The full story is available here.

This year’s topics include:

• FATCA – The Foreign Account Tax Compliance Act
• Codification of the Economic Substance Doctrine
• Art. 33 Maquiladoras
• Mexico’s IETU – Final Resolution by IRS/Treasury?
• Professional Responsibility Issues in Representing Cross-Border Clients
• International Joint Ventures – Tax Problems, Structuring the Deal with Cross Border Partners
• Detecting Tax Fraud – Utilizing Exchange of Information Provisions in Income Tax Treaties
• Transfer Pricing: Recent Developments

The conference agenda includes both U.S. and Mexican speakers from private practice, government and academia.

Mexico Law Blog is a sponsor of this conference.

The NGOs claim that Blackfire provided the mayor with benefits, including airline tickets for himself, his family and his associates, but acknowledge that Blackfire stopped honoring the “ridiculous propositions” after the the mayor asked it to arrange a sexual affair with a Playboy model.

O’Shea was the General Manager of a Sugar Land, Texas-based subsidiary of Swiss electrical engineering company ABB Ltd. (NYSE: ABB).  According to the indictment, the Texas subsidiary, which provides products and services to electrical utilities, allegedly paid money to a Mexican company that served as a sales representative for ABB on two CFE contracts worth approximately $81 million.  The Mexican company was run by Fernando Maya Basurto, a Mexican citizen who pleaded guilty last week to conspiracy to violate the FCPA and U.S. money laundering laws.

O’Shea and Basurto allegedly arranged for CFE officials to receive payments totaling as much as 10% of the revenue that ABB received from CFE.  The indictment seeks O’Shea’s forfeiture of approximately $3 million.

According to the FCPA Professor, “the improper payments were concealed through a series of financial transactions, first to U.S. bank accounts in the name of Basurto and certain of his family members, then through false invoices received from Basurto in the names of the intermediary companies, and then to the ‘foreign officials’”. 

The FCPA Professor notes that a Mexican company and a Panamian company may, in addition to ABB and its U.S. subsidiaries, be subject to DOJ enforcement action as “agents of domestic concerns” under U.S. Code §§ 78dd-2(a) and 78dd-2(h)(1).

Mexico also has certain laws prohibiting the granting of value in exchange for the opportunity to provide goods and services to healthcare recipients or healthcare providers.  The Mexican laws are less complex than their U.S. counterparts and are limited to the government sector. 

In general, these Mexican laws prohibit the granting of any payment, gift, or other consideration by bidders or prospective contracting parties on projects involving the supply of equipment or services to public-health related government (or other governmental) entities in Mexico, whether at the federal or state level.  Such entities include, without limitation, Mexico’s Social Security Institute (IMSS) and Institute for Social Security and Services for State Workers (ISSSTE).  There are also Mexican laws that prohibit government officials from receiving such payments, gifts, or other consideration.  Note that even if a payment is permitted under Mexican law, the payment may be prohibited under the U.S. Foreign Corrupt Practices Act (for more on the FCPA, check out The FCPA Blog).

For private bids and contracts in Mexico, including private bid contests organized by private hospitals or doctor groups that are not affiliated with government entities, there are generallyno prohibitions or restrictions on payments, gifts, or other consideration given to such hospitals or doctors.  However, the officers of the hospitals or the doctors may be subject to ethical rules that prohibit or restrict the receipt or acceptance of these benefits.

An article by David Luhnow in the October 17-18, 2009, edition of The Wall Street Journal puts the film in context:

Mr. Zuñiga’s case is not unusual in Mexico.  Crooked cops regularly solve cases by grabbing the first person they find, along with a cooked-up story from someone claiming to be an eyewitness.  Prosecutors and judges play along, eager to calm a growing public outcry over high crime rates and rising violatence from Mexico’s war on illicit drug gangs.  In practice, suspects are often presumed guilty.  More than 85% of those charged with a crime are sentenced, according to Mexico’s top think tank, the Center for Investigation and Development, or CIDE.

* * *

Unlike the U.S., Mexico’s legal system has no jury trials.  In the majority of cases, there are also no oral arguments, meaning lawyer’s don’t stand in front of a judge to plead their client’s case.  Judges usually never meet the accused.  Everything is done via paperwork.  Judges are subject to a Napoleonic code of justice, meaning laws are strictly codified, leaving them little room for judgment.

