McALLEN, Texas (Border Report) — Aggressive overregulation of cross-border banking regulations between the United States and Mexico is costing billions of dollars in lost funds between the two countries and is doing little to stem the flow of illegal currency that is laundered every year, according to a recent report.

Regulations and enforcement on banking institutions, particularly those transferring funds between the United States and Mexico, contributed to a cumulative U.S. gross domestic product loss of $38.3 billion, or $5.5 billion per year, from 2012 to 2018, according to a report released by the Texas Association of Business.

The report, “Anti-Money Laundering Regulation, Correspondent Banking and the Adverse Economic Effects for the U.S.-Mexico Bilateral Relationship,” was written by Robert Shapiro, former undersecretary of commerce and chief economic adviser during the Clinton administration. It found that overly strict regulation of the correspondent banking market, which is the cross-border transaction process that facilitates the exchange of U.S. dollars for local currency, is deteriorating this market, leading to higher costs for consumers, and doing little to tamp down illegal banking activity.

Specifically cited are the Bank Secrecy Act (BSA,) and “intense” anti-money laundering standards, which fall under the Office of the Comptroller of the Currency, to deter and detect money laundering, terrorist financing and other criminal acts from U.S. financial institutions, which the report says is causing billions of dollars in losses each year for the United States.

“We have concluded that these efforts have become ineffective, misplaced, and costly for the American economy,” the report released last month found.

Worldwide, government authorities seized what the report calls “a very small share” of the estimated $1 trillion to $3 trillion in funds that are illegally laundered annually.

The Rio Grande near Mission, Texas, is the boundary between Mexico and South Texas. In order to transfer money between countries, anti-money laundering standards are applied to banking institutions, which a report recently found “overly regulate” financial institutions and are causing job and economic losses. (Sandra Sanchez/Border Report File Photo)

“Criminals often attempt to evade ‘Know Your Customer’ rules for banks by using bogus identities and creating multiple tiers of shell companies, trusts and foundations registered across several countries and hiring ‘nominee’ directors and officers with no knowledge of an account’s ultimate owners or beneficiaries,” according to the report.

Shapiro also cited “shadow banking” arrangements that fall outside of banking regulations and include internet-based transfers, blockchain cryptocurrency payments and complex financial derivatives” as well as informal transfer systems that shift funds anonymously through networks of intermediaries in currency exchanges, stock brokerages, casinos, and auto dealerships, and through cash purchases of real estate, gems and precious metals,” according to the report.

Given the vast financial breaches, the report found that intense scrutiny of Mexican correspondent banking “is misplaced” and jeopardizes a “major trading partner” for the United States and has led to “significant economic costs.”

Mexican exports slowed to the United States by $74 billion from 2011 to 2021, according to the report.

Mexico’s banking system is more transparent than 109 other countries, including the United States, Japan, Canada and Israel, according to the Tax Justice Network.

But strict over-regulation has forced all but a few Mexican banks to curtail correspondent banking operations, according to the report. Relationships with smaller and regional Mexican banks declined 34%, the report found.

(Graphic by Texas Association of Business Report)

This caused a cumulative slowdown in GDP growth of $38.3 billion and slowed U.S. employment growth by 41,000 jobs per year or 285,000 jobs from 2012 to 2018, according to the report.

The report also found that a decline in the number of Mexican banks willing to take on cross-border transactions “impedes access” for low-income workers to secure financial institutions to send money back and forth among the countries, resulting in them having “marginal access to banking”

Many of these workers are low-income migrants who send money home to Latin America to support families while they work in the United States.

The Texas Association of Business is the Texas State Chamber, and on Monday is hosting a panel discussion with Texas Gov. Greg Abbott in McAllen. Border Report is planning on covering the event.