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Supply Chain Risk

Market Intelligence – Anti-Corruption – Mexico

Lexology GTDT Market Intelligence provides a unique perspective on evolving legal and regulatory landscapes. This interview is taken from the Anti-Corruption volume featuring discussion and analysis of legal developments, compliance risk and the role of enforcement authorities within key jurisdictions worldwide.

1 What are the key developments related to anti-corruption regulation and investigations in the past year in your jurisdiction, and what lessons can compliance professionals learn from them?

Following the creation and entry into force of the National Anti-Corruption System (NACS) in 2016 and 2017, respectively, as a result of the enactment of the landmark constitutional Anti-corruption Amendment of May 2015, the Mexican government has been facing the challenge of meaningful implementation of the NACS and other significant related challenges.

On 1 December 2018, President Andrés Manuel López Obrador was sworn into office. His centrepiece for winning the presidential elections was the promise to tackle corruption within the Mexican government and impunity within Mexican culture. Even though his administration has implemented a major austerity and anti-graft push, a key element in leading the anti-corruption drive includes the full implementation of the NACS, which has not yet happened. Although the federal laws to implement the constitutional Anti-corruption Amendment of May 2015 partially entered into force in July 2017, the constitutional Anti-corruption Amendment of May 2015 has not yet been fully implemented at the federal and local levels.

As a first example, as of this writing, appointments are pending for the 18 federal anti-corruption judges of the Federal Court of Administrative Justice. These are the judges who will have exclusive jurisdiction over cases brought against government officials and private parties that involve serious administrative offences under the General Law of Administrative Responsibilities, including bribery, embezzlement and money laundering, among others. Of these, 13 withdrew their nominations and in July 2019 the Mexican Senate voted to reject the five remaining nominees. Now, it is the turn of President Andrés Manuel López Obrador to submit fresh nominations to Senate. Ironically, his administration is seeking to reduce or eliminate these seats, as part of his austerity plan. The appointment of these anti-corruption judges is of utmost importance for the full implementation of the NACS, because their absence is delaying the processing of dozens of corruption cases, according to the Chairman of the Citizen Participation Committee of the NACS, José Octavio López Presa.

At the local level, four out of 32 states have not yet harmonised their anti-­corruption legal framework with the federal anti-corruption legislation by implementing their mandatory local anti-corruption systems, which were supposed to be in place by July 2017. In addition, seven states have not yet appointed members in one or more anti-corruption operating bodies to implement their local anti-­corruption systems.

Despite these shortcomings, there have also been positive developments in Mexico’s efforts to combat corruption over the past few months. In August 2018, the President’s political party, the National Regeneration Movement, along with non-government organisations and academics, drafted a bill to transform the Attorney General’s Office, which served under the President, into the General Prosecutor’s Office. As a result, in December 2018, the Organic Law of the General Prosecutor’s Office replaced the former Attorney General’s Office. This new law transformed the General Prosecutor’s Office into an autonomous, independent and separate entity from the executive branch. According to this law, the General Prosecutor can only be removed by the President for the commission of serious administrative offences under the General Law of Administrative Responsibilities or serious criminal offences under the criminal legislation. Consequently, in January 2019, the Senate appointed Alejandro Gertz Manero as Mexico’s first national general prosecutor. Subsequently, he appointed María de la Luz Mijangos Borja, as Mexico’s new special anti-corruption prosecutor, to head the Special Prosecutor’s Office for Combating Corruption of the General Prosecutor’s Office and, in March 2019, the Mexican Senate finally approved his nomination.

Additionally, in June 2019, Mexico became the first country to ratify the United States–Mexico–Canada Agreement (USMCA), which includes a chapter on anti-corruption titled ‘Transparency and Anti-Corruption’. If ratified by Canada and the United States, the anti-corruption chapter will oblige the three signatories to adopt or maintain anti-corruption legislative and other measures as may be necessary. This is a very important development in the regional integration efforts to combat corruption and attract investors seeking to do business in Mexico.

With respect to legislative developments, in December 2018, Congress enacted the Federal Law of Remuneration that provides that no public official can receive a salary of a higher amount than the President’s. Moreover, in July 2019, Mexican Senate generally approved a ‘republican austerity bill’, one of the top priorities of President Andrés Manuel López Obrador to significantly curtail government spending in an effort to implement a republic austerity plan in the federal government. Highlights of the provisions of this bill include the abolishment of pensions for former presidents and the elimination of bonuses and benefits for high-ranking government officials, including the President.

Notably, in July 2019, the Secretary of Public Administration launched a federal whistle-blowing platform through which any citizen can report potential acts of corruption anonymously. In addition, as of this writing, the Secretary of Public Administration launched the Integrity Business Registry as part of the Mexican efforts to combat corruption in public procurement. This is the first national registry for companies, aimed at improving corporate ethics, integrity and transparency by publicly recognising companies that, in addition to be in compliance with laws, are committed to ethics and integrity by taking measures aimed at preventing and fighting corruption within the organisation and its supply chain.

