The streets of Nogales, Arizona, are dotted with the remnants of sudden bank closures several years ago.
The building where Banamex USA served cross-border businesses is now the office for a chamber of commerce. Across West Mariposa Road, the former Bank of America building is now occupied by Washington Federal.
Next to Nogales City Hall, a JP Morgan Chase building sits vacant. The bank closed one of its two Nogales branches in 2014, a year after it closed many of its business accounts in Mexico.
Beginning in 2010, federal regulators levied huge fines against banks they said didn’t do enough to stop money laundering, including a $1.9 billion fine against HSBC in 2012.
As fines grew, large banks started closing branches and thousands of individual and business accounts, mainly those of Mexican nationals, in the border region. In Arizona, Nogales was hit hard by the financial closures starting in 2013.
Residents and business owners in Nogales, Rio Rico and other border cities scrambled to find ways to keep alive cross-border accounts, particularly those in the multibillion-dollar produce industry, in the wake of those closures.
They called for congressional action and testified before the Legislature. U.S. Sens. Jeff Flake and John McCain, both Arizona Republicans, asked federal agencies and bank officials to explain what was happening and one of those agencies — the U.S. Government Accountability Office — released its report on Feb. 26.
At the request of the accountability office, the Federal Deposit Insurance Corporation, the Federal Reserve and the Office of the Comptroller of the Currency agreed to review the effects of anti-money-laundering laws on banks’ willingness to provide service.
The GAO report found that many banks decided to “de-risk” — close branches and thousands of accounts in border cities rather than risk large fines for failing to monitor potential money laundering.
“Our evidence shows that de-risking may be an unanticipated response from the banking industry” to anti-money laundering regulations, the report found.
The ramifications in Nogales were widespread.
Chase closed the accounts of the Sierra Seed Co., a Nogales, Ariz., firm where Eduardo Leon is sales coordinator.
Businesses faced closed accounts
Finding a new bank took Sabrina Hallman, CEO of Nogales-based Sierra Seed Co., 18 months of hectic searching after Chase closed her accounts.
She said regulators targeted money launderers, but legitimate businesses like hers were punished.
“They threw the baby out with the bathwater,” Hallman said.
Lance Jungmeyer, president of the Nogales-based Fresh Produce Association of the Americas, pointed to another consequence: Entrepreneurs were shut out of the produce industry.
Where before people would work at a produce company for several years and then strike out on their own with the backing of a bank, “that kind of client now is not even worth considering” due to the cost of due diligence by banks, Jungmeyer said.
While making new arrangements with banks was difficult for large companies, the accountability office found small businesses along the border, such as retailers, restaurants, and used-car dealers, had an even harder time re-establishing banking relationships.
Workers at the accountability office found five border counties — Santa Cruz, Cochise, and Yuma in Arizona; Imperial in California; and Luna in New Mexico — lost 10 percent or more of their bank branches from 2013 to 2016.
They found Nogales lost three of its nine bank branches and San Ysidro, California, lost five of its 12 branches. Most of the closed branches were owned by large banks.
The backdrop for the closures was banking reform after the financial crisis; new regulations in Mexico limiting dollar deposits in banks; and skyrocketing fines from U.S. regulators.
In a survey by the accountability office of officials at southwest border banks, 80 percent said they closed accounts to avoid risks associated with anti-money laundering laws. The same percentage said they did not offer accounts to customers who drew more regulatory oversight and closed accounts when customers did not provide enough information.
For their part, banks felt pressured to do regulators’ jobs by monitoring suspicious activity, all the while worried they will be slapped with heavy fines.
“You’re asking bankers to be cops,” said Terry Frydenlund, president and CEO of 1st Bank Yuma, which moved into Nogales as larger banks left.
If the government needs more investigators, then they should hire them, he said.
Nogales, Ariz., lost three of its nine bank branches, the GAO found, including this former Chase location near City Hall.
Border banking challenges
The U.S. banking industry presents nearly insurmountable challenges for “the small guy in Mexico” who buys business supplies in Arizona, said Carlos Jimenez, owner of a hotel in Nogales, Sonora, and past president of that city’s chamber of commerce.
Opening a U.S. bank account is “next to impossible” for Mexican business owners, he said. As a result, they have to open U.S. accounts as individuals, which can quickly raise red flags for U.S. banking regulators, he said.
“The government asks why is he spending so much money? Why are the deposits so big?” Jimenez said.
Produce businesses in Nogales and Rio Rico depend on regular, multimillion-dollar transfers between growers in Mexico and distributors in Arizona, which often are followed by immediate withdrawals of cash to pay workers in Mexico.
Those transfers, combined with the high volume of foreign-held accounts in border areas, likely led to more reports of suspicious activity by banks, the accountability office found.
Even compared to counties considered high-risk for financial crimes elsewhere in the country, banks on the Southwest border filed more than twice as many suspicious activity reports every year from 2014 to 2016, the accountability office found.
Two years after the Banamex branch in Nogales closed in 2013, Citigroup announced plans to shutter all Banamex branches and agreed to pay $140 million to settle allegations it had failed to monitor for money laundering. Citigroup agreed to pay another $97 million in May 2017 to settle similar allegations against Banamex.
Jaime Chamberlain, president of J-C Distributing in Nogales, said he understood the logic behind banks’ decisions to close accounts, but he didn’t appreciate the way they did it.
Business owners who had decades-long relationships with banks saw their accounts closed abruptly, he said. The lucky ones received a phone call. The rest were notified by letter.
They were given cashier’s checks for the balance of their accounts and left wondering “What the hell do I do now?,” Chamberlain said.
In Nogales and Rio Rico, regional banks helped fill the void left by larger banks, in what Paul Hickman, president of the Arizona Bankers Association, called “a bit of musical chairs.”
Risk vs. opportunity
For Frydenlund of 1st Bank Yuma, “one person’s perception of market risk is another person’s perception of opportunity.”
Small banks are willing to absorb more costs to maintain relationships, he said. To ward off money launderers, the bank grills potential clients on their finances, he said, calling it “truly an inquisition.”
The Yuma-based bank moved into Nogales four years ago and started acquiring produce accounts, alongside a few smaller businesses like restaurants and tire companies, he said. Since then, the growth in deposits has exceeded expectations.
Chamberlain listed banks from Green Valley, Tucson, Phoenix, and elsewhere that have opened accounts with produce businesses in Nogales and Rio Rico.
Those banks haven’t opened brick-and-mortar offices in Nogales or Rio Rico, but they have increased competition for clients, which helps businesses, Chamberlain said.
Frydenlund said the fines and strict requirements from regulators are “typical government overreach” and the pendulum eventually will swing back in the other direction.
“In the meantime, this is where we’re at,” he said.
Representatives for Chase and Citigroup declined the Star’s requests for comment.