Mexico: A Security and Business-risk Assessment

STRATFOR 700 Lavaca Street, Suite 900 Austin, TX 78701 Tel: 1-512-744-4300 www.stratfor.com Mexico: A Security and Business-risk Assessment Nov. 18, 201 1 1

Executive Summary Johnson Controls, Inc. asked STRATFOR to provide a security and business-risk assessment focusing on threats that may impact the company s operations, facilities and personnel throughout Mexico, specifically highlighting the cities of Ciudad Juarez, Reynosa, Matamoros, Nuevo Laredo, Tampico, Saltillo, Ramos Arizpe, Torreon, Santiago de la Monclova, Durango and the Monterrey metropolitan area. Areas of interest identified by Johnson Controls within the Monterrey metropolitan area include Apodaca, Cienega de Flores, San Pedro Garza Garcia, General Escobedo and Garcia, which STRATFOR also discusses within this report. Fractures within Mexico s transnational criminal organizations, commonly referred to as cartels, have contributed to an ongoing volatile security environment in the country. The Mexican military has engaged in an offensive against the country s numerous cartels in certain areas, but despite its successful arrests or killings of high-value leaders, violence continues to increase in these areas. The Mexican government has increased the tempo of its military operations against cartels in 2011 despite the rising death toll, likely because of national elections in 2012 (Mexican President Felipe Calderon appears determined to continue his offensive against the cartels until the end of his term). Military operations are continuing in Tamaulipas and Michoacan states, and new offensives have been launched this year in Veracruz, Durango, Coahuila and Nuevo Leon states. With the federal government s main focus still squarely on combating the cartels, general crime remains a concern for multinational corporations (MNCs ) operations and personnel. In many cases, this crime wave can be directly linked to the drug trade. However, as Mexican security forces continue to put pressure on the cartels drug transportation networks and revenues, the cartels have expanded their revenue-making criminal portfolio to include kidnapping and extortion of individuals not associated with the drug trade, such as foreign businesspeople. Furthermore, between the expansion of operations by Mexican security forces against the cartels and the cartels corruption of municipal and regional law enforcement, smaller criminal groups have been able to flourish in Mexico s unstable security environment. As a result, general crime such as carjacking, mugging, robbery and assault is an increasing threat to business operations and employees in Mexico. Overall violence has increased in recent years; 2010 was the deadliest year of Calderon s term in office so far, with the Mexican government estimating more than 15,000 deaths associated with organized crime. Recorded cartel-related deaths in Ciudad Juarez and Tijuana metropolitan areas dropped appreciably in 2011, resulting in an overall statistical drop of countrywide cartel-related deaths. However, violence has increased severely in the Monterrey, Matamoros, Veracruz and Durango metropolitan regions. In the next three years, one or two of these cartels, most likely the Sinaloa Federation and Los Zetas, may eventually become dominant (we will discuss this scenario further in the Cartel Forecast section of this report). If this happens, one result likely will be a more predictable operating environment for MNCs in Mexico; the need for the cartels to engage in criminal activity for additional sources of revenue lessens or disappears as drug revenue becomes more dependable. However, in the meantime, as the Mexican government and the drug cartels battle for supremacy, the drug trafficking business in Mexico and thus the security environment will remain extremely volatile. MNCs must thus plan their operations accordingly and maintain a robust security apparatus in the country to ensure the productivity and safety of their assets until the violence subsides. Mexico-wide Cartel War Overview The continuing cartel war in Mexico, which has created the most severe security crisis that the country has seen in nearly a century, consists of three fronts: the battles among the various drug cartels, the government s battle against the drug cartels and the violence inflicted by the cartels and other criminal groups against the civilian population. The campaign Calderon launched against the cartels in December 2006 has steadily escalated over the last five years, and while the government is making progress in fracturing the largest and most powerful cartels, one result has been a steadily deteriorating security situation nationwide. 2

One measure of the insecurity is Mexico s homicide statistics related to organized crime. The Mexican Public Security Secretariat recorded approximately 8,200 organized crime-related homicides in 2009, 15,273 in 2010 and 10,933 in 2011 as of Nov. 4. The statistical drop from 2010 to 2011 does not appear to be indicative of a widespread improvement in conditions across the country but rather a result of improved security conditions specifically in Ciudad Juarez and Tijuana. As cartel dynamics continue to evolve, cartel-related violence has shifted geographically. Territorial disputes among drug cartels have long been the norm in Mexico, but Calderon s offensive against the country s most powerful cartels has severely disrupted the criminal balance of power, leaving vacuums that other criminal groups have sought to fill. Throughout 2011 thus far, this conflict has been especially visible in border cities such as Ciudad Juarez, Nuevo Laredo, Reynosa and Matamoros, which the cartels use as drug-smuggling corridors into the United States. In addition, we have seen an escalation in cartel-related conflicts this year in Monterrey, Durango, Veracruz, Acapulco and other parts of Mexico that fall along the drug supply chain. At this point, there are very few states in Mexico that have not been affected by the cartel war. Related to the cartels that operate in areas of interest of Johnson Controls, the Sinaloa Federation, under the leadership of Joaquin El Chapo Guzman Loera, has continued to control the bulk of its home state of Sinaloa, most of the border region in Sonora and Baja California states, and the majority of Chihuahua and Durango states. The cartel continues to pursue its strategic goals of expansion into, or absorption of, neighboring cartel territories and to maintain its methamphetamine and heroin 3

