Mexico’s war on corruption an uphill battle for compliance officers

If anything, anti-corruption efforts are weakening. “The main problem we are facing in Mexico right now … is the independence of anti-corruption institutions,” says Pablo Montes Mendoza, anti-corruption coordinator at the Mexican Institute for Competitiveness. Some say this weakening of independent institutions is AMLO’s attempt to centralize power in his own control.

The recently published 2020 Capacity to Combat Corruption Index (CCC Index) supports this finding. According to the index, which evaluated and ranked 15 of the largest Latin American countries, Mexico scored just 4.55 out of 10 and fared particularly poorly (4.15) in the “legal capacity” category, which includes critical anti-corruption elements, like judicial independence and the independence of anti-corruption agencies.

Mexico also registered dismally in Transparency International’s 2019 Corruption Perception Index, ranking 130th out of 180 countries. Its score on the CPI scale (in which 100 is very clean and 0 is highly corrupt) came in at 29.

Promises of a sweeping overhaul to Mexico’s anti-corruption regime made under the last administration are “if not dead, in a coma,” says Mariana Campos, public expenditure program coordinator at México Evalúa, an independent think tank. This includes the establishment of the National Anti-Corruption System, created in May 2015 to coordinate the myriad anti-corruption institutions at all levels of Mexico’s government to root out corruption. “The main steps that have to be taken in order to put it to work haven’t been taken,” she says.

“Despite his anti-corruption rhetoric, AMLO has made little headway on anti-corruption efforts thus far, and we see no indications that this will change.”

Francisco Garcia, Associate Analyst, Control Risks

A recent analysis conducted by the Washington Office on Latin America, a research and advocacy group, expounds on this point: “Legislators have failed to uphold their constitutional responsibility to nominate key leadership positions, leaving critical seats vacant. At the state level, the anti-corruption systems often receive little funding from state legislatures—or none at all—and many anti-corruption prosecutors say they lack the resources and autonomy needed to do their jobs.”

The coronavirus pandemic further exacerbates corruption risk in Mexico, because the government has a built-in excuse—a national emergency—to control the budget as it sees fit. “This agenda about gaining power and weakening counter-balances is getting stronger,” Campos says.

“Despite his anti-corruption rhetoric, AMLO has made little headway on anti-corruption efforts thus far, and we see no indications that this will change—particularly given the administration’s priorities will now be focused on COVID-19 and the economic impact of the pandemic,” says Francisco Garcia, an associate analyst at Control Risks and a contributing author of the CCC Index.

While a few headline-grabbing corruption investigations have been announced in Mexico, they haven’t progressed in any significant way—for example, the investigation into Emilio Lozoya Austin, the former head of Mexico’s state-run oil company Pemex, over bribery and tax fraud allegations connected to the Odebrecht scandal. Montes Mendoza says of these investigations: “They are flashy, and they may give the appearance that something is happening, but actually within those cases there has been slow movement.”

‘Fiscal terrorism’

Lack of trust in Mexico’s government fuels further unease among companies regarding tax evasion compliance. In October 2019, Mexico’s government approved a law giving the government authority in certain tax evasion cases to seize land and assets without any legal due process, effectively skipping over any presumption of innocence. Theoretically, the government could prosecute any individual or company as it sees fit, even for a minor accounting error and/or if the company is in opposition of the political party.

“Legal reforms in every country do not happen in a vacuum; you have to analyze the context,” Montes Mendoza says. Generally, asset forfeiture and asset recovery are important aspects of anti-corruption reform and would be a good sign if Mexico had “proper checks and balances that cannot be captured by either economic interests or political interest,” he says. That is not the case here.

The extreme lack of trust between and among companies in Mexico and the government exacerbates compliance risk. Reginaldo Esquer, who heads the tax committee at Coparmex, a business organization that represents the interests of Mexican companies, referred to the law as “the start of a new era of fiscal terrorism.”

Moving forward, Garcia recommends keeping a close eye on political events in Mexico relating to corruption matters. “Laws can change, and companies need to keep on top of that to make sure they are compliant,” he says. Companies should also ensure they “fully understand any political connections of potential partners in Mexico. The corruption issue is highly politicized. As such, political connections can influence possible business operations, and indeed, corruption investigations.”

Compliance developments

There have been some key developments that directly impact compliance programs. In March 2019, the Senate confirmed María de la Luz Mijangos Borja as head of Mexico’s new independent prosecution body, the Special Prosecutor’s Office for Combating Corruption, which forms part of the Federal Prosecution Office. Recently, the anti-corruption prosecution body published its first Annual Report to Mexico’s Senate, providing some insight into its enforcement efforts. According to the report, 950 investigations were launched in 2019, of which 600 originated in government institutions.

“This is clearly far from a game-changer for companies concerned about handling corruption cases through official channels,” Garcia says. Of importance to chief compliance officers, the report mentions that incentives and criteria will be created specifically for companies to implement “due internal controls” to address corruption within the private sector.

Luis Danton Martínez Corres explains that the anti-corruption prosecution body expressly vows to focus on the prosecution of corruption crimes committed by companies; aims for the first time to develop guidelines for the evaluation of corporate compliance programs of companies under criminal investigation; and intends to amend several anti-corruption laws to strengthen prosecutorial rights and effectiveness.

“Companies should have in mind that Mexico continues to develop its institutions and tools to combat corruption and, therefore, compliance programs must be developed, as they are essential to protect and defend the company in a potentially more adverse environment of heightened enforcement,” Martínez Corres says.

Zoe Phillips, a principal at Control Risks and leader of its compliance, forensics, and intelligence practice for Mexico, Central America, and the Caribbean, says, “a strong compliance program in Mexico should incorporate the standard key elements: specific anti-corruption policies, education and training, clear reporting channels, internal auditing, comprehensive vetting of partners and vendors, and enforcement measures where necessary.”

USMCA and compliance

Although it’s still too soon to say how impactful Mexico’s anti-corruption bureau will be, “companies should assume that prosecution capabilities are increasing at an accelerated pace,” Martínez Corres says, “and that this learning curve, although steep, will likely be aided by the international cooperation of more advanced jurisdictions, effectively enabling Mexico to leapfrog and prosecute significant cases within the next few years.”

On the international anti-corruption front, the United States-Mexico-Canada Agreement (USMCA), which is set to take effect July 1, includes an entire chapter (Chapter 27) on anti-corruption. Specifically, Chapter 27 “recogniz[es] the need to build integrity within both the public and private sectors and that each sector has complementary responsibilities in this regard,” the USMCA states.

It further encourages management “to make statements in their annual reports or otherwise publicly disclose their internal controls, ethics and compliance programs or measures, including those that contribute to preventing and detecting bribery and corruption in international trade and investment.” It also calls for the implementation and adoption of internal auditing controls to prevent corruption.

Among public officials, the USMCA calls for “integrity, honesty and responsibility,” Garcia says, “The most likely scenario is that corruption-related disputes will be resolved within the framework of the USMCA as opposed to going through each country’s judicial system. This gives Mexico the best of both worlds: It can continue to only partially implement its own anti-corruption legislation while also preventing this from affecting its standing as a commercial partner of the United States and Canada when a corruption-related issue comes up.”

For compliance officers, positive developments may soon be on the way that aid in their internal efforts. “Cooperation and goodwill efforts will likely result in greater promotion and awareness of compliance,” Martínez Corres says. “I strongly believe that international cooperation will prove to be one of the most important forces driving anti-corruption prosecution and enforcement in Mexico the next few years.”