1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
Bermuda welcomes foreign direct investment (FDI). The Bermuda Business Development Agency (BDA) is an independent, public-private partnership, funded by both the Bermuda Government and the private sector. The agency is governed by a Board of Directors comprised of senior industry professionals representing the diversity of Bermuda’s financial services sector. The BDA carries out pro-active, targeted marketing and business development strategies to stimulate growth in the Bermuda economy and create and maintain jobs. (http://bda.bm)
The BDA acts as a partner for existing Bermuda-based companies and assists entities that are considering establishing operations in Bermuda. It connects prospective companies with industry partners and relevant representatives in the Bermuda Monetary Authority (BMA) and the Bermuda Government’s Business Development Unit, making formal introductions, troubleshooting, and communicating with clients to simplify the process. The BDA has segmented its business development efforts into four distinct pillars or industry areas of focus: Risk (insurance, reinsurance, captives, and insurance linked securities), Asset Management, Trust & Private Client, and International Commerce (technology, international markets, etc.). These are key sectors of the Bermuda marketplace, or areas for potential growth, and the BDA has separate business development managers, strategies and goals for each.
Limits on Foreign Control and Right to Private Ownership and Establishment
The 60/40 rule in Bermuda requires all companies to be controlled by at least 60% Bermudians. In February 2020, the Bermuda Government proposed to introduce a bill that will reduce the current required ownership regulations for a local company from 60% owned by a Bermudian, to 40%, as outlined in the 2020 Budget Report, to help stimulate and promote economic competition.
Some local businesses support relaxing the 60/40 rule to encourage FDI, increase liquidity in the local market, and boost the economy. Other businesses oppose it out of concern that they might not be able to compete with majority foreign-owned businesses.
In addition to ownership regulations, there are restrictions governing ownership of land by businesses.
‘Control’ is defined as the percentage of Bermudian directors, and the percentage of its shares beneficially owned by Bermudians, in the company being not less than 60% in each case. Amendments are expected to create more opportunities and foreign investments by Permanent Resident Certificate (PRC) holders who reside on the island.
Local companies can be exempted from the 60/40 rule by obtaining a license (pursuant to section 114B of the Companies Act) from the Minister of Finance, who decides if the granting of a license is in the best interest of the country. When considering an application for a Section 114B license, the Minister considers:
The economic situation in Bermuda and the due protection of persons already engaged in business in Bermuda.
The nature and previous conduct of the company and the persons having an interest in the company whether as directors, shareholders or otherwise.
Any advantage or disadvantage which may result from the company carrying on business in Bermuda.
The desirability of retaining in the control of Bermudians the economic resources of Bermuda.
Certain activities are excluded from the requirement of a license, including:
Doing business with other exempted undertakings (e.g., exempted companies, permit companies, exempted partnerships and exempted unit trust schemes) in furtherance of the business of the exempted company that is being conducted outside Bermuda.
Dealing in securities of exempted undertakings, local companies, or partnerships; and
Carrying on business as manager or agent for, or consultant or advisor to, any exempted company or permit company which is affiliated (whether or not incorporated in Bermuda) with the exempted company or an exempted partnership in which the exempted company is a partner or, in the case of mutual funds, selling or distributing their shares in Bermuda.
In 2012 local companies were exempted from the 60/40 rule if its shares were listed on a designated Stock Exchange, the company conducted business in a material way in a ‘prescribed industry,’ or if the company was a wholly owned subsidiary of such a listed company.
The prescribed industries are capital-heavy and include, inter alia, telecommunications, energy, insurance, hotel operations, banking, or international transportation services (by ship or aircraft).
Other Investment Policy Reviews
Bermuda is a World Trade Organization (WTO) member through the United Kingdom. Bermuda has not conducted an investment policy review through the OECD, WTO, or UNCTAD within the past three years.
Business Facilitation
The Investment Business Act 2003 is the statutory basis for regulating investment business in Bermuda. The act provides a licensing regime for any person or entity (unless otherwise exempted or excluded) engaging in investment business, as defined by the act, either in or from Bermuda.
There are several options for registering a business in Bermuda which depend on the nature of the business and whether business will be conducted in the local market. The Registrar of Companies (ROC) is responsible for the day-to-day responsibilities regarding the administration of companies including name reservation, fees, insolvency and real estate. (https://www.gov.bm/department/registrar-companies).
Formation of a limited company, partnership or LLC, which does not require consent of the Minister of Finance may be accomplished within one day after an application is received. Where a business requires the consent from the Minister, the processing time can take up to one week. The ROC reviews all information relating to the company, and all personal declarations from the proposed beneficial owners.
The Bermuda Government requires those seeking to establish a limited company, partnership or LLC, to get assistance from a law firm, accounting firm, or corporate service provider (CSP) located in Bermuda for guidance on completing steps towards establishing a company, including:
Name reservation
Disclosure and vetting of proposed beneficial owners of the company, including personal declarations where required
Drafting the Memorandum of Association and byelaws of the company
Based on the nature of the proposed business activities, any license or permit applications required to be submitted
Selecting a registered office in Bermuda
Selection of directors, officers, and company secretary
Payment of government fees
Regulations for the emerging Fintech industry have been established. Fintech Bermuda offers information to assist those seeking to establish a digital business on the island (https://fintech.bm/start-a-business/) In 2018, the Government of Bermuda established the Digital Asset Business Act, which outlines the foundation for the government’s regulatory approach towards the industry. The Bermuda Business Development Agency (BDA) also provides guidance for those seeking to establish a digital business on the island and can provide information about immigration, tax and social insurance applications. The BDA also liaises with the Bermuda Monetary Authority, Department of Immigration, Ministry of Finance, Fintech Business Unit and ROC as needed for new incorporations and to monitor the processing of new applications.
