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Opportunities and FCPA Risks in Mexico’s Changing Energy Sector

Mexico.FCPA.Energy [1]In December 2013, Mexico enacted constitutional amendments lifting restrictions on participation in its hydrocarbons and electrical energy sectors. These reforms end longstanding government monopolies held by Pemex, the state oil company, and the Federal Electricity Commission, which will now compete against private generators to supply public energy demands. This “epoch [2]” change opens both sectors to private and foreign companies, presenting them with tremendous opportunities … as well as significant FCPA and related risks. This post identifies several key factors contributing to these risks.

Rapid Regulatory Change

Mexico’s constitutional changes have to be implemented through legislation, which will determine the outcome of these reforms more than the changes in principle made to date. Mexico’s Congress will need to determine the regulations that will govern private sector entities, and overhaul the corresponding regulatory entities. This is a complex undertaking that would benefit from careful and deliberate lawmaking. Congress, however, is pressing [3] to speed through these reforms, and has set a deadline to complete it.

All of which suggests that significant contracts are likely to be signed in a time of regulatory change and uncertainty. Sorting out new rules and practices will likely require significant interactions with government officials. This shifting environment and the high financial stakes will increase both opportunities and temptations for parties to offer or request bribes.

High Risk Sectors

The oil and gas and electricity generation sectors both present high corruption risk. Transparency International’s Bribe Payers Index [4] ranks those sectors 16th and 13th, respectively, out of 19 industrial sectors surveyed. In addition, the Where the Bribes Are [5] index shows that FCPA fines in the energy sector account for nearly half of all such fines.

The Mexican oil and gas sector poses particular corruption risks. Pemex will continue to dominate the industry, which means that private companies will need to conduct day-to-day business with employees that are also “foreign public officials” under the FCPA. And Pemex does not have a great reputation – a recent poll [6] found that 80% of Mexicans now associate Pemex with corruption.

Mexico’s electricity sector also poses significant risks. The 2010 ABB case [7] involved bribes paid to officials at Mexico’s Federal Energy Commission and another state-owned utility in order to obtain business. As FCPAméricas has reported previously [8], Mexico is a jurisdiction that generally presents high corruption risks.

Increasing Oversight

New anti-corruption and anti-money laundering laws in Mexico present additional risk for private companies competing in these new arenas. In 2012, Mexico passed the Federal Anti-Corruption Law for Public Contracts. [Ed. Note: See previous FCPAméricas post [9].] This law is a significant step for Mexican law enforcement, though its scope is limited to public procurements. In 2013, Mexico passed a new anti-money laundering law. [Ed. Note: See previous FCPAméricas post [10].] These laws are intended to reduce corruption risks generally, and will increase the risk that violations will be detected and prosecuted. Whether these effects materialize depends on the how these new laws are interpreted, and the vigor with which they are enforced.

Last but not least, U.S. enforcement agencies have repeatedly prosecuted corruption cases in Mexico’s energy sector – the Where the Bribes Are [5] map shows ten such cases. And the DOJ and SEC are seeking increased cooperation and coordination [11] with foreign counterparts, and conducted training on anticorruption enforcement with Mexican authorities late last year.

Positive Trends

All of which suggests that private sector companies rushing into Mexico’s newly opened markets should perhaps rush carefully. Corruption and enforcement risks can be mitigated through strong compliance programs, training and conducting due diligence before entering into relationships with business partners and third parties. [Ed. Note: See FCPA basics here [12].]

Mexico appears poised to make significant changes to its markets and to its approach to anticorruption issues. These are positive developments for the people of Mexico, and for participants in these new markets. But change brings both opportunities and risks, and companies pursuing the former should take care not to ignore the latter.

The opinions expressed in this post are those of the author in his or her individual capacity, and do not necessarily represent the views of anyone else, including the entities with which the author is affiliated, the author`s employers, other contributors, FCPAméricas, or its advertisers. The information in the FCPAméricas blog is intended for public discussion and educational purposes only. It is not intended to provide legal advice to its readers and does not create an attorney-client relationship. It does not seek to describe or convey the quality of legal services. FCPAméricas encourages readers to seek qualified legal counsel regarding anti-corruption laws or any other legal issue. FCPAméricas gives permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author and to FCPAméricas LLC.

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