Scenic view at Basilica of Guadalupe with Mexico city skyline at sunset, Mexico

Model Program for Corporation Integrity

Last week the Secretary of Public Administration in Mexico published its Model Program for Corporation Integrity to provide interpretation of Articles 21 and 25 of the General Law of Administrative Responsibilities (GLAR[1]). The Model Program provides the following recommendations for compliance programs and policies:

  • Include measures to promote internal norms and accountability within the company, in accordance with national and international commitments.
  • “Tone at the top” commitment from board of directors and general manager.
  • Third Parties and distributors obligated to adhere to the company’s compliance policies.
  • The Code of Conduct must be adequately published and communicated to the personnel of the company. Reference to the Confederation of Employers of the Mexican Republic (“Coparmex” by its Spanish acronym) is recommended.
  • Apply the Code of Conduct in practice and promote reports of suspicious activities. Implementation by areas if a company has multiple divisions.
  • The anticorruption policy must take into account the degrees of risk for the country, industry, transaction, commercial opportunity and commercial association. For these purposes, rely on the Model for International Internal Controls.
  • For financial organizations, refer to these three guidelines: (i) The Sole Memorandum for Banks; (ii) The Sole Memorandum for Stock Exchange; (iii) The Sarbanes Oxley Act.
  • Special attention to the following areas in the company: sales, contracts, human resources and government contacts. The guide also recommends the observance of the guide for the UK Bribery Act.
  • Systems for self-reporting and training must be adequate and efficient.
  • Human resources must employ policies to avoid the employment of individuals who could generate a risk to the integrity of the company.

New National Anti-Corruption System for Mexico

Although not as widely publicized as other recent events in Mexico, the Mexican legal system has been undergoing substantial changes over the last few years. Oral court proceedings and criminal liability for companies are possibly the most profound. Anti-corruption legislation has also made significant advances. The Mexican states voted to amend the Federal Constitution in June of 2015 to create a National Anti-Corruption System. This constitutional amendment was implemented in July 2016 by means of a series of laws, including the General Law for the National Anti-Corruption System; the Organic Law for the Federal Tribunal on Administrative Justice; and the General Law of Administrative Responsibilities (GLAR[2]).[3] The GLAR will enter into full effect on July 19, 2017.

The General Law on the National Anti-Corruption System created the National Anti-Corruption System, which is tasked with coordinating the anti-corruption activity of all government and state agencies responsible for the prevention, detection and prosecution of corruption.[4] After being designated for elimination in 2009 by President Calderón, the Secretary of Public Administration got a new lease on life and fresh relevance in President Peña’s anti-corruption reforms, as the chief enforcer of the National Anti-Corruption System.[5]

The GLAR will punish both individuals and legal entities for any bribery of government officials, whether in the government procurement context or otherwise, and whether at the federal level or any other government level in Mexico.[6] The law will also punish individuals who use influence or other improper means to obtain an undue advantage in any federal, state or local government bid.[7] Regardless of any overlap with anti-trust legislation, any agreement between two or more persons to gain an undue advantage will also be punishable by this law.[8] Finally, these prohibitions also apply to interactions of Mexican persons subject to this law with foreign public officials.[9]

The GLAR also prohibits any person from engaging the services of a public servant during the first year after his/her public service ends, if the public servant had access to information that would give an undue advantage to the persons engaging him/her, and makes it available to them.[10] Evidentiary issues will undoubtedly be difficult in these cases, particularly given the formalistic nature of the Mexican law of evidence.

The most controversial part of the GLAR was the requirement that public officials disclose their property and economic interests, and tax filings[11] that applied to all federal, state and local government officials.[12] This requirement created great controversy in Congress and drew strong resistance from traditionally left-leaning parties that wanted to apply the same transparency requirements to private companies that engage in business with the government. President Peña vetoed the extension as to private parties, and the law went into effect stipulating disclosures for public officials only. The GLAR will replace the Federal Anti-corruption Law on Public Procurement upon entering into force.