production in Sinaloa, Durango, Nayarit, Guanajuato, Aguascalientes and Jalisco states. The Sinaloa Federation is known to be smuggling high-value/low-volume commodities (methamphetamine, domestically produced heroin and Colombian cocaine) into the United States via the plazas it directly controls at Tijuana, Mexicali, Nogales and Agua Prieta, Rio Bravo, El Porvenir, Manuel Ojinaga and the New Mexico cities of Columbus and Santa Teresa, as well as the Gulf cartel-controlled plazas at Ciudad Mier, Miguel Aleman, Diaz Ordaz, Reynosa and Matamoros. Sinaloa has been engaged in running battles to subdue the Vicente Carrillo Fuentes organization (VCF) and take control of the Juarez plaza. The slow, long-term strangulation of the VCF remains in progress (discussed in more detail under the Ciudad Juarez section). According to STRATFOR sources, Sinaloa forces and allied gangs occupy most of the Valley of Juarez, encircling the city from the New Mexico border on the west to the Texas border southeast of El Paso/Juarez. Los Zetas continue to fight a large, multi-front war across Mexico. They are combating the Gulf cartel, Sinaloa and Mexican government forces in the northeast and assisting the VCF in holding Sinaloa forces back in Chihuahua state. Los Zetas are also taking control of additional territory in Zacatecas, pushing into Jalisco, Nayarit, Guerrero and Mexico states and battling Sinaloa in the southern states of Oaxaca and Chiapas. The organization is being hit hard by the Mexican military in its home territories in Nuevo Leon, Tamaulipas, Coahuila and Veracruz states and is fighting to hold the crucial plazas at Monterrey and the port of Veracruz against incursions by Sinaloa, the Gulf cartel and the Cartel de Jalisco Nueva Generacion. Despite significant challenges to their ownership of Monterrey and Veracruz, Los Zetas do not appear to have been displaced, though violence likely will increase significantly in the near term as rival groups openly push into both cities. Meanwhile, Los Zetas have also been allied with Cartel Pacifico Sur (CPS) for about the past year. With assistance from its Zeta allies, CPS continues to fight for supremacy in the central and western coastal regions of Mexico, including northward into Sonora and Baja California states. The CPS also has interests in Durango, Sinaloa, Jalisco and Guerrero states, predominantly along the Pacific coastal regions, and is known to be involved in the war for control of Acapulco. Another dynamic that will directly impact the security environment in greater northeastern Mexico is an internal dispute in the Gulf cartel that has evolved over the past four months into a violent split. During 2009-2010, the organization was co-led by Antonio Ezequiel Tony Tormenta Cardenas Guillen and Jorge Eduardo El Coss Costilla Sanchez. This arrangement shifted when Cardenas Guillen was killed in November 2010. At the time, Cardenas Guillen s nephew, Rafael El Junior Cardenas Vela, reportedly had expected to replace his uncle as co-leader. Instead, Costilla assumed full control of the organization. The schism became wider as two factions formed: the Metros, who were loyal to Costilla, and the Rojos, who were loyal to the Cardenas family. In the past several months, both factions have lost high-value leaders in the ongoing internal struggle. On Sept. 3, 2011, authorities in Reynosa found the body of Samuel El Metro 3 Flores Borrego, Costilla s second in command and the Reynosa plaza boss. Then on Sept. 27, in a hit on U.S. soil, gunmen in an SUV opened fire on another vehicle traveling along U.S. Route 83 east of McAllen, Texas, killing the driver, Jorge Zavala, who was connected to a branch of the Gulf cartel. Though his role in the cartel is unclear, he is rumored to have been close to a senior Gulf plaza boss affiliated with the Metros, Gregorio El Metro 2 Sauceda Gamboa, who was arrested in April 2009. On Oct. 11, the Mexican navy reported that the body of Cesar El Gama Davila Garcia, the Gulf cartel s head finance officer and Cardenas accountant, was found in the city of Reynosa, Tamaulipas. Further indication of active internecine conflict came when U.S. Immigration and Customs Enforcement agents arrested Cardenas Vela on Oct. 20 near Port Isabel, Texas. Los Metros faction has a strong incentive to take out Los Rojos leaders and is in a good position to have or acquire information on Cardenas Vela s whereabouts and his likely hideouts. Cartels usually try to avoid conducting hits on U.S. soil, which suggests that Costilla s faction may have tipped off U.S. authorities on Cardenas Vela s whereabouts instead of killing him. Though the Gulf cartel split has been quietly widening for two years, the apparent targeting of rival elements within the cartel and related violence during the past quarter indicates the division may be 4

about to significantly worsen. The consequences of a violent rupture within the Gulf cartel likely include moves by Los Zetas and the Sinaloa Federation to take advantage of the Gulf cartel s weakness and grab territory. This new dynamic is expected to further heighten violence beyond the already volatile conditions created by the three-way battle between Los Zetas, the Gulf cartel and government forces for control of Mexico s northeast. The cities that would be specifically affected by these developments are Matamoros, Reynosa and Tampico, along with the smaller communities along the network of roads connecting them. Since July 2010, the U.S. State Department has maintained an active order to restrict the travel of U.S. diplomatic personnel in the northern tier of Mexico s states, but Tamaulipas state has been of particular concern regarding personnel security. The cartel power struggle throughout Mexico is far from over; until a lasting balance of power can be solidified, violence will continue and possibly intensify in key battleground regions noted above. It is this situation that confronts foreign businesses, their employees and foreign business travelers, who are forced to conduct daily operations in an increasingly volatile environment. Not only is the personal safety of their employees threatened but also the profitability of their business operations. The level of violence in Mexico also can be attributed to the increasing friction between the Mexican government and the cartels. As the Mexican government continues to disrupt drug trafficking operations, cartels have violently retaliated against law enforcement and government