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Beyond 2012

2012 © Southern Pulse • www.southernpulse.com 2

Acknowledgements The authors would like to take a moment to offer gratitude to our senior and junior investigators in the field, who during the course of 2011 conducted countless interviews and undertook extensive information gathering sessions with Southern Pulse sources across the region. We would also like to thank the Southern Pulse asymmetrical collections team, including Manuela, Paulo, and Marisol, who all worked hard through the year to conduct interviews with members of the press, the body politic, security organs, academics, taxi drivers, informal economy merchants, and others. Finally, we would like to thank in name the individuals who helped us shape the information from the field into a coherent discussion, complete with granular information and the 40,000-ft. perspective. In alphabetical order, these individuals are: Adam Isacson, Senior Associate for Regional Security Policy, WOLA Alex Sanchez, Research Fellow, Council on Hemispheric Affairs Alfredo Corchado, Mexico City Bureau Chief, Dallas Morning News Bruce Bagley, Professor Dept. of International Studies, University of Miami Douglas Farah, Senior Fellow, International Assessment and Strategy Center John Price, Director, Americas Market Intelligence John Sullivan, Lieutenant, Los Angeles Police Department Jonathan Franklin, Author and investigative reporter Joy Olson, Director, Washington Office on Latin America (WOLA) Margaret Myers, Director of China and Latin America Program, Inter American Dialogue Robert Bunker, Professor, Unconventional Warfare, American Military University Robert Evan Ellis, Ass’t Professor of National Security Studies, Modeling, Gaming & Simulation Ruben Olmos, Founding Partner, Global Policy Strategies Steven Dudley, Co-director, Insight Crime

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Beyond 2012


16 January 2012 Dear Reader: I am excited and pleased to share with you Beyond 2012, our debut e-book publication presenting in-depth analysis of the future of Latin America across six important themes. As many of you know, Southern Pulse is a decentralized, field-based organization focused on conducting investigations for private clients interested in security, politics, energy, and business in Latin America. Over the course of 2011, we concluded over 20 separate investigations, interviewing well over 100 sources during a collection process that produced far more material than necessary to fulfill our commitments to any one particular client. We’ve combined the resulting “clippings” with a year-end round of interviews to frame and present the six chapters of this book, capsulated with this introduction and an afterword. We open the book with Mexico, where our first two essays look at politics and public security, respectively. We place a particular focus on the further destabilization of the Mexican public security situation in 2013 and possible scenarios for how the country’s next presidential administration will carry forward with recently initiated reforms that will require several more years of political will and financial resources to complete. We would be remiss to consider the future of Central America without exploring the sub-region’s public security challenges. In 2011, our investigations focusing on the Central American criminal system in many ways revealed how challenges and successes in Washington, Mexico City, and Bogotá have played out as significant citizen security problems in the sub-region’s northern triangle countries. In our third essay, we explore where the trends are headed with a close look at how the black market of drug trafficking will deeply affect the region’s most vulnerable country - and it’s not Guatemala. We explored another vulnerability in 2011, though in one man, not his country. Since Hugo Chavez announced his fight with cancer, his image as the region’s next Castro has seen a paradigm shift. Chavez could die sooner than anyone expected; and no one, least of all el presidente himself, is prepared. Our fourth essay explores the reality of several political scenarios in Venezuela, revolving around the October 2012 elections and extending into considerations for the future of the country’s economy, national security, and energy output. Resource security is an important goal for every country, though few are as focused on this goal as China, whose engagement with Latin America since 2004 has been a constant arena of interest for some and

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concern for others. Our fifth essay explores the next phase of the China-Brazil engagement, one where the rubber meets the road in a way that will likely force China to abandon its former disengaged posture - an entirely new way for the Asian power to relate to Brazil and other Latin American partners. With our sixth essay, we have saved the best for last. Cybersecurity in Latin America is perhaps the most important, unreported trend in the region. From flash-in-the-pan events such as the Anonymous confrontation with Los Zetas, we push you forward into an eventual future where cybersecurity is a reality that extends well beyond identity theft or email hacking. The nexus between organized criminals and local hacker cells is only the beginning of this phenomenon in a region where for every single company or government body with an organized, secure approach to cybersecurity, there are several dozen without. These six essays together represent trends that we believe are worth following for any professional, academic, student, journalist, or sophisticated reader interested in Latin America. The list is by no means exhaustive, but it does represent a core of themes important to our clients and contacts in region for many years to come. We hope that this book will contribute to a better understanding of the emerging trends and will change the way you think about security, politics, or energy in the region. Warm Regards, Samuel Logan Founder & Director Southern Pulse www.southernpulse.com

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Table of Contents Acknowledgements......................................................................................................................................................................................................................... 2

Rights .................................................................................................................................................................................................................................................... 3

Chapter 1: Mexican Politics ........................................................................................................................................................................................................... 7

Chapter 2: Public Security in Mexico .......................................................................................................................................................................................15

Chapter 3: The Northern Triangle .............................................................................................................................................................................................23

Chapter 4: Venezuelan Elections...............................................................................................................................................................................................33

Chapter 5: China versus Brazil ....................................................................................................................................................................................................40

Chapter 6: Cyberwar, Cybercrime, and Political Hacking.................................................................................................................................................46

Afterword...........................................................................................................................................................................................................................................52

Definitions .........................................................................................................................................................................................................................................55

About Authors .................................................................................................................................................................................................................................57

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Chapter 1: Mexican Politics

n the first day of his sixth year in office, President Felipe Calderón ended his address to the nation marking the day by stating: “In health, education, housing, services for women and indigenous people, Mexico is now a fairer country than it was five years ago.” During the

speech, he provided statistics on health and foreign direct investment (FDI - which reached US$100 billion during his term in office) He also claimed that due to increased investment in education, more Mexican children could be grant recipients than assassins. Mexico’s embattled president deserves accolades for his many achievements while in office, but he will not be remembered for any of them unless he can claim a win in his military-backed offensive against the country’s criminal organizations - the most salient policy in his presidential term so far. Calderón has just under six months to prove his administration the victor or fade into history perceived as defeated. His successor, likely Enrique Peña Nieto (EPN) from the Institutional Revolutionary Party (PRI), will face the same dilemma. Judging from what he inherits from Calderón, the inner workings of his own party, and his administration’s possible relationship with Washington and Bogotá, Mexico’s likely next president will face the same legacy challenge that currently stares down the incumbent: he tried to stop crime and failed. Inheritance: Reforms From his first day in office, Calderón set out to initiate several reforms. Across the five most recognizable reform efforts - intelligence, police, judicial, prison, and political - the Calderón administration has netted average results at best, with some areas - judicial, police - gaining more ground and sustainable traction than others, particularly political, prison, and intelligence. Several sources across Mexico and inside the United States agree that prison and intelligence reform barely left paper. In addition to several high-profile prison breaks organized by Los Zetas and others during his administration, one source in Monterrey remarked during an August 2011 research trip that local kidnap victims were sometimes taken to a prison in Coahuila where with the collusion of the warden and guards, the victim would be held as an incarcerated criminal for the term of the ransom negotiation. A separate source, who is a formerly high-ranking official within Mexico’s intelligence agency, the Center for Research on National Security (CISEN), echoed others who claimed that the organization still struggled in redefining itself for a new mission where intelligence collection focused more on criminal targets and less on the political opposition. The net result, according to another close observer in Mexico City, has been “a proliferation of intelligence units in military groups and stove piping.” As we wrote in 2007, soon

O

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after the EPR bombings in Veracruz that cost the country’s businesses millions of dollars, the Mexican intelligence system was not prepared to deal with a domestic security threat. Four years later, our former CISEN source indicates that very little, if any, improvements have been made in terms of HUMINT collection, criminal group penetration, or communication between the Secretariat of Public Security (SSP), the Defense Department (SEDENA), and state-level police agencies. Police and judicial reform have gathered the most national media attention and, arguably, have achieved the highest level of sustainable development relative to other reform efforts. At the federal level, police reform has seen a substantial investment in training facilities and the hiring and vetting of several thousand agents within the newly minted Federal Police (PF) - a result of the merging and purging of the now-defunct federal police agencies, AFI and PFP. The focus on federal police training and “capacity building” has seen some setbacks, however. On several occasions during 2011, sources indicated the growing numbers of federal police renunciations - a statistic confirmed by a 20 December 2011 article published by El Universal, which stated that federal police resignations rose by 200% from 2006 to 2010. Two other interviewees, both with long histories in law enforcement, argued that the top-down approach to investigation and public security presented a stalwart force, but when faced with a bottom-up challenge, i.e. local communities plagued by criminal penetration, the municipal police stood as the front line of defense. Federal police simply do not have the local knowledge. Unfortunately, municipal-level security organs are the most corrupt, and as police reform marches forward, municipal police officers are often the first to go. Yet cities such as Mexicali and Queretaro have proven that with enough time, financial investment, and political will, municipal police forces can be well-trained, producing honorable law enforcement officials. The mando unico plan, developed by Calderón’s Secretary of Public Security and former head of the defunct AFI, Gerardo Garcia Luna, would eradicate all municipal police in favor of placing a “single command” at the state level. The resulting product could look something like Brazil, where the country’s military police operate at the local level across “battalions” but are ultimately under the purview of state government direction and funding. The mando unico plan is a challenging reform policy that still lacks the political will for diffused acceptance across the country. There are several hundred mayors across Mexico who would rather not see the largest section of their budget irrevocably cut. As we’ve noted in previous reports, this reform effort also places a high-degree of power in the state governor’s office, pushing state leaders to an unprecedented level of exposure vis-a-vis criminal networks seeking to establish a relationship - whether by cooperation or coercion - with governors. Though there has

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been some momentum for the mando unico program in states such as Chihuahua, the overall acceptance of the reform shows little sign of a life after Calderón’s administration. Judicial reform, focused on shifting Mexico’s judicial organs from an inquisitorial to an accusatorial system, and to a court setting that places less weight on judges and more on the people (jury), has been “glacial” in the words of one interviewee. Those who follow this particular reform closely agree that the system has a long way to go, though Calderón has achieved a respectable start given the gravitas of the task. Still, the numbers bear out a reality of impunity that stands as a cornerstone of the Mexican criminal system. Since December 2006, Mexico’s justice department has recorded over 50,000 homicides, opened cases on less than 1,000, and solved less than 350, according to Dr. Shannon O’Neil, who added in a recent posting on Latin America’s Moment that “only 1 or 2 of every 100 crimes is solved.” Impunity has tremendous implications for public security, though the bigger picture concern is lack of accountability within the Mexican political system. At the state level, there are several success stories, especially of young PRI party members. These young men do not carry political baggage; they are resplendent with energy and ideas to implement while at the helm of states, such as Oaxaca, that could use the injection of capital and political will that is sure to arrive from Mexico City if (or when) a PRI government comes into office. As the strongest candidate for the country’s next president, Enrique Peña Nieto (EPN) represents the fine line between this young, vibrant, and serious cadre of PRI politicians and the old guard, often referred to as the party dinosaurs, who anchor the party in its past even as EPN and the party’s young leaders struggle to keep it in the present. Inner Workings: PRI Former governor of Sonora and a close ally of EPN, Manlio Beltrones, is perhaps the most visible symbol of the PRI dinosaurs.

Why the PRI?

We decided to consider a future Mexico

with Enrique Peña Nieto as president

and the PRI as the controlling party in

Congress. Political elections are

impossible to predict, so we

acknowledge that there is a strong

undercurrent of possibility for both the

National Action Party (PAN) and the

Democratic Revolutionary Party (PRD)

to rob the elections.

As others have observed, a campaign

led by Andres Manuel Lopez Obrador

for the PRD could strongly compete for

votes to the left of the PRI’s political

position at center-left. And if the

national tenor shifts toward a concern

for the poor, for education, or for

several items on a long social agenda,

Lopez Obrador could gain votes

currently destined for the PRI. As the

PAN draws a focus on its candidate,

Calderón’s successor could be Josefina

Vasquez Mota, whom sources agree is

a serious candidate and good option

for the PAN. Mistakes made by any one

of the campaigns could earns votes for

the other two, as could the winds of

change in Mexican media or a

significant security or economic win for

Calderón before the elections. Still, we

believe that the PRI is best placed to

win the presidential elections. As long

as the status quo message can be

effectively argued by the PRI, i.e. Mexico

is a public security mess, and as long as

Peña Nieto avoids embarrassing public

moments, we still believe he can win,

though the margin might be narrow.

