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As trade with Latin America flourishes, U.S.-based and other multinational corporations are often unprepared for the rude awakening they receive when the relationship with their Latin American-based counterpart goes sour. In resolving these disputes, corporations unfamiliar with Latin American legal systems face several problems that could result in catastrophic results for the corporation and its foreign-based employees, and the in-house counsel who did not see them coming. Certainly two of the most complicated problems in the field of Latin American dispute resolution are, first, the inherent differences between a civil law system and a common law system, and, second, (still encountered in some jurisdictions) the specter of corruption. These phenomena have contributed to the recent growth of international arbitration and mediation as a means of resolving international disputes as companies attempt to avoid these problems and bring efficiency, consistency and predictability to dispute resolution. Increasingly, however, some Latin American litigants are resorting to heavy-handed litigation tactics in order to obtain an unfair advantage against foreign opponents whom they believe may have overwhelming financial and political resources. Virtually any dispute involving Latin America can prove problematic. An American corporation, for example, that is sued in Colombia by its Colombian distributor for nonpayment of royalty fees must not only deal with the substantive aspects of the lawsuit, both legal and factual, but also must be able to function within the vastly different procedures and structure of the Colombian legal system. Problems may also arise even if a matter is already being properly litigated in a court or alternative tribunal in the United States. For example, in the dispute referred to above, the U.S. corporation may have filed a demand for arbitration in the United States, in accordance with the agreement between the parties. Nevertheless, the Latin American opponent, to intimidate or bring additional pressure, initiates criminal proceedings for fraud in Colombia against some of the local managerial employees of the U.S. corporation, based on the same facts that form the basis for the arbitration. Warrants are then issued for the arrest of the employees. Now, in-house counsel, who expected to be dealing with a fairly typical arbitration in the United States, has to answer to superiors who want to know how the company’s employees came to be arrested in a foreign country. Simply put, multinational companies that do business in Latin America today are finding that not only do they have to deal with the substantive aspects of an international dispute, but they also have to be prepared for the unexpected in the course of resolving that dispute. NUANCES OF CIVIL LAW As a case proceeds through the courts in most Latin American systems, foreign litigants must be vigilant. Unlike the system in the United States, where the right to a jury trial often dictates to a large extent the manner in which evidence is developed and presented, Latin America’s civil law model generally places much of the management and development of proof in the hands of the judge. Consequently, in most Latin American countries, the parties to a case — and their lawyers — have less control than in a comparable proceeding in the United States. Moreover, precedent is generally not an important jurisprudential value as each judge has the obligation to interpret the code as that judge understands it. The absence of precedent as a constraint increases the discretion of judges by permitting various interpretations of the same code provisions. Most civil law jurisdictions divide the judiciary into separate divisions for commercial, criminal and labor matters, with distinct jurisdictional requirements. The interpretative role judges have, however, and the relative ambiguity of the classification and definition of crimes — fraud, for example — sometimes allows a criminal judge to accept jurisdiction of a case that properly should be in the commercial division of the court. The differences are also substantial in criminal matters. Depending on the jurisdiction, the judge may play the role of prosecutor, investigative grand jury and determiner of both fact and law. Accordingly, a defendant under investigation initially may not be granted access to court files and may have no idea of the nature of the charges or who has brought them. This can happen because generally, criminal cases are divided into two phases: an investigative phase and a plenary phase. The investigative, or preliminary, phase is a preliminary investigation conducted by either the local police or the court to determine if the charges state a violation of the criminal code; whether the alleged events underlying the charges in fact occurred; and the identity of the people responsible. This phase may be confidential, although technically the defendant may have the right to view the official court file. In theory, this investigative phase should ensure that what is essentially a civil dispute does not turn into a criminal prosecution. Unfortunately, however, it is at this local level that the potential for abuse is greatest, for it is in this phase that arrest warrants and other detention orders are issued. It is also at this level that local litigants have a great tactical advantage over foreign companies. Typically, local litigants will have closer contact and relationships with the investigative body and thereby have the ability to influence the direction of a particular investigation. Ex parte communications