officials. Highranking local and regional law enforcement and elected officials have been executed throughout the country, more often than not for one of three reasons: refusing to work for a cartel, working for a rival cartel or being caught informing on or stealing from the area s dominant cartel. For example, in February the coordinator of the so-called C-5 center, which houses federal police, naval, army, and state and municipal anticrime intelligence officials, was found dead in his burning armored SUV in the center of Monterrey, Nuevo Leon. In March, gunmen in Zamora, Michoacan state, ambushed and killed a Mexican army lieutenant colonel and his girlfriend at a traffic light, firing approximately 150 rounds into the vehicle. On July 27, the mayor of a municipality in Zacatecas state was killed after being kidnapped, and on Sept. 17, the bodies of Mexican federal legislator Moises Villanueva de la Luz and his driver were found along a riverbank below a bridge in Huamuxtitlan, Guerrero state, after having been missing since attending a Sept. 4 political event for the Institutional Revolutionary Party. Given the potential for a severe fracturing of the Gulf cartel noted above, the Calderon government and its successor in 2012 will need to increase military operations in northeastern Mexico significantly beyond the current deployment, as a large upswing in violence brought on by a Gulf cartel split would negatively impact overall stability and MNC operations. The security of MNC operations, as well as their ability to maintain a workforce, will be directly affected by the actions of the Mexican government. One concern involved with these military operations is the potential for collateral damage that could impact business continuity. For example, STRATFOR s MNC contacts have reported delaying shift changes at manufacturing plants and keeping employees at corporate offices on-site when shootouts or military operations are under way in nearby areas. In addition, foreign business travel into Mexico is often delayed for extended periods of time and security measures enhanced for those travelers during extended flare-ups, impeding business plans or requiring additional costs devoted to security for employees to keep some semblance of normal business operations in the country. Another security concern related to the military s presence is military checkpoints, which are intended to provide quick-reaction forces able to thwart possible cartel activities or operations. Anyone associated with Johnson Controls who encounters a military or law enforcement checkpoint should stop and follow the instructions of security personnel. Failure to do so could result in security forces firing upon the vehicle; innocent civilians have lost their lives attempting to avoid these checkpoints or disobey directives. Mexico-wide Criminal Threat General crime has been a serious threat to those in Mexico for more than a decade, but recent changes in the security landscape have led to an expansion of criminal threats in the country that can be expected to persist for the foreseeable future. 5

Mexico s rampant corruption and general breakdown in law and order have created an environment in which criminal organizations unrelated to the drug trade can operate with impunity. Mexican authorities focused on the cartels have not had the resources to address other criminal activity, and anecdotal accounts indicate that police are likely to ignore cartel or street crime to avoid retribution if they are not actively involved in criminal activities themselves. For example, it was reported this spring that some businesses in Cancun were visited by a uniformed policeman, likely on duty, who introduced a man in civilian clothing. The policeman would then step out of hearing range as the civilian, revealed to be a cartel member, established an extortion arrangement with the business owners, sending a clear message that the police would provide no assistance. Moreover, this environment has allowed common criminals not involved in the drug trade to flourish. Automobile theft, robbery, mugging and pickpocketing continue to be staples of Mexican crime. These common crimes are likely to affect Johnson Controls operations and personnel (both Mexican nationals and foreign business travelers) in Mexico much more than cartel-related violence. Vehicle theft is a particular concern for MNCs in Mexico. As the security situation deteriorates, plant managers for many MNCs have requested armored cars; however, these are highly valuable to thieves, both those who would sell them for profit and cartel elements who would use them in their operations. In addition to raising the targeting profile of MNC employees, heavily armored vehicles have less mobility and handling than their less-armored counterparts and can impair the ability of untrained drivers to escape threatening situations. STRATFOR recommends the use of lower-profile and less-armored vehicles if armored transportation is preferred. Cartels themselves also are becoming increasingly threatening to civilians in Mexico. The Mexican government s offensive against the cartels and U.S. efforts to interdict drug shipments from South America over the past few years have resulted in the drug trade becoming a less stable source of income for cartels. To supplement this, cartels that historically would have rarely crossed paths with citizens not associated with the drug trade are becoming increasingly involved in crimes such as extortion and kidnapping for ransom. Mexico s Public Security Secretariat (SSP) reported on Nov. 1 that from January 2010 to September 2011, federal and state authorities have reported a total of 3,114 kidnapping cases, though the vast majority of kidnappings are not reported to authorities, so accurate statistics regarding the kidnapping and extortion threats in Mexico do not exist. Several groups that specialize in kidnapping for ransom also operate throughout Mexico with varying degrees of sophistication. The more professional groups employ several teams with members assigned to specialized roles such as surveillance, countersurveillance, snatching victims and ransom negotiation. On Aug. 5, the federal police arrested five members of a kidnapping ring based in Mexico City, called Los Cabezas de Puerco because of its intimidation tactic of leaving the severed heads of pigs outside targets homes and businesses. The gang is suspected of abducting a businesswoman in Mexico City in August 2010, as well as the attempted