Thanks to the diligent efforts of Rafael Heredia, Mr. Zuñiga’s Mexican defense attorney, and the filmakers, who ran a film of Mr. Zuñiga’s farcical trial before an appeals court judge, Mr. Zuñiga won the appeal and was freed. 

Although “Presumed Guilty” is focused on Mexico’s criminal justice system, the film is illustrative for companies doing business in Mexico because the civil judicial system in Mexico shares many of the criminal system’s features, including its reliance on paperwork and, in some situations, its insidious corruption.  The civil judicial process is also, with some exceptions, notoriously slow and inefficient.  Since Mexico is a civil law country, jury trials do not exist.  Nor does the legal principle of stare decisis as it is used in the U.S. (although under certain limited circumstances Mexican courts recognize the persuasive importance of previous court decisons).  As in Mexican criminal trials, Mexican civil procedure laws require that most evidence in civil lawsuits be presented in writing.  

We once helped a Mexican client retain a former Delaware Supreme Court Justice to provide an expert opinion for use in Mexican litigation.  The opinion, which consisted of dozens of written questions and answers, was prepared in an effort to convince the Mexican court to invoke the Delaware legal theory of piercing the corporate veil to impose liability in Mexico on the Delaware parent corporation of the Mexican litigant.  Incredibly, I too, served as an “expert” in the lawsuit, notwithstanding that my law firm represented the client and that I had received my bar card just two years prior.  My expert opinion answered questions about whether the Delaware parent corporation owned all of the stock of the Mexican litigant, whether the parent had filed its Form 10-K annual reports with the U.S. Securities and Exchange Commission, etc.  To prove our expert qualifications, the former Justice and I had our law degrees and bar certifications notarized and apostilled for delivery to the Mexican judge.  Neither of us were orally deposed or cross-examined nor required to appear in court.  Binders of  documents with counter opinions were presented by opposing counsel.  The case endured for years. 

The moral of the story is that foreign businesses should do their best to avoid litigation in Mexico at all costs.  Here are a few tips:

Know Your Partner.  Perhaps the easiest way to avoid litigation is to be sure to contract with an honest and reliable Mexican business partner.   Before entering into any contractual arrangement, foreign businesses should request references from prospective partners and consider performing a background check on the principals of the prospective partner.  Audited financial statements may be helpful, but only if the audit is performed by a reputable independent accounting firm.  Early and extensive due diligence on prospective business partners, including multiple face-to-face meetings, is essential.  

Seek Guaranties.  Where possible and particularly when there is any doubt about a Mexican company’s capability to satisfy its contractual obligations, foreign businesses should seek to have the obligations guaranteed and secured by the assets of its U.S. or other foreign affiliate companies -provided they exist and have sufficient assets and insurance - and/or its U.S. or other foreign individual affiliates (also with sufficient assets).  

If the guarantors are U.S. persons or entities, the guaranty and security agreements should be governed by and enforceable under laws in the U.S., so that a judgment may be obtained in the U.S. without the need for subsequent enforcement of the judgment in Mexico.   

If the guarantors are non-U.S. persons or entities, counsel to the foreign business should review and determine the enforceability of the guarantees in the foreign jurisdiction. 

If the contract involves the installation, transport or manufacture of goods in Mexico or other significant assets or potential liabilities, the Mexican company should be asked to post a bond and to acquire extensive insurance coverage, preferably payable in the U.S.  for losses arising in Mexico. 

If the contract requires the Mexican company to pay for goods or services, an irrevocable standby letter of credit or other payment guaranty should be requested.  

Choose U.S. Law and Venue or Arbitration in the U.S.  In many cases, contracts between U.S. and Mexican business can be governed by U.S. federal and state law and provide for dispute settlement in U.S. federal and/or state court or by arbitration.  Although resolving disputes in the U.S. is always preferable, if the Mexican counterparty does not have a U.S. subsidiary or other U.S. assets (see “Seek Guaranties” above), then the U.S.  judgment would require enforcement in Mexican courts.

The CISG is an international treaty signed by 74 countries, including the U.S. and Mexico.   In the U.S., the CISG is regarded as a self-executing treaty, meaning that it operates without any implementing legislation.  The CISG is therefore federal law in the U.S., which preempts any conflicting state law provisions, including the Uniform Commercial Code (UCC) as it may be incorporated into state law. 