Liability will accrue for a corporation for acts carried out by persons acting on their behalf that result in benefits for the corporation. Penalties include a fine of the greater of two times the benefits obtained or approximately US$6 million, indemnity of government agencies, possible debarment, suspension of activities, and dissolution of the corporation.

Conduct under the Scope of the GLAR

Conduct is divided between serious and non-serious offenses, with private individuals being held liable when their activities constitute serious offenses. Non-serious offenses are related to the day-to-day activities of public officials. Serious offenses include:

  • Bribery of public officials
  • Participation in administrative proceedings at the federal, state, or municipal level after having been debarred by law or final resolution by competent authorities
  • Use of influence, economic or political power over a public official to obtain a benefit or to cause damage to a person or a public official;
  • Use of false information or simulation of compliance with norms or regulations during an administrative proceeding to obtain an authorization, benefit or advantage, or to cause damage to any person
  • Delivery of false information or delay of the delivery of information during an investigation after being properly served by the authorities.
  • Any joint action with other private parties to obtain a benefit or advantage in a federal, state, or municipal public procurement process
  • Misappropriation of public funds; and
  • Hiring of public officials or former public officials who held office within the past year and who acquired or possess privileged information derived from their status and that directly results in a competitive advantage.

Integrity Policy or Code of Conduct

Under the General Law of Administrative Responsibilities, having a compliance program can act in essence as an affirmative defense. The compliance program, referred to as an “integrity policy” (política de integridad) in the GLAR, must contain the following characteristics, which are generally consistent with those of the DOJ/SEC 2012 Resource Guide[13]:

  • A clear and complete organizational and procedural manual that clearly defines the functions and responsibilities of each part of the company, and specifies clearly the chains of command and leadership for each corporate structure.
  • A code of conduct that is duly published and made known to every person in the organization and that has systems and mechanisms for effective implementation.
  • Adequate and effective controls, monitoring and auditing systems that ensure compliance on a continuous and periodic basis throughout the organization.
  • Adequate whistleblowing systems for internal reports also allowing for reporting to authorities, as well as disciplinary processes with clear and specific consequences for those who act contrary to internal company policies or to Mexican legislation.
  • Adequate systems and processes for training on ethics standards.
  • Human resources policies to avoid hiring employees who could be a risk to the integrity of the company. These policies cannot enable discrimination on the basis of ethnicity, nationality, gender, age, disabilities, social status, health status, religion, political opinion, sexual orientation, marital status, or any other ground that compromises human dignity or curtails human rights and liberties.
  • Mechanisms to ensure transparency and disclosure of interests (avoiding conflicts of interest) at all times.[14]

Because the GLAR will not be fully implemented until July 2017, there is no track record yet on the criteria that the administrative courts may use to evaluate compliance programs or “integrity policies.” There is no guidance by the enforcement authorities on how they may use evidence of compliance programs in decisions on whether or not to bring enforcement actions.

The GLAR also has introduced the concept of a whistleblower in the anti-corruption space.[15] Under this concept, a person who has committed a serious administrative offense, which includes corruption, can admit liability and fully and continuously cooperate with the authorities in exchange for a potential sanction reduction of 50 to 70 percent, or suspension of temporary ineligibility to participate in government procurement processes.

Keeping Track of Priorities

The new National Anti-corruption System is certainly a significant development in Mexico’s fight against corruption. In terms of risk to companies operating in Mexico, however, the US Foreign Corrupt Practices Act continues to be far-and-away the most important legislation to consider, whether in evaluating and minimizing risk, designing a compliance program or conducting an internal investigation. For each of these key compliance-related activities, a thorough knowledge of local law, culture and practices is also a must.

