For decades, the most relevant compliance legislation for international companies operating in Mexico was the US Foreign Corrupt Practices Act. Now, as a result of major national economic and legal reforms enacted during President Peña Nieto’s administration from 2012-2018, Mexico’s compliance environment has undergone a transformation. As foreign investment pours into Mexico's recently opened oil and gas sector, legal entities are now criminally liable for any offenses or irregularities committed in their name, making the case for a robust compliance strategy that includes due diligence investigations into possible business partners.

A changing landscape: Mexico's Energy Reform

Mexico enacted a historic reform program in December of 2013 that opened its oil and gas sector to foreign investment following 75 years of government ownership. Mexico’s energy reform plan was part of a broader, cross-sector effort by President Enrique Peña Nieto to boost the Mexican economy. Since its implementation, there have been three bidding rounds—the latest of which closed in March 2018—that have raised a total of $161.3 billion for investments that will take place until 2025. Fourteen percent of total investment is for public-private partnership projects between domestic and international companies and the Mexican state-owned oil company, Petróleos Mexicanos (Pemex). With these investments, Pemex expects to significantly increase Mexico’s current production of 2 million barrels per day to a hypothetical 3.4 million barrels per day.

There is significant international interest in the process, with 34 companies securing bids. The US, with nine companies, and the UK, with four, lead the pack. Royal Dutch Shell, Qatar Petroleum, British Petroleum and Chevron are just a few of the major multinationals that have a stake in Mexico as a result of the energy reform.

Although significant opportunities are opening up in the sector, it is key that international investors understand the complexities involved with the energy reforms, as they are occurring amid a rapidly changing regulatory environment and era of overall reform resulting from the Peña Nieto years, and as part of a broader shift in sentiment among the Latin American public in the fight against corruption.

The National Anticorruption System and the new compliance environment

In what can be best understood as a citizens’ effort, a set of new legislative and constitutional reforms have been introduced in Mexico since May 2014, culminating in the establishment of the National Anticorruption System (SNA) in July 2016. The SNA is defined as a coordinating body between various institutions, including the Superior Audit of the Federation and the Federal Court of Administrative Justice, among others, to create mechanisms of collaboration and coordination to effectively prosecute corrupt practices.

The SNA is still in its early stages; a Specialized Prosecutor’s Office in Combating Corruption has yet to be properly established, and the Mexican Congress has yet to elect the Anticorruption Prosecutor. However, despite the lack of distinct progress, parts of the legal reforms introduced to create the SNA already have far-reaching implications. 

Namely, a June 2016 reform to the Federal Criminal Code—among other related legislation— introduced a major change: legal entities are now criminally liable for any offense done in their name, benefit or representation, including by employees and/or third parties.

Companies now have to install due controls, risk assessments of third parties, codes of ethics, training programs, and risk management and compliance programs, among other measures. The penalties for not observing these controls include fines, forfeiture of assets, frozen bank accounts and dissolution of any legal entity found in violation of the law.  With this in mind, international companies seeking to access opportunities in Mexico’s oil and gas sector should aim to properly understand the reputations and backgrounds of their local counterparts, providers and employees.

Conducting due diligence investigations in Mexico

One of the central challenges of any compliance program is to conduct due diligence investigations of foreign agents and third parties, particularly in complex jurisdictions such as Mexico, where a myriad of actors—including intermediaries, labor unions and even organized crime—can intervene, directly or indirectly, in any given contract or agreement. Foreign companies seeking Mexican partners for their operations in the O&G sector are particularly exposed to a wide range of risks, given that it is widely considered to be one of the most complex sectors.

Understanding a third party’s reputation requires a detailed analysis of the local context and dynamics, as well as a thorough assessment of its previous track record. Investors should also evaluate and understand the risks of doing business with politically exposed persons, and decide what level of exposure they are willing to tolerate. For example, it is not uncommon in Mexico for former high-level government officials to form their own companies shortly after leaving government positions, profiting from their connections to facilitate contracts, permits and networking. This is particularly the case with Pemex.

While it is not necessarily unlawful nor always a risk factor, it is ideal to investigate and understand the facts prior to beginning a business relationship, since legal entities are now liable for any action carried out by its partners. Partnering, knowingly or not, with a company or individual with a history of corruption or influence peddling is hardly defensible, unless the company can prove that it did all it could to investigate first.
Companies considering operations in Mexico are now expected to conduct due diligence investigations in good faith, understanding that the level of investigation conducted should be proportional to the nature of the relationship with the third party or partner. In many instances, particularly where a company expects to deal with dozens or hundreds of providers and contractors, a limited red flag investigation aiming to broadly identify major issues of concern will suffice.

In cases that involve a key partner, or where ethical or political risks are evident, a more thorough investigation is necessary. There are many intermediaries in the Mexican O&G sector with questionable or unproven backgrounds or experience. Dealing with these issues preemptively can save new and old players in the Mexican market considerable worries, particularly given the long-term nature of the projects at stake.

Compliance as a business opportunity

It is our view at Control Risks that the new legal requirements in Mexico represent an opportunity to preemptively build a solid compliance strategy that includes the adequate level of partner due diligence. Mexico’s O&G sector is one of the crown jewels of the national economy, with considerable untapped deepwater oil resources and a significant need for technological capabilities that open the door to large and small companies alike.

And the timing could not be better: the topic of corruption has been central to Mexico’s upcoming presidential election in July. Companies leading the charge in matters of anticorruption compliance are poised to reap significant reputational and operational rewards in Mexico’s new energy sector.



  • Armando Ortega, Associate Consultant

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