Overview

Any company or individual is subject to the Foreign Corrupt Practices Act ("FCPA") if it directly or indirectly causes an act or effect in the U.S. in the furtherance of a corrupt payment to a public official. In particular, U.S. parent companies of Mexican subsidiaries can be held liable under the FCPA, if they are found to have directed or been involved in the corrupt activities of their Mexican subsidiaries. This QuickCounsel covers how the FCPA affects how business is conducted in Mexico.

Is FCPA Applicable in Mexico?

In 1997, the United States and thirty-two other nations signed and ratified the Organization for Economic Co-operation and Development ("OECD") Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, imposing on all signatories the obligation to enact and enforce laws similar to the FCPA. In 1998, as part of its commitment with the OECD Convention, the U.S. amended the FCPA to impose extraterritorial jurisdiction over U.S. companies and nationals and territorial jurisdiction over non-U.S. companies and nationals through a nationality criteria.

The applicability of the FCPA in Mexico, for acts carried out in Mexican soil, based exclusively in the territoriality concept, might be questionable. However, based on the expansive nationality criteria, the FCPA applies to companies or individuals linked to the U.S. and their subsidiaries in Mexico.

Who is Subject to FCPA in Mexico?

(i) Mexican issuers registered before the Securities and Exchange Commission. This includes Mexican companies sponsoring American Depositary Receipts (ADRs) on U.S. stock exchanges and its affiliates entities.

(ii) Any Mexican entity or individual doing business in the U.S.

(iii) Any U.S. entity (and its Mexican subsidiaries) or individual doing business in Mexico.

Local Anti-Corruption Laws

In Mexico, there are a several laws and regulations that include anti-bribery provisions. The current administration has focused its efforts to promoting anti-corruption regulations. However, despite the significant progress made by the Mexican authorities, enforcement is still improving.

i) Federal Criminal Code (The Criminal Code)

According to the Federal Criminal Code, bribery is a criminal offense, and prosecutes both the "active" party (the giver) as well as the "passive" party (the receiver) of the corrupt practice. A corrupt act occurs when: (a) a public officer directly or indirectly requests or receives money or any other gift for the purpose of taking any action or refraining from taking an action, relating to his or her duties; and (b) when an individual or company gives or offers money or any other gift to any public official, in order to induce the public official to take any action or refrain from taking an action, relating to his or her functions.

In order to comply with their commitments as a signatory of the OECD convention, the Mexican authorities have included a provision in the Criminal Code, provisions regarding corruption to foreign public officers.

Under the Criminal Code, it is a criminal offence to offer, promise or give, money or any kind of gift, with the purpose of obtaining or retaining undue advantages in the development of international business transactions to:

Any foreign public official in order for such public official to act or refrain from acting on the process or resolution of any matter related to its duties; and
Any foreign public official, so that the public official acts or refrains from acting on a process or resolution outside the scope of its duties.

ii) Law on Accountability of Public Officials.

This law prohibits public officials, during their administration or one year thereafter, from soliciting, accepting or receiving gifts, services, employment or commissions from individuals or companies whose professional, commercial or industrial activities are linked, regulated or supervised by the public official and involves a conflict of interest.

Violators of the above provisions will be subject to monetary penalties that vary depending on the offense, prison for up to 14 years, and prohibition from holding a public office for up to 14 years.

iii) Income Tax Law.

This law provides that gifts and similar donations are not deductible for tax purposes.

iv) Federal law against corruption in public procurement.

This law (which applies to Mexican and non-Mexican companies and individuals) was recently approved and is only expecting the blessing of the executive branch to be enacted. According to its provisions, it is illegal to give or offer money or any kid of gift to a public official in order to obtain or retain a privilege or advantage in the area of public procurement, and includes the obligation to report to the Mexican authorities any corrupt activity in a public bidding process.

Violation to its provisions could lead to the application of fines for up to $10 million US, and the offender can be barred from public tenders for up to 10 years.

Compliance Best Practices in Mexico

An increasing number of international in-house and outside counsel involved in transactions in Mexico, have become interested in implementing compliance programs to comply both with the FCPA and Mexican anti-corruption laws.

