Mexico's New Anti-Corruption Framework

Mexico's historic failure to address the problem of corruption is readily apparent. Through its country reports, the OECD Working Group on Bribery has urged the country to strengthen its anti-corruption legislative framework since at least 2000, and in 2011 noted Mexico's lack of enforcement of anti-corruption laws. Transparency International currently ranks Mexico 95th of 168 countries (ranked from least to most corrupt) and awarded the country a score of 35 out of 100 (where 0 is highly corrupt and 100 is very clean). In this year's Latin America Corruption Survey, which gauged the perception of corruption in 19 countries throughout the region, only 8% of respondents working in Mexico found its anti-corruption laws to be effective, and only 28% believe an offender is likely to be prosecuted locally for corruption, compared to a regional average of 59%. Notably, the respondents were surveyed before Mexico issued its new anti-corruption legislation.

Reform Measures

Mexico's new framework aims to address the country's past failings regarding corruption on three major fronts. First, it creates a national system administered by a coordinating committee responsible for, among other things, managing the development of anti-corruption guidelines at all levels of Mexico's government, from the federal to the local/municipal level. Notably, the committee will include participation by citizens through a citizens' participation committee whose representative will preside over the coordinating committee. The committee will also include representatives from the Mexican judiciary and several government bodies (such as a prosecutor and a representative from the transparency ministry).

Second, the framework aims to address corruption among public officials. Specifically, the laws require them to disclose their assets, potential conflicts of interest and tax returns. It also increases sanctions for violations of the laws by public officials, extends the statute of limitations for “serious administrative offenses” from three to seven years, and subjects “serious” cases to the jurisdiction of the Federal Tribunal for Administrative Justice.
Third, the laws target corruption in the private sector by, among other things, encouraging companies to adopt elements of anti-bribery compliance programs, creating a special anti-corruption prosecutor with investigative powers, increasing sanctions for companies violating the laws (e.g., debarment and liquidation), offering a reduction in penalties for companies that voluntarily disclose wrongdoing and cooperate with enforcement officials and creating a public registry of parties debarred from participating in government procurement.

What It Means to Business

The adoption of this new legislation is a strong step in making good on President Enrique Peña Nieto's 2012 campaign promise to address corruption. However, it also comes at a time when the president and his family are embroiled in corruption scandals, including the so-called “White House” scandal (in which the president and his wife were accused of acquiring a mansion from the Grupo Higa, a contractor that appeared to have been favored by the Peña Nieto's presidential and gubernatorial administrations). In addition, on Aug. 9, The Guardian published an article alleging that First Lady Angelica Rivera is using a $2 million luxury apartment in Miami bought by Grupo Pierdant, a supposed contender to run Mexico's ports. On Aug. 11, Reforma's front page reported that Peña Nieto's approval rating was at an all-time low at 23%.

Although Peña Nieto presented this new package of legislation as a way to try to redeem himself for his involvement in the White House scandal (the August scandals did not become public until after passage of the legislation), under these circumstances, the true test of whether the new system will reduce corruption will depend upon implementation and enforcement. In the interim, companies operating in the country need to understand the aspects of the legislation most likely to impact their day-to-day business activities, in order to effectively mitigate any changes to their risk profiles.

When Do the Laws Come Into Effect?

The General Law of Administrative Responsibilities (GLAR or the Ley 3 de 3), which is the primary statute containing new anti-corruption provisions applicable to public officials, companies and individuals, will enter into force in July 2017. Note that the new package of legislation also provides for the creation of a National Anti-corruption System, which is the body that will be responsible for coordinating the adoption of harmonized anti-corruption regulations at the federal and local levels.

What Do the Laws Require of Companies?

Prior to the adoption of this legislation, Mexico had in place legislation prohibiting domestic and foreign bribery. The new legislation builds on that framework by, among other things, creating a complete prohibition of giving gifts to public officials regardless of the value of the gift. It also creates a zero tolerance policy on bribery by prohibiting facilitating payments. In addition, the laws broadly prohibit individuals and companies from bribing public officials, illegally participating in administrative proceedings, engaging in influence peddling, using false information in administrative proceedings and obstructing government investigations of fraud and corruption.