extortion of numerous textile companies. Additionally, so-called express kidnapping gangs have flourished in major metropolitan areas, grabbing victims from the street, driving them to different banks and ATMs and forcing them to withdraw cash from their bank accounts. In another tactic known as virtual kidnapping, criminals extort money from victims by claiming to have kidnapped loved ones but not having actually done so. In one such scheme, the criminals position themselves at youth gathering places under the pretense of offering entry in contests, encouraging youths to fill out entry forms that offer up personal information such as their addresses, home phone numbers and parents names. They then follow the youths until they enter a place where cellphones cannot be immediately answered, such as a school or movie theater, and then call their parents to demand ransom. In regard to extortions, the Mexico-based Center for Public Policy Analysis reported in August 2011 that Chihuahua state s index statistic was 13 per 100,000 population, while Durango state s official extortion rate is 17 per 100,000. Morelos listed the highest number of extortions, followed by Aguascalientes, Chihuahua and Baja California, and Districto Federal. However, other research by the same organization indicates that around 85 percent of extortions go unreported; most victimized citizens and foreign and domestic companies do not wish for that information to be made public due to the threat of 6

retaliation. In one anecdotal example, a group of men who had parked a truck and trailer outside the plant in Reynosa harassed and pressured a MNC to provide wooden pallets (likely to be used to transport drug shipments), prompting the company to shut its gates and remove the guards from their posts in order to avoid any communication and the opportunity to make extortion threats. According to STRATFOR cargo security sources, cargo theft from rail cars has increased in Mexico over the past six months. As of November 2011, theft from containers has generated substantial losses to Ferrocarril Mexicano (Ferromex), Kansas City Southern de Mexico and their customers. According to Ferromex, theft from/of containers generated losses of 95 million pesos ($7 million) in 2011. About 4 million pesos of the total amount involved loads of agricultural products; the remaining 91 million pesos involved metal loads, mainly aluminum, copper, and steel stolen to sell to recyclers. Electronics are also a prized commodity for cargo theft as they can be sold quickly. A recent Ferromex report showed the locations with the highest theft rates in 2011 were Las Juntas, Tlaquepaque municipality, Jalisco state; the Irapuato-Apase highway in Guanajuato state; the Monterrey metropolitan area, Nuevo Leon state; and Celaya and Salamanca, Guanajuato state. Other hot spots for rail theft are the Port of Lazaro Cardenas and around Ciudad Valles, San Luis Potosi state. Rail theft has also been increasing over the past six months in Tamaulipas and Sinaloa states. Police have been accused of ignoring these thefts, and some are suspected of receiving a percentage of the sale price. Johnson Controls Areas of Operation/Interest Ciudad Juarez Just across the border from El Paso, Texas, the Juarez Valley in Chihuahua state is a strategic entry point for both legitimate commerce and illicit goods. Ciudad Juarez is the only major Mexican metropolitan area on the border with quick access to the U.S. interstate highway system within several hundred miles in either direction, making this area extremely valuable to Mexican cartels. U.S. Interstate 10 runs directly through El Paso, intersecting with Interstate 25 just north of the city. This makes it easy to traffic drugs and other illicit goods east, west and north from Juarez. The conflict in Juarez over the past few years has evolved into three different layers of violence. The first layer is street-level violence between local Juarez-based street and prison gangs backed by the VCF and the Sinaloa Federation. The second layer is the more traditional conflict between the cartels enforcement wings, Nueva Gente for the Sinaloa Federation and La Linea for the VCF. The third is the Mexican security forces battles with gangs and cartel enforcers. The first two layers are the primary reasons for the high levels of violence in the Juarez area. Members of the VCF-aligned street gang Los Aztecas (estimated in mid-2011 to number approximately 5,000 in Juarez) continue to serve as foot soldiers, enforcers and smugglers, while augmenting their activities by extorting nightclubs and other businesses. For example, on Aug. 30, Chihuahua state investigators arrested a Juarez police officer believed to have led an extortion gang that focused upon businesses, typically threatening to kill the business owners families unless they paid the gang 120,000 pesos (about $10,000). The Sinaloa Federation utilizes proxy forces among the street gangs in Juarez as well, particularly the Mexicles and Los Artistas Asesinos, to seize territory, steal drug shipments from the VCF s operations and serve as surveillance assets. The Juarez area has the highest concentration of murders per 100,000 inhabitants in the country. Cartel-related deaths ranged from 262 to 352 per month from April to October 2010 but began to subside at the end of 2010. From Jan. 1 to Oct. 31 of this year, 1,738 cartel-related homicides were recorded in the area, down from 2,700 in the same time frame in 2010. Most of the military presence in the Valley of Juarez region has been withdrawn, and the Sinaloa Federation increased its control over the area from the New Mexico border to the Texas ports of entry in Ysleta and Fabens. The VCF, meanwhile, retains control over the three main points of entry that connect Juarez with El Paso. The removal of the military has decreased pressure on the cartels in Juarez and that, coupled with the weakening of the VCF, has contributed to a decrease in inter-cartel fighting. Still, flare-ups of violence in the Juarez area can be expected to continue as the VCF retains 7