with the judge also are an accepted part of the majority of civil law systems. This combination of confidentiality and undue influence can produce quite intimidating results. Imagine the unpleasant surprise awaiting an executive of a foreign company who is stopped for questioning during his travels at an international airport in Europe, pursuant to a detention order issued at the request of a local police officer in Venezuela. It is only if the prosecution continues, when the case shifts to the secondary stage, where proceedings are more open and the defendant is entitled to more due process guarantees. Of course, at this point the damage to the individual’s and the corporation’s reputation may have been done, and the improper objectives achieved. The discretion granted to the investigative bodies, including judges, places great importance on the supervisory role of the appellate courts to constrain undue discretion and its possibilities for abuse although there may be difficulties as well as substantial delay encountered in reaching the appellate level. In addition, while most countries have a judicial council that supervises the administrative functioning and individual performance of all judges, this has not proven to be a significant deterrent. THE CORRUPTION ISSUE Although the judicial traditions of honesty, integrity and fairness exist in Latin America, they cannot be taken for granted. While it is an uncomfortable topic to discuss publicly, it is a reality that corruption is a factor that must be considered and dealt with by companies engaged in international business. As discussed below, in response to corruption in various countries, several global agencies and many local agencies have developed initiatives for judicial reform in Latin America. In many instances, the legal systems in Latin American countries are not tightly controlled. For example, in commercial and other civil matters, fees are required for court services such as filing, copying or processing legal documents. The speed and efficiency of the service may vary depending on whether a “tip” is added to the standard service charge. Without a “tip,” a file may be lost and never make it to a hearing. From this “benign” form of corruption the situation may escalate into outright requests for payments in exchange for favorable rulings. One of the most recognized organizations dedicated to curbing both international and national corruption, defined as “the abuse of public office for private gain,” is Transparency International (TI). Each year, TI publishes a Corruption Perceptions Index. This year, TI ranked 91 countries on the degree to which corruption is perceived to exist among public officials and politicians. TI maintains more than 90 national chapters worldwide. One of the functions of the national chapters is not only to educate lawmakers about the need for new laws that embrace criminal penalties for individuals involved with corruption, but also to provide public access to information. Additionally, the Organization of American States (OAS) maintains an extensive Inter-American Anti-Corruption Network, which includes links to international and country-specific organizations dedicated to fighting corruption. As part of its effort to prevent and fight corruption in Latin America, the OAS adopted the Inter-American Convention Against Corruption. The convention aims to promote and strengthen the development by member states of the mechanisms needed to prevent, detect, punish and eradicate corruption; and to promote, facilitate and regulate cooperation among the member states to ensure the effectiveness of those measures. Among the highlights of the convention is the duty of member states to adopt legislation criminalizing certain conduct, such as illicit enrichment, influence-peddling, asset-laundering and the misuse of privileged information. As a follow-up to the convention, OAS created a permanent council, known as the Working Group on Probity and Public Ethics, which monitors each country’s progress in the fight against corruption. Another organization involved in legal reform initiatives is the World Bank. Many of the World Bank’s economic development and technical assistance programs across the world contain legal reform components. Since 1992, the World Bank has become involved in various capacities in several independent judicial reform initiatives throughout Latin America. ANTICORRUPTION PROGRAMS Other sources include the U.S. Agency for International Development, which supports the Anticorruption Program in Colombia, among others, aimed at increasing transparency and accountability at both national and municipal levels. The program includes a National Public Awareness Campaign to educate citizens, including judicial and government officials, on rights and responsibilities in fighting corruption. Furthermore, many Latin American countries have initiated their own programs for judicial reform. Ecuador, for example, has created the Commission for Civic Control of Corruption, made up of seven members and seven alternates designated by the Electoral College, which is charged with investigating and determining charges of bribery, extortion and fraud in the public administration. The members of the commission are authorized to examine bank accounts of public organizations or individuals in furtherance of an investigation. [FOOTNOTE 1] Nicaragua has established a similar commission, made up of government officials and private individuals as part of its part of its National Plan for Integrity of Nicaragua. [FOOTNOTE 2] Time will tell if these government and international organization efforts will work. In the