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Drug cartel activity hits firms in Mexico

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Escalating crime and violence stemming from drug cartel activity in Mexico poses increasing risks for companies operating along Mexico's northern border, security and risk management experts say.

The risks range from the kidnapping and murder of employees to supply chain exposures caused by cargo thefts as well as potential infiltration of corporate shipping operations to transport illegal drugs, they add.

But companies' exposures stemming from cartel activity can be mitigated with contingency plans, security measures and insurance, sources say.

A “significant deterioration in security” has been occurring since 2006 along Mexico's northern border cities, where many multinational corporations assemble and manufacture products, said Sarah Katz, assistant vp of the kidnap, ransom and extortion department at Victor O. Schinnerer & Co. Inc. in Chevy Chase, Md.

Mexican officials recently said that more than 30,000 people have died in drug-related violence since President Felipe Calderon began cracking down on the drug cartels four years ago. More than 12,400 deaths occurred in 2010 through Nov. 30, up from 9,600 for all of 2009.

The drug-related slayings are affecting employers, said Hilaire Damiron, CEO of Willis Mexico, a Mexico City unit of Willis Group Holdings P.L.C.

Some clients in Ciudad Juarez have seen significant increases in life insurance payouts because of innocent employees caught in the crossfire, Mr. Damiron said.

Juarez lies across the border from El Paso, Texas, and is known for violence by rival cartels that has claimed thousands of lives.

“There is not one week that goes by that I don't get a call about an employee being attacked, raped or killed,” said the security director for a U.S.-based company with thousands of employees in the region who asked not to be identified.

Companies in the region also face kidnapping and extortion concerns, Ms. Katz said. Extortion attempts range from criminals threatening to shut off a company's water supply to burning commercial buildings if their demands are not met, she said.

“Even when it is not directly related to the drug cartels, we often see in the areas where the drug cartels operate that ancillary crimes increase,” Ms. Katz said. “It will often involve members of the cartels or corrupt members of police force or government.”

So far, however, large corporations with vigilant security have avoided extortion, several sources said.

But more recently, the violence has spread south to Monterrey, which is known as Mexico's northern business capital because it is home to many of the country's largest conglomerates.

Criminals there have expanded their “line of business” beyond drug trafficking to other crimes, such as extortion, said Rodrigo Velarde Santos.

Mr. Velarde is director of security for Axtel S.A.B. de C.V., a nationwide telecommunications company based in Monterrey, but he spoke to Business Insurance in his role as a board member the North Mexico chapter of ASIS International, formerly the American Society for Industrial Security.

The criminals also have expanded from extorting illegal businesses to preying on school teachers and small legitimate companies, Mr. Velarde said. But he said he fears that if the extortions are not stopped, the criminals eventually will target larger corporations.

Although mitigating northern Mexico's crime exposures falls largely on corporate security departments, risk managers sometimes are called in to assist, several sources said.

“It tends to be a partnership,” said Bruce McIndoe, president of Annapolis, Md.-based iJET Intelligent Risk Systems, which helps multinational corporations address such threats.

While security departments work to eliminate crime risk, managers evaluate crimes that do occur to determine whether filing an insurance claim may be appropriate, said Mr. McIndoe, whose company has helped companies operating in Mexico quantify the “risk threat” and evaluate the effectiveness of their mitigation efforts for insurance purchasing purposes.

Coverage types that may come into play include property insurance, crime insurance, and kidnap and ransom coverage, sources said.

“We have definitely seen a large increase in claims...along the border over the past few years,” Ms. Katz said.

Brokers and security consultants, meanwhile, are helping companies develop crisis management and contingency plans.

For example, Willis has helped Mexican companies train employees on personal security measures, such as being aware when arriving at or leaving the workplace and alternating their commuter routes, Mr. Damiron said.

Willis also is helping companies prepare should they receive extortion threats or if an employee is kidnapped. Quick reaction and preparation before such an event is vital, Mr. Damiron said.

“You don't just start finding out what to do when it happens because then things (can) get very messy,” Mr. Damiron said.

A crisis management team can help, for example, by knowing which governmental authorities can be trusted to pressure corrupt officials participating in kidnapping a company's employee, Ms. Katz said.

Also of concern is the potential for criminals to infiltrate corporations, security experts said.

For instance, Kroll Inc. has been helping companies in northern Mexico analyze their warehouse and transport facility security, said David Robillard, managing director for Kroll in Mexico City.

“We have seen several cases with clients, and it's been reported in the news in the past six to eight months, from companies that export from their Mexican plants to the United States having their supply chains and transportation logistics usurped by organized crime to move drugs,” Mr. Robillard said.

In one case, criminals essentially engaged in corporate identity theft by marking their trucks to resemble those owned by the company, Mr. Robillard said.

The victimized company had a Customs-Trade Partnership Against Terrorism certification, which is a U.S. Customs and Border Protection program aimed at strengthening international supply chains by allowing companies with proven security measures to undergo less scrutiny when their employees or equipment cross the border.

Conducting extensive background checks of employees can help prevent criminals from gaining access to a company's shipping operations, several sources said.

While Ms. Katz said she expects security conditions in northern Mexico will continue to deteriorate, “that is not to say that in a number of years there couldn't be improvement. We have certainly seen in other countries that security situations can be turned around.”