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While governor, Beltrones shrugged off Federal Bureau of Investigations (FBI) agents’ concerns over covert allegiances with drug traffickers in the 1990s. If EPN is a pretty face and more representative of the bright future ahead of his party, Beltrones is the veteran battle axe behind the scenes who will beat his party into shape and could heavily influence politics from behind the scenes. More than one interviewee for this publication suggested that Beltrones is to Peña Nieto as Dick Cheney was to former US president George W. Bush. “If you take the teleprompter away [EPN] doesn’t know what to say,” one PRI insider source told us. The question we most energetically addressed to our sources focused on the deal cut between Peña Nieto and Beltrones, who until early December presented himself as the second option for the PRI’s presidential candidate. The answers have varied. Before the deal was cut, many sources suggested that Beltrones would possibly sit at the head of the president's cabinet as the minister of “gobernación,” a post that affords control over the day-to-day operations of the government. Beltrones had already served as the deputy secretary of gobernación under the Salinas administration. This cabinet post serves as the president’s mouthpiece when the federal government communicates with state governors, and in some cases, with powerful politicians in the Senate or the Chamber of Deputies, Mexico’s lower house. This is a post that would perfectly fit someone with Beltrones’ capabilities and experience. While it is possible that he would take this position if offered, a separate source indicated that Beltrones would never place himself in a position where Peña Nieto could publicly remove him from the post. Another post available to one of the PRI’s most powerful politicians is simply head of the party, a role filled by Humberto Moreira Valdés until 2 December 2011. Moreira, the former governor of Coahuila, had embarrassed the PRI, one source close to the party claimed, explaining that Moreira had been implicated in too many corruption scandals, including most recently a public-debt scandal, and was seen inside the party as someone who was tarnishing the party’s image at the national level - a reminder of the PRI’s past that EPN will not tolerate during the months of campaigning ahead of his best chance to obtain the country’s highest office. We assess that whether Beltrones chooses to run the party, work for the executive, or remain at the head of the Senate, he will assume a position that offers the necessary leverage to increase power behind the scenes. From the Senate, for example, Beltrones could continue to remain in the background, and if the new president’s public security struggle goes sideways, Beltrones would not be in the line of fire to take the blame, allowing him to ascend to the party’s presidential candidacy position for his final bid at the country’s top political job in 2018.

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When discussing Beltrones, sources are often quick to describe him as one of the party’s most powerful political tools with the weight to cover up any dark dealings from past political posts. Beltrones, sources claim, is powerful enough to protect that history even as his name and face become more exposed to domestic and international scrutiny in the next administration and beyond. The same is not true for PRI “lesser” dinosaurs with shady pasts who may seek to position themselves with fuero, or immunity, via a Congressional seat. In the next administration, these are the men to watch, as their posts could signal a conduit between organized crime and Mexico’s federal political apparatus under a PRI presidential administration. Former Tamaulipas governor Eugenio Hernández Flores, former Durango governor Ismael Alfredo Hernández Deras, former governor of Oaxaca Ulises Ruiz Ortiz, and former governor of Veracruz Fidel Herrera Beltran were all brought up in several interviews as “shady” PRI politicians to watch. Their movement into a Senate or Chamber of Deputies position could signal a deal cut with PRI leaders to protect them from prosecution, which would insulate the party’s national image from potentially embarrassing media attention, but possibly allow the continuance of these politicians’ relationships with members of the Gulf Cartel, Los Zetas, and the Sinaloa Federation while working at the federal level. Beyond Mexico City: Washington, Bogotá, and Brasilia The timing for elections in Mexico and Washington couldn’t be worse for an uninterrupted working relationship between the two, as one country, then the other, passes through elections, inauguration, and the first 100 days of a new administration. If farther apart, say a year, the elections in both countries would cause some disruption, but at a manageable level. As they are now, with Mexico set for July 2012 and the United States set for November 2012, the next Mexican president will be elected when the next US president is neck-deep in campaign mode; the next US president will be elected just before the next Mexican president is inaugurated on 1 December 2012; and, the next US president will be inaugurated just as the next Mexican president is settling into his first 100 days in January 2013. The net effect of the conclusion and initiation of presidential administrations in each country points to an auto-pilot setting of the current relationship from July 2012 (Mexican elections), with little to no bilateral policy shift revealed to the public until possibly as late as April 2013. Assuming the PRI will win the presidency, we can expect a shift in the administration’s public narration to widen its focus from a dialogue directed specifically at Washington to a broader discourse with regional

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and international partners. Sources claimed that the PRI would seek to steadily and publicly distance itself from Washington, likely downplaying the former administration’s tight and cozy relationship with the U.S. and stepping up public efforts to reach out to regional partners. Colombia, and perhaps Brazil, will be at the top of this list. As Southern Pulse has reported in the past, Colombia presents one of Mexico’s best partners for public security support. Brazil, though possibly an additional strong partner for public security policy support, presents interesting options for public policy initiatives that support energy sector development. Colombia’s public security success story - current challenges in Medellín notwithstanding - and Brazil’s clear success with poverty reduction and deep water oil well exploration and drilling are all accessible patches of public policy brain trust that Mexico’s next administration could been keen to leverage. We would not be surprised to see a training and capacity-building agreement reached between Colombia and Mexico toward the end of 2013. Such an agreement would at the least outline a very specific role for the Colombian national police to assist in the training of the Mexican federal police, perhaps state police bodies, too, where governors choose to engage. We expect that such an agreement between Colombia and Mexico would be public and media-intensive, allowing for the evolution of the Merida Initiative, from a public partnership to a covert bilateral mission, to advance smoothly. Meanwhile, one of EPN’s stated goals is to focus on legislative reform that best supports Pemex, Mexico’s struggling national oil company responsible for a considerable chunk of public revenue. Petrobras, Brazil’s public/private energy conglomerate remains well positioned to invest in deep-water drilling projects where it has years of experience and proven success in its own oil fields in the south Atlantic. Of course, a relationship with Brazil will have to be balanced between what Mexico needs domestically in the energy sector and what it wants internationally. Several sources stated that during the past two presidential administrations, Mexico has lost geopolitical “market share” on the international stage to Brazil, where international branding has been a steady foreign policy goal for nearly 10 years.

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Racing to the Ballot Box From the 16 January 2012 date of this publication, through July 2012, Mexican President Felipe Calderón has approximately six months to secure as much political currency for his party, the National Action Party (PAN), as possible. As several sources and interviewees noted, Calderón will do everything possible to prevent the PRI from returning to office. His father founded the PAN, so his political opposition to the PRI is in some ways even personal. The revelation of smoking-gun evidence that links the aforementioned PRI operators with known criminal elements in Mexico is one possible way he could subvert the PRI’s presidential campaign machine. Still, as his party focuses on consolidating support around a single candidate, Calderón likely reminds himself daily that he has until December 2012 to secure his legacy as the president of Mexico - something that all national leaders cherish well beyond their administration. Looking back on his term in office, there are several significant arrests and eliminations of criminal leaders, though the largest prizes - El Chapo, El Lazca, and El 40 - continue to elude him. Between Mexico’s two leading criminal organizations, the Sinaloa Federation and Los Zetas, the latter group is clearly the low-hanging fruit, despite recent claims that Los Zetas control more territory across Mexico. We can expect that Calderón will do everything he can to net a win with a capture of one of the Los Zetas leaders before July elections to support his party at the ballot box, but he has until December 2012 to dismantle the organization as much as possible before leaving office. In our next essay, focused on public security in Mexico, we will discuss the likely development of Mexico’s criminal system as Calderón pushes against his country’s criminal organizations before leaving office, and what his successor faces in 2013.

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Chapter 2: Public Security in Mexico

he community of Mexico observers - from professional to informal and simply curious - has blossomed over the past six years. Terms such as “DTO” and “plaza,” once the purview of the Drug Enforcement Administration (DEA), their Mexican counterparts, and a handful of

journalists and analysts have become household names in the United States and Mexico. Today, groups such as Los Zetas are widely recognized and branded. El Chapo needs no introduction. And Felipe Calderón is perhaps one of the most recognized leaders in the world, though there are still too many inside Mexico who are unfamiliar with his name or face. From a sizable sample of the varied professional observers inside Mexico and the United States, we have recorded an emerging consensus, outlined below. Through our various sources and respected interviewees, we have endeavored to stretch beyond the consensus to look past the elections and politics, understanding that it is not an easy task to separate politics and security, especially when the former almost always trumps the latter. What we have discovered is a public security landscape that appears consolidated at the federal level but becomes less so as the optic of governance and rule of law approach the local level, where we expect to see significantly more violence than today. These drivers of violence will be where public security finds its most significant shift and greatest challenge. Mexico’s next generation of assassins, traffickers, extortionists, kidnappers, smugglers, etc. will be men and women who pertain more to hyper-localized criminal groups that do not yet exist, and less to the national powerhouses of criminal enterprise that have defined the Mexican criminal landscape since the early 1980s. The Consensus When thinking about public security in Mexico, we identify at least five stakeholders: criminals, police, military, government, and citizens (including civil society. Each group has a specific role, and in the past six years, we have seen significant developments within each group. Criminals have consolidated at the national level into two groups: the Sinaloa Federation and Los Zetas. All other established groups orbit one of these two centers of gravity. In addition, we have observed a cycle that every aspiring criminal organization goes through from inception to domination as well as a progression each individual drug lord, or warlord entrepreneur, passes through on his or her way to the top of the pyramid of Mexico’s Criminal system. The net effect is a dynamic criminal system dominated by two players at the top that have less control over their network than most analysts and observers have concluded.

T

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The three levels of police organizations - municipal, state, federal - are in a constant state of flux, with the most attention concentrated at the federal level. The Secretary of Public Security (SSP) operates a top-down, centrally controlled command structure. From the top-down, professionalism, training, and mobility have significantly improved in the past six years, compared to the previous administration. With each step removed from the federal level, however, professionalism, resources, training, and efficacy drop off, with the most dramatic drop from the state to municipal levels. Local police, on the front line of public security, are the least trained, the poorest equipped, and the most likely to work for the criminal system. As we all have read, theirs is often the choice between taking a bribe or a bullet in the head - the infamous “plata o plomo” choice pioneered by the late Colombian capo, Pablo Escobar. The Mexican military, for the purposes of public security, falls into two distinct groups - the Army and the Marines, under Naval command. The Mexican Army remains a well-respected entity but its use on Mexican streets is limited. Theirs is a “clear-and-hold” mission; soldiers are not able to assist in investigation but have some effect when confronting criminal elements, which in most cases would rather retreat than engage. The Marines, by contrast, operate as the “tip of the spear” tactically and are used for specific seek-and-destroy missions. Their use has picked up significantly since the successful December 2009 kill of Arturo “El Barbas” Beltran-Leyva in Cuernavaca, Morelos. As we discussed in the previous essay, the Mexican government is currently in flux. Several political factors will come into play in the next three years that will, more than any other observable outcome, result in a change across the public security landscape, though these changes will likely have little to no impact on the future of public security in Mexico. Homicide rates will rise and fall; kidnapping and extortion will remain constant; the country’s “new barbarism” will only increase; and, the overall sense of security will likely decline. Mexican civilians and civil society have become ever more vocal about their plight, though it is a well-known fact that most of the men and women who died in the past six years had something to do with organized crime. The disturbing trend, however, is that more and more innocent people are falling into the mix, especially when messaging is concerned - as we saw in Veracruz in September and Guadalajara in November 2011 when first the Mata Zetas then Los Zetas, in response, conducted a massacre of allegedly innocent individuals. Within an analytical environment of such alarming levels of violence, where observers have become desensitized to decapitation, dismemberment, and massacres, we would be remiss not to add that violence in Mexico, as in any other country, is a symptom of deeper social issues.