Outward Investment
Bermuda is not involved in outward investment.
3.Legal Regime
Transparency of the Regulatory System
Bermuda is a cooperative jurisdiction and practices ethical transparency standards. Bermuda’s legal, regulatory and accounting systems adhere to a high level of transparency, compliance, cooperation and exchange of information.
Bermuda is a member of regulatory standard-setting bodies for banking (via the Basel Committee on Bank Supervision), insurance (via the International Association of Insurance Supervisors or IAIS), and investment business (via the Financial Services Authority or FSA). In December 2013, Bermuda signed the Foreign Account Transaction Compliance Act (FATCA) Intergovernmental Model 2 Agreement with the U.S. to promote transparency on tax matters, having concluded a FATCA-type agreement with the UK in the previous month. Bermuda financial institutions now automatically transmit FATCA information to the U.S. and UK.
The BMA is the sole regulatory body for financial services, responsible for the licensing, supervision, and regulation of financial institutions conducting deposit-taking, insurance, investment, and trust business on the island. The Bermuda Government continues to strengthen its anti-money laundering and anti-terrorism financing (AML/ATF) framework to ensure a high level of compliance with international standards. Amendments to the Proceeds of Crime Act in 2013 created an obligation to report suspicions of money laundering or terrorist financing and to allow civil proceedings before the Supreme Court for the recovery of property obtained through unlawful conduct. Neither unlicensed nor unregistered entities are permitted to operate in the financial services sector.
Bermuda’s Financial Intelligence Agency is a member of the Egmont Group of Financial Intelligence Units. It shares information with other agencies, within and outside Bermuda. The BMA Amendment (No. 3) Act 2004 clarified the power of the BMA to share information with other overseas authorities. Other laws that authorize the sharing of information with overseas regulators include the Banks and Deposit Companies Act 1999, the Trusts (Regulation of Trust Business) Act 2001, and the Investment Act 2003.
The Investment Business Amendment Act 2012, the Trust (Regulation of Trust Business) Amendment Act 2012, and the Banks and Deposit Companies Amendment Act 2012 regulate investment businesses, trusts, and banks in the areas of civil penalties, public censure, prohibitions against providing certain services, and publication of decisions. The Investment Business Act 2003 granted the BMA stronger intervention powers, including the ability to cooperate with foreign bodies, while the Investment Business Investment Act 2012 brought the Bermuda Stock Exchange (BSX) under the regulation of the BMA. Other provisions provide for criminal penalties, e.g., the Banks and Deposit Companies Amendment Act.
The BMA regulates collective investment schemes (CIS). The 1997 Proceeds of Crime Act (POCA) and the 2006 Investment Funds Act (IFA) regulate fund administrators. CIS are also subject to IFA, which clarifies and codifies the current regulation of funds in order to strengthen Bermuda’s position in the international funds market.
In February 2020, EU Finance Ministers (ECOFIN) listed Bermuda as a ‘cooperative jurisdiction’ with respect to tax good governance. ECOFIN endorsed the assessment of the European Commission and the EU’s Code of Conduct Group on Business Taxation (CoCG) that Bermuda has met its commitments to address concerns raised by the EU in 2019, relating to economic substance requirements. The announcement followed Bermuda’s placement on the EU’s ‘Blacklist’ of uncooperative jurisdictions and ‘Grey-list’ respectively, for jurisdictions that have undertaken sufficient commitment to reform tax policies. The Government reported that the listings were a result of a technical error in its submission to the EU and not because of regulation standards.
Legal System and Judicial Independence
Bermuda’s legal system is based on the English common law of England and Wales and has a Westminster form of government. The Judiciary is established by the Bermuda Constitution as a separate and independent branch of government and is considered to be competent, fair and reliable. The court system is made up of the Court of Appeal, Supreme Court and Magistrates’ Court. There is a specialized Commercial Court within the Supreme Court which also includes civil matters. The final appeal stage is the UK’s Privy Council. Bermuda’s legal system marked its 400th anniversary in 2016.
Laws and Regulations on Foreign Direct Investment
The Bermuda Monetary Authority (BMA) acts as Bermuda’s principal regulatory body. It is responsible for processing applications for incorporation and approving the issue of shares. It approves the beneficial ownership of all entities created in Bermuda and supervises and regulates the financial services sector. The BMA also acts as a central bank, advising the government on banking, financial and monetary matters. www.bma.bm
The Registrar of Companies, previously a department of the Ministry of Finance, is now a division of the Bermuda Monetary Authority. It monitors and regulates all companies operating within Bermuda. The Registrar’s responsibilities include incorporating and registering new companies and international partnerships, granting licenses to allow overseas companies and partnerships to do business on the Island, collecting and storing public documents such as prospectuses, and registering charges against companies.
The BMA also assists other authorities in Bermuda to detect and prevent financial crime and develops risk-based financial regulations that it applies to the supervision of Bermuda’s banks, trust companies, investment businesses, and insurance companies. The Companies Act 1981 as amended is the principal statute governing the formation and operation of Bermuda companies and foreign investment.
Compliance with Organization for Economic Cooperation and Development (OECD) guidelines that seek to eliminate separate regulatory regimes for local and international companies may have been a factor contributing to the decision to ease ownership restrictions. The Limited Liability Company Act was passed in 2016, which introduced the limited liability company (LLC) vehicle, a hybrid entity which merges characteristics of both a partnership and a company limited by shares, for the first time ever in Bermuda. This provides a useful alternative structuring option to complement the existing choice of vehicles available in Bermuda. 2016 also saw the introduction of the Contracts (Rights of Third Parties) Act 2016 modelled on the UK equivalent which allows parties to vary the common law doctrine of privacy of contract. Bermuda is the leading market for the relatively recent mass influx of insurance-linked securities, catastrophe bonds and other alternative risk transfer vehicles. Insurance-linked funds converge the investment funds industry and insurance/reinsurance industry, and Bermuda is by far the most popular jurisdiction for ILS-linked fund managers with approximately US$55 billion in aggregate under management in Bermuda.
