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Billionaire Loses to Mexico Central Bank in Battle Over Cash

Bloomberg logoBloomberg 1/21/2021 Michael O'Boyle

(Bloomberg) -- A battle between one of Mexico’s richest men and one of its most respected institutions appears to have ended in a victory for the central bank.

President Andres Manuel Lopez Obrador came out Wednesday against a bill that would have forced the monetary authority to buy greenbacks that lenders can’t otherwise sell, likely killing its chances of passing the Senate in its current form. Critics said the measure would have exposed the central bank to money laundering allegations by compelling it to buy dollars of dubious origin. Its most prominent proponent was billionaire Ricardo Salinas Pliego, the owner of Banco Azteca and an ally of the president.

The development no doubt comes as a relief to global lenders including Citigroup Inc. and Banco Santander SA, who had spoken out against the measure during debates last month, warning of profound implications for Mexican financial institutions and the country’s reputation as a safe place to do business. Investors have been paying attention as well. The debate weighed on the peso last month until the currency rallied when the lower house delayed its vote.

Lopez Obrador, speaking at his morning press conference Wednesday, said lawmakers needed to find a different solution that wouldn’t risk conflict with international financial organizations.

“Lopez Obrador had to choose between maintaining the autonomy and the soundness of the central bank against solving a very specific problem of a certain group,” said Marco Oviedo, the chief economist for Latin America at Barclays Plc. “Fortunately he chose to keep macro-stability versus special interest.”

The root of the problem for independent Mexican banks are U.S. concerns about illegal drug profits making their way into the financial system. After HSBC Holdings Plc admitted to shipping billions to the U.S. under lax oversight and laundering $881 million from traffickers last decade, authorities on both sides of the border cracked down.

The fallout reduced the number of U.S. banks willing to accept bulk cash shipments from Mexican lenders, leaving those that aren’t part of a global bank stuck with piles of dollars they can’t turn into pesos.

Senator Alejandro Armenta, the head of the Senate finance committee, said the bill was needed to make sure migrants who bring home cash don’t have to sell dollars at a loss to abusive money changers. A member of the president’s Morena party, he disagreed that Lopez Obrador’s comments meant the bill was derailed. He plans to continue to push for it.

“The inept, obsolete financial system is unable to receive these dollars and it has to provide a solution to the migrants,” Armenta said in an interview Thursday.

Legislators may find another mechanism to help banks unload dollars, such as compelling one of the country’s development banks to be a buyer of last resort. But it seems the bill in its current form is dead, according to Carlos Serrano, the chief economist at BBVA Mexico.

“There is a very significant problem of lack of access to the financial system for families of migrants, but there’s no problem with cash,” he said.

Less than 1% of Mexico’s $40 billion in annual remittances comes via cash, BBVA Mexico said in a Dec. 15 report. Out of $4.7 billion in U.S. cash taken in by Mexican banks in the first nine months of 2020, only 2% couldn’t be sold to other clients or shipped to the U.S., according to a letter the central bank sent to senators.

chart: Cashing Out © Bloomberg Cashing Out

Central bank Governor Alejandro Diaz de Leon spoke publicly against the bill, saying the problem of excess dollars was really one bank’s issue and not systemic. Other opponents, including an independent senator and a deputy central bank governor, said the bill appeared to be designed mostly for the benefit of Salinas Pliego and Banco Azteca. Lawmakers in favor of the measure have denied that claim.

Read More: Mexico Central Banker Says Contentious Bill Would Aid One Firm

A spokesman for Banco Azteca said the bank played no role in writing the legislation, and declined to comment on Lopez Obrador’s remarks Wednesday.

But last month, Salinas Pliego published a blog post in support of the proposal, making him the only major banker in the country to publicly back the bill. Salinas wrote that Mexican banks are required to comply with “one of the strictest” sets of anti-money laundering regulations in the world. The rules mean that “the dollars that enter the Mexican banking system, by definition, have a legal origin,” so there is no risk for the central bank to take them, he said.

Salinas Pliego also controls the country’s No. 2 television network, TV Azteca, as well as cable TV, energy and security companies. With a fortune of around $13.9 billion, he is the country’s third-richest man, according to the Bloomberg Billionaires Index.

After his 2018 election victory, Lopez Obrador tapped Salinas Pliego for his new council of business advisers and appointed several of the billionaire’s associates to positions in the administration. His bank, with thousands of branches in cities and scattered across Mexico’s hinterlands, was also picked to help distribute the president’s new anti-poverty aid programs.

In advocating for a rule that the central bank was dead set against, Salinas Pliego was taking on one of the most respected financial institutions in emerging markets. Banxico, as it’s known, developed a reputation for independence since the country’s 1994-95 banking crisis by sticking to its inflation-fighting mandate. The monetary authority could face U.S. sanctions if banks were found to have siphoned dirty dollars into its reserves, Diaz de Leon warned.

Back in December, it looked like Lopez Obrador was going to support the bill. The president said concerns it would curb the central bank’s autonomy were an “exaggeration” and that policy makers needed to get with his program to improve the welfare of the poor. Mexico has spent too long “subordinating” itself to international financial institutions, he said.

But then, Finance Minister Arturo Herrera came out against the measure after remaining silent during December’s debate. He said migrants could be better helped with specific banking solutions for their communities, without involving the central bank.

Herrera likely worked to sway the president, who is a close watcher of the peso and saw the bill’s impact on the exchange rate, according to Shannon O’Neil, a senior fellow at the Council on Foreign Relations in New York.

“It looks like this kills the bill, but it could have pushed the Mexican financial system to the brink,” O’Neil said.

(Adds comment from senator in paragraphs eight and nine.)

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