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The reason why Juarez was until recently considered the most violent city in Mexico (San Pedro Sula, Honduras has the unfortunate title of the most violent city in Latin America) was because there were hundreds of young men and women with a basic education and no outlet for their productive minds. A breakdown of the family was partially responsible, but the “children of the maquilas” who had neither God nor law, as the “ni Dios ni ley” saying goes, turned to one of the few options available: street gangs. By the end of 2011, there were still well over 500 street gangs in Juarez, approximately 30 of which actually had any ties to the larger criminal groups, despite a sharp drop in the murder rate. Similar conditions in Hermosillo, Tijuana, Ciudad Chihuahua, Mexico City, and Monterrey have supported a petri-dish festering of a criminal element within Mexico’s youth bulge with little option but crime to fulfill its need for dignity, acceptance, and food. The violence these groups perpetuate upon one another would be significantly less if the young men who sustain their ranks had better options. While there are many more points to consider when discussing root causes of violence and our collective consensus across the above five touch points for public security in Mexico, we cannot cover them all in this publication. In the interest of brevity, we will focus on the two most important for the future of public security in Mexico: police and criminals. The next three years: Police Beginning this year and looking through the end of 2014, the top-down, centrally commanded federal police force will remain absolutely ineffective at the local level. The picture of an orange balanced on a toothpick comes to mind, where the toothpick is municipal police. Without local support and knowledge, federal police will never be able to do more than one-off missions into the country’s numerous hot spots, never mind make the important switch from reactive to pro-active community policing. Such incursions will net successes of mid-level and from time to time high-level operators, but it will have little to no direct impact on the base of criminality that supports Mexico’s criminal system. The future of policing in Mexico reminds us of the recent past in Rio de Janeiro, where uncontrolled urban areas, known in Brazil as favelas, remained in the control of one of three primary criminal organizations from approximately 1990 through 2011. When federal, state, or local forces entered the favelas on a clear-and-hold or seek-and-destroy mission, the criminal element receded until the government forces completed their mission - sometimes fighting back if necessary. Taking back these urban areas could be attained only with the sustainable presence of a local police force. It took the state of Rio de Janeiro over 20 years to align all the necessary stakeholders under unprecedented international pressure - the World Cup and

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Olympics - to engage in a local solution that is only today, in early 2012, finally finding some sustainable traction. Similarly, Colombia went through numerous strategies, starts, and failures over the past three decades before finding a partial solution to reducing the violence in that country. Though Calderón came to office in 2006 hoping to emulate the recent success of Colombian President Uribe on security, the political consensus that allowed Uribe to implement his policies was built on top of decades of previous security failures that Mexico never experienced. Compared to Brazil and Colombia, Mexico is in year six of this potentially 20 to 30-year trajectory. Public security in Mexico, as in Brazil, is a decentralized, bottom-up challenge. Criminal groups are networked, and at the local level, these mini-structures are repeated in the hundreds across the country. The smaller the group is, the harder it is for a federal unit to seek and destroy, clear and hold, then remain in place long enough to take back lost ground, which at the end of the day must be held by municipal police on a preventative policing footing. As long as the dominant strategy remains a centrally-commanded, top-down solution, the final result will be a tendency to empower smaller groups by breaking down the larger organizations, forcing power into the hands of hyper-local criminal actors, who in turn spread their malaise and malfeasance across the country. Of the 2,000-plus municipalities across Mexico, fewer than 100 are actually hyper-violent; yet criminality is present in some 70% of all municipalities, if not controlling. That is, the roots of criminality exist across most of the country. With enough black market opportunity and criminal power, almost any municipality in Mexico could become hyper-violent if two or more groups decide to fight for the same slice of turf. Securing Mexico’s streets from the federal level down requires too much time and effort for any one president to succeed, as Calderón’s administration will prove - not to mention the retention rate of federal police has not been ideal. Media reports in Mexico indicate a 200% jump in federal police agents leaving the agency in the past four years. We see little indication from our sources and interviewees, and from the next possible president of Mexico (see Chapter 1) that the strategy to attack organized crime will make a significant shift from the current focus on attacking the top of the structure to break apart the larger groups into smaller, more bite-sized entities. This strategy works when the entities that result from the atomization process are summarily mopped up before they are able to take root and establish a firm hold on their local market. But without a strong municipal police force, this devolution of the larger groups is what will drive the current scenario toward a future of Mexico that looks much like Colombia did five years ago, where the large DTOs had been broken down into baby cartels, which then merged with the remnants of the “demobilized” paramilitary forces, known today as criminal bands or bandas criminales (BACRIM).

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The next three years: Criminals We have already explored how taking out the head of a specific organization leads to the development of smaller, mid-sized groups. Developments in Guadalajara since the death of “Narcho Coronel” provide a near perfect example of this phenomenon. The tendency for criminal groups in Mexico is toward small and local. Of the two other national-level criminal power brokers, only the Sinaloa Federation shows signs of remaining intact over the course of the next three years, largely due to its deep connections with specific members of Mexico’s Military (Army) and political class. By contrast, Los Zetas, and their former masters, the Gulf Cartel, are both showing signs of breakup. Already, the Gulf Cartel is separated into two factions: Los Rojos and Los Metros. Both groups contest control of drug trafficking routes and the Gulf Cartel’s symbolic base of operations in Matamoros, Tamaulipas. Any act of violence, inadvertent or not, could shatter the shaky truce that holds these two organizations together, resulting in two, mid-sized groups that will struggle over control of Tamaulipas and part of Nuevo Leon, but eventually settle on control of their own turf in northeastern Mexico. Rumors that Los Zetas’ number two, Miguel Treviño, has systematically worked to undercut the leader of Los Zetas, Heriberto Lazcano, have circulated for months - long enough for our sources in Mexico to believe that there is at least a kernel of truth to the stories. Several Los Zetas leaders loyal to Lazcano were arrested in 2011. The peaceful nature of the raids strongly suggested superior intelligence, possibly developed by the DEA and their Mexican counterparts, or simply given away by Treviño. This same strategy has worked for El Chapo. Whether true or not, there are at least three factions of Los Zetas that due to internal strife and external pressure from the Mexican government and their rivals could split into Mexico’s own version of BACRIM. The first group falls under the leadership of Heriberto Lazcano and holds the middle of the country in Zacatecas and San Luis Potosí. We call this group Los Zetas Central, due to the centrally located operations in Mexico. The second falls under Miguel Treviño’s command, and is largely focused on Nuevo Leon, Tamaulipas, Veracruz, and the Yucutan. We call this group Los Zetas Norte. This second group is arguably the most powerful as it is the drug trafficking faction of Los Zetas. The third group, closely aligned with the second, is possibly under the command of Z-200 and is based in Cobán, Guatemala, Los Zetas’ stronghold and base of operations for Central America. Considering the external factors that could split Los Zetas into three groups, we place the most importance

Beyond 2012


on the Mexican government’s constant, high-pressure offensive, demonstrated by the late December rotation of 8,000 soldiers in Tamaulipas state, as well as the addition of 1,500 federal officers. Depending on how fault lines form across the two Los Zetas factions in Mexico, our sources consider that it is possible that Los Zetas Norte and Los Zetas Central could be further divided into as many as seven separate mid-sized organizations, where Nuevo Laredo, Saltillo, Gomez Palacio, Veracruz, San Luis Potosí, Zacatecas, Hidalgo, and other Zeta strongholds could each become the head of their own plaza-level organization that relies more on extortion and kidnapping than drug trafficking as a means of support. Within this eventuality, long-held Zeta strongholds in Nuevo Laredo, Veracruz, and SLP, for example, could become hyper-violent as smaller local groups, both known and as yet unnamed, seek to establish themselves, or as traditional rivals seek to displace their weakened enemies. Different drivers, same numbers As we theorized in 2005, the devolution of Los Zetas, of the Gulf Cartel, and the predictable dissolution of the Sinaloa Federation points to the formation of several criminal organizations, not a Mega Cartel. Whereas Mexico under the guise of six large, national-level criminal enterprises in 2006 could have been considered a sea of tranquility punctuated by islands of violence (less than 100 municipalities out of 2,000-plus with violence) the opposite may be proven true by early 2014, as the number of well-armed criminal groups jumps from the six significant groups we counted in 2006 - Sinaloa Federation, La Familia, Gulf Cartel, Beltra-Leyva Organization, Arellano-Felix Organization, Carrillo-Fuentes Organization - to over 10 in 2012 with a steady growth of new groups to bring the total number to possibly over 20 by the end of 2014. By the end of 2014, the men organized by El Chapo and his principal rival Heriberto Lazcano will no longer be the principal drivers of violence across Mexico. At the hyper-local level, super-powered street gangs, armed with Twitter, You Tube, the weapon of fear, and an enviable armory will man-handle local politicians and municipal police. The likelihood of journalist cowling or murder, local kidnapping, and state displacement will rise, though underreporting and the breakup of large national groups could translate into what appears on the surface to be a safer Mexico. We expect the incoming administration to take all opportunities available to make that point. Finally, there is at least one more consideration within our space allowed: drug consumption. As several mid- and small-sized groups surface in Mexico, they will all reach for the most lucrative black market product possible. Drugs will continue to play a strong role in black market forces, though local consumption will surely rise across Mexico, even as it plateaus inside the United States largely due to the

Beyond 2012


fact that the strongest groups will run trafficking networks, while smaller groups will be forced to take payment in product for services rendered on the criminal subcontracting level. As we expect to see in Central America, drug consumption in Mexico will become an explosive problem under the next administration - to a point where we expect to see two levels of public security challenges: criminal organizations and the crime committed by addicts who will steal, murder, or maybe even kidnap for a fix.

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Chapter 3: The Northern Triangle

entral America’s northern triangle - Guatemala, Honduras, and El Salvador - is where the worst nightmares for public security in Mexico and select South American countries pass for reality in the light of day. It is the most violent sub-region in the world. Honduras is the most violent

country in the world, per capita, followed by El Salvador, and unlike Afghanistan, neither is in a state of war. Guatemala in January 2012 is arguably the closest approximation to a modern day “hollow state” in the Americas, where organized crime arguably controls over 75% of the country and the outgoing government has accomplished little to curb criminality within the system, though some crime statistics are down. The three principle drivers behind Central America’s criminal system - organized crime, street gangs, and political corruption - will not see significant shifts beyond 2012, i.e. the introduction of a fourth element or the removal of one of the three, though how these elements affect the countries themselves promises to produce some interesting shifts. In the northern triangle, our sources and interviewees expect the most serious criminal problems to shift from Guatemala to Honduras, while El Salvador will have a hard time holding back the tide of criminality pushing in from the north. This year may see a few positive developments in the sub-region, but the unfortunate reality of a violent and less democratic future will overshadow most of these. Traction in Guatemala When Mexican President Felipe Calderón met with then-Guatemalan president-elect Otto Perez-Molina in mid-December 2011, the most salient point that surfaced from this hour-long meeting was the need to

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establish a relation between the country’s two civilian intelligence platforms. Information sharing - especially where transnational criminal organizations (TCOs) such as Los Zetas are concerned - was an easy agreement to make. Implementing such a platform will likely proceed, but the time available to make use of it will be limited by Calderón’s exit ceremony in December 2012. This window of opportunity further reinforces what Southern Pulse sources in Guatemala most fear: Perez-Molina will enter office and waste no time gunning for Los Zetas. The proximity of Los Zetas bases in the Petén to established Kaibiles bases, such as Poptún, indicate where the initial hotspots in the country will be; and the incoming president and former military intelligence officer is making swift moves to leverage any and all intelligence trickling south from Mexico to engage the country’s military in eradicating Los Zetas from Guatemala. This he seeks to accomplish before Calderón leaves office and the necessary relationship with his northern neighbor becomes less certain. Other hotspots could include Cobán and the surrounding area in Alta Verapaz, areas in Huehuetenango department near the Guatemalan-Mexico border, and to the east, in the department of Izabal, just to name a few. Perez-Molina will take the fight to Los Zetas in 2012 and, by extension, the Overdicks and Lorenzanas - arguably the most powerful criminal triumvirate in Guatemala today, according to one interviewee. This offensive posture will have at least one definitive result: violence. Los Zetas, if truly run by the infamous Z-200, will not back down from the new government’s onslaught. Guatemala in 2012, sources agree, will be a significantly more violent place than in the past four years. Statistics that show that the recent drop in the country’s murder rate will likely rise again. Depending on how Los Zetas as an international criminal syndicate organizes itself to confront the next Guatemalan administration, Perez-Molina’s fight against this group could be the defining struggle for the first half of his administration, through the end of 2013, if not beyond. Running parallel with his fight against Los Zetas, Perez-Molina must push forward with consolidating a set of sustainable domestic judicial organizations - police, prosecution, courts, prisons - which successfully operate independently of the United Nations-backed Commission against Impunity in Guatemala (CICIG). The decision to keep Claudia Paz y Paz on as the Attorney General, as one interviewee predicted days before the 7 December 2011 announcement, is a positive move and a strong indication that Perez Molina is serious about pushing ahead with his predecessor’s progress. Though Paz y Paz has weathered some political attacks, she presents a necessary baseline of continuity for the success of Guatemala’s judicial system as it moves from one administration to the next. The open support provided by Francisco Dall'Anese Ruiz, the head of CICIG, arguably Guatemala’s strongest judicial institution, lends a strong international voice of support for her presence within the Guatemalan system, where during the Colom administration corrupt officials far outnumbered honest, hard-working men and women.

