Before ING paid $3 billion to buy control of Mexico's largest insurer, Comercial América, in 2001, the Dutch financial-services giant did its homework on the size and appeal of the fast-growing market. Unfortunately, the European insurance execs failed to take into account Mexico's byzantine judicial system. Now, ING is embroiled in a legal tangle that is every foreign investor's worst nightmare.
The dispute began when Hurricane Juliette smashed into the state of Baja California Sur in September, 2001, seriously damaging a phosphate mine owned by one of ING's clients, Grupo Fertinal. ING's adjuster assessed the damages at $13 million. Fertinal President Fabio Covarrubias protested that actual damages were $47 million.
But what should have been a straightforward civil dispute soon got nasty. After Fertinal's creditors produced documents saying they were beneficiaries of the policy, ING said it couldn't advance the company some $10 million in clean-up money. Covarrubias went to a court in Baja California Sur, where a judge charged 10 ING executives with criminal fraud based on allegations they had pocketed the insurance payout. To ING's astonishment, on Aug. 12, 2002, police arrested two of its executives in Mexico City and flew them to Baja, where they spent a night in jail being sprung on bail.
Fertinal has gone to court in two other states to obtain arrest orders for conspiracy and fraud against 13 ING employees -- all Mexicans -- as well as eight other agents. The ING employees charged are in hiding to avoid arrest, while other ING execs have at times steered clear of the country for fear they too might land behind bars. Last August a judge in Morelos state froze $300 million in ING funds -- the amount for which all Fertinal facilities are insured -- until the case is resolved.
ING denies that it or its employees are guilty of anything except trying to resolve a claim in the normal manner. "That's what we do -- pay out claims to policyholders," says Jean Louis López Alberdi, an ING executive director and spokesman. For his part, Covarrubias says he's only defending his rights under Mexican law. "ING is abusing the fact that they are facing a suit in a Third World country," he says. "They criticize the justice system when they're losing. They figure eventually we'll go bankrupt and they won't have to pay us."
URGENT NEED. The battle has caused concern among investors. Says Jack Sweeney, executive vice-president of the American Chamber of Commerce in Mexico: "Cases like this make companies less and less interested in Mexico. That's one reason foreign direct investment is at a standstill now." Foreign direct investment was $11 billion last year -- still hefty, but the smallest amount since 1996.
For Mexico's critics, ING's travails show the urgent need for legal reform. A United Nations report two years ago said corruption was widespread among judges. The federal courts suffer a backlog of some 10,000 cases, and most judges aren't trained to handle complex commercial disputes. Because cases take so long, some plaintiffs convince local judges to issue criminal charges to pressure the other side to settle, says leading corporate lawyer Thomas Heather, who heads the local bar association's financial law and corporate governance committee. President Vicente Fox knows this is a hot-button issue. "These cases take far too long to resolve," says Eduardo Sojo, Fox's top economic adviser. Mexico's Supreme Court is conferring with the legal community on how to revamp the judicial system.
Officials are acutely aware of the ING case: Last year, Fox's envoys tried to persuade the two parties to seek arbitration. ING execs said they were willing if Covarrubias dropped criminal charges. He rejected the overtures. "We've already spent 2 1/2 years on this. [Why should we] go through arbitration for one or two more years?" he asks. He has boosted his insurance claim to $300 million, on the grounds that he has lost at least that amount with the mine closed. Mexico could prove the biggest loser.
By Geri Smith in Mexico City