Untitled Document
Untitled Document

New business opportunities in Mexico energy market raise FCPA concerns

Glen Kopp and Ryan Myers
Bracewell & Giuliani LLP

After clearing a constitutional hurdle in late 2013, Mexico plans to open its energy market to foreign participation for the first time in seventy-five years, with the first new investment opportunities possible later this year. Mexico has more than 10 billion barrels of proven petroleum reserves, and the country will face no shortage of potential investors.

But companies looking to participate in the newly available market would be wise to consider the compliance risks that come with doing business in Mexico. In particular, companies interested in the Mexican energy sector should have a firm understanding of the Foreign Corrupt Practices Act (FCPA) and should adopt compliance policies and procedures tailored to the corruption risks that Mexico presents.

New opportunities
In 1938, Mexico nationalized its oil industry and terminated agreements with foreign producers.  As a result, Petroleos Mexicanos, or Pemex, eventually became the state oil monopoly with responsibility for supplying about a third of the country’s budget. Pemex, however, has fallen behind in technical capabilities, and the Mexican government has withheld funding for Pemex to pursue capital intensive opportunities such as deep water, shale, and tight oil reserves. Consequently, the country is home to reserves, such as the southern Gulf of Mexico and the western regions of the Eagle Ford shale formation, that likely would be under production today if not for their location in Mexico.

Pending legislation will define Mexico’s new energy policy, including the details of foreign participation. At the heart of the energy reforms, however, is the ability for foreign companies to participate in exploration and production. The Chief Executive Officer of Pemex has said the first new opportunities to enter the Mexican energy market may include partnerships between Pemex and foreign producers. These first partnerships are likely to focus on producing from previously drilled wells where production has slowed and Pemex lacks the technology or experience to continue commercially viable production. But eventually Mexico’s government is expected to extend opportunities for foreign firms to work in areas that have not seen significant production, such as Mexico’s deep water and Eagle Ford reserves.

The energy reforms have already drawn expressions of interest from many of the large multinational firms, including firms with established track records for successfully producing deep water reserves in the American portion of the gulf. And in southwest Texas, both large multinationals and small independents have drilled thousands of wells in the Eagle Ford in recent years, and these companies could be well positioned to bring their experience across the border into Mexico.

Production and exploration are only one part of the new investment opportunities created by Mexico’s constitutional reforms. Indeed, new opportunities are also expected for foreign investment in midstream and downstream operations, including refining, pipelines, transportation, and petrochemicals, as well as in Mexico’s electricity industry.

Corruption risks for foreign companies in Mexico
Unfortunately, the probability of foreign players encountering corruption risks is greater in Mexico than in many other nations. Transparency International’s Corruption Perception Index, a key measuring stick relied upon by the Department of Justice, rates Mexico with a score of 34 out of 100, with scores ranging from zero (highly corrupt) to 100 (very clean). This places Mexico 106th out of 177 countries surveyed. And a recent poll suggests this perception of corruption is shared within Mexico, with 88 percent of Mexicans saying they associate Pemex with corruption.

This challenging business climate is reflected in United States criminal enforcement actions under the FCPA.  Simply put, a major component of the FCPA, which was enacted in 1977, criminalizes the payment of bribes to foreign government officials to obtain or retain business.  Despite barring most foreign participation since 1938, Mexico’s energy market has not avoided the attention of the U.S. Department of Justice. For example, in 1982, federal prosecutors indicted U.S.-based companies and individuals for bribing Pemex officials in order to obtain contracts for the supply of oilfield equipment. More recently, in 2010, federal prosecutors brought charges against the U.S. subsidiary of Swiss energy company ABB Ltd. for offenses including paying bribes to secure business with government-owned electricity utilities in Mexico. And in the same year, Pride International, Inc., an oil and gas services company headquartered in Houston, TX agreed to pay more than $50 million to settle charges related to bribing Mexican officials to avoid customs payments, in addition to corruption violations in other countries.

The benefits of a risk-based compliance program
Cases like the aforementioned prosecutions, along with the ongoing high-profile bribery investigation of Wal-Mart Stores Inc. for its ventures in Mexico, highlight the need for businesses investing in the Mexican energy sector to adopt compliance programs tailored to the country’s corruption risks. The value of such programs extends beyond avoiding criminal corruption violations. The Department of Justice has made clear that when FCPA violations emerge, a defendant hoping to reach a positive resolution with prosecutors should have a compliance program reflecting genuine attempts to identify and account for corruption risks particular to the applicable industry and the country in which the defendant is doing business.   For instance, as a general matter, the Department of Justice’s Principles of Federal Prosecutions of Business Organizations provides that in determining the appropriate remedy for corporate malfeasance, a prosecutor must consider nine factors, including “the existence and effectiveness of the corporation’s pre-existing compliance program.”

The most widely cited example of how a strong risk-based compliance program can be the best defense against corporate prosecution for corruption is the Morgan Stanley case from 2012.  There, the government did not bring an action against Morgan Stanley despite FCPA violations by a managing director in the bank’s real estate group in China.  In its press release announcing the guilty plea of Morgan Stanley’s employee, the Department of Justice highlighted Morgan Stanley’s impressive anticorruption compliance program:

Morgan Stanley maintained a system of internal controls meant to ensure accountability for its assets and to prevent employees from offering, promising or paying anything of value to foreign government officials.  Morgan Stanley’s internal policies, which were updated regularly to reflect regulatory developments and specific risks, prohibited bribery and addressed corruption risks associated with the giving of gifts, business entertainment, travel, lodging, meals, charitable contributions and employment.  Morgan Stanley frequently trained its employees on its internal policies, the FCPA and other anti-corruption laws. Between 2002 and 2008, Morgan Stanley trained various groups of Asia-based personnel on anti-corruption policies 54 times.  During the same period, Morgan Stanley trained [the employee who pleaded guilty] on the FCPA seven times and reminded him to comply with the FCPA at least 35 times.  Morgan Stanley’s compliance personnel regularly monitored transactions, randomly audited particular employees, transactions and business units, and tested to identify illicit payments.  Moreover, Morgan Stanley conducted extensive due diligence on all new business partners and imposed stringent controls on payments made to business partners.