Bermuda continues to promote transparency and global compliance standards and has adopted the OECD’s Common Reporting Standard as an early adopter jurisdiction which took effect on 1 January 2016. In April 2016, Bermuda became the 33rd signatory of the Multilateral Competent Authority Agreement for Country-by-Country reporting which is a component of the OECD’s base erosion and profit shifting (BEPS) project.
Bermuda’s commercial (re)insurance regime also became fully equivalent with Directive 2009/138/EC on the taking-up and pursuit of the business of insurance and reinsurance (Solvency II Directive), as amended in 2016 meaning Bermuda has “third-country equivalence”. This is a significant step for Bermuda and Bermuda commercial reinsurers, insurers and insurance groups as it ensures that they are on equal footing when operating in Europe or globally.
Recent company law changes mean that Bermuda companies are now required to file director information with the Registrar of Companies to be held in a central database that will be open to public inspection and 2016 saw the implementation of the requirement by the Bermuda Monetary Authority for Bermuda’s corporate service providers to be licensed and regulated.
The Regulatory Authority promotes fair business practices and promotes sustainable competition in the telecommunications sector, covering services such as fixed and mobile telephone, long distance, internet access and subscription television and Regulate electricity licensees to ensure compliance with the provisions of the Electricity Act 2016.
The Registrar of Companies, now a division of the Bermuda Monetary Authority, monitors and regulates all companies operating within Bermuda.
Expropriation and Compensation
The Housing Loan Insurance (Mortgage) Regulations 1984 and the Municipalities Act 1923 regulate expropriations. There is no history of expropriation in Bermuda without proper compensation and no expropriator acts against foreign investors.
Dispute Settlement
ICSID Convention and New York Convention
Through the United Kingdom, Bermuda has ratified the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention). Under the convention, foreign arbitral awards are enforceable within Bermuda’s domestic courts. Likewise, under the United Kingdom, Bermuda is also a member state to the International Centre for Settlement of Investment Disputes (ICSID Convention).
Bankruptcy Regulations
The Bankruptcy Act 1989, the Companies Act 1981, and the Companies (Winding Up) Rules 1982 govern bankruptcy and the winding-up of companies. The Supreme Court (the first instance court of general jurisdiction) administers the bankruptcy process. A foreign creditor may apply for the bankruptcy of an individual or for the winding-up of a company provided the creditor follows the procedures set out in the aforementioned statutes.
5.Protection of Property Rights
Real Property
Bermuda law recognizes and enforces secured interests in movable and real property. The Registry General, the Land Tax Office and the Land Valuations Office regulate the acquisition and disposition of property, including land, buildings, and mortgages. The Land Title Registration Act 2011 moved Bermuda from a deeds-based property transaction to a parcel-based land registration system.
Individuals, businesses or organizations who become landowners or own interests in land must apply to the Land Title and Registration Office to register land, register a new owner of a registered property following a sale and register an interest affecting registered land, such as a mortgage, lease or a right of way.
Intellectual Property Rights
Under the Ministry of Home Affairs, the Registry General manages the registration and restrictions for Intellectual Property. Intellectual Property registered in the UK can be applied in Bermuda if permission from the UK certificate of registration extends it.
In 2014, the Government of Bermuda reviewed its intellectual property legislation and in 2015 began dialog with the UK Intellectual Property Office to extend to Bermuda, as a UK Overseas Territory, the right to join the WTO’s Trade Related Intellectual Property Rights (TRIPS) Agreement, the Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks (“the Madrid Protocol”), the Paris Convention for the Protection of Literary and Artistic Works, the Patent Cooperation Treaty, and the Hague Agreement Concerning the International Registration of Designs. Bermuda has yet to sign the World Intellectual Property Organization (WIPO) internet treaties, the WIPO Copyright Treaty (WCT), or the WIPO Performances and Phonograms Treaty.
For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/.
Counterfeit goods are not prevalent in Bermuda. About 70 percent of imported goods derive from the United States.
For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/.
7.State-Owned Enterprises
Bermuda has some traditional state-owned enterprises (SOEs) that compete with the private sector, including public transit, waste management, and the postal service. Governance of SOEs is led by a politically appointed Cabinet Minister. SOEs must provide financial information to the Minister, who submits the information annually to the Auditor General. Most are prohibited from having a board of directors but may have an advisory board.
Bermuda also has quasi-autonomous, non-governmental organizations (QUANGOs)/Public Authorities, established under their respective legislative incorporation acts. The Government of Bermuda controls several other organizations either through the possession of shares or voting rights or by some other means. These organizations include the National Sports Center, Port Royal Golf Course, Ocean View Golf Course, Bermuda College, Bermuda Housing Trust, Bermuda Housing Corporation, Bermuda Land Development Corporation, West End Development Corporation, Bermuda Hospitals Board, Bermuda Health Council, the Regulatory Authority (telecommunications), Bermuda Tourism Authority, Bermuda Economic Development Corporation, Pension Commission, and parish councils.
SOEs purchase or supply goods or services locally. However, the vast majority of goods are imported, because Bermuda produces virtually nothing of its own. Bermuda’s state-owned businesses are heavily subsidized, but nothing in law prohibits private-sector competition. Bermuda has no state-owned banks, development banks, or sovereign wealth funds or other state-owned investment vehicle.
