Terry Gerton Federal contractors already have to certify that they don’t do business with foreign terrorist organizations. But new guidance from the Department of Justice means it might not be so easy to tell who’s who, and that has legal repercussions. To help us understand these new complexities, counsels from King and Spalding, Mike Galdo and Brandt Leibe join me now. Brandt, there’s a lot of shifting uncertainty around trade and tariff rules these days. Especially federal contractors who might have some business in Mexico have got to keep their eye on some new designations from DOJ. What’s going on here and what’s new?

Brandt Leibe So in February of this year, 2025, the State Department has designated multiple Mexican drug cartels as foreign terrorist organizations. And at the same time, also designated them as specially designated global terrorists. And while that might sound just legally esoteric, it has some pretty meaningful consequences for businesses that might be doing business in parts of Mexico where there is pervasive cartel activity. It obviously opens up the risk — maybe not obviously, but it opens up a risk that entities that are giving some material benefit to a cartel could be prosecuted under statutes that criminally prohibit material support for foreign terrorist organizations. And it also opens up some risks of civil liability that I know we will touch on a little later in the conversation. So one of the questions that comes up often when looking at this is what is material support? And material support really can be almost anything. It can be, almost anything of value that’s given to One of these cartel organizations. And as I said that risk is particularly acute in parts of Mexico where cartel activity is really pervasive because that’s where you see the cartels penetrating things that could be seen in some situations as legitimate businesses like a transportation business or some other type of vendor that a company that’s doing business down there might actually contract with unknowingly in some situations.

Terry Gerton So it’s sort of like setting up a cover organization or a way to disguise their own operations.

Brandt Leibe That’s right. I mean, you see them trying to get into those types of businesses to generate more revenue for their operations, and it’s very successful. There’s a reason that these entities continue to exist and are thriving in some situations from a financial perspective.

Terry Gerton So Mike, it doesn’t seem likely that firms who were contracting with the U.S. Federal government would be intentionally engaged with Mexican drug gangs, but these designations that Brandt is talking about might not be obvious, right? Or they might be several levels removed. So how does a government contractor know what they’re dealing with?

Mike Galdo I think knowing what you’re dealing with is one of the key questions. So it’s what you know in terms of U.S.-based headquarters versus what’s known on the ground in Mexico by your managers and your representatives there. Sometimes those aren’t one-to-one. So if you’re a U.S. Business or a multinational business and you have significant operations in Mexico, it really behooves you because of this designation, to take stock of what you know about your operations in Mexico, get full visibility on your business interactions, your vendors, and gain a little bit of knowledge and expertise internally that you then can action in compliance or other steps. And by that knowledge, I mean, even understanding the things that Brent was just discussing that drug cartels, even though we call them drug cartel, don’t just transport narcotics to the U.S. They have all sorts of businesses. They’re in mining, they’re in agriculture. They really are multi-headed hydra entities doing legitimate and illegitimate business. So understanding those kind of basic facts about what you’re dealing with in Mexico, and then understanding how that could impact you in everyday business tasks like constructing a plant, transporting product, and understanding what’s known, what the actual ground truth is on the ground of your operations in Mexico is vital.

Terry Gerton In some of your previous assignments, you’ve actually seen this in real life, so can you give us an example?

Mike Galdo Well, I think the most common example that comes out pretty regularly is extortion. So in large parts of Mexico, it is not uncommon — and this is just based on, not speaking out of school for my Department of Justice life, but public reporting — you can see numerous reports of forced extortion payments to transport goods through certain areas for trucks to move, extortion payments for businesses to remain open in certain areas that are under heavy cartel control. And so that kind of everyday extortion payment and racket that goes on by the cartels can impact businesses directly or their subsidiaries or vendors that they’re dealing with.

Brandt Leibe The issue with extortion is one of kind of leaving yourself in a situation where you’re being repeatedly extorted. I don’t think that someone is going to be prosecuted by the Department of Justice, even if that were theoretically possible, for making a one-time payment to save a person’s life. It’s just remaining in a situation where those demands are both made repeatedly and then met repeatedly. That’s not a tenable situation, and some of the examples of prosecution that we’ve seen through the years involving support of foreign terrorist organizations have involved circumstances like that.

Terry Gerton I’m speaking with Mike Galdo and Brant Leibe, attorneys with King and Spalding. So back to Mike’s point then to follow what you just said, Brant, it really requires a business to be actively engaged with their folks on the ground to know who they’re dealing with, what’s happening. It’s not enough to say, well, I checked in and it all looked good from here, right?