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Moving into 2012, Perez-Molina has the CICIG and Paz y Paz to bring into his administration; it is not what our sources would call a complete recipe for success, but it is a strong start and might be just enough for the new president to gather some traction early in his administration. Beyond Los Zetas and judicial reform, Guatemala must contend with two elements that also plague her neighbors: political corruption and street gangs. Our sources in Guatemala suggest that political corruption will always exist. In a way, the country is a living example of how corruption in any given institution, if left to fester, transforms any democratic organ into an institution of corruption, whereby criminally-minded individuals operate state offices with impunity on behalf of criminal organizations. This particular challenge in Guatemala will not soon improve, and likely not during the Perez-Molina mandate, though we do expect him to be tough on corruption, especially in the military and police forces. El Salvador: Holding Back the Tide The best example we discovered in 2011 of political corruption and criminal minds running political office was in El Salvador. There, three men, known as the “three little pigs,” all but run the president’s office. As outlined in the sidebar accompanying this essay, the Cáceres brothers and their uncle continue to operate a worrisome triangle of power, with the president in the middle. Despite Funes’ own internal struggles with his political party and the men who arguably play a strong hand in running the country, the president will still have to face down the growing threat of organized crime and street gangs before leaving office in June 2014. On repeated trips to the country in 2011, one of the most often heard comments concerned the tide of criminality pushing into the country from Guatemala and Honduras, feeding an already troubling public security problem. The nexus between organized crime and street gangs is strongest in El Salvador, which is increasing in importance as a transshipment point for drugs moving from Colombia to Mexico. Interviews with members of the Mara Salvatrucha in San Salvador confirmed that this gang, at the very least, is working directly with Los Zetas. Sources are also convinced that the Mexican criminal organization has engaged the 18th Street gang. Contact with both gangs will continue to feed two trends well beyond 2012: domestic demand for drugs and technology transfer from the higher-order criminal groups to the street gangs.

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“The Three Little Pigs”

Generally referred to as the “three little pigs” among critics, the three men closest to President Funes, two brothers and

an uncle, hold well-placed positions within the administration. Carlos Cáceres is the treasury minister; his brother

Francisco is the president's private secretary, a gatekeeper. And the uncle, Gerardo "Jerry" Cáceres, is the unnamed

minister, who presides at No. 403 on La Capilla Ave. in San Salvador, where observers have noted a steady stream of

ministers, politicians, businessmen, and other power brokers in the current government since the beginning of the Funes

administration in March 2009. Gerardo, they say, is the most influential of the three.

Gerardo is also the least public. His office is just a few blocks away from the presidential manor, and apart from regular

access to the president, local reports indicate that Gerardo often speaks in the name of the president. Along with his

nephews, Gerardo played a significant role in the presidential campaign, raising money under the "Friends of Mauricio"

banner as well as pushing back against the leftist elements of the FLMN party to keep quiet lest they paint the then-

presidential candidate too red. As political tradition goes, the men who helped Funes into office received political posts,

some of them less official than others.

Gerardo, before his political shadow post, operated Puntual S.A. de C.V, a sort of consultancy that leveraged data-

mining inside Salvador’s tax police to help companies in trouble. Over a period of several years, his consultancy gathered

information on the top companies owing back taxes to the state. This was an effort, sources claim, to help those

companies negotiate their debt with the government. Through this business, Gerardo Cáceres and his associates were

also able to measure how political decisions in El Salvador affected the private sector. With a long-view toward

understanding both the public and private sectors in El Salvador, as well as how decisions on both sides affected the

other, Gerardo offered an invaluable service to the president. His “black list” of companies owning large amounts of back

taxes was a highly effective political tool when dealing with the private sector, and he always kept it handy.

With a certain amount of presidential decision-making power in his hands, Gerardo is in a unique position to proffer

political favors and snuff private initiatives. The quasi-governmental post and Gerardo’s influence is nefarious, but so far

it has been difficult for local investigators, observers, and analysts in El Salvador to put this into concrete terms.

Further speculation over why Funes has ceded any power at all to the Cáceres trio ranges from comments on the

president's own shyness and indecisive nature to the more concrete and widely held consideration that Funes' own party,

the FMLN, has all but abandoned the president. Apart from sound advice, many agree, the president needs verbal

swordsmen to tame the FLMN and any other would-be challenger to his and by extension the Cáceres' agenda. Funes

needs men like the Cáceres, especially Gerardo, to speak on his behalf to cajole politicians into pushing through

proposed legislation and other executive branch initiatives.

There is a strong consensus that Gerardo Cáceres has begun to use his private sector black list to extort tens of

thousands of dollars from the country’s top companies that are in serious financial trouble with El Salvador’s tax police.

As many as 250 separate companies may be on this list, each one paying as much as US$50,000 a month or more.

Corruption begets crime. With the possibility of millions in illegal money flowing into the Cáceres coffers, they would

then require some sort of money laundering mechanism; at least two sources have suggested that they’re using

government accounts to clean their extortion payments.

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We have observed a sort of criminal technology transfer from higher-order criminal groups to street gangs in Central America for several years now, but we expect the rate of this transfer to pick up beyond 2012. Transfers are most often direct. In 2009, when a member of El Salvador’s Cartel de Texis known as “El Burro” arranged for 40 members of the Mara Salvatrucha (MS-13) to travel from El Salvador, Honduras, and Guatemala to a secret ranch location in Guatemala, he broke ground on what by now could be a regularly occurring event in direct technology transfer for the purposes of paramilitary training. Undoubtedly, MS-13 members have been and continue to be trained in marksmanship using new weapons. There are also concerns that they have learned simple military maneuvers and how to safely handle explosives, such as fragmentation grenades. Standing against this tide is the Funes administration, which has proven to be better at formulating ideas than implementing them. Funes’ much applauded security program fell short of any sustainable effect largely due to a lack of funding - an unfortunately common story across the northern triangle. The president’s decision to broaden the use of the military to confront organized crime - beyond his 2009 presidential order - underscores the failure of his community-focused public security policy. His office is currently planning to define a public security role for the military, which will allow it to take on a more offensive role and go after organized crime targets, street gangs, and state corruption. In his last two years in office, we expect Funes to rely more on the military to net the level of public security success he will need to secure popular support and ensure a positive legacy. Of course, the increased use of the military will bring with it mission creep challenges such as the potential for human rights abuses and an escalation of violence as the military confronts an empowered criminal element. Unfortunately, however, empowering the military is a more politically expedient solution in a country where the judicial system remains weak. In many cases, arrested criminals must be released after 72 hours of incarceration due to lack of evidence. And there are more than a few cases in which judges have suddenly decided to drop charges against members of the MS-13, presumably due to death threats. Perhaps the most active transportista group in El Salvador is the Cartel de Texis, which allegedly operates along the “el caminito,” or little path, drug smuggling route through the northern departments of El Salvador - Chalatanango and Santa Ana. This group demonstrates how the increased intensity of drug trafficking over land in Central America can empower local transportista networks, which then use cash and influence to erode democratic institutions as they seek to move cocaine to the highest bidder downstream of their geographical position. El Cartel de Texis employs police, politicians, mayors, businesses men, and street gangs to operate its drug smuggling network, which purchases product from Honduran suppliers to resell to groups in Guatemala.

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As these groups and their street gang contractors become more powerful, we expect there to be an element of resistance - something not seen since the end of the civil war. While we do not expect the resurgence of the FMLN, we would not be surprised to see a resilient streak of organized criminals who choose to dig in and fight rather than drop their guns and run. Indeed, we have already seen this trend take root and grow in Guatemala, where sources claim that groups such as Los Zetas wield more firepower than the military in some sections of the country. The diffusion of criminal monopoly on lethal force is a cornerstone of the future criminal system in Central America. Though we have not yet seen this type of diffusion in El Salvador and Honduras, the lesson from Guatemala is that the trend is moving south. So is a second and perhaps even more dangerous trend: addiction. As in Mexico, criminal organizations such as the Sinaloa Federation pay their sub-contractors with product, not cash. The resulting effort to liquidate the product reinforces local demand, which alone is enough to decentralize crime and drive up violent events at the municipal level. There are also several sources who are concerned that northern triangle countries will become a source - a mid-way hotspot where drugs such as cocaine and methamphetamines are cooked and packaged for export. The combination of product payment and source-country product availability on the domestic market does not bode well for three countries that must deal with the dual challenge of organized crime and street gangs. The networked effect of rising drug addiction, empowered street gangs, criminal organizations and transportista groups that operate with impunity, and a weak, ineffective federal government descended on Guatemala in 2007 and nearly broke the country, hollowing it out in the process.

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Honduras: Circling the Drain? We agree that Presidents Otto Perez-Molina and Mauricio Funes have serious challenges ahead of them, but our sources would argue that beyond 2012, the northern triangle country that faces the most serious threat is not Guatemala, rather Honduras. We have watched Honduras fall off a public security precipice since before the mid-2009 ouster of former Honduran president Manuel Zelaya Rosales. Zelaya has returned to the country since that tense time and appears to have settled into an amicable role in the political opposition, awaiting his time for a return to office or an opportunity to support his wife’s candidacy. Meanwhile, however, the rapid response with which regional criminal networks descended on Honduras as a new base of operations underscored the sensitivity Colombian, Mexican, and sub-regional groups in Panama, Guatemala, and El Salvador have developed for exploiting undulating geopolitical realities in Central America.

Criminal Entrepreneurs in Central America

As the Honduran government struggled with righting a shipwrecked administration, drug courier flights from

Colombia, which had previously landed in Guatemala, began dropping into the Olancho and Gracias a Dios

departments of the Honduran Caribbean coast. These far-removed areas from the center of government offered

little in the way of direct support for these flights save the two things they needed the most: clandestine runways

and manual labor. As our sources began to report on the increasing number of flights, we began to consider how

Hondurans in this part of the country represented the first criminal entrepreneurs, the transportistas that we later

discovered active across the region and elsewhere.

These criminal entrepreneurs were happy to help off-load a landed plane, offer the pilot a bowl of rice and beans

and send him home to Colombia in exchange for a modest fee that likely far surpassed what they would otherwise

earn in a year. As the authors have learned first hand, these individuals are primarily simple campesinos who do not

perceive their actions as criminal. After all, in a reality where the government is absent and there are no jobs, doing

what it takes to put bread on the table is simply referred to as survival.

Clandestine airstrips are always a solid indication of black market activity in any country. In Brazil, along the border

with Colombia, or in Guatemala, near the Mexican border, or in northern Argentina, near the Bolivian border,

clandestine airstrips have existed for decades. Honduras presented an entirely better experience for pilots landing

on fumes and in the dark - pavement. Roads developed by the United Fruit Company in the early years of the 20th

century provided the perfect runways for these daring Colombian pilots, who in their own right were a special class

of criminal entrepreneurs.

The pilots, who take off from eastern Colombia or Venezuela, barely have enough fuel to land in Honduras. The call

the trip the sueño blanco, or white dream – white because of the cocaine and dream for the money they earn.

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While Honduras is well-known as the most violent country in the world, the perpetrators of this violence, those trigger and machete happy forces, are not always the usual suspects. Street gangs and their organized criminal patrones are often behind murders, but a swarming mix of lynch mobs, enterprising assassins on motorcycles, and opportunistic thieves with little to no concern for taking a life make up the bulk of this country’s murder rate. In addition, a growing problem of violence perpetrated by private militias who are funded by the country’s elite is not captured in the statistics, but contributes to the image of violence that crosses from the criminal to the political. Honduras in 2012 presents a picture of what an extreme diffusion of impunity across all criminal sectors might look like. The interesting development in Honduras in 2012 and beyond will be two-fold. First, we will be interested to see if and how the increased presence of organized crime might actually improve public security through its own efforts to control the mayhem in the best interests of business. At some point, the criminal groups will want some level of security so they can operate profitably. Second, we are curious to see how the international community will rally to support Central America’s future candidate for hollow - or narco - state status. The future of Honduras is perhaps the most difficult to discern. There are too many disparate variables at play including a complex post-coup political situation that complicates every debate over security. On the criminal front, we have at least two major street gangs - the MS-13 and the 18th Street - and dozens of smaller gangs that shift allegiances as necessary. Both Los Zetas and the Sinaloa Federation retain a strong interest in the country. Several Colombian criminal groups are present, and we suspect the presence of Albanians, Russians, Italians, and other international criminal groups. Below this throbbing mass of criminality runs an undercurrent of freelance criminal opportunists who will kill at low cost and are good at what they do. . The whole country reminds us of Medellín in the late 1980s. We were not at all surprised to learn that the government outlawed riding two astride on motorcycles - the perfect assassination vehicle. The security forces are not much better. Several sources and interviewees were quick to note that impunity swings both ways: criminals who kill can rest assured that even if caught, they will skate, and police and soldiers who abuse innocents have little concern for repercussion. Corruption is obviously another grave concern. The number of police officers and military officials directly involved in criminal activity is likely much higher than anyone suspects, yet the government’s only option is to send the military to the streets. President Lobo has played his last card. If the military solution fails to net results, he has little recourse to secure the country as his administration marches slowly to the next round of elections in November 2013 - a long time to wait if the murder rate continues to rise.