Finally, we have seen an increased prosecution of administrative and criminal white-collar crimes by the Secretary of Public Administration and Mexico’s anti-money laundering watchdog, the Financial Intelligence Unit, against both public officials and private parties. With this in mind, companies should take the necessary actions to create, develop, implement and enforce an adequate integrity policy or compliance programme, to avoid corporate criminal liability for acts carried out by employees, third parties or other representatives on behalf of a company. As discussed later in this interview, failure to have a compliance programme or an adequate integrity policy can be a significant factor in determining corporate liability pursuant to the General Law of Administrative Responsibilities and expose legal entities to sanctions of up to the equivalent of US$6 million in fines, plus damages and disgorgement.

2 What are the key areas of anti-corruption compliance risk on which companies operating in your jurisdiction should focus?

Findings from PwC’s 22nd Annual Global CEO Survey make clear that Mexico has become one of the top 10 most important countries attracting foreign investment. In addition, according to the World Economic Forum’s Global Competitiveness Report 2018, Mexico is the second most competitive Latin American economy behind Chile, outshining other Latin American countries in terms of business dynamism. However, this study also stresses Mexico’s low marks as being due to the high levels of violence, high homicide rate, low trust in law enforcement officials and recent corruption scandals. Unsurprisingly, Mexico continues to score poorly for corruption and has the highest corruption perception among the Organisation for Economic Cooperation and Development (OECD) countries, according to Transparency International’s Corruption Perceptions Index 2018. Mexico ranks 138 on a list of 180 countries, with an overall score of 28 on a scale of zero to 100 (where zero is highly corrupt and 100 is very clean), one point less than 2017. Additionally, Mexico ranked 99 from a list of 126 countries, with an overall score of 0.45 (where one is the highest score) on the World Justice Project Rule of Law Index 2019, which suggests that corruption, security and criminal justice are areas requiring priority attention in the country. A perception-based survey with Mexican companies suggests that risks related to fraud, corruption and money laundering are especially high in the health, energy, construction and financial sectors. Additionally, this survey also suggests that companies’ own employees have committed more than half of the detected crimes.

In this context, the USMCA’s anti-corruption efforts reached between the United States, Mexico and Canada represent a promising path forward to deter bribery and corruption both in the public and private sectors, taking highly visible action through legislative measures, administrative enforcement actions and international cooperation. Hence, it is critical for companies to undertake comprehensive risk assessments to create, develop, implement or strengthen effective internal auditing controls and procedures and compliance programmes, proportionate to the risks the company faces in the prevention and detection of misconduct, and self-align to international standards.

It is critical that companies considering initiating operations or already operating in Mexico focus on undertaking comprehensive risk assessments to develop and strengthen their compliance programme and internal audit procedures. Strong efficiency gains can be reaped by developing the capability of recognising risk scenarios and promoting a legal culture throughout the organisation and its employees, as well as designing and implementing anti-bribery and anti-corruption policies aimed at mitigating risks and challenges companies may face, including regular training to employees and third-party intermediaries on these policies.

3 Do you expect the enforcement policies or priorities of anti-corruption authorities in your jurisdiction to change in the near future? If so, how do you think that might affect compliance efforts by companies or impact their business?

Despite the items that are yet to be addressed in Mexico’s anti-corruption agenda, the current federal government has taken visible action through both administrative and criminal enforcement authorities against public officials and private parties who violate the General Law of Administrative Responsibilities. Notable key developments related to anti-corruption regulation and investigations in Mexico are the transformation of the former Attorney General’s Office, which served under the President, into the new independent and autonomous General Prosecutor’s Office, and the creation of the Special Prosecutor’s Office for Combating Corruption to independently investigate and prosecute corruption cases, reducing political influence over investigations into corruption cases and putting an end to the pacts of impunity and corruption in Mexico. This is a remarkable opportunity for Mexico to end the political meddling, impunity and inefficiency that have been covered up by its institutions over the years.

As of writing, there are several ongoing criminal investigations and trials concerning high-ranking former government officials reportedly involved in corruption and bribery scandals. Additionally, the Secretary of Public Administration has imposed sanctions on several companies and public officials for administrative offences related to irregularities in public procurement procedures or failure to report relevant information in their disclosure of assets and interests. Nevertheless, while the Federal Court of Administrative Justice has jurisdiction over cases brought against both government officials and private parties that involve serious administrative offences under the General Law of Administrative Responsibilities, none of the anti-corruption judges who are supposed to oversee corruption cases have been appointed by the Senate.

