New Energy Opportunities in Mexico Raise FCPA (Foreign Corrupt Practices Act), Anti-Bribery Risks
Sweeping reforms across Mexico’s oil, gas and electric markets promise more opportunities for the private sector and increased investment from international firms. However, U.S. companies looking to enter this market will need to stay vigilant to anti-corruption risks and plan ahead to ensure they have adequate anti-corruption compliance structures in place to address these risks. Given heightened enforcement of the U.S. Foreign Corrupt Practices Act, particularly in the energy industry, international energy firms need to pay particular attention to their anti-bribery risks when contemplating potential transactions in Mexico’s newly privatized energy markets.
Oil Market Reforms in Mexico
In an interview on February 11, 2014, Mexico’s finance minister, Luis Videgaray, announced that Mexico is expediting the schedule for its first oil contracts with private companies and would begin announcing certain private agreements to the market by early 2015. Considered the country’s most significant legal overhaul since the North American Free Trade Agreement, Mexico amended its constitution in December 2013 to end the state monopoly on oil. Initially, the Mexican government indicated that foreign crude producers would have to wait until late 2015 to begin bidding on oil fields, but Mr. Videgaray’s announcement sends a clear signal that foreign investment is set to move at a significantly faster pace.
The reforms enacted by President Enrique Pena Nieto were designed to end the output slump that Mexico, one of the biggest crude oil resources in the Western Hemisphere, has experienced in recent years. Analysts estimate that by inviting international explorers to drill in Mexico, roughly 2.5 million barrels per day (the equivalent of another Nigeria) will be added to the world’s supply. The Mexican government expects roughly $10 billion per year in new revenues from the privatization of its oil industry, resulting in an added 2.5 percent of gross domestic product by 2025. Despite the significant financial impact and the promised expedited contracting process, significant questions remain regarding the ground rules on how licensing, bidding and contracting processes will work. Drilling may also be slowed down by a lack of infrastructure, uncertain tax structures and other to-be-determined standards.
FCPA and Applicable Anti-Bribery Laws Pose Heightened Risks
As international energy companies move into the Mexican market under an uncertain regulatory environment, they must be proactive with regards to the U.S. Foreign Corrupt Practices Act (FCPA) risks that these opportunities bring. The FCPA bars U.S. companies—and their officers, directors, employees and agents—to act with corrupt intent in furtherance of any offer, payment, promise of payment or authorization of payment, money, gifts or anything else of value to any “foreign government official” for the purposes of influencing the official. Foreign government officials are broadly defined under the FCPA, including employees of state-owned companies and other instrumentalities. Additionally, U.S. companies (including their foreign subsidiaries) and foreign companies whose shares are publicly traded in the United States are also subject to the FCPA’s accounting and bookkeeping provisions, which require accurate recording of expenses and internal controls intended to prevent bribes from being paid. While the FCPA permits facilitation or “grease” payments—a payment to an official to secure routine governmental action—permitting such payments nonetheless poses FCPA risk and may bring liability under other applicable anti-bribery laws (such as Mexico’s anti-bribery law).
Significant risks also exist under the 2012 Mexican Federal Anti-Corruption Law for Public Contracts, a law recently adopted by Mexico to prevent corruption in government contracts. The Mexican Anti-Corruption Law contains provisions similar to the anti-bribery provision of the FCPA, prohibiting offers, payments or anything of value to a governmental official with the intent that the government official fail to undertake his or her lawful duties to provide a benefit or advantage to the offering party. The law applies to all persons and companies that participate in federal public contracts in Mexico, such as bidders, suppliers, contractors and concessionaires. It also applies to all companies and persons who “intervene” in a public contract of a federal nature. While it is unclear what level of involvement in a contract constitutes “intervention,” it is likely that shareholders, partners, agents, subcontractors and other representatives could face liability. The law also applies to all Mexican companies and persons that participate in international commercial transactions outside of Mexico that are related to the execution and performance of contracts for the procurement and leasing of goods and services, public works contracts and the issuance of permits and concessions undertaken by foreign governmental entities.