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The Southern Isthmus For the purposes of this particular essay and due to publication constraints, we chose to focus on the Northern Triangle countries. Each of the “southern isthmus” countries - Nicaragua, Costa Rica, and Panama - has their own challenges. The re-election of Daniel Ortega smacks of a future of dubious democratic activity and perhaps an increased level of political corruption as he grows closer to the ways and means of his Venezuelan patron, Hugo Chavez. That corruption opens the path for organized crime to infiltrate and operate, often with far less violence than they use in the country’s northern neighbors. Nicaragua also appears to be a conduit for FARC activity and drug trafficking in Central America. Sources have repeatedly expressed concern about the presence of a resurgent criminal network organized along the lines of old leftist political institutions. We expect Nicaragua’s future to be one of increased corruption and potential political instability as Ortega fights the opposition to remain in power and enforce his vision for society. Costa Rica’s President Laura Chinchilla was the first candidate ever elected on a public security platform. The region’s tourist haven has seen the dark side of the drug trade, and sources there continually point out that the port of Limon, on the Caribbean coast, is increasingly steeped in criminal activity. Interviews in San Jose indicate significant public concern over “narco-jueces” or judges corrupted by drug money as well as a spike in cocaine consumption. Though the country may still be considered a warehouse for regional trafficking groups, we expect the Chinchilla administration to confront a significant and unprecedented public security problem before the end of its mandate in 2014. Panama’s own struggle with public security has been a constant challenge, largely due to its proximity to Colombia, where both the FARC and criminal organizations see Panama as the first way point along the land and sea routes from Colombia to Mexico and beyond. Our primary concern with Panama, however, is money laundering. In the 1990s, the country was touted as a serious player on the anti-money laundering (AML) stage, having passed strict AML legislation that complicated the use of the modern banking system as an international money laundering hub. For several reasons we are still investigating, the country’s AML status has ebbed as money laundering activity has again begun to flow. Today, however, it is not Colombian organized crime involved in Panama; instead, we have detected Israeli and Venezuelan organizations. Furthermore, media outlets have reported on terrorist financing groups, and we would not be surprised to learn of Asian criminal organizations involved as well. Unlike other Central American countries, Panama was forced to become a pathway for global trade, forever placing this small nation on the world map, for better or worse. Panama beyond 2012

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could surpass both El Salvador and Ecuador - where the US dollar is the official currency - as a regional money laundering hub. The forecast for the region as a whole is not hopeful. International attention remains fleeting, though both Mexico and Colombia have stepped in to offer aid. The United Nations, which supports the Guatemalan judicial system, would do well to consider the implementation of a commission against impunity in El Salvador and Honduras, or even Nicaragua. However, we do not expect that plans for such organizations are near implementation, or even on paper.

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Chapter 4: Venezuelan Elections

he second most important political story in Venezuela is that the Venezuelan political opposition appears to have finally gotten their act together. Pledging unity and focused on issues that matter to voters, the major opposition candidates are running a spirited and lively primary campaign to

decide on a single opponent to take on Hugo Chavez in 2012. Of course, readers know there was a Venezuelan political story more significant than the February 2012 opposition primary. Southern Pulse first wrote about Chavez’s mysterious health problems in February 2011 when the president went missing for over a week. He later announced knee surgery, which for unknown reasons prevented him from doing much public speaking. Finally, in June, the president took an extended trip to Cuba where he had ‘emergency’ surgery for cancer somewhere in his abdomen. While the Venezuelan government has never said exactly what sort of cancer Chavez suffers from, the president admitted they removed a large tumor from his abdomen and he spent significant time in the ICU, some of it in critical condition. By the end of 2011, the Venezuelan government insisted Chavez’s health had improved. Based on his actions and appearance, most analysts believe health problems remain. Several sources believe he is unlikely to make it through the October election and intelligence documents circulating among some journalists and analysts seem to confirm the problems remain. Still, with Chavez traveling and appearing publicly on a semi-regular basis, it’s possible that he really is more resilient than those outside his inner circle believe. The uncertainty about Chavez’s health significantly complicates the forecasting challenges in Venezuela in 2012, an election that is already appearing too close to call in many of the recent polls. Can the opposition win outright against Chavez? Can the Chavistas compete if the president dies? Would Chavez or whoever follows in his boots allow the opposition to take power if they do win? And even if all goes right for the opposition and they do take power, what are their chances of rescuing a country that is falling apart in terms of economics and security? If Chavez’s health stabilizes or improves, he certainly has at least even odds of winning the election. He remains popular among a base of supporters and has a proven ability to get them to the voting mesas. The government brings the same institutional advantages to the table that they have in previous elections. The ability to spend big in the run-up to the election - providing subsidies and handouts to supporters - will boost poll numbers and help people forget about some of the long-time failings. While opposition

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supporters often talk very positively about this being “their” year, Chavez should be considered the frontrunner until the polls show him well below 50%. Chavez’s Achilles Heel is that he politically owns the country’s problems. Crime, electrical outages, and food shortages are probably the three most common issues, all affecting the average voter. Venezuela is the most violent country in South America; electrical outages have shed light on leadership dysfunction; and food shortages directly hit where his constituency could most use government support. With each passing year, Chavez loses credibility as he blames the problems of the country on an opposition that has now been completely out of power for over a dozen years. (After all, half a century later Castro’s supporters still blame Batista at times for the problems in Cuba). However, with a young demographic bubble reaching voting age, many voters no longer even remember a time when Chavez wasn’t in power.

Divisions within Chavismo Chavez’s health problems have helped highlight some divisions within Chavismo that will only be exacerbated if Chavez dies or his health further incapacitates him. To simplify the complex dynamics, Southern Pulse has divided the second tier of Chavista leadership into three groups: Chavez’s family, the politicians, and the criminal-military cartel. Members of Chavez’s family, particularly his brother Adan, work hard to remain in control. Adan currently governs the Barinas state with an iron fist and took on a greater national role as President Chavez’s health declined over the past year. In addition to Adan, Chavez’s younger brother, Argenis, is taking over the electricity portfolio in the government, a relatively thankless job. Perhaps most intriguing is the increasing profile of Chavez’s daughter Maria Gabriela. Long thought to be groomed as a potential successor, she is

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probably too young and politically inexperienced to take the reins in the coming year, but if Chavez lasts longer, she may become the front runner to be a successor as leader of Chavismo. The politicians supporting Chavismo are numerous, and they offer their support for various reasons - from ideological commitment that will last beyond the president to corruption and cronyism that will turn in a new direction the day Chavez leaves the stage. Many of the most ideological, including Elias Jaua, his current vice president, are surprisingly poor politicians who offer no competition to Chavez. A number of these politicians (including a half dozen governors) are civilians who come from the military ranks, which complicates an analysis that is divided along civilian-military lines. We assess that the criminal-military nexus within Chavismo could pull some surprises in the succession fight. A number of top generals have ties with the FARC and other drug trafficking groups, making money off criminal activity and trafficking weapons to some of the more dangerous organizations in the region. When the United States and other governments have pointed out these criminal activities to the Chavez government, the Venezuelan president has taken the warnings as part of the regional geopolitical game rather than a serious threat to the institutions of the country. Colonels and generals linked to drug trafficking have been promoted simply to annoy Washington. As this publication went to press, Chavez appointed General Rangel Silva as his new defense minister, a strong provocation given Rangel’s known support of FARC drug and weapons trafficking as well as his previous comments that the military may not allow the opposition to take power if they were to win an election. The cost of such a reckless policy is that these top military officers have a stake in ensuring the next government continues to allow criminal groups to operate with relative impunity. One shared characteristic of the three groups is that no single figure within them has become powerful under Chavez. Chavez has made sure he is the only ‘irreplaceable’ person within the government and has regularly promoted lesser-known allies and people who have moved below the radar while stifling the ambitions of those near the top. Readers can see a very recent example of this in Chavez’s late December 2011 announcement that four top Chavistas including the vice president, foreign minister, and defense minister would be running for governors of their respective states, which partially removes them from the succession fight going on within Chavismo. One winner of Chavez’s maneuverings at the end of 2011 was Diosdado Cabello. The former vice president is now the head of the PSUV and the national assembly, making him a top potential successor if Chavez were to suddenly pass. Still, Chavez knows that Cabello is widely viewed as corrupt (and rightly so), even among other Chavistas, and his loss to opposition leader Capriles in a previous gubernatorial election makes repeating that potential showdown at the national level very unpalatable for Chavez supporters.

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Another winner in the shuffle is the Venezuelan military. With many ideologues sidelined and Chavez’s family appearing less frequently on the national stage as his health has apparently improved, it appears the military has gained in relative strength and influence over the past few months. Cabello comes from the military ranks and retains strong ties to many within the military. The appointment of General Rangel Silva as defense minister signals a boost of strength for the corrupt military-criminal groups. As hinted several months ago by Chavez’s brother Adan as well as the new defense minister, the president may see the military as the protectors of his revolution should he fall ill again or should his power be threatened by a renewed democratic opposition. Opposition Strategy No matter which candidate wins the opposition primary, they will contend with several key challenges in the campaign. First, the candidate must balance rallying the base using anti-Chavez rhetoric with winning votes from moderate voters including Ni-Nis (voters neither for the opposition nor Chavez) and disaffected Chavistas. Second, the candidate must maintain a focus on future policies that will affect voters, including security and economy. This seems obvious, but will be an increasing challenge as President Chavez and his supporters attempt to bait the opposition into back-and-forth polarizing arguments that play into Chavez’s long-term political strategy. The opposition primary has confounded the president as it will be the first election in which he is not directly or indirectly on the ballot. It does not sit well with Chavez that some other politician will be able to claim a popular mandate through the election, at least among primary voters, and have some level of democratic legitimacy going into the campaign. Chavez has tried to dismiss the primary as irrelevant. He demanded the opposition skip the primary and simply select a candidate among themselves, and tried to use the process to portray the opposition as disorganized or divided. He even briefly attempted to plan a Chavista protest the day of the primary to block voters from the polls, though as of this writing he had backed down from that plan. His supporters insist they are not concerned, but give various indications that this process has been far more popular than they expected. Once the primary is over, the opposition is expected to immediately unify behind the candidate and start a national push against Chavez. Whether or not this happens next month will be a strong signal of opposition unity and Southern Pulse expects that unity to be forthcoming. Southern Pulse interviews with advisors to various opposition candidates indicate that they are all near certain that all candidates will back the eventual winner and none are expected to attempt to play spoiler if they lose. Yet even if the opposition wins, it could lose.

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One regular question is whether the government would accept an opposition win and allow them to take power. There is a real divide within Chavez’s support group among those who believe democratic legitimacy is necessary to govern and those who would be willing to go the non-democratic route. While Chavez’s fiercest opponents may not acknowledge the democratic forces within Chavismo, a large portion of his base and several top officials believe in citizen power. This contrasts with Chavez’s brother Adan along with segments of the military leadership and some of his most militant supporters who have indicated that an opposition win would not be accepted. Criminal elements within the military involved in drug trafficking and other organized crime would likely push back against an opposition victory that could end the impunity for their criminal activities. Assuming Chavez and his more militant supporters allow a transition to take place, there are questions as to whether the opposition can succeed in turning the country around. On the issues of security, economics, and energy development the country may be too far gone for any president to reverse the slide in a single term. Additionally, continued Chavista influence in key institutions including the legislature, judicial system, local governments, and the military will hamper any opposition efforts to change course from Chavez’s policies and could serve to undermine the new government.