the loyalty and services of Los Aztecas. If the Sinaloa Federation succeeds in completely cutting off the VCF from its drug supply lines, which is possible within the next 12-24 months, Los Aztecas may abandon the VCF or shift their loyalties to the Sinaloa Federation, which could spur clashes between what remains of the VCF and its rivals as the VCF attempts to reopen supply lines. STRATFOR sources in the El Paso-Juarez area also expect that an accommodation probably will be reached at some point within the next two years. Should that scenario materialize and the VCF is either dissolved or some accommodation with the Sinaloa Federation is reached, violence in Juarez would subside, creating a more stable operating environment. Coahuila State Though for the past several years most of Coahuila state has tended to be quiet by Mexico s standards, with Los Zetas holding the border cities of Ciudad Acuna and Piedras Negras along with most of the rural territory, the cities of Saltillo and Torreon stand out as significant exceptions. The state is sparsely populated, lacks high-volume interstate highway arteries and remains a largely undisputed Zeta territory. However, several recent events, along with an increasing Mexican military presence, could point to a coming change in Coahuila s security conditions. According to official government news releases and STRATFOR sources in the region, there has been a gradual increase in the deployment of military assets to Coahuila, resulting in an increase in a military offensive against cartel elements in the state during the summer and fall months of 2011. As the military presence has grown, their patrols began to have an impact on what now appears to be a significant drug and arms storage area for Los Zetas. On June 1, Mexican army personnel found 38 narcofosas (hidden graves) in the village of Guerrero, located 50 kilometers (30 miles) southeast of Piedras Negras. It is not yet clear how many victims were disposed of at the Guerrero sites; the meterdeep pits contained thousands of bits of charred human bones, metal buckles, buttons and other personal items. Three 55-gallon drums also were found in which human bodies had been cremated. These events in Coahuila are by no means unique for Mexico, but the increase in military personnel and operations in the sparsely populated state is notable. As the military presence grows, significant clashes between Los Zetas and Mexican troops are possible. Generally, the cartel s operators have demonstrated a tendency to fade away and not engage the military unless pressed or cornered, but there appears to be a concerted effort on the part of the military to search for Los Zetas assets in Coahuila, which may push Los Zetas into reacting. Mexican cartels have generally demonstrated that they will absorb a low level of losses as the cost of doing business. However, losses can reach a point where they are no longer acceptable to an organization and violent countermeasures tend to result. In the quieter areas of Coahuila, particularly in the western and northern regions of the state where the Sinaloa Federation and Gulf cartel have not bothered to contest Los Zetas control, Los Zetas may soon respond to the Mexican government s inroads with direct and violent action against the military and to deter against any attempts by other cartels to make inroads to those regions should they deem Los Zetas to be on the defensive. Santiago de la Monclova A small crossroads city in Coahuila, Santiago de la Monclova has seen limited cartel-related violence, although it is not entirely immune to such activity. Within a few miles of the city, the military found several large munitions and narcotics caches belonging to Los Zetas in May and June 2011. The stashes included 1 metric ton of cocaine (2,204 pounds), just under 1 metric ton of methamphetamine, 11 kilograms (24 pounds) of heroin, 378 assault rifles, 600 sets of camouflage or black uniforms with boots, several grenade launchers, three sniper rifles and more than 122,000 rounds of ammunition. There are likely many more such caches in the vicinity, and the threat of their loss may cause the cartel to defend them violently if cornered or attempt to move them quickly if they have advance warning. The latter possibility creates a concern for MNC operations and assets; cartel members may attempt to steal or hijack cargo trucks and vehicles used to carry legitimate goods or belonging to employees for use in moving supplies. Saltillo 8

Saltillo, a major crossroads city in the state of Coahuila, has seen less cartel-related violence than other large cities in northeastern Mexico in recent years, but security conditions recently have deteriorated. STRATFOR sources in the region tell us that Saltillo, with its narcotics transshipment route, is becoming a key battleground in the war between Los Zetas and the Gulf-Sinaloa alliance. According to some sources, Saltillo has remained historically stable because of an old aristocracy in the area that is not intimidated by the cartels though it reportedly is unconcerned about drug trafficking activities in the area. However, an increase in cartel clashes has been reported in the city this year. Notably, these seem to be coming in spikes rather than the steady escalation seen in other contested cities. Examples of the increase in violence include running gunbattles March 5, 6 and 22 in which groups of Gulf cartel gunmen drove through the city provoking firefights with Los Zetas. Then on May 18, gunmen from either the Sinaloa Federation or the Gulf cartel began conducting random attacks in the city to provoke a response from Los Zetas and Mexican security forces. On May 29, residents near the Cathedral de Santiago reported machine gun fire and several grenade blasts. On Nov. 1, several running gunbattles occurred in eastern and northeastern neighborhoods of the city; in one firefight, gunmen from the Gulf cartel and Los Zetas fought through the neighborhoods of Los Cerritos, Praderas, Magisterio, Los Maestros and Guanajuato. The inter-cartel battles triggered responses from local and federal authorities. Another battle occurred that same day in the immediate vicinity of the Instituto Tecnologico de Saltillo campus between a group of gunmen and Mexican marines. Fighting spread through east and northcentral Saltillo over several hours before it subsided. STRATFOR is paying close attention to the dynamics evolving in and around Saltillo, specifically watching this aristocracy to see whether it reacts forcefully against the cartels or seeks an accommodation with them. The security conditions in Saltillo, we believe, pivot on the reactions of the aristocracy over the next six to 12 months, given that until fairly recently conditions have been stable but now appear to be escalating. Meanwhile, STRATFOR sources report that cargo theft is increasing in Coahuila state, with a 167 percent rise in reported cargo thefts