Mexico has recently topped the news as a result of widespread violence and corruption within the government. It is speculated that the violence is the natural response to increasing efforts by the Mexican government to confront home grown corruption. The reports relate largely to corruption associated with the drug trade, but the issue goes deeper than that. The press and violence have resulted in significantly increased focus by U.S. and Mexican authorities on the behavior and connections of Mexican government officials.
The U.S. has punished several companies for violating the Foreign Corrupt Practices Act based in part on their business practices within Mexico. This heightened focus on our Southern neighbor, coupled with the government's new found zeal for aggressively pursuing offenders, will continue to drive the considerable expense associated with investigating suspect activity once the government comes knocking with a subpoena in hand. As a result, it is extremely advantageous to proactively identify the problem itself rather than be caught by either government. Companies that conduct business in Mexico should routinely investigate their business practices to ensure that neither their employees nor their agents or distributors are violating either the FCPA or Mexican anti-corruption laws.
The Tide Is Changing
According to U.S. statistics, Mexico is the third-largest trading partner with the United States in terms of both exports and imports. Total trade between the countries exceeded $315 billion, topped only by Canada and China. Total U.S. trade with China in 2008 was only 10 percent greater than trade with Mexico. In fact the U.S. exports nearly twice as much to Mexico as it does to China. As a result, corruption in Mexico is a substantial issue for U.S. companies.
According to Bradley J. Richards, a leading partner in the Haynes and Boone international law department, "Mexico is a great location for a company's first investment outside the United States. It has a strong rule of law, easy transportation links, strong treaty arrangements with the United States, and a favorable 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 articles out of Mexico by anti-corruption activists, Mexicans paid over two billion dollars in 2008 in bribes, representing approximately eight percent of their rather meager incomes. This includes the police and nearly every provider of services in the country. These payments are considered essentially user fees that augment the compensation of poorly paid government workers. Since the 1990s the government of Mexico has tried to change this behavior to improve the lives of its people, with modest success.
This tradition is equally apparent in business and is being found to be just as difficult to eradicate. Mexico (like China) has been given a mere 3.6 out of 10 on Transparency International's Corruption Perceptions Index which measures the degree of corruption associated with doing business in these countries. Mexico adopted the OECD 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 an attempt to increase government transparency and eliminate corruption within the Mexican government. Enforcement in the commercial arena has been equally hit or miss.
From a regulatory standpoint, Mexico has a very strong anti-corruption set of laws. The Fox and Calderon administrations have made fighting corruption a priority. Although they have made some progress in the enforcement of these laws, businesses still report that corruption and inefficient business processes remain a major issue.
Activists are demanding that anti-corruption laws be enforced. The current government is working with the U.S. to try to get ahead of this problem. This may put U.S. businesses who conduct business in Mexico squarely in the regulators' cross-hairs. It is critical that U.S. entities exhibit exemplary behavior as this effort unfolds.
The Foreign Corrupt Practices Act (FCPA) 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 some 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 authorize, even if indirectly, the payment of the bribes. Proving a negative is never easy.
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-U.S. involved countries and nearly always involve the severe punishment of one or more executives implicated in the investigations.
Penalties are ordinarily in the millions, even hundreds of millions, of dollars. Recent settlements have broken all-time records with Siemens paying over $1.6 billion. Leniency by U.S. enforcement agencies, the Department of Justice and the Securities and Exchange Commission is a thing of the past. Heightened enforcement has been the norm now for nearly ten years. The law itself is over 30 years old. No company can claim ignorance of this law.
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 U.S. bribe payer and to cooperate with U.S. authorities. Mexico may also prosecute the payer under its domestic laws. More stringent as to individuals than U.S. law, Mexican law nearly requires that at least one executive involved in or charged with overseeing the operations in which the violations occurred, whether they had knowledge or not, be punished.
