Determined efforts by the Mexican government to confront organised crime and corruption in business – with added weight from its own Sarbanes-Oxley-type legislation on corporate governance – are beginning to pay off.
Extra impetus has come from across the border, where the US government has been aggressively punishing companies for violating its Foreign Corrupt Practices Act anywhere in the world – not least, of late, in business deals within Mexico.
And now, in Mexico, the ‘tide is changing’ – pressures to weed out business corruption are having an effect, evidenced by organised crime gang violence on the streets, speculate economic analysts.
Certainly, heightened US focus on intra-trade with its southern neighbour, coupled with the US government's new-found zeal for aggressively pursuing corporate offenders wherever they may be found, is driving boardroom awareness of the need to adhere to corporate governance laws and standards.
And increasingly, US company directors have been looking to mitigate against the alarming costs incurred to investigate ‘suspect activity’ within their ranks which becomes an emergency if the government is already knocking with a subpoena.
As a result, UHY’s Forensic, Litigation and Valuation Services (FLVS) Group in the US is currently experiencing an upsurge of clients wanting to proactively identify, at their own pace, any problems in their cross-border business dealings within Mexico, rather than be caught out by either government.
"Companies that conduct business in Mexico should routinely investigate their business practices to ensure that neither their employees, nor their agents nor distributors, are violating either the Foreign Corrupt Practices Act or Mexican anti-corruption laws," advocates FLVS managing director Jeff Harfemist.
A different business culture
Mexico has long since had trade agreements with North America, Canada and Japan stretching back more than 20 years and it is the third-largest trading partner with the US for both exports and imports. Total trade between the countries exceeds USD 315 billion per annum, topped only by Canada and China. Total US trade with China in 2008 was only 10% greater than trade with Mexico. In fact the US exports nearly twice as much to Mexico as it does to China. As a result, sound and ethical business practice in Mexico is a substantial issue for US companies.
The same applies elsewhere, but on a lesser scale. Whereas 80.2% of Mexican exports are to the US, exports to Canada represent 2.4% and to Germany 1.7% (2008 figures). Mexico exports manufactured goods, oil and oil products, silver, fruits, vegetables, coffee and cotton and has 12 free trade agreements with more than 40 countries including Guatemala, Honduras, El Salvador, the European Free Trade Area, and Japan – putting more than 90% of trade under free trade agreements.
According to attorney Bradley Richards, a leading partner in the corporate department of lawyers Haynes and Boone LLP (the largest law firm in Texas), who works with UHY’s FLVS Group on certain engagements: "Mexico is a great location for a company's first investment outside the US. It has a strong rule of law, easy transportation links, strong treaty arrangements with the US, and a favourable business climate. But, it is a different culture, and one cultural attribute has been significant low-level bribery."
Bribery in Mexico, referred to colloquially as ‘bites’ or ‘mordida’, is a long-standing tradition. According to recent reports out of Mexico by anti-corruption activists, Mexicans paid more than two billion dollars in bribes in 2008, representing approximately 8% of their income.
Corruption is said to infiltrate the police and nearly every provider of services in the country. Bribes are considered essentially ‘user fees’ that augment the compensation of poorly paid government workers. Since the 1990s, the Mexican government has tried to change this behaviour, and to improve the lives of its people, but with modest success.
This tradition is equally apparent in business – and the Mexican government has been finding business bribes just as difficult to eradicate. Mexico (like China) has been awarded only a 3.6 out of 10 rating on the Transparency International's Corruption Perceptions Index, which measures the degree of corruption associated with doing business in various countries.
Mexico adopted the Organisation for Economic Co-operation and Development ‘Convention Against Corruption’ by amending its penal laws in 1999 to prohibit bribery of foreign government officials.
Since then, it has passed numerous laws in its bid to increase government transparency and eliminate corruption within government. "And enforcement in the commercial arena has been attempted, with mixed results," says Harfenist. "From a regulatory standpoint, Mexico has a very strong anti-corruption set of laws," he says. “Administrations have made fighting corruption a priority. Although they have made some progress in the enforcement of these laws, businesses still report that corruption remains a major issue.