during the third quarter of 2011 over the same time frame in 2010. Trucks loaded with industrial and building materials were the most heavily targeted, and of those, the commodities stolen most were steel, copper and aluminum materials. For the third quarter of 2011, Saltillo ranked third in the country for thefts, particularly because of the jump in steel and copper thefts. Ramos Arizpe Ramos Arizpe, the seat of the municipality of the same name, straddles a main transportation artery, Mexico Highway 54. It sits just north of Saltillo, an important transportation corridor between Zacatecas, Zacatecas state, and Laredo, Texas, the border terminus of U.S. Interstate 35. It also is just south of Highway 54's intersection with another strategically important highway, the Nuevo Leon-Monclova highway. The location of Ramos Arizpe in close proximity to these transportation corridors benefits manufacturing and industry as well as cartels involved in drug trafficking, which not only utilize but also seek to control these vital crossroads. That puts Ramos Arizpe squarely in the middle of cartel territorial aspirations. Similarly to Saltillo, open-source media have reported no major recent cartel conflicts or related violence in Ramos Arizpe, certainly not of the scope seen in cities closer to the U.S. border. Because of its proximity to Saltillo, we expect the cartel activity in Ramos Arizpe to be tied to that of Saltillo. That said, given the presence of several MNC operations in the immediate vicinity, there likely have been cargo thefts from trucks arriving, departing or transiting through Ramos Arizpe. Torreon Cartels must move contraband not only into and out of the country but also across it. Situated in central Mexico in the state of Coahuila at the intersection of two major highways, Torreon is a 9

critical hub for cartels moving illicit goods to northern Mexico and eventually into the United States. Control of Torreon helps facilitate the movement of product from Mexico s Pacific coast across the country to smuggling corridors, such as Nuevo Laredo and Ciudad Juarez, on the U.S.-Mexico border. Because cartels understand the importance and vulnerability of their own supply routes, Torreon is hotly contested between Los Zetas and the Sinaloa Federation. In July 2011, 10 decapitated bodies were found piled in an SUV, with the bodies heads discovered scattered around the city. On Aug. 20, a gunfight erupted in Torreon after a three-vehicle convoy of gunmen reportedly crashed through a security checkpoint outside the Territorio Santos Modelo soccer stadium. No one was killed or seriously injured during the shootout. The gunmen evaded arrest by using caltrops (small, four-pointed spikes used to deflate vehicle tires) to slow pursuing authorities. Their truck was found abandoned and containing three high-caliber weapons and two grenades. We can expect to see continual violence in the city over the next two to three years, as Los Zetas and the Sinaloa Federation continue to vie for control of these strategic transit routes. In response to this uptick in violence, the military has been conducting operations in Coahuila state since early summer. As the cartel violence in Torreon, Santiago de la Monclova and Saltillo as well as Piedras Negras and Acuna all appear to be trending gradually upward, it is likely that the military presence will remain in the state for the foreseeable future. MNCs operating in Torreon and elsewhere in Coahuila should be prepared for sporadic gunbattles, likely between cartel and military elements. In addition, cartels commonly set up roadblocks to allow passage of their own forces along certain routes and to block other cartels or military forces, often funneling traffic into ambush zones, and the theft of MNC-owned or contracted tractor-trailer rigs for use in such blockades should also be expected. Tamaulipas State Matamoros Matamoros, Tamaulipas state, sits just south of the Rio Grande River from Brownsville, Texas, and has been home to one of the most prolific Mexican drug trafficking organizations since the 1990s: the Gulf cartel. With its extensive history of organized criminal activity, Matamoros has long experienced periodic bouts of violence, but it has been the location of sustained high levels since February 2010. In the 17 months since the Gulf cartel and Los Zetas began fighting in the Tamaulipas border region, Matamoros remained a stronghold for the Gulf cartel. During 2011, Matamoros continued to be a target for Los Zetas to carry out raids against the Gulf cartel, and running firefights in the streets of Matamoros became almost a weekly, and sometimes daily, occurrence. For example, in mid-june a 40-60 member-strong Los Zetas contingent pushed deep into Matamoros and multiple gunbattles flared up as Los Zetas and the Gulf cartel clashed. City buses were stolen and placed as roadblocks in an effort to keep responding military forces out, though the fight still devolved into a three-way battle. Then on May 18, Los Zetas made another incursion into the city in an attempt to oust the Gulf cartel, with heavy fighting penetrating the city to the area of Lucio Blanco, near the Free Trade Bridge Port of Entry (commonly referred to as the Los Indios Bridge ) at the U.S. border, prompting authorities to temporarily halt traffic on both sides of the border and preventing any foreign business travelers from returning to the United States. The security threat to Johnson Controls facilities in the Matamoros area over the next six to 12 months stems from the previously mentioned schism within the Gulf cartel due to increases in intra-cartel combat, Los Zetas pushing into the area with large forces to take advantage of Gulf cartel weaknesses, Sinaloa Federation forces attempting to make the same move while fighting against Los Zetas and increased military actions against all parties. MNCs and their employees should expect to see running gunbattles in any zone of the city, both between rival cartels and with the military. In addition, auto theft is a concern in the Matamoros area, especially theft of SUVs, heavy-duty trucks and four-wheel-drive vehicles. Regarding other forms of crime in Matamoros, the Gulf cartel has not traditionally engaged in large-scale extortion schemes against companies, unlike its rival, Los Zetas, who are known to be quite ruthless in this 10