In FCPA enforcement, third-party corruption risk remains the are of greatest concern in Mexico. Consultants or “gestores” (intermediaries dealing with administrative bureaucracy on behalf of clients), family members of state-owned customers, fictitious service providers, shell companies and various other intermediaries have all been identified by US authorities in FCPA cases as having been used to pay bribes involving Mexico. Numerous company executives operating in Mexico have also pled guilty for their participation in corruption schemes.[16] Major Mexican government institutions, such as Petroleos Mexicanos (Hewlett Packard case[17]), Comisión Federal de Electricidad (Lindsay Manufacturing case[18]), Policía Federal Preventiva, Coordinación General de Transportes Aéreos Presidenciales (BizJet case[19]), and the Mexico Social Security Institute (Stryker case[20]), have all been implicated in recently disclosed FCPA cases.

Improper gifting and excessive hospitalities amounting to corruption have also been a recurrent issue in Mexico, particularly with healthcare companies.[21] Obtaining licensing and permits is another major area that lends itself to corruption, particularly given the immense bureaucracy in Mexico (Wal-Mart case[22]). Another recurrent theme presented in these cases is the hiring of government officials’ relatives and falsification of documentation on services allegedly provided by such relatives (Tyson Foods, Paradigm cases[23]). Payments of percentages of profits on government contracts and other kickbacks are also widespread in Mexico (Orthofix case[24]).

In fiscal year 2015, the US Securities and Exchange Commission’s Office of the Whistleblower received tips from 61 non-US countries, including 13 complaints from Mexico.[25] In 2016, while the number of complaints non-US origin complaints rose by 10%, those originating in Mexico rose over twelve times more than the average (123%).[26] Given the recent trends and growing whistleblower activism, FCPA enforcement involving Mexico will likely continue unabated.

[1] Ley General de Responsabilidades Administrativas [General Law of Administrative Responsibilities], Diario Oficial de la Federación (Official Federal Gazette), http://dof.gob.mx/nota_detalle.php?codigo=5445048&fecha=18/07/2016

[2] Ley General de Responsabilidades Administrativas [General Law of Administrative Responsibilities], Diario Oficial de la Federación (Official Federal Gazette), http://dof.gob.mx/nota_detalle.php?codigo=5445048&fecha=18/07/2016

[3] On the same day, as published in a special evening edition of the Daily Federal Gazette, Congress approved modifications to the Federal Criminal Code, the Organic Federal Public Administration Law, the Audit Law, the Tax Coordination Law, the General Accounting Law, and the Organic Law of the Attorney General of the Republic. http://dof.gob.mx/index.php?year=2016&month=07&day=18&edicion=VES.

[4] Ley General del Sistema Nacional Anticorrupción [General Law of the National Anti-Corruption System], Art. 6.

[5] Ley Orgánica de la Administración Pública Federal [Organic Law of the Federal Public Administration], Art. 37 (cf. paras. XXV, XXVI).

[6] General Law of Administrative Responsibilities, Art. 66.

[7] General Law of Administrative Responsibilities, Art. 70.

[8] General Law of Administrative Responsibilities, Art. 70.

[9] General Law of Administrative Responsibilities, Art. 70.

[10] General Law of Administrative Responsibilities, Art. 72.

[11] General Law of Administrative Responsibilities, Arts. 32 to 48.

[12] General Law of Administrative Responsibilities, Art. 3(XXV).

[13] “SEC and Justice Department Release FCPA Guide,” November 14, 2012, accessed December 20, 2016, https://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171485784

[14] General Law of Administrative Responsibilities, Art. 25.

[15] General Law of Administrative Responsibilities, Art. 88.

[16] https://www.justice.gov/opa/pr/former-chief-executive-officer-lufthansa-subsidiary-bizjet-pleads-guilty-foreign-bribery.

[17] Hewlett Packard pled guilty in 2014 and agreed to pay over US$108 million for FCPA violations on a world-wide basis. In Mexico, it allegedly paid nearly US$1.5 million through an over-paid “channel partner” to win a Pemex IT contract worth approximately US$6 million. One of the Pemex officials reportedly received US$125,000 in bribes. See, https://www.justice.gov/opa/pr/hewlett-packard-russia-agrees-plead-guilty-foreign-bribery, consulted July 9, 2016.