interim, however, what can a multinational company do to avoid finding itself at a disadvantage in Latin America? First, any company that conducts business in a foreign country and wishes to avoid the problems that can arise when dealing with that country’s legal system should routinely provide in its agreements for the resolution of disputes through arbitration. Of course, the precise language and scope of the arbitration or ADR provision will depend on many factors relevant to the particular situation. Other relevant issues to be considered at the outset include the enforceability of forum-selection and choice-of-law clauses, and the availability of interim measures and provisional remedies, such as freezing of assets and injunctions. Next, in-house counsel may consider incorporating counsel familiar with both the civil law system of that country, as well as the common law system of the United States. Often, criminal convictions of a corporation abroad will have tax and other regulatory implications in the United States. If something unexpected occurs, the initial period is often the most crucial, and precious time can be lost while searching for counsel adequate to the situation. Additionally, a program should be implemented that clearly and specifically articulates values, policies and procedures to be used to counter or prevent bribery and corruption from occurring in the operation of its business. At a minimum, the program must comply with U.S. laws and those of the relevant foreign country, and must apply to all employees and directors doing business related to that foreign country. Such a program serves to diminish the chances that the company will become involved in corrupt practices itself, and may help the company in the event that its opponent tries to claim impropriety by the U.S. company. This is a significant danger for companies merging with Latin American corporations and retaining personnel who may not share the same corporate culture. STEPS TO FOLLOW Once a company believes it is being victimized by corruption, there are certain steps that should be considered and undertaken immediately: � Contact the U.S. embassy in the particular country to enlist its assistance. There are several options that the embassy can help explore. A diplomatic note, which is a formal memorandum from the U.S. ambassador himself, to a key player in the foreign government (such as the president or prime minister), may act to neutralize the influence of the other side and thereby ensure that the parties are operating on a level playing field. A downside of pursuing a diplomatic note is that it must go through several steps of drafting and approval within the United States before it can be formalized and delivered. The commercial attache at the embassy can also assist in initiating the procedure to have the United States file a claim for investigation under Article XIV of the Inter-American Convention Against Corruption. Article XIV provides that signatories to the convention shall afford one another the “widest measure of mutual assistance to investigate or prosecute the acts of corruption.” The United States and a majority of countries in Latin America have ratified the convention. � Contact a national chapter of Transparency International. The local representative of TI may have legitimate influence with the foreign government and may be able to alert the attorney general or an important judicial officer to the improprieties in the case. � Contact the OAS bureau (or bureaus) responsible for the implementation of the programs sponsored in the context of the Convention (the Department of Legal Cooperation and the Unit for the Promotion of Democracy) to inform them of the situation and to enlist their assistance. This should be followed up by filing a specific letter of complaint through the Permanent Council or the relevant OAS bureau, informing them of the specific violations of due process in connection with the matter, which suggest the possible existence of corrupt practices. In any of these options and depending on the facts of the case, copies of relevant correspondence may be provided to the country’s Executive Officer, the Ministry of Justice, the relevant Judicial Council who supervises the particular judicial officer in question and, possibly, the judge himself. � Although it forces the company to rely on the same judicial officials presumably subject to corruption, consider meeting with a prosecutor to initiate criminal charges against those involved with the corruption. This is a tactical decision that should be made only after serious consideration. � Finally, file a civil claim for damages for defamation or extortion. Under the civil code of many Latin American countries, a company is entitled to request substantial damages from the other side if the charges presented by the other side were false. As a practical matter, the ultimate proof may be difficult to sustain. Alberto J. Ordonez is an attorney in Miami who concentrates his practice on complex commercial litigation, including international arbitration and international litigation. Miami-based attorney Heidi Schulz focuses on international commercial litigation and international arbitration, as well as creditors’ rights, asset recovery and white collar criminal defense. ::::FOOTNOTES:::: FN1 See Ley de la Comision de Control C’vico de la Corrupcion de Ecuador, Law 99-39, approved by Congress Aug. 12, 1999. A translation is available at www.respondanet.com/ english/index.htm. FN2 Plan Nacional de Integridad de Nicaragua, translation available at www.respondanet.com/ english/index.htm.

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