compliance Challenges

Challenge: Identifying Terrorist-Linked Transactions

A major challenge for financial institutions is differentiating between:

1. Transactions linked to local (U.S.) criminal organizations, which require a SAR but no asset blocking

   and

2. Transactions connected to foreign terrorist organizations, where institutions must block assets and may also need to file a SAR

To make things even more challenging, criminal networks collaborate, i.e. a local drug trafficking group may partner with a designated cartel. Once proceeds are mixed, financial institutions will have further difficulty identifying where the line is between potentially criminal and terrorist, potentially leading to an increase in asset blocking.

As a result, it's critical to note that transactions meeting blocking requirements may not always require a SAR. This is because designations of this type require all transactions involving the designated party to be blocked, whether it is suspicious (potentially criminal) or not.

Challenge: De-Risking & Consumer Impact

As more assets are blocked, the existing issue of de-risking (where banks close accounts due to perceived high risk) may escalate. Recently, news articles have picked up on customers complaining about unexplained account closures. An emerging trend could consist of customers receiving letters stating their assets are blocked, with the only recourse being an appeal to the federal government. Financial institutions may face increased regulatory pressure on one side for compliance, and consumer protection on the other.

Steps Financial Institutions Must Take

Enhanced Screening

• Onboarding Screening: Ensure know-your-customer (KYC) checks are robust enough to detect ties to designated cartels.

• Transaction Screening: Implement real-time monitoring to flag suspicious transactions. Any positive match will likely trigger a full investigation into past transactions to identify previously missed risks.

• Counterparty Due Diligence: In addition to enhanced KYC processes, financial institutions need to know their customers' counterparties. They need onboarding and transaction screening processes that will aid them in identifying the underlying purposes behind transactions, and any links to cartels.

Strengthened Blocking Mechanisms

• Pre-established blocking processes are critical. Traditional financial institutions may already have these in place, but fintechs lacking experience in sanctions compliance could struggle.

• Annual blocked asset reports must be submitted to federal regulators, meaning institutions should prepare for a higher volume of blocked transactions.

Heightened AML Investigations

• Financial institutions should be extra cautious with SARs that even suggest involvement in criminal activities designated cartels are known to engage in (such as drug trafficking).

• Any international component in a SAR heightens compliance risk, making it essential to rule out connections to terrorist cartels before reporting.

The Bottom Line

This Executive Order significantly complicates financial institutions’ compliance efforts, forcing them to adapt screening, blocking, and investigative processes to mitigate risk.

At Hummingbird, we focused on providing support to financial institutions working to manage these changes. We do this via:

• Advanced screening partnerships for real-time risk detection.

• Automated branching workflows that streamline investigative processes.

• Collaborative compliance tools that enhance decision-making in complex cases.

As regulatory expectations increase, financial institutions must act swiftly to align with these new requirements – exactly the kind of compliance environment Hummingbird was designed for.