practice. However, given the state of flux in which the Gulf cartel currently finds itself, an increase in extortion schemes is likely in the Matamoros region over the next two to three years. Reynosa Reynosa, Tamaulipas state, located just across the Rio Grande River from McAllen, Texas, has seen intense violence in the past year. The Reynosa area has been under the control of the Gulf cartel following Los Zetas strategic retreat to their strongholds in Monterrey, Nuevo Laredo and Veracruz in July 2010. However, Gulf cartel control has been regularly and violently contested by Los Zetas over the last 16 months. As previously discussed, the Tamaulipas border region is the front line of a conflict between the Gulf cartel and Los Zetas with occasional assistance to the Gulf by the Sinaloa Federation, and Reynosa is caught in the middle. Los Zetas have, over the course of 2011, engaged in random raids into Reynosa in which gangs of younger members of Los Zetas have driven into and around the city, throwing grenades as they went. This practice often is referred to as heating up the plaza, and such activities pose obvious dangers to MNC assets and employees. Specifically, a spate of grenade attacks during the first week of June incurred civilian casualties: Nine civilians were hurt when a grenade was thrown toward a crowd on Calle Benito Juarez. Later the same day, a group of gunmen engaged in a battle along Calle Margarita Maza de Juarez, during which one person was killed and another wounded. Five days later, a grenade was thrown at a bus stop near the LG plant in the Reynosa industrial area near the airport, injuring 10 workers. Competing cartels also have been known to deploy their own checkpoints in the area in an effort to catch rival cartel members. We continue to see elements of both Los Zetas and the Gulf cartel utilizing roadblocks to impede the response of Mexican soldiers and police to cartel activities. Along with the ever-present threat of running gunbattles in any area where Los Zetas are trying to push Gulf cartel forces out, there are kidnapping gangs operating with impunity, as well as local street crime and extortion rackets in Reynosa. In June, personnel at 22 municipal police departments were dismissed pending corruption investigations; they were replaced by approximately 2,800 military troops. In early August, four Reynosa municipal officers and two other individuals were indicted on kidnapping charges involving 68 immigrants found during a raid of a stash house in April 2011. Tampico Tampico is currently one of the Gulf cartel s three main territories in Tamaulipas state, the other two being Matamoros and Reynosa. Tampico has seen less cartel-related violence than other cities in Tamaulipas state such Reynosa and Matamoros, likely because the Gulf cartel has retained its control and Los Zetas satisfied for now with their territory in northeast Mexico including Nuevo Laredo, Monterrey and Veracruz have not attempted to make inroads there. Still, the city s bustling container ship terminal has high strategic value, both for importing cocaine and methamphetamine precursors and for exporting narcotics to Europe and Africa. As with nearly every other city in Mexico where there is a strong cartel presence, the law enforcement personnel in the city have been known to be bribed or intimidated into not interfering with cartel operations, which also opens opportunities for street criminals. The full spectrum of criminal activity should be expected, from theft of cargo and vehicles to kidnapping and extortion. If the Gulf cartel does split into two separate factions, cartel-related violence in the Tampico region can be expected in the form of targeted assassinations and shootouts. For example, shootouts were reported around the city in the early morning hours of April 24. Four auto dealerships located on Tampico s main business artery, Avenida Hidalgo, were damaged, and heavy gunfire was also reported in the Del Valle, Del Bosque and Solidaridad neighborhoods. In the adjoining municipality of Ciudad Madero, a grenade attack at a Soriana shopping center in the Colonia Ampliación resulted in a fire that heavily damaged the structure. Then on Nov. 10, four bodies were found hanging from a bridge above a major thoroughfare in Tampico s business and financial district. In addition, should the Gulf cartel continue to fracture as we have been seeing, Los Zetas, as well as the Sinaloa Federation, can be expected to try to make inroads into 11

the area to take control of this strategic port city. Therefore, there is the potential for greater inter-cartel rivalries in this region within the next six to 12 months. Nuevo Laredo Nuevo Laredo has been a stronghold of Los Zetas in Tamaulipas state for at least two years, and the city has regularly seen cartel-related violence. For example, a group of armed men in several vehicles on Feb. 2 killed Manuel Farfan Carriola, the chief of the Public Safety Secretariat for Nuevo Laredo, along with one of his top aides. Farfan, a retired Mexican army brigadier general, had only been in his position since Jan. 1 and was in the process of selecting his staff for the Nuevo Laredo Public Security Secretariat. STRATFOR security sources have advised that some of his personnel decisions led to his assassination. On Feb. 26, security forces discovered four decapitated bodies at the Cristobal Colon monument on Avenida Paseo Colon. On March 25, the military intercepted a large shipment of munitions when army personnel stopped a tractortrailer. Three gunmen inside the trailer with the cargo opened fire on the soldiers when they opened the trailer door to inspect the cargo. A fire broke out inside the trailer, causing a large quantity of ammunition and grenades to detonate in the heat. After putting out the fire, authorities discovered remnants of a very large shipment of guns, ammunition, tactical radios, a rocket-propelled grenade launcher and three belt-fed light machine guns. As Nuevo Laredo is a central territory of Los Zetas, rival cartels and the government are likely to target them there. Los Zetas also have branched out to crime in the city unrelated to the drug trade, a trend that can be expected to continue. STRATFOR security sources recently confirmed that the greater Nuevo Laredo area continues to have a very low police presence and thus very high crime rates. Monterrey Metropolitan Area The greater Monterrey metropolitan area, in Nuevo Leon state, is the third-largest population center in Mexico and the country s industrial and manufacturing hub. In addition to being a commercial powerhouse, Monterrey is a well-known stronghold