Whenever Chavez leaves power, whether next year or later this decade, he will leave behind a very dangerous security situation. The proliferation of small arms, particularly among Chavez’s supporters and militias, will create a security challenge with a potentially politicized element. The government will lack control on the border where the FARC and other criminal groups maintain illicit trafficking, extortion, and kidnapping networks.

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In fact, there is a potential worst-case scenario in which the security situation deteriorates even further following a Chavez loss. The number of small arms has greatly expanded in the country, particularly among the poor who make up Chavez’s base. Chavez has created and expanded citizen militias, giving training to a number of loyal party members. Certainly, nobody suggests that all of them are going to violently oppose an opposition government. However, all it takes is a few hundred extreme and armed Chavez supporters, far less than one-tenth of one percent of his base, to take up arms to “defend the revolution.” That would create a decent sized insurgency that could cause serious headaches for a new government. The economic situation is no better. It will be tough to tame the government budget without inflaming anger among those who have received benefits under the Chavez government. Unwinding the complex government programs and identifying the significant corruption throughout will require diligent accounting, even as a new group of politicians enter power hoping for their share of the spoils. Deciding how to undo currency controls could lead to an economic panic if managed incorrectly and is a source of dispute among the opposition. Perhaps the only easy job for the opposition will be managing Venezuela’s foreign relations and orchestrating a shift away from Chavez’s foreign policy, which is unpopular among the Venezuelan public. The public does not appreciate the largess given to countries like Nicaragua, Bolivia, and Cuba; nor do they approve of Chavez’s relations with Iran.. While the Venezuelan public is not overly pro-U.S., they generally do not agree with Chavez’s over-the-top criticisms of the “empire.” The public will certainly embrace a change of Venezuela’s foreign policy. However, Venezuela’s neighbors are watching and wondering whether they are exchanging the devil they know for the devil they don’t. Neighborly Concern Venezuela’s neighbors will closely watch the election and have concerns regardless of the outcome. Most neighboring leaders are far more concerned about the real issues of weapons, crime, security, stability, and energy than they are of any alleged ideological war-mongering on the part of Chavez. Another Chavez term will mean a continuation of policies that have been largely negative for countries like Colombia and Brazil. However, a transition scenario carries potentially greater short-term risks for the Venezuela’s neighbors. Countries in ALBA and Petrocaribe are also watching to see if Venezuelan assistance will continue. Cuba is nearly completely dependent on aid from Venezuela, and ann opposition win, or even the wrong Chavista coming to power, could spell an end to that aid and a tough time for the Castros. Sources indicate that Cuba is vetting Chavez supporters for potential successors, doing what they can to ensure aid continues.

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Other ALBA-leaning governments would feel a bit of pain, but not as much as some analysts believe. Bolivia, Nicaragua, and Ecuador have all read the tea leaves. For the past 12-18 months, they have taken steps to diversify economically, continuing to accept Venezuelan aid but also finding new sources of money that would allow the governments to survive a sudden disappearance of that aid. Nicaragua is maintaining an open economic tie with the United States, doing more than any other country in the region to benefit from DR-CAFTA even as President Ortega regularly attacks US politics and economics. Bolivia increasingly has turned towards Brazil, becoming more dependent on Brazilian investment and aid than Venezuelan. Ecuador has reestablished economic relations with Colombia and is working to increase trade with China. Regionally, Chavez’s absence would remove one of the most vocal anti-US voices in recent decades. The Venezuelan president has divided the region, and the US-versus-Venezuela narrative, whether exaggerated or not, has in some ways distracted the region from needed debates over democracy and economic policy. Chavez’s farewell removes a thorn in the side for the US and an annoyance to many others in the region, but it may also reveal and even antagonize some of the region’s deeper conflicts that Chavez’s distraction has allowed it to ignore.

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Chapter 5: China versus Brazil

hina is increasing its presence, investment, and influence in Latin America and the Caribbean.

Brazil is a rising power regionally and globally. Neither trend should surprise anyone who has paid attention to the Western Hemisphere over the past decade. The region’s multilateral organizations and think tanks have done multiple studies on the rising influence of both countries. The general consensus is that Brazil and China are usurping some of the influence that was once held by the United States. What is missing from much of the available analysis is how these two trends find themselves on a collision course. As China and Brazil expand their influence in the Western Hemisphere they also increase their economic and political competition. The economic competition goes beyond bilateral trade disputes into competition to build infrastructure, control energy resources, win military equipment contracts, and influence global politics. This battle for influence becomes more significant when considering that Brazil’s interest in stable and peaceful neighbors and a developing region clashes with a Chinese foreign policy that seeks resources from all corners of the planet. Indeed, the most significant emerging competition in South America may be between these two rising powers. This does not, however, mean that the two countries are always competing. The China-Brazil relationship, like the China-US relationship, is a complex mix of competition and cooperation as the two become increasingly reliant on each other. Brazil and China have very strong economic ties, with the latter providing a significant market for the former’s goods, and the former helping to feed the latter’s population. On the political side, when they can cooperate, the two wield significant influence. Both Brazil and China belong to the BRICS, an investment analysis term that has become a self-fulfilling international grouping and meets on a semi-regular basis to attempt, not always successfully, to coordinate policy among the world’s top emerging markets. They also hold weight in the G20, and their economies are important to international financial stability.

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Given the enormous amount of academic research and articles on the rising influence of China in Brazil, we devote much of our focus here instead on the collision course. By way of background, we endeavor first to outline some of the signs of the rise of Chinese and Brazilian influence in 2011, followed by key areas of competition between the two countries. We follow this by focusing on specific events in which the two countries’ attempts to expand were met with a backlash by local governments and populations. Finally, we examine areas in which competition will surface most significantly in 2012 and beyond. China’s Rise China’s increasing presence in Latin America is largely related to the country’s global search for resources. South America has the food, fuel, and metals that China requires to realize its development aspirations. Chinese demand has been a boon for Latin American economies during the recent global economic crisis. In 2011, China continued to invest in Latin America, remaining the top trade partner of a number of countries, including Brazil. Though demand in China appeared to slow somewhat, it was Chinese demand that allowed countries like Brazil, Argentina, and Paraguay to remain economically strong amid the global economic crisis. Colombian President Santos told the Financial Times that his country had rather advanced plans to work with China to build a dry-canal train system linking the Atlantic and Pacific Oceans. However, very little progress was made as the year progressed. Indeed, China may be reconsidering the idea after two of their oil workers were kidnapped and security in general in the region of the proposed train line deteriorated. In mid-2011, China pushed a story that it planned to invest US$4.5 billion in Brazil’s technology sector. Brazilian President Rousseff announced, to much fanfare, a plan to open a US$12 billion Foxconn plant in Brazil that would produce iPhones or other high tech communications devices. However, negotiations later stalled over Brazil’s trade restrictions and lack of skilled workers. While the Foxconn plant will move forward, reports at the end of the year indicate that while some phones are being produced there and other investments are being made, they do not reach the initial potential from the announcement. This was a blow to the Brazilian government, which wanted to promote the deal as proof that trade with China is going in both directions. One event that surprised observers in 2011 was China’s quiet move into the downstream energy sector. Driven largely by its interest in gaining better leverage in negotiations for upstream deals, China finds itself the full or partial owner of refineries and gas stations in South America – gas stations that serve the South American consumer, not Chinese demand. From gas stations in Argentina to thermoelectric plants in

Beyond 2012


Venezuela, Chinese enterprises appear to be investing beyond the basic core interests of the country. While our sources do not believe China is attempting to gain political leverage for future negotiations, China certainly could use that leverage if the need arose. Brazil’s Rise Brazil, as South America’s most populous nation, is the region’s economic and political powerhouse. While its influence is often downplayed in the U.S. media compared to the more entertaining and provocative Hugo Chavez, President Luis Inacio “Lula” da Silva greatly expanded Brazil’s regional role, and President Rousseff is continuing that expansion, albeit more subtly. Overall, Brazil continued to set the agenda and influence UNASUR and other regional multilateral organizations while allowing other countries to take the lead role, providing multilateral cover for Brazilian foreign policy. The South American Defense Council continues to move forward, signing a number of agreements including plans to build a regional training jet and boosting regional security as well as the Brazilian defense industry. In 2011, one key show of influence and power from Brazil manifest itself in the victory for Ollanta Humala in Peru. Humala, once portrayed as a key Chavez ally, was guided towards a moderate political path and successful campaign by Lula’s own top advisors. These advisors successfully toned down Humala’s rhetoric and encouraged him to reach out to the business community for support. The presence of the Brazilians was a signal to moderates that Humala was not going to be an extremist. Thanks to their help, Humala fared quite well in the first round, and then successfully portrayed Keiko Fujimori, the daughter of former and disgraced President Alberto Fujimori, as the more extreme opponent in the second round. Brazil also greatly expanded its role in Bolivia in 2011, signing several defense agreements to provide training to the Bolivian military and allow for the use of unmanned aerial vehicles along the border to prevent illicit trafficking. However, while those agreements were a sign that Brazil was expanding its own “war on drugs” in South America as we expected, they were overshadowed by heated debates over Brazilian construction projects including the TIPNIS project, which we examine subsequently. Competition between Brazil and China Perhaps the most direct sign of Brazil-China competition in 2011 was the debate at Mercosur. With the support of Argentina, Brazil implemented heavy tariffs on a number of sectors at a meeting in late 2011. These tariffs directly target Chinese goods entering the region, partly in retaliation for the current lopsided trade numbers that are harming manufacturing in both “Southern Cone” countries.

Beyond 2012


There were also a number of more subtle venues for competition between Brazil and China around the hemisphere, particularly in connection to developing energy projects. Brazil is building multiple hydroelectric projects in Peru, with the hopes of profiting from Peruvian energy use and using the excess capacity to supply growing Brazilian demand. Both Brazil and China vied for hydroelectric projects in Costa Rica. Across the San Juan River in Nicaragua, Brazil continues to build an ambitious hydro project signed between Presidents Lula and Ortega several years ago. China is building hydroelectric projects in Ecuador as President Correa has sought to expand his alliance with the Asian country. Lacking international finance and wanting to avoid any sort of dependence on ALBA, the international group led by Chavez, Correa views China as the best potential ally on this front. For Brazil, which clashed with Ecuador in 2010 over its refusal to pay back loans to the Brazilian development bank, the loss of projects in Ecuador to China was a disappointment. Backlash Amid this competition, it becomes clear that Latin American leaders and populations are not altogether receptive to these emerging powers. Various events signaling a backlash against China or Brazil occurred in 2011 and Southern Pulse expects that to increase in 2012 and beyond. The backlash against China comes from both the grassroots and elite levels of society. At the grassroots level, there is concern that Chinese imports are responsible for declining local manufacturing jobs, while Chinese investments in agriculture and mining do not respect the environment or local wishes. According to our sources, there is talk among elites, including several key officials from ECLAC and the World Bank, of a “new dependency” forming around China’s procurement of raw materials from Latin America. The model is giving Latin America a burst of money but holding back its own economic development through manufactured goods. One of our interviewees, who had previously viewed relations with China as a “win-win” situation, concedes that China may come out on top in this competition, to the detriment of the region and its interests. Indeed, many of the deals signed have proven to be lopsided in favor of China. Of those lopsided agreements, none have been more beneficial to China than those with Venezuela. They have offered cheap oil access to the Chavez government, which is always in need of money in spite of the high price of crude. However, at the same time, that may signal that China’s most significant challenge will emerge from Venezuela’s 2012 election. Over the past few years, China has taken advantage of Chavez’s need for capital and his eagerness to sign agreements that demonstrate an “anti-imperialist” bent. At the same time, China has

Beyond 2012


managed to obtain oil prices well below market rates, providing the Venezuelan opposition a political weapon to use against President Chavez’s foreign policy. China should be concerned about a potential opposition move to negate or renegotiate those deals if they managed to rise to power. China holds little leverage to prevent that from happening. Though Beijing has faced criticisms but not a significant revolt against its policies in Latin America so far, recent events in Burma and Zambia show how an anti-China protest and political movement can surprise the Asian superpower, as one of our interviewees pointed out in December 2011. Protests in the highly authoritarian Myanmar (Burma) forced the closing of a hydroelectric project, while the opposition won a recent Zambian election campaign based on an anti-China platform. An opposition revocation of Chavez’s China policies is not the most likely scenario. In fact, it would be unprecedented in Latin America. However, it is certainly a negative potential scenario that must concern Beijing. Other areas in the Andean region are also ripe for protests against China. In Ecuador, environmental activists complain that China’s hydropower plans pose a threat to one of the country’s highest waterfalls in the Sumaco Biosphere Reserve, adversely affecting the environment and diminishing eco-tourism possibilities. Similar complaints are heard about Chinese projects in Peru, where locals say the companies do not take important environmental concerns into consideration (of course, the same complaint is made of US and Canadian companies in Peru). Given violent protests in Peru over other mining communities, China should expect to see some sort of controversy leading to protests in the coming year. Neither is all well with Brazil’s energy projects. Paraguay continues to complain that Brazil is not offering it a fair deal on hydroelectric power. Bolivia has at times changed its contractually mandated export quotas to Brazil due to local demands. These minor disputes hint at a near future in which Brazilian electric demand will be a key point of negotiations with neighboring countries. Brazil will attempt to benefit by investing in energy creation that plays into an integrated regional system. China has fewer interests and its projects may directly compete with Brazil’s needs. However, for Brazil, the biggest sign of a potential backlash occurred in Bolivia. The Brazilian government funded a highway through the TIPNIS nature reserve to improve Bolivia’s transportation infrastructure. Indigenous communities directly impacted by the construction demanded a halt to the efforts and took their protest on a long march from the remote jungles of Bolivia to the capital in La Paz. Brazil does not bear all the blame for this, and arguably the Morales government significantly mismanaged the controversy. The debate over the highway created a crisis within the Bolivian government and remains unresolved.