The takeaway from the Morgan Stanley case is straightforward: create and implement an effective risk-based anti-bribery compliance program.

Short of a straight declination of prosecution, companies can resolve FCPA violations by an agreement under which the government agrees not to prosecute the company (a Non-Prosecution Agreement or “NPA”) or to defer prosecution (a Deferred Prosecution Agreement or “DPA”).

How to build a risk-based compliance program for new opportunities in Mexico

Guidance from the Department of Justice and the U.S. Securities and Exchange Commission falls short of specifying how companies should build effective compliance programs. Instead, the best available guidance comes from the remedial compliance measures prosecutors have mandated in non-prosecution and deferred prosecution agreements reached with previous FCPA defendants.

For example, the deferred prosecution agreement obtained by Pride International after its corruption violations in Mexico and other nations required the company to adopt a compliance policy that included the following:

  • Designate at least one senior official responsible for corruption compliance and grant this official authority to report to the audit company of the board of directors.
  • Provide annual training certifications for all directors and officers, as well as for appropriate employees, agents, and business partners.
  • Require contract provisions with agents and business partners giving Pride the right to audit the agents or business partners to ensure corruption compliance.
  • The deferred prosecution agreement entered by ABB contained many similar requirements and also directed the company to:
  • Develop a compliance program “on the basis of a risk assessment addressing the individual circumstances of the company, in particular the foreign bribery risks facing the company, including, but not limited to, its geographical organization, interactions with governments, and industrial sector of operation.”
  • Enforce policies covering gifts, hospitality, entertainment, expenses, customer travel, political contributions, charitable donations and sponsorships, facilitation payments, solicitation, and extortion.
  • Institute “properly documented risk-based due diligence pertaining to the hiring and appropriate and regular oversight of agents and business partners.”
  • Develop standards and procedures designed to reduce corruption violations and apply these policies to all directors, officers, and employees, and where necessary, to agents, intermediaries, consultants, representatives, distributors, teaming partners, contractors, consortia, and joint venture partners.

A key element of the aforementioned compliance programs mandated by DPAs and NPAs is the concept that a program must be tailored to the risks that arise from doing a particular type of business in a particular location. For example, the corruption risks raised by negotiating an offshore-shore production profit-sharing agreement with Pemex are different than those raised in negotiating an import license with government officials in Guinea Bissau or entering into a joint venture agreement with a hydroelectric company in Angola.

The business opportunities soon to arrive in Mexico will bring with them risks not previously encountered. This means that even companies with international energy experience and, in particular, experience doing business in Mexico, should revise their compliance programs to assess and address risks created by these new opportunities.

Assessing these risks is complicated and requires a company to carefully research a proposed business environment before committing to a deal. In considering new opportunities in Mexico, the following factors should be among those a company considers in assessing corruption risk and developing its customized compliance program:

  • Interaction with government officials and the degree of government oversight and inspection:

o    Who are your points of contact in the Mexican government? Who in the government is responsible for your ability to begin and to continue operating in Mexico? What are your regulatory requirements? Who will perform inspections?                

  • Extent of reliance on third parties:

o    Will you be hiring an intermediary to negotiate, handle payments, or obtain permits? Have your properly vetted this intermediary? How and why is this third party able to accomplish tasks more efficiently than you would?

  • Changing risks:

o    How will my company know if and when previously identified risks diminish and new risks arise? Who is responsible for periodically evaluating the adequacy of our compliance program? How will this evaluation be conducted?

Assessing risks is of course only the first step. A company must also build a program that addresses these risks and then incorporate the program in a way that reduces the probability of a corruption violation. All of this must happen before a company begins investing in Mexico. An effective compliance program should provide a framework for evaluating whether to do certain types of business and whether to do business in certain places. In this way an adequate compliance program will not only guide how a company operates in Mexico, but whether the company pursues certain opportunities at all.

The corruption risks in Mexico are significant, but these risks are unlikely to keep foreign companies from taking advantage of Mexico’s energy reforms. Fortunately, companies willing to develop a robust risk-based compliance program should be able to pursue profits in Mexico without undue risk of prosecution.

About the authors
Glen Kopp is a partner in Bracewell & Giuliani’s white collar, internal investigations and regulatory enforcement practice in New York. His practice focuses on FCPA, regulatory enforcement matters, criminal proceedings, litigation and internal investigations relating to financial institutions; corporate, accounting, wire and bank fraud; insider trading; money laundering; options back-dating; securities; export control; and other matters. Prior to joining the firm, he was a former Assistant United States Attorney in the Southern District of New York.

Ryan C. Myers is an associate in Bracewell & Giuliani’s white collar, internal investigations and regulatory enforcement practice in Houston. He concentrates his practice on white collar defense, internal investigations, litigation and corporate compliance for clients in the energy, trade, pharmaceutical and manufacturing sectors.

 

 

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