Mexico Facing Cost of Bribe Ethos That Snared Wal-Mart

Tyson Foods Inc. (TSN) was searching for a way to speed up Mexican approval to export chickens raised in that country in the mid-2000s. Company employees, Tyson later acknowledged to U.S. authorities, achieved this by paying off local officials.

The decision ended in Tyson, the largest U.S. meat processor, paying regulators $5.2 million last year. Siemens AG (SIE), Europe’s largest engineering company, made a more expensive mistake, paying $1.6 billion in fines and criminal and civil penalties in 2008 for violating the U.S. Foreign Corrupt Practices Act in markets including Mexico.

Corruption is one of the biggest obstacles to foreign investment in Mexico, watchdogs and local attorneys say, and it has now ensnared Wal-Mart Stores Inc. (WMT), the world’s largest retailer. The New York Times reported April 21 the company’s Mexican unit paid more than $24 million in bribes to open stores more quickly. The company says it’s aiding U.S. probes into the matter.

“This type of activity is common practice in Mexico,” said Luis Alberto Perez, a partner at the Mexico City law firm Camelo y Perez Abogados, referring to corruption. “The reality is, if your competition is partaking of these practices and you don’t, it’s going to be difficult for you to grow and expand quickly.”

He says he still advises his clients not to pay bribes because it’s against the law and unethical.

Mexico, the world’s 13th largest economy, is perceived as less honest than 99 other nations, including communist China and Cuba, in dealing with companies, according to Berlin-based Transparency International.

Wal-Mart Case

The culture of bribery and kickbacks that pervades Mexico hinders government efforts to attract foreign investment and boost growth that has averaged 2.2 percent over the past decade, less than other major emerging markets such as Brazil and China. It also presents a quandary for companies seeking to expand in the country.

Wal-Mart, which owns 69 percent of its Mexican unit, said April 21 it is looking into the allegations that it paid bribes in the early 2000s to expedite permits for new stores in Mexico. The company is taking steps to ensure it remains in compliance with the U.S. Foreign Corrupt Practices Act and is strengthening controls and training in Mexico to achieve this, according to a statement yesterday.

‘Any Pretext’

The government’s failure to tackle graft pushed Mexico to 100 out of 183 countries in a corruption index compiled by Transparency International, down from 72 in 2008.

Arturo Pueblita, a Mexico City lawyer whose clients include international pharmacies and local retailers, said corruption is “an everyday occurrence.” His firm, Cuevas y Pueblita Abogados, hands out manuals to clients on how to react to public officials and conducts “preventive audits” to ensure authorities cannot find an excuse to pressure their clients for payments, he said.

“Authorities find any pretext to close a company or threaten to do so, unless they get what they want, which is a bribe,” he said.

As a result, companies pay about 10 percent of their earnings to corrupt officials, according to a study released last week by the Business Coordinating Council’s Private Sector Economic Studies Center. The total economic cost is 10 percent of Mexico’s $1 trillion gross domestic product, the study said.

‘Gestores’

“Corruption and the backlog in establishing and administering an adequate legal framework are considered the most problematic factors of doing business in Mexico,” Gerardo Gutierrez Candiani, president of the Mexican lobbying group, said in a statement accompanying the study on April 16.

The long waits to process paperwork and administrative proceedings have created an industry of “gestores,” or legal fixers who navigate people and businesses through the bureaucracy, and in some cases, grease palms to speed up the process, Pueblita said.

The Economy Ministry said in a statement April 23 that there’s no evidence Mexican federal officials were involved in alleged bribes paid by Wal-Mart employees. Corruption described in the New York Times story dealt with land use and construction permits, which fall under local and not federal jurisdiction, the ministry said, adding that it would collaborate with any U.S. investigation.

The ministry declined to comment further on what the government has done to reduce corrupt practices. A request for comment from Mexico City authorities went unanswered.

‘Cozy Relationships’

“This is a serious problem in Mexico,” said Claudio Loser, a former International Monetary Fund official. “The country is characterized by very strong domestic interests, very cozy relationships between government and local big enterprises.”

Mexican prosecutors said March 14 they are investigating Bizjet International Sales and Support Inc. after the company agreed to pay an $11.8 million criminal penalty to U.S. authorities to resolve charges related to the U.S. Foreign Corrupt Practices Act.

Bizjet, based in Tulsa, Oklahoma, allegedly paid $2 million between 2004 and 2009 to obtain maintenance, repair and general inspection contracts worth about $24 million for federal and state helicopters, according to a statement last month from Mexico’s Attorney General’s Office.

Two phone calls and an e-mail to Jay Holtmeier, a Bizjet attorney in New York, weren’t immediately returned yesterday.

Settlements involving the corrupt practices act are typically 1 percent to 2 percent of sales, and that would probably be $4.5 billion or more in the case of Wal-Mart, Robert Carroll, an analyst at UBS AG in New York, said in an April 23 report.

Largest Settlement

FCPA investigations take two to six years to resolve and the largest such settlement ever was Siemens’s 2008 payment, Carroll said. Among other accusations, from the mid-1990’s until 2007, units of the Munich-based company paid bribes to obtain contracts to work on refineries in Mexico, the SEC said. Alexander Becker, a Siemens spokesman, declined to comment.

Tyson Foods, based in Springdale, Arkansas, paid government veterinarians in charge of inspecting chicken plants to keep the officials from disrupting operations, according to the U.S. Justice Department.

Tyson spokesmen Worth Sparkman and Gary Mickelson referred to a 2011 statement following the settlement and said the company had no additional comment. Tyson said at the time it voluntarily disclosed the illegal payments to U.S. authorities and the bribes started before it acquired a stake in the company that became Tyson de Mexico.

Under their settlements, neither Siemens nor Tyson admitted or denied SEC allegations.

‘Stagnate’

“On an economic level, this causes investment to stagnate,” said Alejandro Salas, Transparency International’s regional Americas director.

Mexico received $19.4 billion of foreign direct investment in 2011, according to preliminary figures from the Economy Ministry. It received $20.2 billion in 2010. Brazil, the region’s largest economy, received $66.7 billion in 2011, according to data from the South American nation’s central bank.

Eduardo Bohorquez, head of Transparency International’s Mexico organization, said enforcing a 2002 federal transparency law, which was also approved at the state level, has been difficult.

“This is a shared responsibility,” Bohorquez said. “Governments of course have to lead anti-corruption efforts. The private sector also has a crucial role in leading important changes in self-regulation and promotion of anti-corruption policies.”

Extortion

Mexico’s IPC stock index has advanced 4.7 percent this year, compared with a gain of 10.2 percent by the Standard & Poor’s 500 index and a 9 percent rise by Brazil’s Bovespa index over the same period. Yields on Mexican corporate dollar bonds have declined 32 basis points, or 0.32 percentage point, according to information compiled by JPMorgan Chase & Co.

“There’s an image of corruption where people think that in Mexico we solve everything that way,” Pueblita said. “It’s a problem for investment in Mexico.” In many cases international clients “end up feeling like they’ve been extorted.”

To contact the reporters on this story: Crayton Harrison at tharrison5@bloomberg.net; Nacha Cattan in Mexico City at ncattan@bloomberg.net.

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.

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