Bermuda is not a party to the Government Procurement Agreement (GPA) within the framework of the World Trade Organization.
Privatization Program
In 2017, a public-private partnership between the Bermuda Airport Authority, Government of Bermuda and Bermuda Skyport Corporation led to Bermuda’s new airport redevelopment project. The new L.F. Wade International Airport Passenger Terminal opened its doors to the public in December 2020. The Bermuda Airport Authority is the public sector party to the agreement, representing the interests of the Government of Bermuda and owner of the L.F. Wade International Airport. The Bermuda Skyport Corporation Limited is the private sector party to the project agreement. Skyport, a wholly owned subsidiary of Aecon, was responsible for delivering the new airport terminal building and is responsible for its ongoing operation and maintenance. The Authority continues to retain oversight of Skyport’s operations and maintenance for the duration of the project agreement.
Other examples of public-private partnerships are the King Edward VII Memorial Hospital Redevelopment Project and the establishment of the Bermuda Tourism Authority, formerly a government entity. In awarding contracts, the Government of Bermuda does not always follow established bidding processes if the Accountant General agrees that not doing so is in the public interest.
9.Corruption
Bermuda has laws, regulations and penalties to combat corruption, and effectively enforces them. The Good Governance Act 2012 discourages financial abuse by ministers and members of the civil service and protects whistleblowers. Under the Act, politicians who attempt to influence the award of government contracts could face a USD 10,000 fine and a year-long jail sentence. The penalties also apply to contractors and public officers found guilty of collusion. The Act also improved the transparency and accountability of government contracts, strengthened requirements for internal audits, and established an Office of Project Management and Procurement to strengthen oversight/control of government projects.
The Bermuda Criminal Code and the Proceeds of Crime Act provide for punishing corrupt practices in the area of investments, particularly for misleading statements and practices, market manipulation, and insider trading.
To distance itself from perceived impropriety often associated with offshore banking centers, Bermuda continues to update its regulatory framework to meet international standards, including those of the IMF, the Financial Action Task Force (FATF) and the OECD.
Resources to Report Corruption
Regulatory Authority
1st Floor, Craig Appin House
8 Wesley Street
Hamilton, HM11
441-405-6000 info@rab.bm
Bermuda Police Service
Organized Economic Crime Department
10 Headquarters Hill, Prospect
441-295-0011
Bermuda Monetary Authority
BMA House
43 Victoria Street, Hamilton
441-295-5278 www.bma.bm
Costa Rica
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
Costa Rica actively courts FDI, placing a high priority on attracting and retaining high-quality foreign investment. There are some limitations to both private and foreign participation in specific sectors, as detailed in the following section.
PROCOMER and CINDE lead Costa Rica’s investment promotion efforts. CINDE has had great success over the last several decades in attracting and retaining investment in specific areas, currently services, advanced manufacturing, life sciences, light manufacturing, and the food industry. In addition, the Tourism Institute (ICT) attends to potential investors in the tourism sector. CINDE, PROCOMER, and ICT are strong and effective guides and advocates for their client companies, prioritizing investment retention and maintaining an ongoing dialogue with investors.
Limits on Foreign Control and Right to Private Ownership and Establishment
Costa Rica recognizes and encourages the right of foreign and domestic private entities to establish and own business enterprises and engage in most forms of remunerative activity. The exceptions are in sectors that are reserved for the state (legal monopolies – see #7 below “State Owned Enterprises, first paragraph) or that require participation of at least a certain percentage of Costa Rican citizens or residents (electrical power generation, transport services, professional services, and aspects of broadcasting). Properties in the Maritime Zone (from 50 to 200 meters above the mean high-tide mark) may only be leased from the state and with residency requirements. In the areas of medical services, telecommunications, finance and insurance, state-owned entities dominate, but that does not preclude private sector competition. Costa Rica does not have an investment screening mechanism for inbound foreign investment, beyond those applied under anti-money laundering procedures. U.S. investors are not disadvantaged or singled out by any control mechanism or sector restrictions; to the contrary, U.S. investors figure prominently among the various major categories of FDI.
Other Investment Policy Reviews
The OECD accession process for Costa Rica, which began in 2015, resulted in a wide swath of legal and technical changes across the economy that should help the economy function in a more just and competitive manner. Toward that goal, the OECD will continue to monitor Costa Rican progress in a number of areas and will publish periodic progress updates and sector analysis that may be useful to prospective investors. A comprehensive review of the Costa Rican economy was published by the OECD at the conclusion of the accession process, which offered valuable insights into challenges faced by the economy, “OECD Economic Surveys Costa Rica 2020: https://www.oecd.org/countries/costarica/oecd-economic-surveys-costa-rica-2020-2e0fea6c-en.htm . In the same context, the OECD offers a review of international investment in Costa Rica: https://www.oecd.org/countries/costarica/OECD-Review-of-international-investment-in-Costa-Rica.pdf.
Additionally, in recent years the OECD has published a number of reports focused on specific aspects of economic growth and investment policy – several of these reports are referenced elsewhere in this report. For the index of OECD reports on Costa Rica, go to https://www.oecd.org/countries/costarica/3/.
The World Trade Organization (WTO) conducted its 2019 “Trade Policy Review” of Costa Rica in September of that year. Trade Policy Reviews are an exercise, mandated in the WTO agreements, in which member countries’ trade and related policies are examined and evaluated at regular intervals: https://www.wto.org/english/tratop_e/tpr_e/tp492_e.htm .
