Mexican Cartel Extortion: A Threat to Mining Investments and Full Protection and Security Claims

Growing Threat from Organized Crime:

Over the past 17 years, Mexican drug cartels have evolved from drug traffickers to diversified criminal enterprises. They now exploit various sectors, including the lucrative mining industry. Reports indicate that international miners in Mexico face severe disruptions from cartel-related extortions. For instance, Pan American Silver suspended operations in Zacatecas due to silver concentrate theft, while Americas Gold and Silver's Cosalá mine in Sinaloa experienced a prolonged blockade involving organized crime. Canadian miners in Guerrero pay "taxes" to cartels for security, a situation acknowledged by President López Obrador. According to the Mexican Mining Chamber, criminal extortion may lead to revenue losses of up to 30% for some mines. This environment of lawlessness raises a critical question: can international mining investors seek protection under investment treaties for cartel-related extortion by claiming a breach of the Full Protection and Security (FPS) standard?

Understanding the Full Protection and Security Standard:

The FPS standard is a long-standing investment protection measure, mandating sovereign states to ensure physical protection and vigilance over investors' properties. While formulations vary across treaties, FPS typically obliges the state to protect investments from third-party interference. Historical cases support this view:

1. Tatneft v. Ukraine: Ukraine was found in breach of FPS for not providing police protection during a refinery seizure.
2. Von Pezold v. Zimbabwe: Zimbabwe failed to protect an investor’s estate from local settlers, leading to an FPS violation.
3. Cengiz v. Libya: Libya was held liable for not securing infrastructure projects from looting during political upheaval.
4. De Sutton v. Madagascar: Madagascar breached FPS when local police failed to protect a garment factory from rioters.

In these cases, tribunals have emphasized the state's obligation to physically protect investments from violent acts, evaluating the state's actions against specific circumstances.

Applicability to Cartel-Related Extortion in Mexico:

Although no precedents specifically address mining sector extortion by organized crime, the principles established in the aforementioned cases suggest that Mexico's failure to protect mining operations from cartel interference could be construed as an FPS violation. The De Sutton case highlights the need for a detailed analysis of factual circumstances, considering factors like the investor’s awareness of security risks, the state's resources, and the progression of risks during the investment.

Recent Developments and Future Outlook:

In recent years, Mexico has witnessed a surge in investment claims related to the mining industry. Notably, Canadian miner Silver Bull filed a NAFTA legacy arbitration against Mexico, alleging that local groups occupied its Sierra Mojada mine and demanded illegal royalties, with Mexican authorities failing to intervene. Silver Bull claims an FPS violation under NAFTA, marking the first such arbitration related to mining extortion. If cartel-related extortion continues, more similar claims are likely to follow. Although the period for NAFTA legacy claims has passed and Canada has renounced Investor-State Dispute Settlement (ISDS) under the USMCA, Canadian miners can still seek protection under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which includes FPS provisions.

Conclusion:

The growing interference of Mexican cartels in mining activities poses a significant challenge for international investors and the Mexican government. The upcoming administration under President-elect Claudia Sheinbaum must address this security crisis to stabilize the economy and reassure investors. The outcome of the Silver Bull arbitration will be pivotal in determining the extent to which cartel-related extortion can be deemed a breach of the FPS standard, potentially setting a precedent for future claims. As insecurity continues to plague mining operations, the interplay between organized crime and investment protections will remain a critical area of legal and economic scrutiny.