Extortion can be defined as the action through which one individual obtains a resource from another through intimidation or threat of violence. This criminal activity has been used by organized crime groups since early modern human civilization.
In fact, it has been the most common and reliable practice for criminals since it involves few risks and low costs, and can provide significant revenue if applied to the correct segment of the population. Mexico has not been an exception.
In fact, extortion has formed part of the daily Mexican life since the second half of the 20th century. The rampant political, administrative and police/armed forces corruption has created a system of thousands of individuals who make a living out of obtaining money from others by threatening them with the use of force if they refuse to make the payment. Nowadays, extortion in Mexico is manifested in many forms, including derecho/cobro de piso ("user rights"), where the business owners are asked to pay criminals periodically in order to be able to work.
*This article was originally published by Borderland Beat. This is a shortened and edited version, republished with permission, but does not necessarily reflect the views of InSight Crime. See the complete original here.
In this report, Borderland Beat will analyze derecho/cobro de piso and its effect on Mexico's private sector, ranging from the humble street vendor in Mexico City to the transnational avocado industry in Michoacán. This is a very vast topic that cannot be addressed purely on the basis of economic theory. Thus, Borderland Beat developed its own field research. We interviewed several business owners in Tamaulipas and Nuevo León for this report, and asked them a range of questions about their experience. We designed this report according to their answers.
Types of Extortion Used by Mexican Criminal Groups
When talking about the extortion rackets used by organized crime, like the derecho/cobro de piso, we cannot study it as a monolithic practice. In fact, the derecho/cobro de piso can manifest itself in different forms. We can classify the different forms of derecho/cobro de piso according to the relationship between the extortionist and the victim.
The most common relationship is parasitic. In this kind of relationship, the extortionist asks its victim for several payments over a long period of time and threatens to hurt the victim if the demands are not paid. This is the most common type of extortion used in Mexico since it is easy to perform and brings revenues at a minimal cost. The victim is badly damaged by this kind of extortion since they do not obtain anything from the relationship and lose money.
SEE ALSO: InDepth Coverage of Extortion
The second relationship is predatory. In this example, the extortionist demands a single or one-time payment for a large amount of money. This kind of extortion is mostly connected to the kidnapping industry and is not part of the derecho/cobro de piso industry except for exceptions that are not very relevant for this study.
The third kind of relationship is symbiotic. In this case, the extortionist demands seasonal payments from the victim but at the same time offers them their resources to achieve some kind of mutually-benefited relationship. This kind of extortion is very common in areas where organized crime has a strong presence. For example, in Italy, the Sicilian Cosa Nostra exerted this kind of extortion. It demanded money from local businesses but at the same time, providing them with security, contacts to further their business operations, and the reassurance that their commercial deals would work. In this kind of relationship, the extortion is mutually beneficial for both the extortionist and the victim.
Many criminal groups conduct their extortions in a mechanical way: not showing special interest in the maintenance of the businesses they extort.
Although this kind of extortion requires a highly developed protection market with stable businesses and trustworthy criminal groups, we can find evidence of this symbiotic relationship happening in Mexico. For instance, one of the businessmen consulted for the report stated that when he was approached by extortionists, they told him they were available if he or his business "needed anything". The extortionists presented themselves as protectors against robbers and debt collectors in case anyone owed the business any money.
Nevertheless, other Latin American countries with high levels of organized crime violence like Brazil offer an excellent example of how this protection is provided. In Rio de Janeiro, for example, criminal militias are well known for demanding monthly payments from any kind of business (legal or informal) in the favelas. They conduct violent campaigns against petty criminals who rob or assault local businesses they extort.
In Mexico, drug cartel members have claimed to have killed suspected looters and robbers (often displaying their corpses in public with a written message). This could mean that incidents like the ones seen in Brazil apply to Mexico as well and that, in some cases, protection is provided by certain groups to local businesses.
The Resources of the Extortion Industry
One of the main reasons why Mexican criminal groups get involved in extorting businesses is because of its low barriers of entry (i.e. few resources needed to perform the activity) and its low costs.
Contrary to other criminal activities such as drug trafficking, which requires multiple and sophisticated resources ranging from cultivation fields to refining laboratories, extortion requires three basic elements: intelligence gathering, reputation and workforce.
The Mexican criminal groups involved in the extortion businesses might appear as entities charging money randomly to any kind of business operating in the areas under their control. Although this is partially true, most criminal groups behave like rational economic individuals who use the information at their disposal to classify businesses accordingly. According to our research, cartels consider factors like a business's industry and income range to apply a quota.
Criminal groups try to rely on intelligence gathering in order to discover, classify and charge the businesses. In fact, Mexican criminal groups can be so sophisticated in areas which are firmly under their control that they might even use government office’s data for calculating the range of payment that must be addressed by each type of business.