Costa Rica’s single-window business registration website, crearempresa.go.cr , brings together the various entities – municipalities and central government agencies – which must be consulted in the process of registering a business in Costa Rica. A new company in Costa Rica must typically register with the National Registry (company and capital registry), Internal Revenue Directorate of the Finance Ministry (taxpayer registration), National Insurance Institute (INS) (basic workers’ comp), Ministry of Health (sanitary permit), Social Security Administration (CCSS) (registry as employer), and the local Municipality (business permit). Legal fees are the biggest single business start-up cost, as all firms registered to individuals must hire a lawyer for a portion of the necessary paperwork. Crearempresa is rated 17th of 33 national business registration sites evaluated by “Global Enterprise Registration” (www.GER.co), which awards Costa Rica a relatively lackluster rating because Crearempresa has little payment facility and provides only some of the possible online certificates.
Traditionally, the Costa Rican government’s small business promotion efforts have tended to focus on participation by women and underserved communities. The National Institute for Women (INAMU), National Training Institute (INA), the Ministry of Economy (MEIC), and PROCOMER through its supply chain initiative have all collaborated extensively to promote small and medium enterprise with an emphasis on women’s entrepreneurship. In 2020, INA launched a network of centers to support small and medium-sized enterprises based upon the U.S. Small Business Development Center (SBDC) model.
Within the World Bank’s “Doing Business” evaluation for 2020, http://www.doingbusiness.org, Costa Rica is ranked 144/190 for “starting a business”, with the process taking 10 days.
Outward Investment
The Costa Rican government does not promote or incentivize outward investment. Neither does the government discourage or restrict domestic investors from investing abroad.
3. Legal Regime
Transparency of the Regulatory System
Costa Rican laws, regulations, and practices are generally transparent and meant to foster competition in a manner consistent with international norms, except in the sectors controlled by a state monopoly, where competition is explicitly excluded. Rule-making and regulatory authority is housed in any number of agencies specialized by function (telecom, financial, health, environmental) or location (municipalities, port authorities). Tax, labor, health, and safety laws, though highly bureaucratic, are not seen as unfairly interfering with foreign investment. It is common to have Professional Associations that play a regulatory role. For example, the Coffee Institute of Costa Rica (ICAFE), a private sector organization, promotes standardization of production models among national producers, roasters and exporters, as well as setting minimum market prices.
Costa Rica is a member of UNCTAD’s international network of transparent investment procedures (http://www.businessfacilitation.org). Within that context, the Ministry of Economy compiled the various procedures needed to do business in Costa Rica: https://tramitescr.meic.go.cr/. Accounting, legal, and regulatory procedures are transparent and consistent with international norms. The stock and bond market regulator SUGEVAL requires International Accounting Standards Board for public companies, while the Costa Rican College of Public Accountants (Colegio de Contadores Publicos de Costa Rica -CCPA) has adopted full International Financial Reporting Standards for non-regulated companies in Costa Rica; for more, see the international federation of accountants IFAC: https://www.ifac.org/about-ifac/membership/country/costa-rica.
Regulations must go through a public hearing process when being drafted. Draft bills and regulations are made available for public comment through public consultation processes that will vary in their details according to the public entity and procedure in question, generally giving interested parties sufficient time to respond. The standard period for public comment on technical regulations is 10 days. As appropriate, this process is underpinned by scientific or data-driven assessments. A similarly transparent process applies to proposed laws. The Legislative Assembly generally provides sufficient opportunity for supporters and opponents of a law to understand and comment on proposals. To become law, a proposal must be approved by the Assembly by two plenary votes. The signature of 10 legislators (out of 57) is sufficient after the first vote to send the bill to the Supreme Court for constitutional review within one month, although the court may take longer.
Regulations and laws, both proposed and final, for all branches of government are published digitally in the government registry “La Gaceta”: https://www.imprentanacional.go.cr/gaceta/. The Costa Rican American Chamber of Commerce (AmCham – http://amcham.co.cr ) and other business chambers closely monitor these processes and often coordinate responses as needed.
The government has mechanisms to ensure laws and regulations are followed. The Comptroller General’s Office conducts operational as well as financial audits and as such provides the primary oversight and enforcement mechanism within the Costa Rican government to ensure that government bodies follow administrative processes. Each government body’s internal audit office and, in many cases, the customer-service comptroller (Contraloria de Servicios) provide additional support.
There are several independent avenues for appealing regulatory decisions, and these are frequently pursued by persons or organizations opposed to a public sector contract or regulatory decision. The avenues include the Comptroller General (Contraloria General de la Republica), the Ombudsman (Defensor de los Habitantes), the public services regulatory agency (ARESEP), and the constitutional review chamber of the Supreme Court. The State Litigator’s office (Procuraduria General) is frequently a participant in its role as the government’s attorney.
Costa Rica is transparent in reporting its public finances and debt obligations, including explicit and contingent liabilities. The Ministry of Finance provides updates on public debt through the year, with the debt categorized as Central Government, Central Government and Non-Financial Sector, and Central Bank of Costa Rica: https://www.hacienda.go.cr/contenido/12519-informacion-de-la-deuda-publica
The review and enforcement mechanisms described above have kept Costa Rica’s regulatory system relatively transparent and free of abuse, but have also rendered the system for public sector contract approval exceptionally slow and litigious. There have been several cases in which these review bodies have overturned already-executed contracts, thereby interjecting uncertainty into the process. Bureaucratic procedures are frequently long, involved and can be discouraging to new investors.
While Costa Rica does consult with its neighbors on some regulations through participation in the Central American Integration System (SICA) (http://www.sica.int/sica/sica_breve.aspx), Costa Rica’s lawmakers and regulatory bodies habitually refer to sample regulations or legislation from OECD members and others. Costa Rica’s commitment to OECD standards and practices through the ongoing OECD accession process has accentuated this traditional use of best-practices and model legislation. Costa Rica regularly notifies all draft technical regulations to the WTO Committee on Technical Barriers in Trade (TBT).