Which Companies Are Subject to the Jurisdiction of the Laws?

The new provisions of the GLAR will apply to companies (whether domestic or non-Mexican), their affiliates and their officers who do business in Mexico and have any type of contact (direct or indirect) with Mexican government officials. As a general matter, the new framework will make it easier for Mexican enforcement officials to punish any company engaging in bribery in Mexico, including foreign companies. Of course, companies' exposure to corruption risk will vary depending upon industry. Some industries have their main source of revenue directly linked to their interaction with the government (e.g., public procurement, infrastructure, oil and gas, pharmaceutical, etc.) while others will seldom interact with the government (e.g., only to obtain licenses and permits). However, the type of corruption sanctioned by the GLAR is so broad and comprehensive that what may have been considered to be part of the ordinary course of business before the enactment of the laws (e.g., grease or facilitation payments at a state or municipal level) can now be strongly punished against both the bribe recipients and bribe payers. Moreover, the Criminal Code will continue to sanction — as it did before the new laws — Mexican companies that pay bribes abroad.

What Penalties Do Companies Face for Violating the Laws?

Under Article 81 of the GLAR, both companies and private individuals face fines of the greater of up to two times the benefit obtained or approximately $608,700 for individuals and $6,087,000 for companies. They also face possible disqualification from participating in public procurement (for up to eight years for individuals and 10 years for companies), and the payment of damages to the public treasury for the harm caused. Companies are also subject to possible debarment for up to three years or mandatory liquidation of the company.

What Is the Statute of Limitations for 'Serious Administrative Offenses'?

The GLAR also extends the statute of limitations for “serious administrative offenses” to seven years, which will allow for the prosecution of such offenses beyond the six-year presidential term. This change is important because Mexico does not allow presidents to serve more than one term in office. As a result, presidents and members of their administrations can be prosecuted for corruption even beyond their time in office.

What Is the Benefit of Having a Compliance Program in Place Under the New Laws?

Even though the GLAR does not require companies to adopt a compliance program, it provides for possible reductions in penalties for companies being prosecuted for “serious administrative offenses” if the company had an adequate compliance program in place at the time the offense occurred. Article 25 of the GLAR allows companies to receive such credit if their compliance programs consist of, at a minimum: 1) organizational charts with manuals specifying the duties of each part of the organization; 2) a code of conduct that is publicized and rolled out throughout the organization; 3) adequate internal accounting controls; 4) a whistleblower program; 5) training programs on relevant ethics policies; 6) human resources policies designed to prevent hiring individuals who increase the risk of corruption at the organization; and 7) mechanisms that ensure transparency.

Companies subject to the U.S. Foreign Corrupt Practices Act (FCPA) or the UK Bribery Act (UKBA) that are operating in Mexico likely already have compliance programs containing these elements. However, many Mexican companies that are not subject to the FCPA, the UKBA or other major anti-corruption legal regimes, may need to enhance their compliance programs if they wish to benefit from reduced penalties in an enforcement action.

What Are the Odds a Company Will Be Prosecuted for Violating These New Laws in Mexico?

The legislation will only be effective in reducing corruption in Mexico if it is enforced. Because citizens themselves will lead the National Anti-corruption System, we expect they will push for investigations to be carried out. Press reports of corruption will also put pressure on enforcement bodies to initiate investigations. However, by July 2017, when the GLAR enters into force, the June 3, 2018 elections will be the prime focus of Mexican politics, and the anti-corruption agencies will only be starting to test the intricacies and complexities of the intra-agency operation of the new system. As a result, they may not begin their work in earnest before the president leaves office in 2018. Only time will tell the effect of these new laws.

*****
Saskia Zandiah is Counsel at Miller Chevalier, Washington, DC. Diego Sierra is a Partner with Von Wobeser & Sierra, S.C., Mexico. This article also appeared in Corporate Counsel, an ALM sibiling of this newsletter.

