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USMCA Heralds New Era of Anti-Corruption Enforcement

By Victor Padilla

August 12, 2019

First published on the Latin Lawyer website, 6 August 2019

USMCA, the successor accord to NAFTA, will usher in a new phase in the shared fight against corruption, says Victor Padilla, managing director at US forensic accounting consultancy Ankura.

In renegotiating the North American Free Trade Agreement (NAFTA), the three member nations were unambiguous in their mutual goal of strengthening the legal framework for deterring and criminalising corrupt acts. The resulting US, Mexico, Canada Agreement (USMCA) has not yet been ratified by any national legislature and its approval remains uncertain given current political environments, particularly in the US. Its provisions nonetheless provide compliance professionals with clear guidance for preparing for stricter rules and heightened scrutiny.

Even without the ratification of the new accord, the anti-corruption landscape has been evolving in the wake of high-profile scandals. Mexican officials in particular face increasing public pressure to take concrete action against abuses and a culture of impunity. This volatile domestic dynamic highlights the need for any company operating in Mexico to update its corporate policies.

Chapter 27 of the USMCA provides a comprehensive framework for preventing and combating bribery and corruption. It is separated into nine distinct articles addressing the three countries’ responsibilities in implementing and enforcing anti-corruption measures. Among these measures are whistleblower protections, the promotion of public official integrity efforts, multiple-party cooperation initiatives, corruption drives and dispute mechanism accords.

This chapter is designed to work in concert with Chapter 31, which covers the recourse and procedures by which members can bring disputes against one another over allegations of inconsistent policies or a failure to adhere to anti-corruption terms in a way that affects either trade or investment.

If these two chapters are implemented as now written, the number of companies covered under the USMCA could significantly exceed those now subject to the US Foreign Corrupt Practices Act (FCPA), Canada’s Corruption of Foreign Public Officials Act (CFPOA), and Mexico’s National Anti-Corruption System (NAS), which the country only enacted in July 2017.

Overall, the anti-corruption elements of the USMCA’s Chapter 27 largely resemble those of the existing legislation in each country, including Mexico’s Federal Criminal Code. Compliance professionals need to assess the current laws and the USMCA provisions closely and revise their own policies and procedures accordingly.

There are potential pitfalls and problems. Facilitation payments, narrowly permitted by both the FCPA and CFPOA, are explicitly discouraged under USMCA. Gifts and promotional expenditures are another area that demand caution. Both the FCPA and CFPOA allow “reasonable” payments. Mexican law urges officials to behave in so-called righteous ways and explicitly prohibits public officials to use their position to seek or obtain any benefit or gifts of any person or organisation.

Chapter 27 of the USMCA sets out the parameters of disclosure by senior public officials of any outside activities, gifts, and other benefits that result in a conflict of interest. At the same time, its article 27.1 defines a foreign public official broadly, to encompass both politicians and appointees, of any seniority, at any level of government. In a similar vein, the accord’s definition of a public enterprise extends to any entity over which the government may exert a dominant influence, direct or indirect.

An important change under USMCA is allowing claims for non-compliance with its anti-corruption provisions. If FCPA’s history is any guide, this will promote adherence, prosecutions, and penalties as well as increased international cooperation among law enforcement agencies. The US did not regularly enforce the FCPA until 20 years after its enactment. Only then were other countries prompted to take action.

More recently, the far-reaching Odebrecht scandal has resulted in investigations of, charges against, and – in some cases – the imprisonment of, public officials and company executives in six countries. These prosecutorial actions have fostered international cooperation among national authorities and US officials and regulators at the Department of Justice and Securities and Exchange Commission. This type of cross-border cooperation is expected to continue, regardless of the status of the USMCA.

In similar cases and with corruption more broadly, Mexico lags far behind and faces the greatest challenges. Bribery in the police force, judicial system, and government licensing offices is widespread, and collusion among police, judicial authorities, and criminal gangs is extensive. President Andrés Manuel López Obrador pledged to fight corruption on the campaign trail. He is now contending with the realities of consolidating the recently-created NAS, redirecting policies toward sanctions and asset recovery, and dismantling the networks of corruption that receive protection at multiple levels of government.

In a hopeful sign, Mexico’s attorney general is pursuing a case involving Odebrecht and a former director of Pemex, the state-owned oil company, that had languished under his predecessor. Despite the appearance of shifting positions, López Obrador is expected to follow through on his campaign promises and support increased enforcement of anti-corruption laws. The US will also likely be advocating for stiffer rules, statutes, and penalties from both its North American trading partners, putting additional pressure on Mexico and companies operating there.

Assuming the tri-national political environment does not substantially change, several trends are likely. First, if the USMCA is ratified, investor-state dispute settlements may be scaled back.

NAFTA had provided for a form of binding arbitration that allows private investors to pursue claims against sovereign nations for alleged violations of the investment provisions in trade agreements. Under the USMCA’s new dispute-resolution mechanism, US investors already present in Canada will be allowed to use investment arbitration for another three years. After that, they must go back to the Canadian courts.

Mexico and the US have negotiated an annex that allows investors to bring claims only for expropriation and non-discrimination in the context of trade. Claimants must first try to resolve issues in domestic courts. Only after exhausting those avenues may they bring these disputes to an international forum.

In contrast, NAFTA’s dispute-resolution mechanism had allowed investors to bypass local Mexican courts and bring claims directly to international arbitration. The USMCA’s proposed dispute-resolution mechanism extends to claims for non-compliance with anti-corruption measures set forth in Chapter 27, with the exception of issues over the application of local anti-corruption laws or level of cooperation.

Private investors under NAFTA could also pursue claims against sovereign nations for alleged violations of the investment provisions. This will likely remain largely intact for trade disputes, albeit with some restrictions. Under USMCA, the revised dispute-resolution mechanism extends to cover claims over non-compliance with anti-corruption measures.

Another likely trend will be an increase in anti-corruption enforcement actions involving companies operating in Mexico.

The US is expected to seek a commitment from each USMCA member nation to criminalise government corruption, to take steps to discourage corruption, and to provide adequate penalties and enforcement tools in the event of prosecution of persons suspected of engaging in corrupt activities. López Obrador’s presidential campaign revolved around his pledge to fight corruption.

Taken together, these positions help set the stage for increased anti-corruption enforcement, particularly in Mexico.

A final trend may be a continued emphasis on ensuring compliance with books and records provisions.

To appreciate the importance of the books and records provisions in Chapter 27 of the USMCA, look to the US FCPA, whose similar provisions have been instrumental in its success. Stanley Sporkin, one of the architects of the Act, astutely observed that companies often manipulate accounting information when trying to omit, falsify, or conceal improper payments.

Of the FCPA enforcements undertaken by the SEC between 2011 and 2018, more than half only involved books and records or internal control elements, as opposed to explicit anti-bribery provision charges. One explanation is that bribery is generally more difficult to prove than violations of books and records statutes.

Anti-corruption laws incorporating books and records provisions that function in concert with enforcement from the corresponding authorities can serve as powerful deterrents to bribery and other violations.

The USMCA’s Chapter 27, if implemented in conjunction with appropriate reforms to increase regulatory transparency and ensure effective rule of law, could have a net positive effect through greater economic prosperity. A failure to increase transparency and address corruption undermines investor confidence, discourages foreign trade, and in the long run, degrades the economic outlook. This is especially true for Mexico, where the gaps in regulatory transparency and anti-corruption efforts are most pronounced.