“Activists are demanding that anti-corruption laws be enforced. The current Mexican government is working with the US to try to get ahead of this problem. This may put US businesses who conduct business in Mexico squarely in the regulators' cross-hairs. It’s critical that US entities exhibit exemplary behaviour as this effort unfolds."
FCPA liability
The Foreign Corrupt Practices Act (FCPA) in the US prohibits the bribing of foreign officials, which includes not only those working for the government but also those working for businesses owned in whole, or in part, by the government. A bribe is anything of value paid or promised (even if never paid) to secure a business advantage. The bribe can be paid directly or indirectly.
Bribes paid by agents or distributors that result in an advantage for a company will nearly always be considered violations of the FCPA by that company. The burden shifts immediately to the company to prove it did not pay or authorise, even if indirectly, the payment of the bribes. "Proving a negative is never easy," says Harfenist.
"It is widely reported that prosecutions involving allegations of corruption are on the rise and that the Obama administration has no intention of slowing down that train. In addition, the costs associated with non-compliance are rising dramatically. Penalties are now often assessed by many of the non-US involved countries and nearly always involve the severe punishment of one or more executives implicated in the investigations."
While prosecution of government officials in Mexico may be mixed, when a bribe is discovered by the Mexican authorities, there is no hesitation to turn in the US bribe payer and to cooperate with US authorities. Mexico may also prosecute the payer under its domestic laws. More stringent on individuals than US law, Mexican law nearly always requires punishment for at least one executive involved in, or charged with, overseeing the operations in which the violations occurred, whether they had knowledge or not.
FCPA violation examples in Mexico
In September 2007, Paradigm B.V. settled with the US’ Department of Justice for a fine of USD 1 million, in part as a result of improper payments to Mexican government officials. In addition to violations in other countries, Paradigm Mexico provided a USD 12,000 trip, USD 10,000 in entertainment expenses and a house to certain employees and wives of employees of Pemex, Mexico's national oil company.
One of the world’s largest offshore drilling companies, Pride International, Inc, based in Houston, US, performed its own internal investigation and uncovered improper payments to government officials in Mexico and Venezuela. The payments in Mexico were made to get certain equipment through customs, to move personnel through immigration processes and for entertainment of government officials. Pride self-reported these violations to the Department of Justice and the Securities Exchange Commission.
Investigating current practices
To improve outcomes, says FVLS, US investors should:
- Review the business, legal and cultural factors that will impact the investment
- Ensure proper diligence before making the investment
- Develop a plan to ensure compliance with US and Mexican anti-corruption laws after the investment has been made.
Any company conducting business in Mexico, whether directly or through agents or distributors, should periodically conduct a multi-step investigation of its in-country operations.
The system of internal controls should be reviewed both in terms of its overall adequacy, areas of weakness, the potential for collusive behaviour, and the level of consistent enforcement with stated anti-corruption policies and procedures.
The first step involves developing a detailed understanding of the business, including the nature of its customers, the channels used to go to market, the competitive landscape of the industry in which it operates, and the factors (both internal and external) that are exerting pressure on the company.
Next, a detailed review of financial records is performed using forensic tools to identify, among other factors, potentially anomalous transactions, including payments with unusual attributes, vendors with suspect origins, atypical travel and entertainment expenses, and reimbursements without proper documentation and back up.
Intelligence is gathered by experienced investigators on all of the suspected participants in the business to determine backgrounds, connections, ownership of entities and other suspicious affiliations.
Local professionals are employed to address unique accounting issues, local customs and cultural aspects of the case, and to present reputational information that may only be known locally.
The whereabouts of the company's electronically stored information is identified, categorised, and where pertinent, collected in a forensically sound manner, in case future analysis is needed.
Connections are made between the financial data uncovered and those involved to determine whether a deeper review should be undertaken and in which direction it should go.
All investigations are carried out through an attorney to protect all available privileges.
Once the investigation is completed, it is up to the company and its lawyers to determine whether to report any findings of problematic behaviours to government agencies; and to correct any weaknesses found in financial controls.
Conclusion
As world trade grows and barriers come down, corruption is gradually being eliminated in even the most troubling countries. "It may never disappear," says Harfenist, “but countries like Mexico are working diligently to improve international trade opportunities by making it a safer and a more ethical place to operate."