A number of publications have addressed this concern, and most of the multinationals operating in Mexico have developed compliance programs. Below is a summary of the most common compliance guidelines used in Mexico.

i. Regular training to local officers and employees on compliance with FCPA (when applicable) and Mexican laws.

This training must involve the top-level management who must show their commitment to preventing anti-corruption and bribery within the organization. They need to foster a culture within the company in which corruption and bribery are never acceptable: however, it is necessary to share with all members and employees the anti-corruption policies and the consequences in the event of a breach.

Practical Advice:
Have an ethics code with clear wording and examples. Be as clear and simple as possible and highlight the potential consequences. Be sure that all employees sign a document evidencing that they agree with its content and that they received a copy.

Organize regular training sessions not only for top-level officers but also for all the administrative employees and sales crew.

Encourage the officers and employees of the company to report any possible act that may be considered as corruption and bribery in accordance with the law and the internal regulations of the company, assuring the confidentiality of such report in order to avoid any adverse consequences for the whistle-blower.

Create an internal group in charge of the anti-bribery issues. This group shall encompass fixed members (head of Human Resources, General Manager and head of Legal Department) and variable members (employees randomly selected on a temporary basis). A number of companies invite their outside counsel to this group.

ii. Conduct anti-bribery risk assessments.

Companies shall assess the nature and extent of their exposure to potential external and internal risks of bribery. The assessment shall be periodic, informed and documented.

Practical Advice:
Perform researches into the markets where you are planning to do business and due diligence on the individuals or companies you will be doing business with.

Develop an anti-corruption practices due diligence checklist for use in any acquisition or strategic commercial relationship.

Draft a know-your-client questionnaire.

In addition to the code of ethics or manuals, include anti-bribery provisions within the employment agreements (the provisions may vary depending on the level of the employee and certainly top officers shall have more responsibility than administrative staff).

Include specific anti-corruption clauses in all commercial agreements with third parties.

iii. Monitoring Program and red flag analysis.

There are significant red flags to consider when working with any third party, such as: questionable integrity and reputation; prior legal issues related with corruption and bribery; questionable business associates and subcontractors; etc. It is necessary to establish within the company, a monitoring program in order to identify such red flags and to communicate all anti-corruption policies used by the company.

Practical Advice:
Have at least 2 officers attend meetings with public officers, and request detailed minutes of the meeting, including all attendees, issues discussed and proposals made.

Provide specific guidelines to employees attending meetings with public officers indicating what they can say or do on behalf of the company, and how to react in case a corrupt request is made.

Try to investigate any background about the public officers they will meet with.

It is important to act immediately when there is any corrupt action or behavior, and report it to Headquarters.

iv. Professional Advice

In order to confirm that your compliance programs are in fact compliant with both FCPA and Mexican laws, it is advisable to request professional assistance from expert local counsel, who can also play an important role as whistle-blower in case a corrupt action is identified, and will be on the ground to respond any inquiry from local officers related with the day-to-day operations in Mexico.

Conclusion

Notwithstanding that FCPA is a U.S. law and that its extraterritorial application is questionable, it has a significant impact in Mexico for U.S. based entities or individuals with operations in Mexico, as well as for Mexican companies or individuals with sufficient US links.

An integral anti-bribery compliance program is now a must for U.S.-based entities or individuals with operations in Mexico. The program has to be modified and adjusted to contemplate compliance with Mexican laws and be consistent with local healthy business practices.

Compliance with FCPA and Mexican laws can be challenging and might require the investment of significant time and resources; however, it is worthwhile as it helps you avoid the exposure to violation and significant fines and penalties related thereto.

The outcome of the Walmart case will, no doubt, be extremely important to enlighten multinationals operating in Mexico on the consequences of a potential violation.

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1 The OECD Anti-Bribery Convention establishes legally binding standards to criminalize bribery of foreign public officials in international business transactions and provides for a host of related measures that make this effective. The 34 OECD member countries and four non-member countries - Argentina, Brazil, Bulgaria, and South Africa - have adopted this Convention. Mexico deposited the instrument of ratification of May 27, 1999 and the Convention provisions became law on July 26, 1999. http://www.oecd.org/document/21/0,3746,en_2649_34859_2017813_1_1_1_1,00…