The US Department of Justice and Securities & Exchange
Commission's investigation of Walmart and its Mexican subsidiary Walmex
provides a good example of why companies should not rely on the
facilitation payment exemption under the Foreign Corrupt Practices Act
(FCPA).
While the FCPA's anti-bribery provisions allow these small payments
to expedite certain routine government actions, most other countries –
including Mexico – do not.
On paper, Mexico's domestic anti-bribery laws appear robust. The
Federal Law on Administrative Accountability of Public Officials and the
Federal Law on Accountability, along with the Federal Criminal Code
outlaw bribery of officials, including facilitating payments. Plus the
Mexican House of Representatives in April passed a bill banning bribery
of public officials for a business advantage.
But despite these measures, practice has proved different. And it's
unclear if the latest bill will make much of a difference even if passed
by the Senate and made into law. This is due in part to the
discretionary powers of public officials to authorise business permits
for a fee, as is thought to have been the case with Walmex's building
permits.
"Let us not forget that Mexican public officials put their careers on
the line every time discretionary powers are exercised and they are
held accountable," says Jáuregui y Navarrete partner Miguel Jáuregui
Rojas.
Mexico was ranked 100 out of 183 countries and territories surveyed
in Transparency International's 2011 Corruption Perceptions Index. This
can make it difficult for large companies with subsidiaries in the
country. "Sometimes local competitors, with different standards than
those espoused by Fortune 500 companies, might take part in behavior
damaging to those observing such standards upon competing in the
market," says Jáuregui Rojas.
To comply with the FCPA as well as host-country laws, companies are
advised to establish a reputation of compliance with bribery laws in all
markets they are active. But this easier said than done. "Management
can't simply say no (to facilitating payments) if the culture in a
location includes those kinds of payments," says Shearman &
Sterling's Danforth Newcomb. Instead they must put in place practical
alternatives so that line employees can follow the policy of no
facilitation payments and still do whatever job is required of them.
In the case of Mexico, Newcomb says this can mean placing the local
subsidiary in a special enterprise zone where local officials have less
ability to hold-up matters. It can also mean building more time into
schedules so the local business can wait out a local hold-up, carrying
extra supplies so hold-ups do not shut down production and appealing to
higher levels of government when hold-ups occur, he added.
If facilitating payments were allowed under Mexican law, there would
still be debate over what qualifies. The term applies to obtaining
permits and licences among other things, but its reach has become
narrower in recent years as FCPA enforcement has increased. And many
experienced practitioners are still not clear on the exact scope of the
carve-out.
Shareholder lawsuits
A newer threat to public companies, according to local lawyers, is
shareholder lawsuits following Mexico's collective action law enacted on
March 1. At this early stage it's difficult to assess the precise
impact of the legislation, but Ritch Mueller attorney Andrés Alcántara
says insurance premiums and other operational costs of Mexican companies
may increase.
Companies will try to have class actions dismissed to avoid
litigation costs, but any challenge on the standing of a class action
must be submitted within five days of receiving notice of the suit.
The law allows three types of class actions: diffuse actions,
collective actions and homogenous individual rights class actions.
Collective contractual grievances are to be filed as homogenous
individual rights class actions, bringing up the issue of mandatory
individual arbitration provisions.
While mandatory arbitration provisions are not included in the bylaws
of most Mexican companies, class action rights could be mooted for
shareholders who have stakes in this type of company. "It's common in
our experience," says Rodrigo Gómez of Jones Day. "We see a lot of these
clauses in shareholder agreements that defer to arbitration procedure."
Gómez says Mexican courts should rule the collective action law
supersedes mandatory arbitration agreements: "It's very expensive. Not
everybody is allowed or has the resources to go to arbitration".
Another point needing clarification is the calculation of damages, AS
companies will not know the number of plaintiffs until 18 months after a
decision is reached. "The law states that the judge will have to
include the amount of damages that will be paid to the plaintiffs," saYS
Luis Rodrigo Salinas, another attorney at Jones Day. "However due to
the opt-in period, these are calculated after its rule."
Salinas thinks the 18-month opt-in period could discourage companies
from agreeing to a settlement with shareholders because more
shareholders could opt-in and claim damages under the same terms
post-settlement. It could also make compliance with Mexican GAAP
difficult because companies might not be able to value exact litigation
costs at the time they file financial statements. Corporate attorneys
said they were hoping for some flexibility in this regard.
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