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As never before, U.S. companies engaged in cross-border business in Latin America face significant risk when it comes to avoiding entanglement with the Foreign Corrupt Practices Act (FCPA). On the one hand, Latin America as a whole, and certain countries in particular — including those with the three largest economies, Mexico, Brazil and Argentina — suffer from entrenched public corruption and weak law enforcement. On the other hand, the U.S. Department of Justice (DOJ) and the U.S. Securities and Exchange Commission have determined that enforcement of the FCPA — the U.S. statute that makes bribery of foreign officials a violation of criminal and securities law — is a top priority. Last year saw far more FCPA enforcement actions than in any prior year. Carrie Johnson, “U.S. Targets Bribery Overseas,” Washington Post, Dec. 5, 2007, at D1. There is a severe disjuncture between anti-corruption enforcement on different sides of the border.

This disparity is heightened by the harsh punishments imposed by U.S. law enforcement. The 2007 FCPA roster demonstrates that a typical resolution involves a multimillion-dollar fine and other significant sanctions, such as requiring companies to hire independent compliance monitors for multiyear stints, an expensive and burdensome proposition. In addition, companies frequently are required to enter into deferred prosecution agreements that do not eliminate the risk of prosecution until the agreement has run its course. These sanctions are imposed, moreover, even when companies have voluntarily disclosed the matter to the government.

DOJ’s powerful tools for investigating incidents occurring outside of the United States further increase the risk for companies operating in corruption-ridden regions. For example, the United States has mutual legal assistance treaties with the major Latin American countries — meaning that those countries have agreed to aid U.S. law enforcement investigations. Judicial assistance requests (letters rogatory) can be used when a treaty is lacking. Grand jury subpoenas are enforceable extraterritorially against U.S. nationals and foreign businesses with minimum contacts with the United States. The U.S. government can institute a border watch to subpoena a foreign witness passing through a U.S. port of entry, such as when changing planes at a U.S. airport. And when a company has disclosed a potential FCPA problem, making available to the government evidence and witnesses wherever they are located is part and parcel of the cooperation the government requires.

An overview of anti-corruption initiatives in Mexico, Brazil and Argentina illustrates the range of efforts, the progress attained, and the challenges that remain in the region.

Mexico is attractive to foreign business and investors due to its large economy, relatively well-developed infrastructure, proximity to the United States and pro-free market policies, particularly since the National Action Party won the Mexican presidency. Levels of foreign direct investment are the second highest in Latin America.

Mexico good, in context

Nonetheless, corruption poses substantial obstacles to doing business in Mexico, outranked only by inefficient bureaucracy. See World Economic Forum, Global Competitiveness Report 2007-2008, Mexico. Mexico fares better than many countries in Transparency International’s annual corruption survey, ranking No. 72 out of 179 worldwide, and No. 13 of 32 in the Americas.

However, this reflects the greater corruption in worse-ranked countries more than it does Mexico’s success: Mexico’s absolute score reflects that its public institutions are seriously compromised. See 2007 TI Index. (Mexico scores 3.5 out of 10). A recent PricewaterhouseCoopers survey reports that 15% of companies in Mexico acknowledge engaging in bribes. A survey commissioned by the Mexican government reported that Mexican companies spend an average of 6% of annual revenues on bribes of federal officials alone. Mexican companies fare poorly in TI’s “Bribe Payers Index,” a ranking of the propensity of companies from the 30 largest exporting countries to engage in bribery — a fact that does not reflect well on the conditions inside Mexico.

Within the context of Latin America, Mexico can be praised for its anti-corruption efforts. The laws on its books are cited as exemplary, at least with respect to the federal government. See Global Advice Network (GAN), Business Anti-Corruption Portal-Mexico. Initiatives include laws improving transparency in federal government procurement, including competitive bidding, blacklisting of companies involved in improprieties and a whistleblower process. See , at 136 (April 2006)United Nations Global Compact, Business Against Corruption/ An interministerial commission created in 2000 oversees each federal ministry’s anti-corruption efforts. In 1999, Mexico joined the Anti-Bribery Convention of the OECD. And, in a measure that goes beyond most OECD countries, Mexico requires public officials to disclose their assets. Id. at 8.

Enforcement and prosecution, however, are weak. When the OECD evaluated Mexico’s domestic anti-corruption efforts in 2004, it found that there had been only eight federal criminal proceedings in the preceding six years. Id. at 40-41. No figures were available for state proceedings. Detection is a basic stumbling block: Most crimes in Mexico go unreported, let alone the crime of bribery. Id. at 40. Moreover, a notable loophole in Mexico’s legal reforms is a lack of protection for private-sector whistleblowers. See OECD, Mexico: Phase 2 Follow-Up Report, at 4 (April 4, 2007).

Mexico’s efforts pertaining to bribery of non-Mexican officials (in other words, the Mexican counterpart to the FCPA) have lagged behind its domestic initiatives. Mexico has yet to report a single investigation or conviction for such bribery. Id. at 5. This phenomenon reflects another way in which companies subject to the FCPA lack an even playing field as compared with companies subject to other jurisdictions’ laws.

Problems in Brazil

Brazil has the largest Latin American economy, substantial natural resources and, beginning in the late 1990s, a relatively liberalized economic regime. These factors have made conducting business there attractive. Although foreign direct investment has yet to catch up with the size of the economy, as of 2007 Brazil was the leader in Latin America in this regard (together, Mexico and Brazil receive 60% of all such investment).