for Los Zetas. Strategically situated about 150 miles south of the Texas-Mexico border, the Monterrey metro area is a key transshipment point for legitimate commerce and illicit goods headed to northern Mexico and southern Texas largely because of the highway infrastructure that connects it to the Reynosa and Nuevo Laredo border crossings. Contingents of the Sinaloa and Gulf cartels continue to target Los Zetas support network in and around Monterrey in a regional offensive that began in the final weeks of 2010, which has degraded the security environment in the Monterrey region over the past year. Los Zetas have employed tactics similar to those seen in Reynosa, hijacking and disabling large tractor-trailers and other vehicles to block major thoroughfares throughout the city or when moving large quantities of drugs through a particular part of town to hinder Mexican security forces response. For example, unidentified men set up two roadblocks near the municipal palace in Monterrey following a reported firefight April 27. Authorities responded after the men used buses and a taxi to set up the roadblocks. Los Zetas also have used improvised explosive devices to deter law enforcement and military personnel. Most recently on Oct. 20, a small sedan apparently filled with cartel gunmen rapidly pulled in front of a military vehicle, drawing the military patrol into a car chase in downtown Monterrey. After a brief pursuit, the vehicle carrying the cartel gunmen turned at an intersection. As the military vehicle slowed to negotiate the turn, an improvised explosive device that had been concealed in a parked car at the intersection detonated. The incident appears to have been intended to lure the military patrol into a designated attack zone. While the ambush did not kill any soldiers, it did cause them to break off their chase. As Mexico s industrial and manufacturing center, Monterrey is ripe for cargo theft. Mexico s two major highway corridors, Federal Highway 85 to Nuevo Laredo and Federal Highway 40 to Reynosa, run through the area, and large volumes of everything from raw materials to high-end finished goods travel into and out of Monterrey every day, creating a target-rich environment for cargo thieves. The threat of kidnapping also is increasing in the Monterrey area, though the city has not experienced the same level of kidnapping-for-ransom cases that other regions in Mexico have seen. STRATFOR has 12

been anticipating an escalation in kidnappings in the Monterrey area due to the large concentration of wealth in the region and the defensive posture Los Zetas have had to assume because of their ongoing conflict with the Sinaloa Federation. The threat of kidnapping in Monterrey increased to such an extent that the U.S. State Department ordered the departure of all minor dependents of U.S. diplomatic personnel in the region in August 2010. The State Department also issued travel warnings on Sept. 10, 2010, and again on April 22, 2011, for U.S. citizens related to the increasing kidnapping concern. Regarding the metro cities of Apodaca, Cienega de Flores, San Pedro Garza Garcia, General Escobedo and Garcia, there does not appear to be a singular cartel element in control. As metropolitan cities close to the major transportation corridors that fan out from Monterrey, all of the cities of interest are potentially in the path of future cartel battles should the Sinaloa Federation, or the military for that matter, make large-scale pushes into the city to eliminate Los Zetas. The following descriptions and incidents highlight the overall security environment in the Monterrey metropolitan area. Apodaca On March 9, soldiers opened fire on a group of unidentified gunmen in Guadalupe, Nuevo Leon state, killing one. Later, several gunmen kidnapped an injured man receiving treatment for a gunshot wound at an aid station. After the kidnapping, roadblocks were reported in Guadalupe, Juarez and Apodaca. Then on March 11, several roadblocks set up by gunmen using stolen vehicles were reported in Apodaca and San Nicolas. The roadblocks began after an attack on a police patrol car that left one police officer dead and another injured. On May 2, soldiers in the La Hacienda neighborhood chased and killed two suspected cartel gunmen in a car. A third gunman reportedly escaped, leaving behind a suitcase full of ammunition. On Sept. 15, gunmen in two separate incidents attacked transit officers, resulting in the deaths of three officers and the kidnapping of another. Cienega de Flores On Sept. 21, soldiers killed five unidentified gunmen during a shootout on the road that connects Monterrey to Nuevo Laredo in the municipality of Cienega de Flores on the outskirts of Monterrey. San Pedro Garza Garcia A significant facet of Monterrey s strategic value to the cartels made the news May 25 when four casinos were robbed. Heavily armed gunmen reportedly emptied out the cashier cages at Casino Hollywood, Casino Royale, Casino Red and Casino Miravalle Palace, all in the same general area between Monterrey proper and the western metropolitan area city of San Pedro Garza Garcia. Then on Aug. 25, attackers set fire to Casino Royale, leaving 53 people dead and 12 injured. In response, the Mexican government announced a deployment of 500 soldiers to catch the perpetrators. General Escobedo General Escobedo has seen less cartel-related violence than Monterrey proper this year with only two events of note. On Jan. 30, six charred bodies were found between the bypass road on Highway Loop near Salinas Victoria, in a gap known as El Palomo. Though no cartel connection was identified, some reports mention that large quantities of tape were used and that the bodies were thoroughly incinerated, both of which are common cartel methods. The second incident involves the arrest of five individuals believed to be Los Zetas, including one who is thought to be the paymaster for Nuevo Leon state, on Nov. 11. The military was investigating an anonymous tip regarding a residence in the Hacienda Las Palmas neighborhood. Garcia On Sept. 9, Garcia Mayor Jaime Calderon Rodriguez began the fourth stage of a set of comprehensive courses for municipal security for the city s administration, judges and citizens. The project, which began after Calderon Rodriguez s inauguration, includes self-defense training, first aid and emergency procedures, surveillance and information sharing. Other than two attempts on the mayor s life by cartel gunmen, on Feb. 25 and March 29, there does not appear 13