For example, some of the people interviewed for this report expressed their suspicions about Mexico's Tax Administration Service (Servicio de Administración Tributaria – SAT), the equivalent of the US Internal Revenue Service (IRS). They said that some employees from this government agency had colluded with the Gulf Cartel and provided them with information about the different types of businesses that might be targeted for extortion in Tamaulipas.
SEE ALSO: Mexico's Cartels Fighting It Out for Control of Avocado Business
Another real-life example of how sophisticated the market for extortion might become in Mexico is the case of the Michoacán avocado plantations. Michoacán is the world's leading avocado producer, accounting for 90 percent of the country's production. In an area less than 150,000 hectares, there are at least 25,000 avocado producers, with businesses of all sizes. This area covers 22 municipalities, including the major avocado-producing ones like Uruapan, Tancítaro, Zitácuaro, Tacámbaro, Peribán, Tingambato, Los Reyes, and Paracho.
A market of such importance could not escape from the Michoacán-based Knight Templar Cartel's extortion activities. In order to obtain information about the avocado businesses in the area, the Knights Templar Cartel obtained information from the Secretariat of Agriculture, Livestock, Rural Development, Fisheries and Food (Secretaría de Agricultura, Ganadería, Desarrollo Rural, Pesca y Alimentación – SAGARPA). Specifically, cartel members looked for the local permits issued by the Local Plant Health Councils to locate every avocado farmer in order to extort them.
The use of economic information obtained through the government might indicate why several criminal organizations demand extortion quotas that are usually proportionate to the business's size.
For instance, according to business owners interviewed for this report, the Gulf Cartel extorted business of the same size and charged them more or less the same amount range. However, large businesses in the area, like the maquilas operating in Matamoros, were forced to pay higher quotas.
This indicates that extortionists can operate in a rational way by dividing businesses depending on their size/revenue and demanding lower or higher payments depending on these factors.
The second resource for a successful extortion campaign is the reputation of the extorting group. In Mexico, most extortion demands are accompanied by threats. Thus, the victim will be compelled to meet the extortionist's demands if the extortionist presents himself as a member of a criminal group known for its ruthless reprisals against those who oppose it. For example, when a person is killed inside a business that was extorted, the extorting group might be setting an example in an attempt to discourage potential clients who are reluctant to pay. In conclusion, if a criminal group is violent, victims are more likely to pay.
The last factor is the workforce. This represents the people who contact the business owners and demand extortion payments. According to a business owner interviewed for the report, the extortionists directly went to the business site to demand the payment every month. In other cases, the contact was made indirectly.
In Guanajuato, for example, we know that certain businesses are contacted through a letter or note containing a name and phone number. The victim must make contact by phone and negotiate the payment with the extortionist remotely.
To summarize, the extortion business is cheap and easy to perform because the resources needed are basic and easy to deploy. Extortionists can do face-to-face extortion, but our research shows that they do not have to be physically present to successfully run this activity. Criminal groups simply need people, a violent reputation and victims who fear them.
Characteristics of the Mexican Extortion Industry
Since the extortion market is an illegal environment, it does not operate unilaterally and different situations may often arise. In Michoacan, for example, the quotas demanded from the avocado producers were fixed for everyone in the production chain. Regardless of their size, non-exporting producers paid 1,500 Mexican pesos (about $70) for every hectare cultivated each year. On the other hand, exporting producers paid 3,000 Mexican pesos (about $140) for every hectare on a yearly basis.
When the Knight Templars started suffering from increasing competition from rival organizations and local self-defense groups, they made their extortion demands even more stringent. They began asking for 10 cents more for each kilo of avocado (10 pesos for every 100 kilograms or 100 pesos for every ton.)
One of the businessmen interviewed for this report stated that the criminal group who extorted him (the Gulf Cartel) allowed them to extend their payment date if necessary. However, in doing so, the business suffered a 10% post-maturity interest.It is not exactly clear to what extent criminal groups facilitate extortion payments. Italian criminal organizations, for example, are known to apply a rationalistic method to their demands by offering some sort of deferred payment for the businesses that are unable to pay them. The use of accrued interests is common and we have discovered that in certain parts of Mexico this is used.
There are also cases where the extortionist group does not allow any kind of late payment and react violently if their demands are not met on time. We cannot establish with absolute certainty why some organizations are minimally open to negotiation while others are not, but the fact that the same groups happen to behave in both ways at the same point in time while in different areas might suggest that their behavior is dependent on the control degree they exert over a certain area. The presence of rival criminal groups plays a role in their behavior.
It is also important to determine when criminal organizations become involved in extortion in the areas they operate in. Based on our studies, turfs where rival criminal groups compete lead to higher extortion levels. Having two or more rival groups in a turf hinders the possibility of conducting the most lucrative activity: drug trafficking. To meet their daily expenses, criminal groups in these situations start looking around for easy and quick means of making money. Extortion is usually among the first options.
