On Dec. 21, 2013, Mexico’s energy reform became law, representing the most significant overhaul of Mexico’s oil, gas and electric industries of the last seven decades. These reforms across Mexico’s oil, gas and electric markets promise huge opportunities for the private sector and increased investment from international firms. However, U.S. and international companies looking to enter this market need to stay vigilant of anti-corruption risks and plan ahead to ensure they have adequate governance, risk, and compliance structures in place to address these scenarios.
The contractual framework for such opportunities will be subject to a higher degree of scrutiny, not only because the new regulations to be enacted for such purpose, but because they will also be closely monitored based on both national and international standards.
Given the heightened enforcement of the U.S. Foreign Corrupt Practices Act (FCPA), particularly in the energy industry, international energy firms need to pay particular attention to their anti-bribery risks when contemplating potential transactions in Mexico’s newly privatized energy markets. They will also need to be aware of the local rules in this area – specifically Mexico’s 2012 anti-corruption law, which has important considerations for all parties involved.
Mexico has already adopted various legal tools that would potentially be applicable to fight and prevent corruption and abuse of power. Among the most important are the constitutional lawsuit framework, the criminal code and its specific provisions regarding fraud and the federal law of administrative accountability of public officers. Other related legal frameworks that will play a pivotal role as the energy sector opens are those related to class actions, money laundering, tax regimes and labor rules, among others that have recently been amended.
Despite the existence of a solid and modern framework of laws and regulations designed to fight corruption, Mexico still struggles with a negative track record where lack of transparency, undue political influence and fraud have unfortunately created a negative perception. There are significant rule of law issues and gaps not because there is an inappropriate legal framework, but because the state energy monopoly that existed until very recently came from decades of inefficient operation, lack of transparency and corruption.
Some of these realities are changing by transforming negative elements into what could represent a more controlled business, political and legal environment. An example is the recent decision to centralize PEMEX procurement activities into a single, more transparent and better-coordinated area. Other examples are the audited methods under which the new energy contracts will be implemented based on the rules that will apply, and the overall expectation for a better legal scenario that the execution and implementation of the energy reform should create.
Turning to the specific analysis of the two key legal bodies we have selected for this discussion based on their influence and potential impact, we will focus on these:
As international energy companies move into the Mexican market, they must be proactive with regards to the FCPA risks that these opportunities bring. The FCPA bars U.S. companies – and their officers, directors, employees and agents – from acting with corrupt intent in furtherance of any offer, payment, promise of payment or authorization of payment, money, gifts or anything else of value to any “foreign government official” for the purposes of influencing the official.
Additionally, U.S. companies (including their foreign subsidiaries) and foreign companies whose shares are publicly traded in the United States are also subject to the FCPA’s accounting and bookkeeping provisions, which require accurate recording of expenses and internal controls intended to prevent bribes from being paid.
The anti-bribery provisions of the FCPA define a “foreign governmental official” as any officer or employee of a foreign government (or any department, agency or instrumentality or state-owned entity thereof), foreign political party or a public international organization or any person acting in an official capacity for or on behalf of any such government or public international organization. In the context of the Mexican oil and gas and electricity markets, past FCPA prosecutions in the United States involving bribes paid in Mexico have found that corrupt payments to employees of Mexican state-owned companies such as Pemex and CFE constitute prohibited payments to foreign governmental officials under the FCPA.
Penalties for violations of the FCPA can be very significant. A U.S. company (or a foreign company acting in the United States) may be fined up to $2 million per violation of the FCPA and also be subject to a civil penalty of up to $10,000 per act in violation of the statute. Any officer, director, employee or agent of a U.S. company (or foreign national acting in the United States) may be fined up to $100,000 and/or imprisoned for not more than five years, plus be subject to a civil penalty of not more than $10,000 per act in violation of the FCPA.
The Federal Anti-Corruption Law for Government Procurement
Mexico enacted the Federal Anti-Corruption Law for Government Procurement in 2012 as part of its efforts to comply with its obligations under the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions; the Inter-American Convention Against Corruption; and the United Nations Convention Against Corruption. Mexican laws have traditionally punished authorities charged with corruption, but with the enactment of the anti-corruption law, Mexico is also focusing on punishing the businesses that motivate such illegal behaviors.
This prohibition applies to everyone engaged in federal government contracting in Mexico – Mexican and non-Mexican individuals and companies alike – and includes bidders, participants in tenders, recipients of RFPs, suppliers, contractors, licensees, concessionaires and their shareholders, partners, associates, representatives, principals, agents, attorneys-in-fact, brokers, managers, advisers, consultants, subcontractors and employees. In addition, the law prohibits Mexican individuals and companies from bribing foreign (i.e., non-Mexican) government officials, following the same principle as the FCPA.