Legal System and Judicial Independence
Costa Rica uses the civil law system. The fundamental law is the country’s political constitution of 1949, which grants the unicameral legislature a particularly strong role. Jurisprudence or case law does not constitute legal precedent but can be persuasive if used in legal proceedings. For example, the Chambers of the Supreme Court regularly cite their own precedents. The civil and commercial codes govern commercial transactions. The courts are independent, and their authority is respected. The roles of public prosecutor and government attorney are distinct: the Chief Prosecuting Attorney or Attorney General (Fiscal General) operates a semi-autonomous department within the judicial branch while the government attorney or State Litigator (Procuraduria General) works within the Ministry of Justice and Peace in the Executive branch. The primary criminal investigative body “Organismo de Investigacion Judicial” OIJ, is a semi-autonomous department within the Judicial Branch. Judgments and awards of foreign courts and arbitration panels may be accepted and enforced in Costa Rica through the exequatur process. The Constitution specifically prohibits discriminatory treatment of foreign nationals. The Costa Rican Judicial System addresses the full range of civil, administrative, and criminal cases with a number of specialized courts. The judicial system generally upholds contracts, but caution should be exercised when making investments in sectors reserved or protected by the Constitution or by laws for public operation. Regulations and enforcement actions may be, and often are, appealed to the courts.
Costa Rica’s commercial code details all business requirements necessary to operate in Costa Rica. The laws of public administration and public finance contain most requirements for contracting with the state.
The legal process to resolve cases involving squatting on land can be especially cumbersome. Land registries are at times incomplete or even contradictory. Buyers should retain experienced legal counsel to help them determine the necessary due diligence regarding the purchase of property.
Laws and Regulations on Foreign Direct Investment
Costa Rican websites are useful to help navigate laws, rules and procedures including that of the investment promotion agency CINDE, http://www.cinde.org/en (“essential info”), the export promotion authority PROCOMER, http://www.procomer.com/ (incentive packages), and the Health Ministry, https://www.ministeriodesalud.go.cr/ (product registration and import/export). In addition, the State Litigator’s office (www.pgr.go.cr) the “SCIJ” tab compiles relevant laws.
Competition and Antitrust Laws
Two public institutions are responsible for consumer protection as it relates to monopolistic and anti-competitive practices. The “Commission for the Promotion of Competition” (COPROCOM), an autonomous agency housed in the Ministry of Economy, Industry and Commerce, is charged with investigating and correcting anti-competitive behavior across the economy. The Telecommunications Superintendence (SUTEL) shares that responsibility with COPROCOM in the Telecommunications sector. Both agencies are charged with defense of competition, deregulation of economic activity, and consumer protection. COPROCOM has traditionally been underfunded and weak, although a law passed in 2019 is designed to change that by giving COPROCOM greater regulatory independence and sufficient operating budget.
The three principal expropriating government agencies in recent years have been the Ministry of Public Works – MOPT (highway rights-of-way), the state-owned Costa Rican Electrical Institute – ICE (energy infrastructure), and the Ministry of Environment and Energy – MINAE (National Parks and protected areas). Expropriations generally conform to Costa Rica’s laws and treaty obligations, but there are allegations of expropriations of private land without prompt or adequate compensation.
Article 45 of Costa Rica’s Constitution stipulates that private property can be expropriated without proof that it is done for public interest. The 1995 Law 7495 on expropriations further stipulates that expropriations require full and prior payment. The law makes no distinction between foreigners and nationals. Provisions include: (a) return of the property to the original owner if it is not used for the intended purpose within ten years or, if the owner was compensated, right of first refusal to repurchase the property back at its current value; (b) detailed provisions for determination of a fair price and appeal of that determination on the part of the former owner; (c) provision that upon full deposit of the calculated amount the government may take possession of land despite the former owner’s dispute of the price; and (d) provisions providing for both local and international arbitration in the event of a dispute. The expropriations law was amended in 1998, 2006, and 2015 to clarify and expedite some procedures, including those necessary to expropriate land for the construction of new roads. (For full detail go to https://PGRweb.go.cr/SCIJ . When reviewing the articles of the law go to the most recent version of each article.)
There is no discernible bias against U.S. investments, companies, or representatives during the expropriations process. Costa Rican public institutions follow the law as outlined above and generally act in a way acceptable to the affected landowners. However, when landowners and government differ significantly in their appraisal of the expropriated lands’ value, the resultant judicial processes generally take years to resolve. In addition, landowners have, on occasion, been prevented from developing land which has not yet been formally expropriated for parks or protected areas; the courts will eventually order the government to proceed with the expropriations but the process can be long.
Dispute Settlement
ICSID Convention and New York Convention
In 1993, Costa Rica became a member state to the convention on International Center for Settlement of Investment Disputes (ICSID Convention). Costa Rica paid the awards resulting from unfavorable ICSID rulings, most recently in 2012 regarding private property belonging to a German national within National Park boundaries.
Costa Rica is a signatory of the convention on the Recognition and Enforcement of Arbitral Awards (1958 New York Convention). Consequently, within the Costa Rican legal hierarchy the Convention ranks higher than local laws although still subordinate to the Constitution. Costa Rican courts recognize and enforce foreign arbitral awards. Judgments of foreign courts are recognized and enforceable under the local courts and the Supreme Court.
Investor-State Dispute Settlement
Disputes between investors and the government grounded in the government’s alleged actions or failure to act – termed investment disputes ‒ may be resolved administratively or through the legal system.
