A Tough Line On Fraud

Mexico, along with most other countries in Latin America, is integrating rapidly with the global economy. The country's GDP grew by nearly 5 percent last quarter, and its investment climate is generally considered favorable. Yet that same integration, along with heightened concerns about terrorist funding, has led to more scrutiny of the region's business and regulatory practices. In particular, new U.S. corporate-governance laws like Sarbanes-Oxley, and certain provisions of the U.S. Patriot Act, are pressuring Latin American regulators and corporations to do more to find and eliminate fraud.

One Sarbanes-Oxley provision requires foreign companies listed on American stock exchanges to tighten up their internal fraud controls or face potential legal action by U.S. authorities. The laws are also aimed at curtailing money laundering, and mandate that U.S. companies perform tougher "due diligence" investigations of foreign firms and individuals with whom they do business. David Robillard, the Mexico director for the security firm Kroll, says the more-stringent U.S. regulatory environment has forced often-lax Latin regulators to toughen up or lose control over their own multinationals. Adds Boris Kruijssen, Latin America regional director of Control Risks Group: "There's still a lot of anti-Americanism in places like Brazil, but they're now doing business in a different way because of these U.S laws."

On Jan. 4, the U.S. Securities and Exchange Commission filed several civil fraud charges against Mexican media baron Ricardo Salinas Pliegas, chairman of Mexico's second largest broadcaster, TV Azteca. Using a provision of the Sarbanes-Oxley Act, U.S investigators charged Salinas and two of his top executives with engaging in "an elaborate scheme" to conceal a $109 million profit Salinas allegedly engineered by purchasing debt at reduced prices from an Azteca cell-phone subsidiary called Unefon. Salinas has denied the charges and accused the SEC of operating in "bad faith." U.S. regulators filed the charges against the TV Azteca executives because the company is traded on the New York Stock Exchange, and thus is subject to U.S. laws.

Mexico's National Banking and Securities Commission led the TV Azteca investigation, and may yet charge the executives itself. But the fact that a U.S. regulatory body went public with the charges has raised questions about whether Latin American countries are ready to handle the new regulatory demands sweeping in from Washington and New York. "The U.S. laws do raise the bar, and if you've got transactions [involving subsidiaries or partners in America], you'd better be careful," says Grant Kirkpatrick, a senior economist at the OECD in Paris. In response to criticism that its new laws require too much of other countries too quickly, the SEC last week extended the deadline (to July 15, 2006) when foreign firms with U.S. listings must comply with its fraud-control rules.

In fact, Mexico has made great strides in recent months to strengthen its own regulatory infrastructure. A robust new securities law is expected to be presented to Congress within the next three weeks. And the National Banking and Securities Commission is currently investigating 70 Mexican companies.

U.S. firms are increasingly using security companies to scrutinize foreign partners, deals and operating practices. Last year several of the companies that attended a Control Risk Group corruption workshop joined forces to stop an emerging pattern of extortion involving a specific Mexican Customs office, which was asking for bribes to facilitate passage of dry-docked goods. In the end, the companies pressured the office to release the goods without payment. Kroll was hired by a major international hotel chain when it found its plans for development were being stymied at every turn by a zealous environmental NGO. Kroll discovered that the NGO was on the payroll of a competing hotel chain. The director of the NGO had received more than $2 million in property in exchange for stopping the hotel development.

America's brass-tacks approach will benefit emerging markets. Mexico has attracted substantial foreign investment in recent years, and it's likely to do whatever it takes to keep the momentum going. "Every day there's more transparency," says Antonio Esteinou, director of equities at the trading firm Valores Mexicanos. "Ten years ago it was difficult to find a company with a good investor-relations arm. Today, most [major] companies have one." The TV Azteca case has been an embarrassment for Mexico, but it will accelerate a reform process that the country desperately needs.