First and foremost, companies should invest in implementing an adequate integrity policy or compliance programme proportionate and tailor-made to its risks. In this regard, the General Law of Administrative Responsibilities sets forth the aspects of a compliance programme or an integrity policy that law enforcement authorities must consider as adequate for effective internal control. These prevention controls are a significant factor for companies to mitigate their exposure to corporate administrative liability as established in the General Law of Administrative Responsibilities. Adequate design, development, implementation and enforcement of compliance programmes, along with ongoing monitoring and comprehensive and proportionate risk assessments, are critical to mitigating potential corporate criminal and administrative liability for acts carried out by third parties on their behalf.

4 Have you seen evidence of continuing or increasing cooperation by the enforcement authorities in your jurisdiction with authorities in other countries? If so, how has that affected the implementation or outcomes of their investigations?

Recent years have seen a continued increase in internationally coordinated enforcement actions in Mexico. For instance, following a major prosecution by US enforcement authorities, Mexican drug kingpin Joaquín Guzmán Loera ‘El Chapo’ was convicted of 10 crimes related to international drug trafficking, murder and money laundering, and sentenced to life in prison. President Andrés Manuel López Obrador has repeatedly stated that the proceeds and assets from his illicit activities ‘belong to Mexico’ and declared that the Secretary of Foreign Affairs will coordinate efforts with US authorities to make the request. If this request is granted, the efficiency of the new Mexican asset forfeiture framework would be put to a test.

According to the recent Washington Office on Latin America report The Future of Mexico’s National Anti-Corruption System: The Anti-Corruption Fight Under López Obrador, the General Prosecutor’s Office inherited a major backlog of cases from the General Attorney’s Office and, thus, is prioritising five emblematic high-profile cases that stalled during then-President Enrique Peña Nieto’s administration, including the scandal involving the Brazil-based construction giant Odebrecht, which has admitted to making and causing to be made approximately US$10.5 million in corrupt payments to government officials in Mexico to secure government contracts and paying US$6 million in bribes to a high-level official of a Mexican state-owned company in exchange for the official assisting the company in winning a project. This investigation was initially delayed by the presidential elections in July 2018 and subsequently delayed because of the filing of constitutional appeals by the individuals investigated. However, this investigation has recently been reopened and, in recent months, there has been progress in investigating the former Pemex Chief Executive Officer Emilio Lozoya Austin, implicated in the largest corruption scandal in Latin America’s history.

While Mexico has showed a lethargic approach to this far-reaching bribery scheme, considering the progress made so far and the continuous information exchange agreements entered by Mexico, we expect that Mexico’s increasing anti-corruption efforts will lead to increased cross-border cooperation and collaboration between Mexico and foreign enforcement authorities in tackling corruption.

5 Have you seen any recent changes in how the enforcement authorities handle the potential culpability of individuals versus the treatment of corporate entities? How has this affected your advice to compliance professionals managing corruption risks?

As of June 2016, the most significant amendment to Mexico’s criminal legislation has been the advent of corporate criminal liability for legal entities when acts related to serious administrative offences are committed by individuals, whether employees or third-party intermediaries, acting on behalf or in benefit of the legal entity. As previously discussed, the General Law of Administrative Responsibilities punishes both government officials and private parties, including both individuals and legal entities, for any bribery of government officials in Mexico, whether in the federal, local or municipal public procurement context or otherwise. Consequently, under Mexican anti-corruption legislation, both administrative and criminal sanctions may apply to legal entities. Administrative sanctions for legal entities include double disgorgement or, even if there was no proven tangible benefit, sanctions can include fines of up to the equivalent of US$6 million. Additionally, legal entities can be sanctioned by up to 10 years’ debarment from participating in public procurement processes. Furthermore, when sufficient evidence suggests that the individual was using the legal entity as an alter ego, sanctions may also include the suspension of the entity’s activities or even dissolution of the legal entity.

While there is technically no affirmative defence in criminal cases to negate corporate criminal liability in Mexico, the existence of a compliance programme or an integrity policy may be presented in practice as an affirmative defence in criminal cases and a mitigating factor in administrative cases for legal entities by reducing sanctions for up to 25 per cent. To obtain this benefit, the compliance programme or integrity policy must have the following characteristics:

  • a clear and complete organisational and procedures manual that clearly defines the functions and responsibilities of each department of the company, and clearly specifies the chains of command and leadership for each corporate structure;
  • a code of conduct that is duly published and made known to every person in the organisation and that has systems and mechanisms for effective implementation;
  • adequate and effective control, monitoring and audit systems that ensure compliance on a continuous and periodic basis throughout the organisation;
  • adequate whistle-blowing systems both for internal reports and for reporting to authorities, as well as disciplinary processes with clear and specific consequences for those who act contrary to internal standards or to Mexican legislation;
  • adequate systems and processes for training on ethics standards;
  • human resources policies to avoid hiring people who could be a risk to the integrity of the company – these policies cannot enable discrimination on the basis of ethnicity, nationality, gender, age, disabilities, social status, health status, religion, political opinion, sexual orientation, marital status or any other that compromises human dignity or curtails human rights and liberties; and
  • mechanisms to ensure transparency and publication of interests (avoiding conflicts of interest) at all times.