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Argentina has had trade disputes with both China and Brazil. China banned imports of soy from Argentina, affecting the country’s economy in the year before an election. While the two countries eventually worked out their differences, Argentina’s government will not soon forget the incident. Argentina will work to make itself less dependent on China and, beyond the Mercosur tariffs, may attempt other forms of retaliation in the coming years. Various South American countries have passed or are debating laws to restrict land ownership in part due to China’s increasing attempt to control future food and energy supplies. Laws in Brazil were tightened in 2010 to prevent foreign companies from using loopholes by creating Brazilian subsidiaries to dodge restrictions on foreign ownership. A 2011 law in Argentina restricts foreign ownership to 15% of its territory. Additionally, no single country can own more than 30% of that share, and the percentages are even smaller in key fertile regions of the country. The law was in part a response to China’s leasing of 750,000 acres in Rio Negro, which set off local protests and drew national attention. Uruguay is also considering a law restricting foreign ownership, though they ironically face opposition from Brazil and Argentina, both of which have significant foreign assets in the country. Paradox of supply and demand Brazil has found itself in a paradoxical position here. If Chinese demand slows, China will recede from the regional race, but the economics of the situation could hit Brazil particularly hard, reducing her ability to influence the region as well. If Chinese demand continues, Brazil has little choice but to watch as it and other countries in the region fall into a new dependency trap, exporting primary materials to China. Nevertheless, we assess that with the advantages of geography and cultural similarities, Brazil should be able to navigate that paradox and end up on top, regardless of which direction China takes. The most important advantage Brazil has is that the region perceives it as acting to build regional integration. Meanwhile, countries are learning that China only acts in its own interests and cares little about the long-term success of South America or regional security and stability. One significant aspect to follow is whether this competition between China and Brazil remains a background issue or whether a particular event pushes it into the media spotlight. A battle over a significant infrastructure contract or a mistake by Brazil or China that leads to major environmental damage could force the region to choose sides. Neither China nor Brazil desire a publicly played out battle and would likely work to quietly resolve their differences; however, any tension created over a single incident could help better illuminate how this will develop over the next decade.

Beyond 2012


Chapter 6: Cyberwar, Cybercrime, and Political Hacking

hen the international hacking group “Anonymous” announced an attack on Colombian

government websites in early 2011, it was an interesting novelty that caused the Colombian authorities a bit of heartburn, but did no serious damage. A few months later, when several bloggers were killed by the Zetas in Mexico, cyber issues had become mainstream and deadly. Various forms of cybercrime and political hacking have existed in Latin America since the late 1990s, but the issue jumped into the media spotlight in 2011 with high-profile cyber attacks, political hacktivism, private information leaks, and a potential conflict between hackers and a Mexican criminal organization. For the region, this was the year that issues in the cyber domain entered the political mainstream and general public conversation. We expect this issue to continue to rise in profile in 2012 and beyond as more of the region is connected and has online access. The region should take this opportunity to educate policymakers and discuss some of the tough debates over cybersecurity. While hacking and defacing websites received the most attention in 2011, more damaging attacks occur when private government information is leaked. The example of Wikileaks, in which tens of thousands of classified US government documents were leaked on the internet, was replicated several times in 2011 in Latin America. Emails from Argentine government officials were leaked on a website, leading to a court order to block those websites inside the country. Spreadsheets containing budget items of Venezuela’s donations to Nicaragua were leaked and then published online. A local Brazilian hacking group took down various Brazilian government websites and stole the personnel information of 1,000 Brazilian soldiers. Similarly, in Peru, local hackers managed to obtain information about police officers including their bank account information. Cuban exiles based out of Miami hacked the email accounts of government officials and posted cell phone and address information online to encourage activists to contact those officials. Often, the less public the attack the more damage potential. The Honduran government announced that

W

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email servers at the president’s palace had been hacked and data stolen. However, they were unable to identify the culprits or the motive. Was it another nation-state, local political opposition, organized crime, or just some kids having fun? The fact that the government may have lost sensitive communications about security and budget issues and does not know who has it or what they are doing with that information is troubling. The attacks were not just hackers versus governments. In Venezuela, opposition leaders and activists have had their emails and phone records hacked, with voice mails broadcast on state television. This hacking has occurred partially due to training and direct actions by Cuban intelligence and military inside Venezuela. There is also a fluid black market of hackers in Venezuela who make a living by hacking private information and then selling it to the highest bidders, who are often Venezuelan government officials trying to impress their bosses. Less malicious but still disturbing to many internet users, the Chilean and Brazilian governments both indicated they have programs in place to monitor posts on social media sites including Facebook to identify potential protests and social disturbances. The Ecuadoran government proposed legislation to track social media users and force companies to identify otherwise anonymous authors. The Mexican government took the issue a step further, placing two Twitter users on trial over posts that allegedly created panic among the local population. There may have been other, unreported incidents. Statistics indicate that cybercrime is on the rise, with more than half of major firms in one poll reporting incidents of theft or extortion online; however, few businesses, particularly banks, are willing to disclose the precise damage of the attacks. Similarly, economic espionage against multilatinas and US and European businesses operating in Latin America is occurring at levels in Latin America that are clearly underreported based on data from other areas of the world. Zetas vs. Anonymous Anonymous is a group of self-organized hackers who involve themselves in various causes. They tend to be supportive of radical transparency for governments, corporations, and leaders and radical privacy for individuals, though those ideologies sometimes contradict each other. Anonymous and other similar organizations do not have a specific membership policy or leadership structure (as some of its members are anonymous), though there are certain pseudonymous leaders who have gained reputations as being attached to the group. Anyone can join the organization, and local versions have

Beyond 2012


popped up around Latin America. Hackers in Guatemala, Chile, Peru, and Brazil all called themselves members of Anonymous while attacking government or corporate websites over the past year. Additionally, Anonymous seems to have a serious following in Spain with an interest in involving itself in attacks in Latin America. Most attacks in 2011 by Anonymous and Lulzsec, a similar international hacking group, involved hacking government websites and taking them offline. In some instances, the groups managed to obtain some limited information from those websites and publish it. The hacks were embarrassing for governments and costly as they were forced to upgrade security efforts. However, they did little real damage to any governments in Latin America. The announcement in late October that Anonymous would target the Zetas was a startling development and a significant shift from their previous modus operandi in Latin America. Taking on a violent cartel places actual lives in danger, as the Zetas had already proven by killing several bloggers and online activists. As the story unfolded, it was clear that Anonymous was not united on the decision to target Los Zetas. Many within the online community in Mexico felt the announcement was reckless and made them targets. The story that a member of Anonymous had been kidnapped and then released appeared to have shifting details that could not be confirmed by reporters and analysts on the ground. In the end, the story fizzled. While a few websites were hacked and one state attorney general was accused of being paid off by Los Zetas, no real damage was done to the group and the Mexican criminals did not appear to retaliate in any significant way. Still, this was likely the first skirmish in what will be an escalating war between hackers and criminal groups. Even as criminal groups like Los Zetas expand their cybercrime capabilities, a portion of the Mexican and international hacking community is going to look for ways to attack the group. Groups like Los Zetas lack significant critical infrastructure that can be hacked by activists in the cyber domain, (though the recent discovery of Zetas’ communications systems may indicate they do have some vulnerabilities to hacking groups). What harms the Zetas are efforts at transparency and effective police and judicial institutions. Programs that expose their corruption of public officials or could lead to the arrest and prosecution of these criminals are threats. This is an area where the cyber culture excels, providing transparency to organizations that want to remain obscure. Of course, Los Zetas do not likely keep a database of all their corrupt officials stored on a server somewhere. Activists from Anonymous and other more local Mexican hacking groups are looking for ways

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to obtain the information by exposing businesses that have paid extortion fees and breaking into government databases to search for classified information about corrupt officials or police. This makes the government and private sector casualties caught in the crossfire between the two organizations. Without better security measures, this crossfire is likely to become more deadly. The Near Future Along with the fight between hackers and Mexico’s criminal organizations, 2012 will likely see more of what was seen in 2011. Numerous political hacks will draw attention as they take down government and candidate webpages. Under the surface of what media coverage informs observers about these attacks and groups that perpetuate them, cybercrime will continue to expand, particularly in the banking industry. Governments are unlikely to catch up to make needed investments in infrastructure to prevent the threat of cyber attacks. In 2012, Brazil and Mexico will continue to be the two highest-profile battlegrounds. Brazil reigns as the cybercrime king in the region and the attacks coming out of that country will continue to increase in sophistication. In Mexico, the criminals, government, and civil society have only begun to scratch the surface of how the current conflict could play out in the cyber domain. Sources agree, however, that both sides will improve their capabilities and imagination for causing damage to the other. The most interesting battles in South America could occur in Venezuela, where the potential for operations in the cyber domain will overlap with the contentious October 2012 election. Supporters for the opposition are generally better connected online, but the government has been connecting supporters and encouraging them to go after the opposition online. Several years ago, President Chavez announced he was training an arm of the Bolivarian militia to operate in cyberspace and respond to “information terrorism” (as he used to refer to criticisms on Twitter before he joined the platform). Other issues to watch include government regulations in Mexico, Panama, Ecuador, and Argentina which are trying to restrict online speech or identify users of social media sites. Ecuador, in particular, seems determined to crack down on anonymous online criticisms of the government as part of its broader attacks on press freedom. Such policies may create a hostile reaction against specific government agencies for local hacking groups or larger, networked groups such as Anonymous. Indeed, over the course of 2011, Anonymous criticized and threatened several governments in the hemisphere that acted to restrict web freedom including Ecuador, Mexico, and Chile.

Beyond 2012


Additionally, though many of the biggest incidents in 2011 appeared to occur within countries, with Brazilian hackers targeting the Brazilian government, Colombian hackers targeting the Colombian government, etc., one potential trend that would provide even greater impetus to this issue is an increase in cross-border cyber incidents. We see a future where Brazilian hackers are hired to dig into files owned by Argentine targets, or Venezuelan hackers contracted to monitor specific targets in Colombia. Government Issues While issues in the cyber domain enter the public debate, there remains significant confusion among policymakers in the region as to how to respond. Some countries, such as Brazil, appear to be ahead of their neighbors on cybersecurity efforts and legislation, yet remain far behind the criminals and hackers who plague their internet. Brazil’s military is at the forefront of creating a force that can attack and defend in the cyber domain, and they have been relatively public about those plans, with leading generals speaking to media several times in 2011. Brazil also takes a key regional leadership role. As part of UNASUR infrastructure plans, Brazil hopes to expand high bandwidth connections across South America. This will better connect the region and is a smart policy, but it also creates infrastructure that will need to be defended against attacks in that domain. Many countries have opened Computer Emergency Response Teams (CERTS) in recent years, with Colombia being the most recent. The coordination efforts of those CERTS through the OAS is one of the untold success stories of the past few years and has probably been the most significant area of progress for the region in terms of securing the internet. Other countries simply lack the resources and technical know-how to deal with the problem, allowing computers and ISPs to be used for botnets and crimes with impunity. The poorest countries in the hemisphere struggle with limited resources and have other priorities that should rank higher than cybersecurity. If their neighbors and the international community do not help, the problem will languish on the sidelines. The net result may see these countries become deep pools of botnets where a significant percentage of the online computers are used to help implement cyber-criminal events. It is important to recognize that the online ecosystem is not heavily constrained by national boundaries. Malware infecting servers in one country easily jumps to other countries. One internet security firm predicted that Central America would be among the top locations in the world for hosting botnets because a high proportion of computers use pirated operating systems without security updates and the governments and ISPs lack resources to defend against the problem.

