Mexico and Brazil Enter the Era of Compliance
Efforts are Under Way to Diminish Corruption in Pivotal LatAm Markets
Written by Fernando Cevallos (Mexico City-based director for Compliance, Intelligence, Investigations, and Technology at Control Risks.)
Mexico and Brazil have much in common. As the two largest countries in Latin America, they boast the region’s two largest and most dynamic economies. As such, both countries have captured the attention of investors seeking to capitalize on growth in emerging markets, but each has proven challenging—particularly when it comes to the culture of corruption and official efforts to combat it.
Of course, there are obvious differences, too. In addition to speaking different languages, the countries boast different cultural flavors: tequila, tacos, and mariachis in Mexico; "'caipirinha, samba, and futebol in Brazil". Similar cultural distinctions exist around the conduct of business—and the paying of bribes—and companies that appreciate these differences are more likely to avoid allegations of wrongdoing.
Bribe-paying has been a fixture of Mexican and Brazilian business cultures for years. It was rarely discussed, and never legal, but greasing a few palms was widely understood to be the way things get done. In the last decade, the taboos that prevented people from speaking openly about bribery began to break down. The result has been raising public concern in both countries over corruption and its effect on society.
That concern spurred each country’s government to pass new legislation. In 2012, Mexico passed the Federal Law Against Corruption in Public Procurement and two years later, Brazil ushered in the Clean Company Act. Both laws prohibit the payment and receipt of bribes in both the public and private sectors. Whereas previous laws only sanctioned individuals, these new laws create penalties for corporations as well.
But the similarities between the two countries’ legal frameworks end when it comes to enforcement. Since Mexico’s law went on the books in 2012, there has been no enforcement. The government has continued to maintain positive body language, reinforcing the anti-corruption framework with a new transparency law and establishing a third-party monitor, but it has declined to bare its teeth.
The absence of enforcement has stalled any momentum toward an improved compliance paradigm in the country. This has only served to reinforce a sense of inevitability around corruption—that every business venture will eventually come up against someone in a position of power seeking to take advantage. For all intents and purposes, companies’ need to focus on compliance is no different than it was five years ago.
Meanwhile in Brazil, enforcement of the Clean Companies Act has made compliance a top priority for businesses throughout the country. Operation Car Wash—the investigation into a widespread bribery scandal at the state-owned oil company Petrobras—has already implicated several other companies and dozens of prominent politicians. Petrobras says the scandal has cost it US$2 billion, and the widespread public protests have sapped the power of President Dilma Rousseff. This is a paradigm shift for Brazil, and is evidence of not only a new legal framework, but also increasingly independent law enforcement and judicial institutions.
The divergence in the two countries’ anti-corruption frameworks is particularly evident in their oil and gas sectors. As one Spanish investor traveling through Mexico recently lamented, “Everywhere I go, someone asks for a moche (bribe).” It is true that businesses seeking contracts, licenses or permits will often receive a slip of paper with wire instructions—a not-so-subtle hint of a quid pro quo. This is particularly common in more remote places, where the risk of bribery and corruption is highest.
Up until a couple of years ago, Brazil’s healthcare, pharmaceutical, and oil and gas markets, among others, were very similar. But a series of investigative reports by major news networks cast a spotlight on such practices. In fact, this was one of the contributing factors to the groundswell that led to the Clean Companies Act. Mexico is still waiting for such a catalyzing moment, and there’s no telling how long that wait will last.
Yet other similarities persist. Both countries have very relationship-driven business cultures, which often results in inadequate due diligence. Failure to properly monitor third parties is a classic recipe for scandal; trust can easily be misplaced. Both countries are also home to challenging security environments, which increases the temptation to pay off criminal organizations in order to avoid operational disruptions or retaliation. Such extortion schemes usually end badly for the company, leading to a Pandora’s box of corruption, fraud, money laundering, and reputation risks
There is no single recipe for steering clear of corruption risks in Brazil and Mexico, but the International Organization for Standardization’s anti-bribery management systems standard—ISO 37001—is about as close as it comes. This document, to be released in 2016, will identify clear, discrete steps that companies of all sizes can take to certify that they have the controls in place to resist demands for bribes. Certification to this standard will become a global competitive advantage for companies doing business, allowing them to avoid one of the biggest pitfalls in attractive markets such as Mexico and Brazil.
At the same time, there is also a move in both Mexico and Brazil toward training the next generation of compliance professionals. Local universities—such as Tecnologico de Monterrey in Mexico (ITESM) and Fundacão Instituto Administração in Brazil—have invested in programs that teach the skills and techniques businesses will need to ensure their actions remain above board. As these students find their way into the workforce, they have the potential to reshape business culture.
Brazil and Mexico will not remain emerging markets forever; however, in the long term, increased scrutiny of corrupt practices seems inevitable. Companies that focus on compliance now not only gird themselves against uncertainty in the short term, but they set themselves up to thrive in the long run.
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