Compliance professionals managing corruption risks should be sure to include a comprehensive risk assessment in the creation of compliance programmes tailored to the industry, size and needs of the business. More importantly, it is crucial that compliance professionals should advise companies doing business in Mexico or seeking to do business in Mexico to adequately localise their global anti-bribery and anti-corruption policies and compliance programmes, ensuring that they are in strict adherence to the local laws, regulations and policies in Mexico, so that certain provisions do not constitute a contravention of any existing local legislation, coupled with periodic compliance training sessions for their its implementation.

6 Has there been any new guidance from enforcement authorities in your jurisdiction regarding how they assess the effectiveness of corporate anti-corruption compliance programmes?

To date, there have not been cases on the assessment of effective corporate anti-corruption compliance programmes or an adequate integrity policy under the General Law of Administrative Responsibilities. In June 2017, however, the Secretary of Public Administration published the Model Program for Corporation Integrity to provide guidance on compliance programmes or integrity policies, as follows.

  • Include measures to promote internal standards and accountability in the company, in accordance with national and international commitments.
  • ‘Tone at the top’ commitment from board of directors and general manager.
  • Third parties and distributors obligated to adhere to the company’s compliance policies.
  • The Code of Conduct must be adequately published and communicated to the personnel of the company. Reference to the standards of the Confederation of Employers of the Mexican Republic is recommended.
  • Apply the Code of Conduct in practice and promote reports of suspicious activities. Implementation by departments if a company has multiple divisions.
  • The anti-corruption policy must take into account the degrees of risk for the country, industry, transaction, commercial opportunity and commercial association. For these purposes, rely on the Committee of Sponsoring Organizations of the Treadway Commission’s Internal Control–Integrated Framework.
  • For financial organisations, refer to these three guidelines:
    • the Sole Memorandum for Banks;
    • the Sole Memorandum for Stock Exchange; and
    • the Sarbanes Oxley Act.
  • Special attention to the following areas in the company: sales, contracts, human resources and government contacts. The guide also recommends the observance of the guide for the UK Bribery Act.
  • Systems for self-reporting and training must be adequate and efficient.
  • Human resources must employ policies to avoid the employment of individuals who could become a risk to the integrity of the company.

7 How have developments in laws governing data privacy in your jurisdiction affected companies’ abilities to investigate and deter potential corrupt activities or cooperate with government inquiries?

The National Institute of Transparency, Access to Public Information and Data Protection, Mexico’s data protection watchdog, has been very active in pursuing enforcement actions and imposing sanctions for violations of the Federal Law on the Protection of Personal Data held by Private Parties (the Data Protection Law), mainly, the breach of customer and employee data protection rights and the obstruction of authority verification procedures.

Considering the above, companies operating in Mexico should focus on evaluating compliance with the obligations set forth in the Data Protection Law, such as publishing their respective privacy notices and implementing mechanisms to ensure consent for processing any personal data.

The Inside Track What are the critical abilities or experience for an adviser in the anti-corruption area in your jurisdiction?

As with many other jurisdictions, corruption scandals in Mexico have focused in large part on government procurement projects. As the President himself has pointed out, corruption ploys may use direct or no-bid assignments where they are not warranted by law. But they may also take the form of staged public bids in which either the request for proposal is directed toward a particular supplier or the bidding process itself is staged with ‘straw man’ participants who only participate to give the appearance of a competitive bid. As a result, knowing the complex bidding rules is a critical ability for ABAC counsel in Mexico.

What issues in your jurisdiction make advising on anti-corruption compliance challenging or unique?

Knowing the structure of industry sales in the country, as well as the major players, is very important. Mexico’s industries have developed in peculiar ways for historical reasons that may not always be apparent to persons with only a general familiarity. Finally, an understanding of US law as it applies to Mexican transactions is important for evaluating evidence, which is treated very differently in Mexican courts.

What have been the most interesting or challenging anti-corruption matters you have handled recently?

Challenges in recent months have come from the President’s frequent tirades and general accusations against companies that he claims, often without providing any evidence, have engaged in corrupt behaviour. Also challenging is the fact that many of the new President’s appointees have relatively little experience in government and therefore are not familiar with the rules they must follow. In some cases, they change significantly the way that the government has been conducting itself in recent years. This may be a welcome change in some cases, but it is nearly always challenging.

 

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