Corruption, however, remains an immense problem in Brazil. Brazil’s TI rankings are the same as for Mexico: No. 72 out of 179 worldwide; No. 13 out of 32 in the Americas. 2007 TI Index, supra; 2007 TI Index Regional Highlights, supra. Brazil ranks very poorly on the Bribe Payers index: 23 out of 30. TI Bribe Payers Index 2006, supra, at 4. The government has pledged to fight corruption, but numerous corruption scandals involving members of the Brazilian Congress and other officials have erupted in recent years.

Surveys indicate that both the public procurement and the taxation systems, among other government functions, are plagued with corruption: 38% of international companies based in Brazil report having lost business because a competitor paid a bribe. More than half of businesses in Brazilreport tax-collector requests for bribes. See also GAN, Business Anti-Corruption Portal-Brazil.

Brazil has instituted certain reforms, such as a constitutional amendment to improve the functioning of the notoriously slow and unaccountable judiciary. TI Country Reports-Brazil, at 133-34 (2006). There is a comptroller general’s office in charge of inspecting and auditing states and municipalities with respect to corruption, and in that connection a whistleblower procedure. See GAN, Business Anti-Corruption Portal-Brazil, supra. Generally speaking, the laws against domestic bribery are considered adequate on paper, but underenforced. Id.

Brazil has implemented legislation pursuant to the OECD Convention Against Bribery. The OECD has criticized Brazil, however, because its law does not provide for liability for a legal person — a corporation or other business entity, as opposed to a natural person — for bribery of non-Brazilian officials. OECD, Brazil: Phase 2 Report, at 4, 50-51 (Dec. 7, 2007). There have been no cases in which a Brazilian entity has been held legally accountable for such an act. Id.

One interesting initiative that has emanated from the business community is the Private Sector Pact for Promoting Integrity and Fighting Corruption. The pact consists of a series of recommendations for transparency in business transactions, particularly in dealings with public officials. See United Nations, Business Against Corruption, supra, at 158. Since the pact was announced in 2005, more than 450 signatories have pledged to follow anti-corruption laws and to institute appropriate corporate compliance policies and internal controls. The pact’s goal of a clean business environment has yet to be achieved. Yet it is an example of how actors in the private sector can help themselves and each other work towards a different kind of business environment.

Bureaucracy and corruption

Argentina, the third-largest Latin American economy, appears to be recovering from its 2001-2002 collapse. Like Brazil, Argentina implemented liberalizing economic reforms in the 1990s. Argentina ranks fifth in Latin America in terms of foreign direct investment.

Argentina, however, is even worse off than Mexico and Brazil in terms of corruption, ranking No. 105 out of 179 countries worldwide, and No. 23 out of 30 for the Americas. 2007 TI Index, supra; 2007 TI Index Regional Highlights, supra. The country’s absolute score on TI’s index reflects “rampant” levels of corruption, according to that organization. 2007 TI Index Regional Highlights, supra. In a World Bank survey of firms operating in Argentina, close to 20% reported having paid bribes in order to “get things done.” See World Bank & IFC, Enterprise Surveys: Argentina 2006, at 8. This problem is closely associated with the complexity and burdensomeness of Argentina’s regulatory regime, which is known to be even more difficult to deal with than bureaucracies in Latin America generally. Such a regime provides opportunities for government officials to abuse their power. Id.; See GAN, Business Anti-Corruption Portal-Argentina.

Argentina’s legal code provides a framework for addressing the corruption, and Argentina is an OECD Convention signatory, but as so often is the case the problem is lack of enforcement. Government institutions whose mission is to combat corruption include the Oficina Anticorrupcion, an investigative agency and a national auditor, but these institutions are not reputed to have true independence. Moreover, Argentina does not offer whistleblower protection. GAN, Business Anti-Corruption Portal-Argentina. The current Argentine administration has not made fighting corruption a priority.

There are some nongovernmental anti-corruption initiatives of interest. Most notable is a watchdog group known as the Centro de Investigation y Prevencion de la Criminalidad Economica (CIPCE). This group recently provoked a major scandal by exposing alleged bribes by a Swedish company to the National Planning Ministry in connection with an oil pipeline project. An initiative in Argentina resembles the Brazilian private sector pact, but is limited to the water supply industry. Poder Ciudadano, Announcement of Transparency Agreement (in Spanish).

As the foregoing discussion illustrates, a wide range of anti-corruption efforts exist in Latin America, including some creative private and nonprofit sector initiatives. These efforts, however, pale in the face of the profound levels of corruption. The realities of the business environment create tremendous pressure for the well-intentioned company that seeks to comply with the FCPA.

It behooves any U.S. company involved or contemplating involvement in cross-border business in Latin America to take a renewed look at its FCPA compliance. It also is important to understand the environment in the Latin American country in which business is to be transacted, including the level of corruption, the types of transactions with greatest risk and what local anti-corruption efforts and resources exist. Such an understanding is helpful for developing an effective compliance program.

It remains to be seen whether U.S. authorities, particularly if they keep their promise of an ever more aggressive and proactive FCPA policy, will develop a willingness to take into account the disparity between the anti-corruption enforcements of the United States and that of other countries.

Iris E. Bennett is a partner in the Washington office of Chicago-based Jenner & Block. She is a member of the firm’s white-collar practice with a special focus on the Foreign Corrupt Practices Act. She can be reached at [email protected].

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