Mexican drug cartels not only get involved in extortion during ongoing violence. They can get involved to affirm dominion over a certain area before violence erupts in order to secure incoming revenue and cover potential losses in the future.
One of the biggest problems that victims could face is the possibility of multilateral extortion. This happens when an area is contested by two or more rival organizations that are constantly fighting over resources. There is a chance that a certain business begins to be extorted by several groups at the same time. For example, the state of Guanajuato is currently the epicenter of a violent war between the Jalisco New Generation Cartel (CJNG) and the Santa Rosa de Lima Cartel (CSRL) over local illicit markets, mainly oil theft and drug distribution at the retail level.
SEE ALSO: Mexico’s Oil Thieves Have Moved Into Extortion in Guanajuato
Both organizations have started extorting local businesses in order to find resources to finance their cells and gain territorial control. In some cases, the contested zones are small and businesses get extorted by both criminal groups. Most of the time, when a criminal group contacts a business for extortion purposes, they introduce themselves and say which cartel they represent and the local boss they work for.
For example, the business owners interviewed for this report were told very clearly who they were paying to and were also advised not to pay to any other group. Some of them told Borderland Beat that they knew of other businesses that had been extorted by Los Zetas and the Gulf Cartel concurrently. Some of these business owners were kidnapped or killed for refusing to pay and for paying a rival group. Others, the interviewees said, closed down their businesses overnight and fled. Multilateral extortion damages the victim twofold: business owners have to endure greater economic losses while at the same time risk retribution for paying a rival gang.
The Effects of Extortion in Mexico
The effects of extortion in Mexican businesses vary greatly since there is not a unique extortion practice being applied uniformly in the country. One of the main effects of the extortion suffered by certain businesses in Mexico is the possibility of the quotas being so high that the business is unable to meet the requirements, and in order not to suffer retribution, they are forced to close down. This has happened in fiercely contested zones where each rival drug group is constantly looking around for resources and tries to drain the maximum possible from each extorted business.
In August 2019 in Guanajuato, tortilla markers in the town of Celaya went on strike demanding local authorities for protection against extortionists, particularly the CSRL. By this year, the CSRL was suffering losses in its war with the CJNG, and their leader José Antonio Yépez Ortiz ("El Marro") began increasing the extortion rates to make up for them.
Tortilleros were forced to pay an initial fee ranging between 3,000 to 500,000 Mexican pesos (about $140 to $22,000) plus monthly quotas ranging from 3,000 to 50,000 Mexican pesos (about US$1400 to $2,200). Two days after the strike, three women were gunned down at the La Indita tortilla factory in Celaya. One of them had participated in the strikes.
The following month, a Ford Motors shop in Celaya was attacked by gunmen for failing to pay an extortion. The shop closed down a few days later under fears of future attacks. Over 80 employees lost their jobs overnight.
We must take into account that these dramatic results (e.g. businesses shutting down) do not always play out in this manner. As a matter of fact, certain industries can adapt very quickly and efficiently to organized crime extortion rackets. One of the best examples is the avocado industry in Michoacan. The avocado industry in Michoacan has suffered extortion since the 2000s but the industry has not declined as a result of it. In fact, avocado production has continued to grow every year since 2010 despite the violent turf wars between the CJNG and their rival groups in the area like Los Viagras, the Nueva Familia Michoacana and the Tepalcatepec Cartel.
One common observation in extortion studies is that extortion quotas lead to an increase in the prices of the products and services of the extorted businesses. Although this might be true in the case of small and medium-sized businesses, who may need to increase prices to cover for the extortion losses, this observation was not applicable to the avocado industry. The steady price of Mexican avocado shows that extortion does not necessarily affect the price of a product or service.
For example, when the self-defense (autodefensa) groups in Michoacan started fighting the Knights Templar in 2013, the cartel increased its quota on avocado companies from $1,300 to nearly $2,800 per ton. Avocado prices fluctuated for years with no significant spikes or surges. In early 2016, avocado prices decreased to its original 2013 price. However, in mid-2016, the prices went up again and declined later that year. This occurred again between 2017 and 2019.
The fluctuation of avocado prices shows that the classical "cost theory" of extortion – which assumes that extortion increases the prices of products and services of extorted business – is not necessarily factual. Avocado prices go up and down according to very well defined price cycles and are determined by factors like foreign demand and not local extortion rates.
For the avocado industry, extortion rates represent only a small portion of their fixed costs and were an "affordable" expense. For example, in 2013, the Knights Templar Cartel received an estimated $119 million pesos (approximately $5.2 million) from avocado extortions. This represents only 0.5 percent of the total value of avocado production that year. The available data also shows that the percentage of extortion money paid in relation to the avocado production growth actually decreased over time. In other words, the quotas demanded by extortionists were not fast enough to keep up with the industry's growth.
*This article was originally published by Borderland Beat. This is a shortened and edited version, republished with permission, but does not necessarily reflect the views of InSight Crime. See the complete original here.
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