In some respects, the Mexican Anti-Corruption Law is broader than the FCPA and follows the “zero tolerance” approach taken by the United Kingdom in the U.K. Bribery Act of 2010 (UKBA). Like the UKBA, the Mexican law does not make any exception for facilitation payments, and it is generally consistent with anti-corruption conventions ratified by the Organization for Economic Cooperation and Development (OECD) and the United Nations. And, unlike the FCPA that focuses solely on the bribe payor, the Mexican Anti-Corruption Law penalizes both the bribe payor as well as the government official who receives or solicits the bribe payment. Thus, Mexican government officials who participate in or oversee federal public contracts are also subject to the Mexican Anti-Corruption Law. In addition, Mexican officials have an additional express obligation to report any violation of the Mexican Anti-Corruption Law.
Following a number of high profile FCPA enforcement actions in recent years by the U.S. Department of Justice and the U.S. Securities and Exchange Commission, involving the energy sector in general and alleged bribery schemes in Mexico in particular, companies positioning themselves to enter the Mexican oil market should anticipate close scrutiny by U.S. regulators. Further, the Mexican government has clearly signaled its intent to pursue corruption and bribery matters, as evidenced by the recent adoption of its own strict anti-bribery law. The Mexican Ministry of Public Administration has brought a number of investigations in recent years and likely will continue to do so under the new law.
Take Proactive Steps to Address FCPA Risks Upfront
Given the expedited implementation of the energy reforms, the uncertain regulatory environment with regards to drilling and exploration in Mexico and the increased likelihood of anti-bribery scrutiny by both Mexican and U.S. authorities, it is important for energy firms to take a number of steps to reduce their FCPA and anti-bribery risk before the contracting process begins.
First, companies should arm themselves with knowledge and obtain a firm understanding of their specific anti-corruption risk profile for any contemplated transactions in Mexico. Undertake comprehensive risk assessments before entering the market: Who will be your business partners in Mexico? What third parties will you need to engage? And for what functions? With what regulators will the company be interacting, and who on the ground will have contact with government officials or state-owned entities? Do adequate due diligence on any potential local hires, business partners, agents and third parties before engaging them; don’t wait until after contracts are won and operations have begun before thinking of potential FCPA/anti-bribery concerns and undertaking the recommended due diligence.
Companies should take stock and reassess their anti-corruption compliance programs now to ensure they are well equipped to meet the challenges of a new market and that they have adequate resources in place before undertaking new projects. If appropriate, consider putting in place a local compliance team to bolster your corporate compliance capacity. U.S. regulators expect that companies will utilize appropriate resources when entering new markets to address their FCPA risk, and building out your compliance program in conjunction with the business’s expansion can demonstrate just that.
Firms should also re-emphasize anti-corruption training for any personnel who will interact with foreign government officials. Training should be tailored by job title and function, conducted in the local language, and attendance records kept. Providing FCPA and anti-bribery training to any employees, consultants, agents or other third parties acting on your company’s behalf is highly advisable. It is also recommended that employee handbooks contain specific FCPA policies, and that the handbooks and training are available in both Spanish and English.
Finally, all red flags should be promptly investigated and remediated. Look for excessive payments or unusual payment terms for consultants or other third parties, or the engagement of a third party that is not well known in the industry or lacks the capacity to do the work for which it is hired. Other red flags include relationships between anyone on the ground representing your company and the government officials responsible for the contracting or regulatory processes (or their relatives). Plan to audit activities and records related to any contracts won in the Mexican energy market, and require those companies or individuals you work with to certify compliance with the FCPA and applicable anti-bribery laws on a periodic basis.
Mexico’s reforms present a game-changing outlook for its energy industry; and if companies proactively address their anti-bribery risks, it is likely that entry to the Mexican market could represent a tremendous business opportunity.