Under Chapter 10 of the CAFTA-DR agreement, Costa Rica legally obligated itself to answer investor arbitration claims submitted under ICSID or the United Nations Commission on International Trade Law (UNCITRAL), and accept the arbitration verdict. To date there have been two claims by U.S. citizen investors under the provisions of CAFTA-DR. Extensive documentation for both cases is filed on the Foreign Trade Ministry (COMEX) website: http://www.comex.go.cr/tratados/cafta-dr/, under “documentos relevantes”. No local court denies or fails to enforce foreign arbitral awards issued against the government.
In some coastal areas of Costa Rica, there is a history of invasion and occupation of private property by squatters who are often organized and sometimes violent. It is not uncommon for squatters to return to the parcels of land from which they were evicted, requiring expensive and potentially dangerous vigilance over the land. Nevertheless, in recent years the Supreme Court has refused title to squatters on land already titled, thus removing some incentive for persistent squatters.
International Commercial Arbitration and Foreign Courts
The right to solve disputes through arbitration is guaranteed in the Costa Rican Constitution. For years, the practical application was regulated by the Civil Procedural Code, which made it ineffective with no arbitration cases until 1998, the year the local arbitration law #7727 was enacted. A 2011 law on International Commercial Arbitration (Law 8937), drafted from the UNCITRAL model law (version 2006), brought Costa Rica to a dual arbitration system, with two valid laws, one law for local arbitration and one for international arbitration. Under the local act, arbitration has to be conducted in Spanish and only attorneys admitted to the local Bar Association may be named as arbitrators. All cases brought before an arbitration panel, under the rules of local arbitration centers, will normally be resolved within two months of the closing arguments hearing. Parties can withdraw their case or reach an out-of-court settlement before the arbitral tribunal delivers an award. If the award meets the review criteria, the losing party has the option to request that the Costa Rican Supreme Court examine the award, but only on procedural matters and never on the merits. Under the local Law for International Arbitration, proceedings may be held in English and foreign attorneys are authorized to serve as arbitrators. The following arbitration centers are in operation in Costa Rica:
Centro de Conciliacion y Arbitraje. Costa Rican Chamber of Commerce (CCA)
Centro de Resolución de Controversias. Costa Rican Association of Engineers and Architects (CFIA)
Centro Internacional de Conciliacion y Arbitraje (CICA). Costa Rican American Chamber of Commerce (AMCHAM)
Centro de Arbitraje y Mediacion/Centro Iberoamericano de Arbitraje (CAM). Costa Rican Bar Association.
Beyond such arbitration options, law #7727 also facilitates courts’ enforcement of conciliation agreements reached under the law. Some universities and municipalities operate “Casas de Justicia” (Justice Houses) open to the public and offering mediation and conciliation at no cost. Law #8937 empowered local arbitration centers, beginning with that pertaining to the Engineers and Architects’ Association, to implement Dispute Board regulations, as a method to address construction disputes. Dispute Boards have acquired importance lately in construction contracts; with CFIA implementing new by-laws favoring the use of Dispute Boards in such contracts.
Outcomes in local courts do not appear to favor state-owned enterprises (SOEs) any more or less than other actors. SOEs can sign arbitral agreements, but must follow strict public laws to obtain the permissions necessary and follow correct procedures, otherwise the agreement could be voided. Once SOEs find themselves in arbitration, they are subject to the same standards and treatment as any other actor.
U.S. companies cite the unpredictability of outcomes as a source of rising judicial insecurity in Costa Rica. The legal system is significantly backlogged, and civil suits may take several years from start to finish. In the tax arena, several U.S. businesses have objected to the Ministry of Finance’s aggressive stance in interpreting transfer pricing principles, compounded by what the businesses perceive as a lack of specialized judges to competently address such cases. Some U.S. firms and citizens satisfactorily resolved their cases through the courts, while others see proceedings drawn out over a decade without a final resolution. Commercial arbitration has become an increasingly common dispute resolution mechanism.
Bankruptcy Regulations
The Costa Rican bankruptcy law, addressed in both the commercial code and the civil procedures code, has long been similar to corresponding U.S. law. In February 2021, Costa Rica’s National Assembly approved a comprehensive bankruptcy law reform #21.436 “LEY CONCURSAL”. As of late March 2021, the bill was waiting to be signed by the President and published in the official Gazette. It will come into effect six months after publication.
The new law will ease bankruptcy processes and help companies in financial distress to move through the “administrative intervention” intended to save the companies. The previous law too often ended with otherwise viable companies ceasing operations, rather than allowing them to recover, due to a bias towards dissolution of companies in distress. The new law simplifies processes in court, reduces time and costs, and allows judges to act fast, with a system that is clear and expeditious.
As in the United States, penal law will also apply to criminal malfeasance in some bankruptcy cases. In the World Bank’s “resolving insolvency” ranking within the 2020 “Doing Business” report, Costa Rica ranked #137 of 190 (http://www.doingbusiness.org/rankings).
5. Protection of Property Rights
Real Property
The laws governing investments in land, buildings, and mortgages are generally transparent. Secured interests in both chattel and real property are recognized and enforced. Mortgage and title recording are mandatory and the vast majority of land in Costa Rica has clear title. However, the National Registry, the government entity that records property titles, has been successfully targeted on occasion with fraudulent filing, which has led in some cases to overlapping title to real property. Costa Rican law allows long-time occupants of a property belonging to someone else (i.e. squatters) to eventually take legal possession of that property if unopposed by the property owner. Potential investors in Costa Rican real estate should also be aware that the right to use traditional paths is enshrined in law and can be used to obtain court-ordered easements on land bearing private title; disputes over easements are particularly common when access to a beach is an issue. Costa Rica is ranked 49th of 190 for ease of “registering property” within the World Bank 2020 Doing Business Report.