Brandt Leibe That’s exactly right. More diligence is required. What you’re trying to avoid is any later allegation that someone could say that you are consciously avoiding learning connections to cartel activity, to these transnational criminal organizations that have now been designated as foreign terrorist organizations. And what the government will really be looking for is whether you buried your head in the sand about those things, or whether you took some further steps to educate yourself on who you’re doing business with and whether they have these kinds of connections. One of the things that Mike and I have been talking about with our clients is that this is a very significant development, this designation of the cartels as foreign terrorist organizations from the government side. And your response to that, you as a business operating in Mexico, should be meaningful, should be something more than what you were doing before as a response to something that the people on the government side will see, the government enforcement side will see as a very significant development.

Terry Gerton So, Mike, what’s at risk here for government contractors? What might they be liable for if they wind up in a continued relationship that might be against these regulations?

Mike Galdo So even putting aside what we’ll call the big bad of the Department of Justice coming to knock on your door, which is clearly a risk. If the government wants to bring those cases, there’s some significant civil risks at play. So there’s the Anti-Terrorism Act, which enables U.S. nationals to sue businesses for aiding and abetting any sort of foreign terrorist organization. So we’ve seen historically lawsuits brought related to overseas terror incidents and overseas terror groups, but now we have these groups that are operating in the United States. They’re trafficking fentanyl, for example, and businesses that have repeat ongoing exposure interaction are potentially liable for a civil lawsuit. So this has a long tail. These incidents may build up over time and then suddenly you’re facing a lawsuit about what your business did. The other risk that we really wanted to flag for government contractors is some potential False Claims Act risk, which obviously can come from the private sector with a “qui tam” [lawsuit] or also from the government directly. And that could come because of certifications that are made as part of the regular contracting process. Really get into what government contractors may be saying, “of course we’re not doing business with foreign terrorist organizations or violating [the Office of Foreign Access Control],” but this new wrinkle about potentially supplying money or funds to a vendor that actually is cartel-connected could raise some additional risk, especially if your people on the ground know something about that vendor or that contractor that you don’t know in your headquarters. That’s really where that risk could arise, which could easily come to light through a whistleblower two years later or a news story that comes out two years later and the next thing you know, you’re facing some scrutiny.

Terry Gerton So this has a really long tail. Brandt, how do contractors protect themselves from this kind of risk?

Brandt Leibe I think it’s doing exactly the kinds of things that Mike was describing earlier to educate themselves about who they’re doing business with, what their operations involve. And then if you are exposed to those sorts of extortion scenarios, really analyzing those carefully and being sure that there’s a process for discussing those and understanding whether the circumstances that gave rise to the extortion are likely to repeat themselves and then taking some action so that you don’t find yourself in a situation where you’re repeatedly extorted or being forced to do business with a company that, again, might seem to be legitimate but could have some ties to the cartels.

Terry Gerton Any of this have to be documented in the records in terms of “I did this investigation on this day and here’s what I found” or — that would be helpful later, right?

Brandt Leibe Very helpful to have the documentation of having done this because that’s sort of the first thing that you pull out if you ever get questions about whether you knew, you were aware, you were attempting to avoid awareness about connections to these cartel organizations. If you have a file that you could pull out, electronic or paper, right, a file that you can pull out and say, no, no. This is something that we looked at very carefully. Here’s what we did. It’s possible that we missed something, but we were attempting to address this risk and control for it, we were not putting our heads in the sand.

Mike Galdo Yeah, I think it’s also really important to think about the analysis that you’re doing, not just in light of your immediate risks and then the long tail of risks we talk about, but there’s also some very tricky legal and business decisions that need to be made if you do uncover something during this review, right? So do you have a self-disclosure obligation? Do you need to report something to law enforcement? Are you in a position where law enforcement actually if you notify them, they would want you to stay operating in that area of Mexico for intelligence or other reasons? There’s just a whole large decision tree you can go down when you start peeling back these layers of knowledge and understanding about your businesses in Mexico that, really, you need to be strategic and deliberate about that process. It’s not a “whip around a compliance email to everyone saying, don’t deal with drug cartels. All right, we checked the box, now we documented it.” It’s a little more complicated than that.

Terry Gerton Well, and speaking of complexity, there’s got to be a side facing the government’s own contracting officers and grant officers, right? Because theoretically, these businesses are already certifying that they don’t have these relationships with cartels. What is the role of the government contracting or grant officer now to make sure that their vendors are in compliance?

Brandt Leibe Terry, I wish I had a better answer for you, but I think that’s something that remains to be seen. This is one of the kind of second-order consequences, the certification component to this of the foreign terrorist designation. The first, I mean, we might even call it like a tertiary consequence, because the first order, we see a lot of noise about taking military action, and this designation certainly opens up some of those possibilities, and this is well beyond the scope of what we’re here to talk about. The second order is kind of what I was describing in terms of prosecution. And then I think you have these other consequences like for the contractors, federal contractors and the certifications they’re making. So it remains to be seen how aggressive the government will be in that capacity and how they will go about looking into those sorts of things. So just something to watch out for as we go.

Terry Gerton Well, this feels a little bit like movies coming into real life, but it has real life consequences. So thanks for bringing this to our attention.