UPDATE 1-Mexico temporarily hands CIBanco, Intercam trust businesses to development banks

Mexico's government has also rebuffed the allegations from the U.S., though Mexico's banking regulator stepped in last week to manage the three institutions.

Mexico will temporarily transfer the trust-handling businesses of two financial institutions sanctioned by the U.S. for alleged involvement in money laundering, the finance ministry said on Friday.

Mexican development banks will temporarily take over the trust units of CIBanco and Intercam Banco, while the ministry looks for a permanent solution to transfer them over to private institutions, it said in a statement. The transfer will allow "the trusts to continue operating uninterrupted, for the benefit of their settlors, beneficiaries, and third parties involved," the ministry said.

CIBanco and Intercam, as well as brokerage Vector Casa de Bolsa, which was also sanctioned, have denied wrongdoing. Mexico's government has also rebuffed the allegations from the U.S., though Mexico's banking regulator stepped in last week to manage the three institutions. The U.S. sanctions effectively cut the institutions off from the financial system there and could have a significant impact on Mexican banking, given the interconnectedness between lenders and close trade ties with the U.S., experts have said.

Since the sanctions were announced, a number of local trusts, particularly real estate trusts, have dropped the firms as trustees.

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