As such, the CISG is the default gap-filling law in the U.S. applicable to all contracts for the sale of goods between U.S. companies and foreign companies whose places of business are in countries that are party to the CISG.  Since both the U.S. and Mexico are party to the CISG, any contract for the sale of goods between a U.S. company and a Mexican company will be governed by the CISG unless the parties expressly exclude its application.

An example illustrates how the CISG comes into play.  I am reviewing a contract this morning on behalf of a Mexican company that seeks to be the exclusive distributor in Mexico for a technology product manufactured by a Texas company.  The governing law clause, drafted by the Texas company’s U.S. counsel, provides: “This Agreement shall be governed, interpreted and construed in accordance with the laws of the state of Texas.” 

The laws of the state of Texas that govern the international sale of goods are: (1) The Texas Business & Commerce Code (TBCC), which is the UCC incorporated into Texas law; and (2) the CISG.  Accordingly, if there is a dispute under an international sales contract governed by “the laws of the state of Texas”, the court or arbitrator should apply the CISG to fill any gaps in the contract because the CISG is a self-executing treaty, which is U.S. federal law, which preempts Texas law. 

The problem is that the lawyer for the Texas manufacturer probably never intended for the CISG to govern.  In addition, since the CISG and the UCC often contain different gap-filling terms for the same set of factual circumstances (e.g., remedies in the event of breach, contract formation through the exchange of forms), the outcome of a dispute under the contract may significantly vary depending on which body of law is applied.

Fortunately, Article 6 of the CISG allows contracting parties to exclude the CISG, vary its effect, or derogate from any of its provisions.  I often use the following language to exclude the CISG from international sales contracts:

 This Agreement shall be governed by and construed under the laws of the state of _______, U.S.A. (including the Uniform Commercial Code as incorporated into the laws of the state of _______, U.S.A.), without regard to its conflict of laws provisions and without regard to the United Nations Convention on Contracts for the International Sale of Goods (CISG).

For example, an effective date on a pagaré that is before the actual date of signature might be used to enable the lender to evidence a debt of the Mexican borrower that arose because of money advanced before the actual signature date of the pagaré.  Similarly, an effective date on a pagaré that is after the actual date of signature may be used to enable the lender to evidence a future debt of the borrower that will arise if some event does not incur in the future (e.g., the Mexican borrower does not pay the lender’s invoices).

Article 170 of Mexico’s General Law of Negotiable Instruments (Ley General de Títulos y Operaciones de Crédito), which lists the elements required to create a valid pagaré, provides that, among other elements, a pagaré must include the date on and place at which the pagaré was signed by the borrower.

Accordingly, to avoid any possible argument by the Mexican borrower in a collection lawsuit on the pagaré by the lender that the pagaré is defective because it is not dated the actual date of signature or that the lender altered the pagaré post-signature, the most prudent course of action for the lender is to have the debtor sign the pagaré on the actual date that appears on the pagaré, whether the date is (a) pre-printed on the pagaré by the lender or (b) handwritten on the pagaré by the borrower or the lender.

If the lender must date the pagaré before or after the actual date of signature, one alternative for the lender would be to pre-print the date the lender wishes to include on the pagaré, whether such date is before or after the actual date of signature, BEFORE the pagaré is signed by the borrower.  However, it is conceivable that this alternative could give rise to an argument by the borrower in a collection lawsuit by the lender that the pagaré is defective because it is not dated the actual date of signature contrary to Article 170.  In other words, there is some risk to the lender associated with this alternative.

A much less favorable alternative if the lender must date the pagaré before or after the actual date of signature is to leave the date of the pagaré blank and fill-in the desired date, whether such date is before or after the actual date of signature, AFTER the pagaré is signed by the borrower.  This alternative, which is not recommended, is far more likely than the previous alternative to give rise to an argument by the borrower in a collection lawsuit by the lender that the pagaré is defective because it is not dated the actual date of signature or because the lender altered the on the pagaré post-signature violation of Article 170.

The website enables users to:

• Search for and reserve a corporate name with the Ministry of Foreign Relations (Secretaria de Relaciones Exteriores);
• Pay the fees required to form the entity;
• Select a Mexican Notary Public to protocolize the formation documents; and
• Use and modify standard form corporate by-laws (estatutos).

Protocolization of the estatutos must still performed by a Mexican Notary Public following the physical appearance of the shareholders (or their attorneys-in-fact) with official identification and proof of address in hand, along with payment applicable Notary fees.

The new website is welcome news for Mexican businesses and investors, who might soon enjoy some reduction in the time and cost required to form a new company in Mexico.