Beyond 2012


For this reason, the Western Hemisphere needs to be united against threats in the cyber domain, with more technologically advanced countries including the United States and Brazil providing assistance to countries that otherwise could not begin to defend against criminals in this space. There is also a more philosophical discussion to be had about this domain in the hemisphere:

• What differentiates war, espionage, crime, and political protest in the cyber domain? The fact that certain online malware or a large botnet could be used for a nation-state attack, an act of espionage, or by organized crime means that the divisions among military, intelligence, and civilian agencies may not be clarified until intent is known.

• Does a cyber attack against one country cause other countries to come to its aid? • Can a physical response be appropriate for a cyber attack that causes real damage? • If a non-state group attacks a country across borders (imagine civilian hackers in Colombia or

Venezuela attacking the other government’s servers), is it an act of war, and what measures can the other country take to retaliate or defend?

• Under what circumstances, if any, can a country hit a “kill switch” and shut off the internet? • Is a country liable if computers on its territory are being used in an act of war in which it is

otherwise not involved? These are questions that the US and other developed countries are just beginning to wrap their heads around. They have barely been discussed in the hemisphere. Unfortunately, they are unlikely to be discussed until after it is too late - after a serious attack has taken place and damage is done.

Beyond 2012


Afterword

hree clear challenges emerged as we began to discuss the scope of topics to be included in Beyond 2012. First, the list of potential topics was nearly endless. We decided to limit ourselves to these six essays because the topics they address represent key trends that will certainly shape the region

over the coming year and well beyond. Second, like all analysts, we had to accept the limits of our ability to predict the unpredictable. Finally, once we selected the focus topics and examined the predictive possibilities, the process of synthesizing bits and pieces of hundreds of interviews, document clippings, media reports, and other tangible forms of information and intelligence emerged as a daunting task. Prediction is precarious work. Many of the defining events of Latin America over the past few years surfaced with less than one week’s notice, and sometimes overnight. We had sources on the ground before, during, and after events like the 2009 coup in Honduras or the Zetas vs. Anonymous battle in 2011, but none of our analysts could have predicted those events more than a few weeks in advance. We expect that several events will occur in 2012 and beyond that are as significant as they are surprising, especially in the countries we have discussed above. In this book, we have written about two elections, neither of which can be predicted with perfect accuracy. In Mexico, campaigning is beginning to heat up and we are already noticing media coverage of how Enrique Peña Nieto, the man we think will win the elections, has stumbled into embarrassing moments in front of national and international media. Predicting elections in Mexico is easier than in Venezuela, primarily because we expect the ruling party in Mexico to run a reasonably respectable campaign. More importantly, we expect that the ruling party will honorably step down if it loses. We are not so sure of either in Venezuela. Dissecting Chavismo in advance and examining what it will look like after Chavez is a tricky hypothetical given the centrality of Venezuela’s president as a caudillo and his prevention of others from within his own party rising up to take significant leadership roles. Politics aside, analyzing the evolution of criminal systems in Mexico and Central America is only slightly less complicated than politics. The markets for drugs and other illicit items are fairly well established, as are the drivers behind the violence in Mexico and Central America’s Northern Triangle countries. Yet, as we pointed out in the case of Honduras, these variables could line up in ways to promote unknown actors, or catalyze significantly positive or negative outcomes among existing groups.

T

Beyond 2012


We believe the evolution of public security in these countries has more to do with the criminal actors themselves, as part of the larger criminal system, and less to do with and specific policies, or with how governments choose to confront them. Corruption within governments and within the leadership dynamics of organized criminal groups themselves is one variable that skews all logic. Where normal alliances would make sense, corruption and power struggles present strange bedfellows instead, especially in countries such as Guatemala and Mexico where we have observed the evolution from corruption inside an institution to the de facto institutionalization of corruption. In Mexico, if Los Zetas break up into three or more separate groups, we might see one group align itself with one of the two groups that currently form the Gulf Cartel. The more mid- to small-sized criminal organizations there are in Mexico, the less likely anyone will be able to foresee how these groups will operate, where they will operate, and whom they will target. The proliferation of mid-sized groups over the next two to three years is why Mexico beyond 2012 could be more violent, though in a different way, than it has been in the past five years. Further south, Guatemala’s murder rates have decreased, but there is less fighting between former rival groups. We suspect that the dust has settled to a certain extent, but could very quickly kick up if the new administration goes on the offensive. This is an easy conclusion. It is harder to see how Honduras or El Salvador can get worse, already facing the worst homicide rates in the world. The chemistry is right for ongoing violence, however, largely because of criminal evolution and the government’s consistent inability to gain traction. Bureaucratic inertia suggests that any policy will be difficult to remove after several years of implementation and institutionalization. The same is true for “criminal inertia,” where several years of criminal ownership of a certain section of state institutions, towns, or stretches of territory become increasingly harder to win back to government control. So far, criminal inertia in some areas of Mexico and Central America has been building over a decade or more of state absence. Whatever the trend moving forward, the years of violence have taken a toll on all three Northern Triangle governments’ ability to function, degrading the basic social contract that exists between the government and society. The institutions in those countries face a critical fight to strengthen and reestablish the legitimacy of the governments or face a certain degree of state failure. Regionally, as many analysts focused on new institutions, including the Community of Latin American and Caribbean States (CELAC) in 2011, we know that 2012 will bring a renewed importance for the Organization of American States (OAS) through the Summit of the Americas process. No matter how much some leaders may deride the process, it is the only event at which the U.S. president meets with all of his regional counterparts. We do not expect the U.S. or the EU to engage in a game-changing way in the

Beyond 2012


next two years due to financial and political constraints, but they are still key partners for the region, even as analysts often prefer to focus on the newer rising powers. It is through the Summit of the Americas as well as continued UNASUR activities that we expect Brazil will exercise its influence in the region. The focus on regional integration projects gives Brazil a chance to play a leadership role where China cannot. And her role is not limited to the traditional foreign policy of extractive sector support from Petrobras or engineering solutions from Odebrecht. We expect Brazil to engage in public security as well, both directly through bilateral agreements and indirectly; though providing an example of how community-policing programs, with the right funding and political attention, can break the cycle of criminal inertia. In the favelas of Rio de Janeiro, crime has ruled for well over 20 years, and the government in that state has exemplified a remarkable take-back strategy. Beyond 2012, Brazil may be willing to step up to assist Mexico with “state capture.” Brasilia could also be well positioned to assist regional governments with what we expect will be an increasingly serious cybersecurity challenge. The cyber component of this book is of direct interest to Southern Pulse because it impacts our work on a weekly basis. Contributors, sources, investigators, and editors are diffused across Latin America and the Caribbean. The on-the-ground aspect of our collection and reporting process is key to everything we do, but it also requires us to be networked to synthesize and analyze everything we collect. As a decentralized network tethered together by the internet, we see the challenges that security in this domain presents. We also see the opportunity that it offers to Latin America and the Caribbean. Managed correctly, it is an opportunity for the region to leapfrog over decades of technology and bring the next generation into the global economy, as Twitter and YouTube users in Mexico proved by getting the news out even as journalists struggled for their lives. Leapfrogging, however, can only be done with smart cybersecurity policies and political will to take on the science, technology, and education issues that will ensure the region has its rightful safe and secure access to the information environment.

Beyond 2012


Definitions Bolivarian Alternative for the Americas (ALBA) - A coalition of self-defined “leftist” countries allied with Venezuelan President Hugo Chavez. Atomization - The result of a law enforcement strategy designed to arrest high-level leaders of criminal organizations. Once removed, their organizations often fracture into smaller pieces. Botnet - A collection of computers connected to the internet that have been compromised by malware and can be controlled by a remote server. BRICS - Standing for Brazil, Russia, India, China (and sometimes South Africa), this was a unit of economic analysis invented to discuss rising emerging markets. The countries have since increased their integration. Criminal Entrepreneurs - A term that describes the process by which individuals - educated or not - chose a life of crime when no other options were available. Once made, the decision leads individuals down a path of entrepreneurial activity whereby simple tasks, such as cooking, manual labor, scouting, driving, and observation support the criminal system, most often the drug trade. In addition, these individuals often do not consider their activity as criminal. Criminal System - An elite organization of likeminded actors who leverage political, judicial, military, and financial resources to promote the stability and growth of a black market enterprise at the expense of licit business and government. Deviant Globalization - “Cross-border economic networks that produce, move, and consume products...and takes place in the shadows of the formal, licit global economy...challenging traditional notions of wealth, development, and power.” DR-CAFTA - A free trade agreement between the United States, the Dominican Republic, and Central America. Hactivism - A combination of “hacker” and “activism”, this is the process of making a political point through computer hacking.

Beyond 2012


Internet Service Provider (ISP) - a private or public organization that provides internet connectivity through wireless, fiber optics, cable, or dial up connections. Multilatinas – Multinational corporations based out of Latin America. Networked Effect - the result of synergistic connections between powerful nodes within one network, i.e. among the various clicks of a street gang such as the Mara Salvatrucha (MS-13), or connections across networks, as observed within the criminal system, i.e. the connections between corrupt governors, warlord entrepreneurs (see below), black market businesses, and criminal entrepreneurs (see above). Ni-Ni - translated from Spanish, literally, “neither God, nor law,” or as some have defined it: “neither work nor school.” This term refers to the marginalized youth who join street gangs to find dignity, a source of employment, and a sense of family or of belonging. Petrocaribe - A program implemented by Venezuelan President Hugo Chavez that provides cheap funding and beneficial terms to countries in Central America and the Caribbean purchasing Venezuelan oil. Transportistas - Criminal logisticians that often operate in Central America. Also a term that refers to the smaller criminal organizations that form to support international drug trafficking organizations that use Central America as a transshipment corridor. See: criminal entrepreneurs. UNASUR - The Union of South American Nations is the leading integration unit on the continent. Warlord Entrepreneur – Deviant actors who prosper through a series of novel and asymmetric games in a black market economy and take advantage of power vacuums as the legitimacy and advantage of existing institutions erodes; these actors compete for influence by playing a larger role in markets and services currently provided by the state or mainstream business.

Beyond 2012


About Authors Samuel Logan is the Founding Director of Southern Pulse. From 1998 to 2009, Logan lived in worked in Central and South America as an Outward Bound instructor, an extreme white water kayaking guide, a desk news reporter, travel writer, and investigative journalist. He is the author of This is for the Mara Salvatrucha (Hyperion, 2009), co-authored with Dr. George Grayson The Executioner’s Men (forthcoming, Transaction, March 2011), and is a National Geographic Television story consultant. Logan has an MA in international policy studies, with a specialization in the economics of black markets from the Monterey Institute of International Studies. He is a regular speaker on organized crime, small arms and light weapons, corruption and drug trafficking, and geopolitics in Latin America, and continues to travel through the region supporting Southern Pulse network development and conducting private investigations. James Bosworth is a freelance writer and consultant based in Managua, Nicaragua. Over the past seven years, in his free time, he has been the author of 'Bloggings by Boz' where he provides daily analysis and commentary on Latin American politics and US foreign policy. Additionally, he has written recent reports on energy markets in South America, organized crime in Honduras, arms trafficking in El Salvador and global cybersecurity cooperation to combat botnets. Prior to freelancing, Bosworth was Associate for Communications at The Inter-American Dialogue and Director of Research at The Rendon Group. About Southern Pulse Founded in 2005, Southern Pulse is a professional services firm focused on investigating themes related to security, politics, energy, and business in Latin America. Southern Pulse is based in Annapolis, Maryland, and runs its online media monitoring service from Washington, DC. From hubs in Mexico, El Salvador, Colombia, Brazil, and Chile, Southern Pulse operates a human intelligence network across the Americas and focuses on offline-only, OSINT collection to develop proprietary products and services for public and private clients in the Americas and Europe. For Media inquiries, please email: [email protected] or call +1-202-470-0148.

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