Eyes wide open

Juan Carlos Luna discusses the risk, compliance and anti-corruption challenges of doing energy deals in Mexico.

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Mexico’s energy reform became law on 21 December 2013, representing the most significant overhaul of Mexico’s oil, gas, and electric industries of the last seven decades.

This comprehensive new legal and regulatory framework promise huge opportunities for the private sector and increased investment from international firms. However, there are two crucial components when assessing such opportunities. The first is dealing with the economics and financial conditions of the market and the specific contracts, and the second one, dealing the rule of law circumstances and the level of scrutiny and realization of corruption.

Under this second component, US and international companies looking to enter this market will need to consider and stay vigilant of corruption risks, and strategically plan ahead to ensure they implement and maintain adequate governance, risk and compliance structures in order to properly address these scenarios.

Being aware not only of the local but also of the transboundary and international rules, is a key requirement to ensure business is conducted in a way where risks are properly managed, and violations of laws are avoided, since the contractual framework for such opportunities will be subject to a higher degree of scrutiny, not only because the new regulations 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 US Foreign Corrupt Practices Act, particularly in the energy industry, international energy firms need to pay particular attention to their anti-bribery provisions, guidelines and applicable rules when contemplating potential transactions in Mexico. They will also need to be aware of the local rules in this area. Specifically Mexico’s Anti-Corruption Law which has important considerations for all parties involved.

A business operating in any capacity outside of their base country will be held accountable to the bribery and corruption laws in another jurisdiction. Even if you are not covered by legislation such as the FCPA or UK Bribery Act, your organization can still be subject to prosecution under international OECD guidelines or other local anti-bribery laws. Increased enforcement will lead to greater risks for companies that do not have adequate anti-bribery and anti-corruption compliance programs in place or companies who have insufficient background information on their suppliers.

Regulators look for evidence that there is a commitment at the executive level to foster a culture in which bribery is not tolerated within an organization. One of the key considerations for any anti-bribery and anti-corruption compliance program is to consider the risk that suppliers and third parties can potentially bring.

Applicable rules

Mexico has already adopted various legal tools that would potentially be applicable to fight and prevent corruption and abuse of power; amongst the most important are the Constitutional Law suit framework; the criminal code and its specific provisions regarding fraud, the federal law of administrative accountability of public officers.

Despite the existence of a solid framework of laws designed to fight corruption, Mexico still struggles with a negative track record, where lack of transparency, undue political influence, and fraud have created a negative perception and a concern for investors.

In a way, some of these realities are changing into what could represent a more controlled business, political and legal scenarios. An example is the audited methods under which the new energy contracts will be implemented based on the applicable regulatory rules, and the overall expectation for a better legal scenario that the implementation of the energy reform should create.

Regarding the FCPA, the US is the most prolific enforcer of anti-bribery/corruption legislation and its reach is global. There have been a number of recent initiatives that will drive greater enforcement. Subsequently, increased enforcement leads to greater risks for companies that do not have adequate anti-bribery and anti-corruption compliance programs in place or companies that have insufficient background information on their suppliers, partners or alliances.

As international energy companies move into the Mexican market, they must be proactive in assessing the risks involved and the potential legal and economic effects that could derive from the application of the US Foreign Corrupt Practices Act (FCPA), which bars US companies—and their officers, directors, employees and agents—to act 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 and gaining a commercial or business advantage. Additionally, US companies (including their foreign subsidiaries) and foreign companies whose shares are publicly traded in the US 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 US involving bribes paid in Mexico have found that corrupt payments to employees of Mexican state-owned companies such as Pemex or CFE (Federal Electricity Commission) constitute prohibited payments to foreign governmental officials under the FCPA.

On the other hand, Mexico has enacted new Federal Anti-Corruption Law for Government Procurement, 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 or 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 law provides two types of administrative sanctions: (i) financial and (ii) temporary exclusion from future biddings. Sanctions for Individuals could range from approximately US$5,000 to approximately US$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 range from approximately US$50,000 to US$10 million, and companies may be excluded from public projects for up to 10 years.

Being proactive

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 with 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 US authorities, it is important for energy firms or any other company doing business in Mexico to take a number of steps to reduce their 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. They 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.

Establishing an effective third-party ethics and compliance program is strongly advised. Such a program should, at a minimum:

• Survey these third parties as to their ethics and compliance efforts;
• Set standards in a code of conduct for third parties so they understand that integrity is a prerequisite for doing business with your company;
• Closely monitor all payments to and from third parties, such as commercial representatives, agents, and consultants—particularly in high-risk countries;
• 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 energy 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, planning ahead to ensure they have adequate tools to take advantage of the opportunities while controlling and managing risks.

Juan Carlos Luna is the managing director of Lawgistic. Practicing in the Firm’s Houston and Mexico City offices, he assists on transactional projects throughout Mexico and Latin America, as well as advising clients on Governance, Risk and Compliance issues, and strategic legal management consulting.