[18] In 2012, Lindsay Manufacturing. After a conviction of three of its employees in 2011 for bribing officials at the Comisión Federal de Electricidad, Mexico’s state-owned electric utility, a US District Court overturned the conviction. Prosecutors had sought US$24 million in criminal fines for bribes in relation to supply contracts. See, http://blogs.wsj.com/corruption-currents/2012/05/29/u-s-drops-appeal-in-lindsey-manufacturing-fcpa-case/, consulted July 9, 2016.

[19] In 2012, Bizjet agreed to pay US$11.8 million criminal penalty to resolve charges of illegal payments to officials at the Mexican Policía Federal Preventiva, the Mexican Coordinación General de Transportes Aéreos Presidenciales, the air fleet for the Gobierno del Estado de Sinaloa, the air fleet for the Gobierno del Estado de Sonora, as well as Panamanian officials. The payments were to secure aircraft maintenance contracts. It paid bribes both directly to the foreign officials or through a shell company owned and operated by a BizJet sales manager. See, https://www.justice.gov/opa/pr/bizjet-international-sales-and-support-inc-resolves-foreign-corrupt-practices-act, consulted July 9, 2016.

[20] According to the SEC, in Mexico Stryker paid US$46,000 in bribes through a law firm to the Mexican Social Security Institute to gain sales of medical device purchases, worth US$2.1 million. Brought by the SEC, the case was based solely on the books and records provisions of the FCPA. Stryker agreed to pay US$13.2 million to settle the charges. https://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540044262, https://www.sec.gov/litigation/admin/2013/34-70751.pdf, consulted July 9, 2016.

[21] As part of a $623 million 2016 settlement with the DOJ, Olympus Corporation of the Americas agreed to pay $22.8 million and submit to a three-year DPA to resolve criminal FCPA allegations. In seven countries in Latin America, including Mexico, Olympus paid money and provided free medical education travel, free or heavily discounted equipment, and other things of value to doctors working at government hospitals and clinics to induce purchase of Olympus products. See, https://www.justice.gov/opa/pr/medical-equipment-company-will-pay-646-million-making-illegal-payments-doctors-and-hospitals, consulted July 9, 2016.

[22] In 2012, The New York Times published articles that claimed that top officials at Wal-Mart Mexican hid a widespread corruption scheme from the company’s headquarters. Allegations claimed that Wal-Mart personnel had paid over $24 million in bribes for expedited and controversial construction permits throughout Mexico, including one location in the shadow of the Teotihuacan pyramids. After Wal-Mart had spent over US$600 million on a compliance investigation, the Wall Street Journal reported that the investigation was winding down without finding major wrongdoing. The case is still in process. http://www.wsj.com/articles/wal-mart-bribery-probe-finds-little-misconduct-in-mexico-1445215737, consulted July 9, 2016.

[23] Paradigm’s hiring of the brother of an official from Pemex, from which Paradigm was then awarded a contract, was cited as an FCPA offense.  See, http://www.fcpablog.com/blog/tag/paradigm#sthash.cpphJRrg.dpuf, consulted July 9, 2016.

[24] In 2012, Orthofix agreed to pay US$7.4 million and submit to a deferred prosecution agreement, partially based on allegations in Mexico of payments to Mexico Social Security officials of percentages of profits on government contracts. See, https://www.justice.gov/sites/default/files/criminal-fraud/legacy/2012/08/15/2012-07-10-orthofix-info.pdf, consulted July 9, 2016. https://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171483164, consulted July 9, 2016.

[25] SEC, 2015 Annual Report to Congress on the Dodd-Frank Whistleblower Program (2015), available at https://www.sec.gov/reports.

[26] SEC, 2016 Annual Report to Congress on the Dodd-Frank Whistleblower Program (2016), available at https://www.sec.gov/reports.