Examples Of FCPA Violations In Mexico
In September of 2007, Paradigm B.V. settled with the DOJ for a fine of $1,000,000 which was in part due to improper payments to Mexican government officials. In addition to violations in other countries, Paradigm Mexico provided a $12,000 trip, $10,000 in entertainment expenses and a house to certain employees and wives of employees of Pemex, Mexico's national oil company. 1
Pride International 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. One might once have argued the first two were excluded "facilitating payments" but that exception has narrowed so much as to be nearly irrelevant. Pride self-reported these violations to the DOJ and the SEC.2
Syncor International was prosecuted by the DOJ and SEC as a result of FCPA violations by its two largest subsidiaries, Syncor Taiwan and Syncor de Mexico. The two subsidiaries paid $600,000 in improper payments to hospitals and doctors in those countries. In both countries, healthcare is nationalized and so all members of the medical community are foreign officials under the act.3
Recently the Antitrust Division of the DOJ has given notice that it will actively pursue FCPA violations uncovered in the course of its investigations. Last December, the Antitrust Division convicted a former manager for Bridgestone and a Japanese native of FCPA violations. He was sentenced to two years in jail and fined $80,000 for paying bribes to employees of government-owned businesses in Argentina, Brazil, Ecuador, Mexico and Venezuela to make sure Bridgestone won bids for their marine hose products. Most of these bribes were made by and funneled through local sales agents without the knowledge of the company. A self-directed investigation would likely have uncovered the anomalous payments.
Investigating Current Practices
"To improve outcomes, U.S. investors should (i) review the applicable business, legal and cultural factors that will impact the investment; (ii) ensure proper diligence before making the investment; (iii) develop a plan to ensure compliance with U.S. and Mexican anti-corruption laws after the investment has been made," advises Mr. Richards from 25 years of experience working with companies in cross-border transactions.
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 author recently completed an extensive investigation of the activities in Mexico for a major U.S. company to address potential concerns. These investigations have to be conducted with the utmost discretion so as not to alert either the U.S. or Mexican authorities before the company and its attorneys determine the existence of any problematic activities.
The system of internal controls should be reviewed both in terms of its overall adequacy, areas of weakness, the potential for collusive behavior, 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 should be performed using forensic tools in order to identify, among other things, 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 should be 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 should be 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 should be identified, categorized, and where pertinent, collected in a forensically sound manner, should there be a need for future analysis.
Connections will be made between the financial data uncovered and those involved to determine whether deeper review should be undertaken and in which direction it should be directed.
All investigations of this sort should be done through an attorney to protect all available privileges.
Once the investigation is completed, it will be up to the company and its lawyers to determine whether to report any findings of problematic behaviors to government agencies. Any weaknesses found in the financial controls should be corrected and enforcement enhanced.
As world trade grows and barriers come down, corruption is gradually being eliminated in even the most troubling countries. It will never disappear, but countries like Mexico are working diligently to improve international trade opportunities by making it a safer and more ethical place to operate. If your company has not made the strides required to prevent bribes, you will likely find not only your company but yourself in an uncomfortable position before powerful regulatory agencies from both countries.
1 DoJ Release - http://www.usdoj.gov/opa/pr/2007/ September/07_crm_751.html; The FCPA Blog - http://fcpablog.blogspot.com/2007/09/paradigms-pre-ipo-due-diligence-reveals.html
2 The FCPA Blog - http://fcpablog.blogspot. com/2008/03/pride-discloses-global-corruption.html
3 SEC Litigation Release - http://www.sec.gov/litigation/litreleases/lr17887.html .
JeffreyHarfenist is the Texas Practice Leader and National Fraud and Forensic Service Line Leader for the Forensic, Litigation and Valuation Services (FLVS) Group of UHY Advisors, Inc. Jeffrey also leads the firm's Foreign Corrupt Practices Act (FCPA) team within the Fraud and Forensic Service Line and the Anti-corruption Special Interest Group within UHY International. He is also a licensed CPA and Partner with UHY LLP, a licensed CPA firm. Jeff has practiced accounting as a CFO and in private practice for over 25 years, received his M.B.A. from Rice University in 1999, finished in the top 5% of his class and received the Jones Scholar Award. He joined UHY Advisors in 2001.