Mining and bribery in Mexico: playing with fire.
The Royal Canadian Mounted Police in August opened an investigation into Canadian company Blackfire Exploration over allegations that it paid bribes to a local mayor in Chiapas, southern Mexico. Blackfire denied the allegations that the firm paid off the mayor in order to prevent strikes and protests against the company in the municipality of Chicomuselo.
The episode highlights, however, the threats associated with bribery in a country among the most affected by corruption in Latin America, while also underlining continuing operational threats in Mexico.
Corruption is a significant problem in Mexico, costing the equivalent of 9% of GDP, according to World Bank estimates. Moreover, Transparencia Mexicana (the local branch of global corruption watchdog Transparency International) highlighted in its 2010 Corruption Perceptions Index that the percentage of transactions involving bribes had increased to 10.3% in 2010 from 10% three years earlier.
Corruption is ingrained at many levels of society and foreign companies have often fallen into the trap of paying bribes because they frequently feel this is the only way to ”get things done.” Bribery with the purpose of preventing civil unrest appears to have become increasingly frequent and represents a particular threat in the mining sector, which is especially prone to labor and social disputes.
Deprived communities in remote rural areas often oppose mining activity on the grounds that it dispossesses local people of land and mineral resources. Chiapas has been a traditional hotspot for social conflicts reflecting issues ranging from land ownership to indigenous rights. In addition, local residents are often dissatisfied with community programs that mining companies offer because they are perceived as insufficient to satisfy their basic needs and alleviate poverty. There have been instances of local politicians benefiting from the perceived threat of local unrest by requesting irregular payments in exchange for protection.
However, seeking protection from labor unrest is always a risky business and is not to be advised under any circumstances. Moreover, while local clientelism and patronage networks are ingrained in local communities in Chiapas, bribes only go so far and are, in any case, severely penalized under a wide range of jurisdictions. Meanwhile, community groups have become increasingly vocal and received growing support from international NGOs, the Catholic Church and local organizations, such as the Mexican Network of Those Affected by Mining (REMA).
To exacerbate the problem, corruption in Mexico has increased in tandem with the growing power and influence of drug cartels. This has significantly undermined public institutions and the rule of law, both of which have been weakened at the local level in areas affected by increasing levels of drug violence.
In this context, the mining industry has expressed concern over President Felipe Calderón’s military-led security strategy against the cartels, which has seen drug-related violence increase dramatically in traditional mining areas such as Chihuahua, Guerrero, Michoacán and San Luis Potosí. While mining companies continue to operate in such areas, security threats have increased markedly in recent years. This has resulted in increased spending on private security guards and prevention measures such as closed-circuit television (CCTV) cameras, raising security costs for companies willing to operate in high-risk areas.
According to César Vázquez, general manager of the Association of Mining Engineers, Metallurgists and Geologists of Mexico (AIMMGM), the largest mining association in Mexico, “Mining and drug-trafficking have always lived side by side in Mexico … in remote mining areas, the industry creates a smokescreen of sorts for the drug traffickers’ illicit activities.”
In one of the most extreme cases of companies being affected by drug-related violence to date, Canadian mining company Torex Gold Resources Inc. was forced temporarily to halt operations in March after armed groups stole trucks and resources from one of its mines in the gold-rich state of Guerrero. Although Torex was a victim of drug-related crime, mining companies generally feel that drug traffickers do not interfere with them or their mining activities. However, it should be noted that involvement in drug-related corruption, recurrent in areas affected by drug violence, carries significant legal and reputational risks, as well as considerable extraterritorial consequences.
The US Treasury maintains a blacklist of companies with suspected links to the illegal drug trade and freezes any of their assets held in the US. The UK has also established stricter regulations under the 2010 Bribery Act, which came into effect on July 1 this year. Bribery abroad is severely punished under both jurisdictions, forcing companies to implement stricter controls and adequate procedures.
Despite the high risks of doing business in Mexico, there are also high rewards. The country is ranked either first or second in the world (estimates vary) in terms of silver production, fifth for zinc and lead production, and 10th or 11th for copper production. Gold brings in significant revenue and is generally obtained as a co-product of silver. In addition, the country’s macroeconomic stability, respect for private property and overall positive business environment saw it ranked 14th out of 51 countries in a recent Fraser Institute Survey of Mining Companies.
Meanwhile, interest in Mexico’s mines has increased due to the current high international prices for gold and silver, while the country’s adherence to NAFTA remains a significant incentive for investors. Nevertheless, corruption and bribery remain operational threats that must be taken into account when investing in Mexico. Reputational damage is an important threat in an era of high-speed electronic communication, and mining companies are increasingly advised to develop internal protocols to address the issue. In addition, social threats are as important as ever, particularly in cases where mining communities have been affected by drug-related violence. While mining companies should be aware of the current operational risks in Mexico, the rewards on offer will surely continue to attract foreign investors.
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