What’s the Aftershock of the Wal-Mart Mexico Scandal?

Recent news headlines are fraught with controversy involving multinationals operating in Latin America.  Spain’s Repsol has now officially sued the Argentine government over last month’s nationalization of oil company YPF. Wal-Mart Corporation (operating in Mexico with the “Walmex’ brand)  is also on the defensive as a corruption scandal in Mexico threatens to incite deeper investigations into the company’s global operations.  To gain a better sense of business environment and legal protections afforded to international investors operating in the region, we turned to John Crespo, Partner and Latin America practice lead at King & Spalding. 

We first met up with John in New York at last month’s Bloomberg Latin America Investing conference, where YPF and recent trade agreements between the U.S., Colombia and Panama were major topics of debate.  Since the North American Free Trade Agreement (NAFTA) provides a rich context and legal benchmark for international business dealings in the region, we questioned John on some of the specifics around market access, trade regulation, foreign investment laws, intellectual property laws, and dispute settlement in Mexico:

NSAM – What unique legal provisions does NAFTA provide multinationals operating in Mexico?

Crespo – NAFTA is an expansive international custom trade agreement between the U.S., Mexico, and Canada enacted back in 1994 that broke down aggressive trade tariffs between these three markets.  It also established intellectual property protections and perhaps most importantly in this regard, brought about changes to Mexican law set to protect trade secrets of foreign investors.  NAFTA also lowered barriers to labor entry by providing for special work visas for professionals in production and manufacturing, but also for marketing and sales personnel.  It also provides comprehensive protections to foreign direct investment (FDI) giving recourse for international arbitration and non-local venue for dispute resolution to foreign investors of a member state in similar scope to the protections afforded in bilateral investment treaties.

NSAM – What are some of the legal challenges inherent to Mexico’s business landscape? 

Crespo – Mexico in terms of ease of doing business is ranks near the top regionally.  The general processes of incorporation are fairly well established and investor friendly. If I had to rank Mexico on business friendliness I would put it in 4th place after Chile, Peru, and Colombia. Where Mexico may be lagging is in the registration of property. If you want to register property it is a lengthy process that can take up to four months if not more.  The preparation and payment of taxes can also be more tedious compared to other countries especially with respect to income tax.  There are also issues with electricity supply around the process and permitting of energy for large industry and commercial operations.

NSAM – When it comes to market entry, what legal precautions should investors be mindful of? 

Crespo – In terms of entry by acquisition i.e. via asset transfer instead of a stock deal there are certain aspects that can be tricky, particularly when it comes to land and labor regulations. For any form of acquisition, if you’re not careful how you perform diligence regarding the acquisition or structure initial agreements you can be liable for severance obligations and trailing liability for breaches of the foreign corruption act, like Wal-Mart’s current situation in Mexico where accusations of bribery over land deals are costing the organization millions of dollars in legal fees.

NSAM – Mexico’s legal system is based on civil law.  Does this have an impact on contracts/dispute resolution?

Crespo – With respect to pure investment protection from governmental action, NAFTA helps break down some of these incongruent barriers to the extent that it provides for a framework to go to the World Bank’s international arbitration forum, but these protections under NAFTA are limited to disputes between a foreign investor and the Mexican Government. When it comes to private agreements, the parties should also seek to exclude local forums in favor of private international arbitration forums such as the International Court of Arbitration (ICC). So if you’re contracting with a Mexican counterpart you have greater opportunity to enforce a favorable judgment outside the confines of Mexican jurisdiction, especially if your counter-party is a Mexican multinational with assets abroad.  When you’re dealing with the purchase of land you have greater difficulty in having adequate recourse through arbitration given the localized nature of land purchases.

You will be subject to Mexican court system which is much different than common law in terms of evidentiary procedures and speed of adjudication. It’s also important to remember that not all states in Mexico are alike and neither are their court systems. From a procedural aspect you might be better off doing business in the federal capital or Monterrey where international business practices are more established.

NSAM – How will the recent free trade agreement between Colombia/US impact that country? 

Crespo – Even without the free trade agreement Colombia in terms of ease of doing business probably ranks ahead of Mexico.  Although Colombia’s international trade agreement may not be as expansive as NAFTA, in terms of additional protections, it should be a tremendous boon for Colombian competitiveness. Look at the Mexican companies today – they are huge multinationals.  The successes that companies like Grupo Bimbo, Cemex, Aeromexico have had are partly attributable to the opening of trade barriers and the strengthening of legal frameworks via NAFTA. These agreements will also help the country overcome perception hurdles, mainly concerns over drug violence and how it affects investor confidence. For example, two-three years ago you couldn’t talk to sovereign wealth funds about Colombia.  Today is a different story and Colombia is being flooded with foreign capital.