Has Mexico finally turned its eye to compliance?

November 2015 | EXPERT BRIEFING | FRAUD & CORRUPTION

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Without doubt, corruption is a major problem in Mexico. It stops development, slows growth, harms institutions, discourages investors, costs Mexicans millions a year and arrests up to 10 percent of the country’s GDP. It is no surprise that Mexico tops the list of corruption perception among Organisation for Economic Co-operation and Development (OECD) countries, in accordance with Transparency International (as the most corrupt out of 34 countries). As the world strengthens its fight against corruption, corporate prosecutions make headlines around the world and corporations aim to avoid millions in fines, Mexico cannot ignore the problem. In that sense, both the Mexican public and private sectors are becoming more anticorruption-savvy and increasingly willing to take action.

The latest version of the Corruption and Good Governance National Index (INCBG) measured the levels of corruption affecting Mexico, and the diverse ways in which it impacts the Mexican people. According to the Index, which was compiled in 2010, 200 million corrupt acts were identified related to the use of public services provided by federal, local and municipal authorities, as well as public concessions and services managed by private parties. On average, Mexican homes set aside 14 percent of their revenue to corruption.

As an official response to corruption, the Mexican Congress approved on May 2015 the so called Anti-corruption National System (SNA), pushing a major constitutional amendment and the creation of secondary laws, yet to be published.

The SNA aims to coordinate mechanism between governmental entities, auditing entities and those in charge of controlling public resources. The main highlights of the constitutional amendment are the obligation for public officers to file personal estate and conflict of interest statements, the extra powers granted to the Federal Superior Auditor (ASF) to execute ‘real time’ audits, the creation of a new system to determine liability over public servers and, when applicable, to individuals committing administrative offences, and the fact that Mexican states are bound to create their own local anti-corruption systems.

At a glance, the SNA will have the following features, aimed at preventing, detecting and sanctioning corrupt acts. The ASF will be in charge of reviewing the use of public federal resources and Mexican states’ debt in cases where the federation appears as guarantor. It will submit claims for unlawful actions to the anticorruption prosecutor and administrative courts. The ASF will investigate corruption offences and take them to court. Finally, the Federal Tax and Administrative Tribunal will rule over corruption cases, imposing sanctions on public officers and private entities through the creation of specialised courts.

Although the above actions were welcomed by some sectors of the political class and the Mexican public, they also were received with fair levels of scepticism and criticism by some of the most reputable commentators on the subject. However, the federal government’s efforts to make a long expected first move against corruption is expected to have a positive impact on one of Mexico’s key problems.

From a private standpoint, as the country with most free trade treaties in the world, and notwithstanding well known challenges such as insecurity, violence and drug cartels, Mexico continues to be an attractive destination for foreign investment from around the world, with the US as its main economic partner. In that sense, the growing trend of multijurisdictional investigations for unlawful corporate actions has also impacted the Mexican marketplace. The need for Mexican companies to become compliant with foreign regulations such as the FCPA and the UKBA in order to do business with foreign companies, in addition to meeting stronger local regulation and sanctions, have forced them to evolve and create policies, internal controls and compliance programmes which had only minor relevance in previous years. While this matter has been a ‘hot topic’ in other jurisdictions for years, recent major cases (some of them allegedly involving high-ranking government officials and with exhaustive media coverage) have opened the eyes of Mexico’s private sector and encouraged companies to start taking steps toward compliance.

As a consequence, some concepts such as legal audits and compliance due diligence are becoming of paramount importance for companies executing joint ventures, involved in M&A transactions, and generally doing business in the country. Service providers such as law firms, audit companies and tax advisers, have responded to this trend by creating specialised practice groups which are growing busy due to regulatory compliance in the Mexican marketplace.

More companies are undertaking legal audits, and more specifically, compliance audits. This consists mainly of hiring professional consultants (such as specialised attorneys) to conduct a thorough investigation and analysis of a company’s information, documents, mechanisms, internal controls, policies, etc., with the purpose of determining the company’s level of compliance and protection, as well as its related risk exposure. Audits are aimed at detecting (and ultimately correcting, for prevention purposes) problems and deficiencies in a company’s compliance programmes, which could potentially damage company and its operations.

Compliance audits are not the same as regular legal audits; they are of a specific, specialised nature beyond the scope of general legal audits, which may prove insufficient for certain risk detection. Detecting ‘red flags’ during compliance audits is a result of a systematic process composed of diverse stages. Also, those red flags are classified by risk-level – high, moderate or low risk. They do not necessarily indicate or result in the existence of serious deficiencies or, for example, corrupt acts. However, red flags normally confirm the existence of irregular situations within the company’s operations.

Regularly, and especially where relevant high risks are detected, audits are followed by an investigation phase. Investigations are a critical component of a robust compliance programme. This phase focuses on conducting a deep and rigorous internal investigation to identify suspected breaches of law or corrupt acts within the company. The investigation, also known as a ‘forensic’ audit process, analyses the results of the compliance audit stage by following and assessing the diverse elements exposed by red flags.

Affording special interest and attention to the creation of well-structured internal compliance programmes and the performance of audits should be (and is becoming) a high priority for companies doing business in Mexico. Trends have shown this practice is growing at an intense pace, and that companies are willing to take the necessary steps to mitigate risks.

In conclusion, Mexico must travel a long and hostile road toward eliminating or at least reducing corruption, a road that entails joint and coordinated efforts from diverse battlefronts, including both the government and the private sector. As corruption has proved to be deeply rooted in Mexico, conscience has to be created in the sense that it is not just the government to blame, but also the Mexican people and businesses. It is well known that in most cases the complicity of the private sector is involved in corruption cases. This is the main reason why well structured compliance programmes, including exhaustive audit processes, should play a leading role in the struggle to eradicate corruption in Mexico.

Daniel Del Río is a partner and Fernando González and Rodolfo Barreda are senior associates at Basham, Ringe y Correa, S.C. Mr Del Rio can be contacted on +52 55 5261 0400 or by email: delrio@basham.com.mx. Mr González can be contacted on +52 55 5261 0400 or by email: fagonzalez@basham.com.mx. Mr Barreda can be contacted on +52 55 5261 0400 or by email: rbarreda@basham.com.mx.

Daniel Del Río, Fernando González and Rodolfo Barreda

Basham, Ringe y Correa, S.C.