Publish in Perspectives - Wednesday, July 18, 2018
Anti-corruption efforts in Mexico -- here represented by the Zocalo square in capital Mexico City -- have stalled in recent years, but may gain momentum with the new president, the authors argue. (Photo: Mexico City Government)
The victory of AMLO appears to signal the beginning of a new era in anti-corruption enforcement.
BY WIFREDO A. FERRER, MARCELO OVEJERO & JAIME RODRIGUEZ
Approximately two years ago, Mexico undertook one of the most comprehensive and ambitious anti-corruption reforms in the world. A major constitutional amendment in 2015 and seven statutes passed in 2016 gave birth to the Mexican Sistema National Anticorrupción (National Anti-Corruption System or NAS), an intricate network of laws, governmental institutions, public officials and civilians designed to prevent, investigate and sanction corrupt practices involving public officials, as well as companies and individuals in the private sector.
Shortly after its creation, however, the NAS lost momentum. The lack of political consensus to make appointments in, or to allocate public resources to, certain government bodies that are central to the NAS basically halted the implementation process. As a result, the current situation is one where there is a total dearth of enforcement, with zero cases brought under the NAS to the present date.
But the NAS may soon be back at the forefront. On July 1, 2018, Mexicans voted for Andrés Manuel López Obrador as its new president and he will take office on December 1, 2018. AMLO—as the president-elect is popularly known in Mexico—mainly based his campaign on promises to combat corruption at the highest government levels. In this context, the NAS should be expected to be a top enforcement priority for the new Mexican government.
This article covers one of the novelties introduced by the NAS: compliance programs. For companies doing business in Mexico, compliance programs can be a great tool to protect themselves from anti-corruption liability under the NAS. Compliance programs, though, are foreign to the Mexican legal tradition, so it is essential for companies operating in Mexico to fully understand what they are, their import under the NAS, and how can they benefit from them.
What is a Compliance Program?
In the anti-corruption arena, a compliance program is a set of policies and procedures that a company adopts internally to prevent and redress violations to anti-corruption laws committed by their officers or employees. A compliance program is typically comprised of different elements, including a written code of conduct, risk assessment and audit procedures, training, third-party due diligence, reporting mechanisms, etc.
The most salient feature of a compliance program is its preventive approach towards the law. The traditional approach when it comes to interacting with the law is reactive in nature, in the sense that a legal violation first occurs and only then does the company resort to its lawyers to deal with the consequences of the violation. Instead, a compliance program attempts to anticipate the legal violation and prevent (or, at least, mitigate) it by means of internal rules that regulate the conduct of the company’s personnel.
A compliance program’s preventive approach is likely the key to explain its growing acceptance and use, especially in the corporate sphere. In a middle- or big-size company, the cost of maintaining a compliance program to prevent legal violations is probably lower than the amounts of the fines and other penalties that could be imposed for such violations. In this regard, a compliance program is similar to insurance—a minor cost is paid upfront to avoid paying higher costs in case something bad happens in the future.
The Role of Compliance Programs in Mexico’s National Anti-Corruption System
Anti-corruption legislations around the world assign different legal consequences to having a compliance program. Under the pioneering U.S. Foreign Corrupt Practices Act of 1977 (FCPA), a company is vicariously liable for the corrupt acts of its officers and employees, but having a compliance program that satisfies certain requirements is a mitigating factor to be considered when determining the company’s sentence. A different model, like the one followed in Argentina for instance, provides a company with a full defense against anti-corruption liability if a compliance program containing specific elements is in place. And pursuant to a third model, of which Chile is a good example, the company is not directly responsible for the corrupt acts of its personnel, but for not having an adequate compliance program to prevent such acts.
In Mexico, compliance programs appear in the most significant NAS statute: the Ley General de Responsabilidades Administrativas (General Law of Administrative Responsibilities or GLAR). In an unprecedented move for the Mexican legal system, the GLAR subjects companies to administrative liability for a variety of corruption-related offenses, such as bribery, influence peddling, use of false information, obstruction of justice, collusion, misuse of public resources, and the unlawful hiring of former public officials. The GLAR contains stiff penalties for companies, including fines of up to twice the amount of any illegally obtained benefits, disqualification of up to 10 years to participate in public bids, suspension of commercial activities of up to 3 years, compulsory dissolution, and damages.