Key Takeaways for Businesses

On July 18, 2016, Mexico published a comprehensive body of new anti-corruption legislation implementing its 2015 Constitutional reform on this area of the law. The new legislation has received significant attention, and for good reason. Mexico is Latin America's second largest market by GDP and a central player in the region. However, it has long been plagued with a reputation for corruption, both at the federal and local levels.

A Bad Reputation

Mexico's historic failure to address the problem of corruption is readily apparent. Through its country reports, the OECD Working Group on Bribery has urged the country to strengthen its anti-corruption legislative framework since at least 2000, and in 2011 noted Mexico's lack of enforcement of anti-corruption laws. Transparency International currently ranks Mexico 95th of 168 countries (ranked from least to most corrupt) and awarded the country a score of 35 out of 100 (where 0 is highly corrupt and 100 is very clean). In this year's Latin America Corruption Survey, which gauged the perception of corruption in 19 countries throughout the region, only 8% of respondents working in Mexico found its anti-corruption laws to be effective, and only 28% believe an offender is likely to be prosecuted locally for corruption, compared to a regional average of 59%. Notably, the respondents were surveyed before Mexico issued its new anti-corruption legislation.

Reform Measures

Mexico's new framework aims to address the country's past failings regarding corruption on three major fronts. First, it creates a national system administered by a coordinating committee responsible for, among other things, managing the development of anti-corruption guidelines at all levels of Mexico's government, from the federal to the local/municipal level. Notably, the committee will include participation by citizens through a citizens' participation committee whose representative will preside over the coordinating committee. The committee will also include representatives from the Mexican judiciary and several government bodies (such as a prosecutor and a representative from the transparency ministry).

Second, the framework aims to address corruption among public officials. Specifically, the laws require them to disclose their assets, potential conflicts of interest and tax returns. It also increases sanctions for violations of the laws by public officials, extends the statute of limitations for “serious administrative offenses” from three to seven years, and subjects “serious” cases to the jurisdiction of the Federal Tribunal for Administrative Justice.
Third, the laws target corruption in the private sector by, among other things, encouraging companies to adopt elements of anti-bribery compliance programs, creating a special anti-corruption prosecutor with investigative powers, increasing sanctions for companies violating the laws (e.g., debarment and liquidation), offering a reduction in penalties for companies that voluntarily disclose wrongdoing and cooperate with enforcement officials and creating a public registry of parties debarred from participating in government procurement.

What It Means to Business

The adoption of this new legislation is a strong step in making good on President Enrique Peña Nieto's 2012 campaign promise to address corruption. However, it also comes at a time when the president and his family are embroiled in corruption scandals, including the so-called “White House” scandal (in which the president and his wife were accused of acquiring a mansion from the Grupo Higa, a contractor that appeared to have been favored by the Peña Nieto's presidential and gubernatorial administrations). In addition, on Aug. 9, The Guardian published an article alleging that First Lady Angelica Rivera is using a $2 million luxury apartment in Miami bought by Grupo Pierdant, a supposed contender to run Mexico's ports. On Aug. 11, Reforma's front page reported that Peña Nieto's approval rating was at an all-time low at 23%.

Although Peña Nieto presented this new package of legislation as a way to try to redeem himself for his involvement in the White House scandal (the August scandals did not become public until after passage of the legislation), under these circumstances, the true test of whether the new system will reduce corruption will depend upon implementation and enforcement. In the interim, companies operating in the country need to understand the aspects of the legislation most likely to impact their day-to-day business activities, in order to effectively mitigate any changes to their risk profiles.

When Do the Laws Come Into Effect?

The General Law of Administrative Responsibilities (GLAR or the Ley 3 de 3), which is the primary statute containing new anti-corruption provisions applicable to public officials, companies and individuals, will enter into force in July 2017. Note that the new package of legislation also provides for the creation of a National Anti-corruption System, which is the body that will be responsible for coordinating the adoption of harmonized anti-corruption regulations at the federal and local levels.

What Do the Laws Require of Companies?

Prior to the adoption of this legislation, Mexico had in place legislation prohibiting domestic and foreign bribery. The new legislation builds on that framework by, among other things, creating a complete prohibition of giving gifts to public officials regardless of the value of the gift. It also creates a zero tolerance policy on bribery by prohibiting facilitating payments. In addition, the laws broadly prohibit individuals and companies from bribing public officials, illegally participating in administrative proceedings, engaging in influence peddling, using false information in administrative proceedings and obstructing government investigations of fraud and corruption.