The Mexican anti-corruption law results from the ongoing need to fight corruption in the country and clearly reacts to recent global trends in this area. It is an important step toward better controls and prevention of this type of illegal activity.
The law provides two types of administrative sanctions: (1) financial and (2) temporary exclusion from future biddings. Sanctions for Individuals could range from approximately U.S. $5,000 to approximately U.S. $240,000, and disqualification from participating in federal government procurement processes for a term of not less than three months and not more than eight years. Sanctions for companies range from approximately U.S. $50,000 to U.S. $10 million, and companies may be excluded from public projects for up to 10 years.
Take proactive steps to address risk and compliance issues upfront
Any company regularly involved in government contracting processes at the federal level or in international commercial transactions where foreign public officials are involved should implement strict compliance policies or revise the existing ones to include clear rules for contracting with governmental entities in Mexico and abroad. Likewise, it is highly advisable to conduct training sessions for those employees within the company who deal with the Mexican federal government or other foreign governments.
It is also recommended that companies carry out due diligence on all third parties who may participate as intermediaries in business relationships with the federal government or foreign governments. Given the expedited implementation of the energy reforms and the increased likelihood of anti-bribery scrutiny by both Mexican and U.S. authorities, it is important for energy firms or any other company doing business in Mexico to take a number of steps to reduce their FCPA and anti-bribery risk before the contracting process begins:
1) Companies should undertake comprehensive risk assessments before entering the market: Who will be your business partners in Mexico? What third parties will you need to engage? And for what functions? With what regulators will the company be interacting, and who on the ground will have contact with government officials or state-owned entities? Do adequate due diligence on any potential local hires, business partners, agents and third parties before engaging them. Don’t wait until after contracts are won and operations have begun before thinking of potential FCPA/anti-bribery concerns and undertaking the recommended due diligence.
2) Companies should emphasize anti-corruption training for any personnel who will interact with foreign government officials.
3) All red flags should be promptly investigated and remediated. Look for excessive payments or unusual payment terms for consultants or other third parties, or the engagement of a third party that is not well-known in the industry or lacks the capacity to do the work for which it is hired.
Other basic risk mitigation factors considered in a company’s anti-corruption and compliance program should include, at a minimum:
Top-level commitment: Management should foster a culture within the organization in which such conduct is never acceptable.
Risk assessment: The company should assess the nature and extent of its exposure to potential internal and external risks of corruption on its behalf by associated person. Such assessments should be periodic, informed and documented.
Due diligence: The company should apply due diligence procedures, taking a risk-based approach, with respect to persons who perform or will perform services for it or on its behalf in order to mitigate identified corruption risks. This step is critical in a country such as Mexico, where the use of third-party intermediaries in business dealings with the government is a prevalent practice.
Communications: The company should seek to ensure that its anti-corruption policies and procedures are embedded in and understood throughout the organization via internal and external communications.
Monitoring and review: The company should monitor and review its corruption prevention policies and procedures and make modifications and improvements where necessary. In revising policies and practices to reflect the changing global anti-corruption landscape, an area to which close attention should be paid is a company’s relationships with third parties. This is a particular challenge for corruption risks associated with doing business in Latin America, where such third parties are used extensively to navigate opaque bureaucracies and to process day-to-day regulatory paperwork.
Establishing an effective third-party ethics and compliance program is strongly advised. Such a program should, at a minimum:
1) Survey these third parties as to their ethics and compliance efforts.
2) Set standards in a code of conduct for third parties so they understand that integrity is a prerequisite for doing business with your company.
3) Closely monitor all payments to and from third parties such as commercial representatives, agents and consultants – particularly in high-risk countries.
4) Ensure that contracts with third parties include provisions addressing the issue of bribery such as warranties that no secret commissions have been paid, no competition rules have been violated, no bid rigging or price fixing has been engaged in, etc. (Contracts should have provisions for immediate termination if any of the standards are not adhered to.)
Every potential investor will want to see best practices implemented and legal certainty before they are willing to make their investments in developing Mexico’s shale resources, its deep-water resources or any other directly or indirectly related business opportunity. Considering that this is a heavily regulated sector, with new regulatory frameworks being developed and various still fresh legal, political and economic conditions and expectations on the table, this becomes even more important.
Companies looking to enter this attractive market need to stay vigilant and understand all of the moving parts, as well as plan ahead to ensure they have adequate tools to take advantage of the opportunities while controlling and managing risks.