As to compliance programs, article 25 of the GLAR states that whether company has in place—or not—a compliance program (política de integridad, as the GLAR calls it) is a factor that must be considered “in determining the [company’s] liability.” In this respect, Mexico’s NAS appears to be modeled after the FCPA, where a compliance program does not exempt a company from liability but rather operates as a mitigating factor that can cause a reduction in applicable penalties. A minor difference that may exist between the NAS and the FCPA is that, as worded, the GLAR could be read to also contemplate the lack of a compliance program as an aggravating factor, which is not the case under the FCPA.
Unfortunately, the precise legal consequences of having a compliance program under the GLAR are unclear. The GLAR considers having a compliance program a mitigating factor, but does not provide for any specific, tangible benefits. Contributing to this state of uncertainty is the fact that—as explained in the beginning—the NAS (including the GLAR) has been virtually unenforced thus far. Therefore, companies doing business in Mexico and subject to the NAS might be fairly asking themselves whether adopting a compliance program is really worth it.
The Value of Compliance Programs: The U.S. Perspective
To fully appreciate the value of compliance programs, it is perhaps helpful to see how such programs have worked in other countries. The United States is, without a doubt, a global leader in anti-corruption enforcement. Nowadays, it is quite commonplace for U.S. companies to have an anti-corruption compliance program in place, even though doing so is not a legal requirement in most cases. The reason for U.S. companies to adopt an anti-corruption compliance program is likely tied to the benefits they derive from such a program.
First and foremost, a properly managed compliance program can actually help a company to prevent legal violations or, at least, to avoid the problem from becoming widespread. That in turn saves the company millions of dollars in fines and legal fees, which is precisely the logic that fuels compliance programs.
Having a compliance program can also help a company even when the program fails to prevent legal violations. As explained above, U.S. law makes it a mitigating factor to have a qualifying compliance program, which could lead to a significant reduction of the applicable fine range under the federal sentencing guidelines.
Importantly, the benefits of an anti-corruption compliance program are not limited to more favorable legal consequences for the company. As the U.S. experience demonstrates, a having a compliance program can bring significant economic benefits too. Simply put, a company with an anti-corruption compliance program has more intrinsic value than a company that does not adopt one.
For instance, commercial counterparties that are risk-averse or sophisticated are much more comfortable dealing with a company that has a compliance program. When operating with a company that does not have a compliance program, these counterparties might require more assurances or guarantees, thereby increasing the cost of doing business. Or, even worse, they might refrain from dealing with the company altogether.
The same holds true for M&A purposes. A company with a compliance program is a company for which conscious investors are willing to pay more. Conversely, a company that lacks a compliance program is a company that will have a lower price, because investors need to spend more to protect their investment.
In sum, like in the NAS in Mexico, U.S. law also assigns a mitigating effect to having an anti-corruption compliance program. While cognizant of this benefit, companies in the United States have also realized that the real value of a solid compliance program goes beyond than just getting better legal treatment from the authorities. There is no reason why the same cannot be true for companies in Mexico.
A more robust anti-corruption culture is taking hold in Latin America, and Mexico is not the exception. The adoption of the NAS approximately two years ago, and the recent victory of a presidential candidate who put the fight against corruption at the front and center of his campaign, appear to signal the beginning of a new era in anti-corruption enforcement.
To be adequately protected against liability, companies doing business in Mexico need to revisit their anti-corruption strategy, and specifically their approach towards the NAS. Compliance programs—we think—are called to play a critical role under the NAS. Although the precise legal consequences of having one are still uncertain, companies can rest assured that at least some kind of benefit will be afforded, probably in the form of reduced penalties. In any event, there are other important reasons for a company operating in Mexico to adopt a compliance program. As the U.S. experience shows, a solid compliance program has a direct and palpable impact on the company’s intrinsic value. Plus, in times where more and more countries are joining the anti-corruption movement, a compliance program will soon become a “must” for companies to be part of the global marketplace.
Wifredo "Willy" Ferrer, Marcelo Ovejero and Jaime Rodriguez are attorneys with Holland & Knight and members of the firm’s Global Compliance and Investigations Team. Ferrer, who is the former United States Attorney for the Southern District of Florida, is chair of the team. Ferrer and Ovejero are headquartered in Miami and Rodriquez is in Mexico City.
They wrote this column for Latinvex.
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