Which Companies Are Subject to the Jurisdiction of the Laws?

The new provisions of the GLAR will apply to companies (whether domestic or non-Mexican), their affiliates and their officers who do business in Mexico and have any type of contact (direct or indirect) with Mexican government officials. As a general matter, the new framework will make it easier for Mexican enforcement officials to punish any company engaging in bribery in Mexico, including foreign companies. Of course, companies' exposure to corruption risk will vary depending upon industry. Some industries have their main source of revenue directly linked to their interaction with the government (e.g., public procurement, infrastructure, oil and gas, pharmaceutical, etc.) while others will seldom interact with the government (e.g., only to obtain licenses and permits). However, the type of corruption sanctioned by the GLAR is so broad and comprehensive that what may have been considered to be part of the ordinary course of business before the enactment of the laws (e.g., grease or facilitation payments at a state or municipal level) can now be strongly punished against both the bribe recipients and bribe payers. Moreover, the Criminal Code will continue to sanction — as it did before the new laws — Mexican companies that pay bribes abroad.

What Penalties Do Companies Face for Violating the Laws?

Under Article 81 of the GLAR, both companies and private individuals face fines of the greater of up to two times the benefit obtained or approximately $608,700 for individuals and $6,087,000 for companies. They also face possible disqualification from participating in public procurement (for up to eight years for individuals and 10 years for companies), and the payment of damages to the public treasury for the harm caused. Companies are also subject to possible debarment for up to three years or mandatory liquidation of the company.

What Is the Statute of Limitations for 'Serious Administrative Offenses'?

The GLAR also extends the statute of limitations for “serious administrative offenses” to seven years, which will allow for the prosecution of such offenses beyond the six-year presidential term. This change is important because Mexico does not allow presidents to serve more than one term in office. As a result, presidents and members of their administrations can be prosecuted for corruption even beyond their time in office.

What Is the Benefit of Having a Compliance Program in Place Under the New Laws?

Even though the GLAR does not require companies to adopt a compliance program, it provides for possible reductions in penalties for companies being prosecuted for “serious administrative offenses” if the company had an adequate compliance program in place at the time the offense occurred. Article 25 of the GLAR allows companies to receive such credit if their compliance programs consist of, at a minimum: 1) organizational charts with manuals specifying the duties of each part of the organization; 2) a code of conduct that is publicized and rolled out throughout the organization; 3) adequate internal accounting controls; 4) a whistleblower program; 5) training programs on relevant ethics policies; 6) human resources policies designed to prevent hiring individuals who increase the risk of corruption at the organization; and 7) mechanisms that ensure transparency.

Companies subject to the U.S. Foreign Corrupt Practices Act (FCPA) or the UK Bribery Act (UKBA) that are operating in Mexico likely already have compliance programs containing these elements. However, many Mexican companies that are not subject to the FCPA, the UKBA or other major anti-corruption legal regimes, may need to enhance their compliance programs if they wish to benefit from reduced penalties in an enforcement action.

What Are the Odds a Company Will Be Prosecuted for Violating These New Laws in Mexico?

The legislation will only be effective in reducing corruption in Mexico if it is enforced. Because citizens themselves will lead the National Anti-corruption System, we expect they will push for investigations to be carried out. Press reports of corruption will also put pressure on enforcement bodies to initiate investigations. However, by July 2017, when the GLAR enters into force, the June 3, 2018 elections will be the prime focus of Mexican politics, and the anti-corruption agencies will only be starting to test the intricacies and complexities of the intra-agency operation of the new system. As a result, they may not begin their work in earnest before the president leaves office in 2018. Only time will tell the effect of these new laws.

*****
Saskia Zandiah is Counsel at Miller Chevalier, Washington, DC. Diego Sierra is a Partner with Von Wobeser & Sierra, S.C., Mexico. This article also appeared in Corporate Counsel, an ALM sibiling of this newsletter.