Foreigners are subject to the same land lease and acquisition laws and regulations as Costa Ricans with the exception of concessions within the Maritime Zone (Zona Maritima Terrestre – ZMT). Almost all beachfront is public property for a distance of 200 meters from the mean high tide line, with an exception for long-established port cities and a few beaches such as Jaco. The first 50 meters from the mean high tide line cannot be used for any reason by private parties. The next 150 meters, also owned by the state, is the Maritime Zone and can only be leased from the local municipalities or the Costa Rican Tourism Institute (ICT) for specified periods and particular uses, such as tourism installation or vacation homes. Concessions in this zone cannot be given to foreigners or foreign-owned companies.
Intellectual Property Rights
Costa Rica’s legal structure for protecting intellectual property rights (IPR) is quite strong, but enforcement is sporadic and does not always get the attention and resources required to be effective. In the 2019 United States Trade Representative (USTR) Special 301 Report, USTR noted the substantial progress made by Costa Rica in protecting IPR. As a result, USTR did not include Costa Rica in the 2020 or 2021 Special 301 reports. Costa Rica was not listed in USTR’s 2020 Review of Notorious Markets for Counterfeiting and Piracy.
Costa Rica is a signatory of many major international agreements and conventions regarding intellectual property. Building on the existent regulatory and legal framework, the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) required Costa Rica to strengthen and clarify its IPR regime further, with several new IPR laws added to the books in 2008. Prior to that, the World Trade Organization’s Agreement on Trade-Related Aspects of Intellectual Property (TRIPS) took effect in Costa Rica on January 1, 2000. In 2002, Costa Rica ratified the World Intellectual Property Organization (WIPO) Performances and Phonograms Treaty and the WIPO Copyright Treaty.
The IP Registry presented two bills to the General Directorate of the National Registry on January 12, 2021 for approval before sending to the National Assembly for final approval. In 2020, the IP Registry drafted a bill that will include the new proposed reform of the Law on Invention Patents, Industrial Designs, and Utility Models. This bill will adjust the current law to international standards to make it a more useful tool for the promotion of innovation in the country. Additionally, the National Registry merged the Law on Copyrights and Related Rights and the Law on Procedures for the Enforcement of Intellectual Property Rights into a single draft bill, with the aim of incorporating the provisions of the Marrakesh Treaty to Facilitate Access to Published Works for Persons Who Are Blind, Visually Impaired or Otherwise Print Disabled and the Beijing Treaty on Audiovisual Performances.
On June 22, 2020, the General Directorate of the National Registry merged the Registry of Industrial Property and the Registry of Copyright and Related Rights into a single Registry of Intellectual Property, improving the National Registry’s efficiency and fulfilling a reform called for in the National Registry Law from 2010.
While online piracy remains a concern for the country, in February 2019, Costa Rica modified the existing regulation on internet service providers (ISPs) to shorten significantly the 45 days previously allowed for notice and takedown of pirated online content, creating an expeditious safe harbor system for ISPs in Costa Rica. To meet a longstanding CAFTA-DR requirement mandating government use of legal software, in March 2020, the National Registry launched LegalSoft, a new software program to track software licenses and renewal dates across 95 government institutions, with all agencies set to report by July 2020, followed by external audits to verify implementation. With the tracking program now in place, Costa Rica has a systematic solution for monitoring and ensuring the purchase and use of legal software.
In August 2020, Costa Rica’s Intellectual Property Registry launched a WIPO online platform that will allow interested parties to submit online applications to register trademarks. The online service has improved efficiency and encouraged registrations from small-to-medium-sized companies across the country. During 2019, the National Registry of Industrial Property announced implementation of TMview and DesignView, search tools that allow users to consult trademarks and industrial design data.
The Costa Rican government does not release official statistics on the seizure of counterfeit goods, but the Chamber of Commerce compiles statistics from Costa Rican government sources: http://observatorio.co.cr/ In 2020, Costa Rica’s Economic Crimes Prosecutor investigated 14 IPR cases, down from the totals in the last four years. As in years past, prosecutors ultimately dismissed several cases due to lack of interest, collaboration, and follow-up by the representatives of trademark rights holders. Government authorities complained that the lack of response by trademark representatives is a recurring behavior dating back to at least 2016 and may explain the drop in IPR cases. In 2020, the Prosecutor’s Office established a specialized cybercrime unit with the purpose of improving the country’s response toward computer-oriented crimes, including copyrights infringements. The Costa Rican government publishes statistics on IPR criminal enforcement at http://www.comex.go.cr/estad percentC3 percentADsticas-y-estudios/otras-estad percentC3 percentADsticas/.
On September 4, 2019, Costa Rican Customs issued an executive decree titled “Contact of the Representatives of Intellectual Property Rights for Enforcement Issues” establishing a formal customs recordation system for trademarks that allows customs officers to make full use of their ex officio authority to inspect and detain goods. Under the decree, customs offices have the power to include new trademark rights holders in a formal database for use by customs officials in the field. As of 2020, 150 trademarks are included in this database.
For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/. Resources for Rights Holders
Resources for Rights Holders
Contact at the U.S. Embassy in Costa Rica:
Attention: Investment Climate Statement
Economics Section
Embassy San Jose, Costa Rica
2519-2000 SanJoseEcon@state.gov
7. State-Owned Enterprises
Costa Rica’s total of 28 state-owned enterprises (SOEs) are commonly known by their abbreviated names. They include monopolies in petroleum-derived fuels (RECOPE), lottery (JPS), railroads (INCOFER), local production of ethanol (CNP/FANAL), water distribution (AyA), and electrical distribution (ICE, CNFL, JASEC, ESPH). SOEs have market dominance in insurance (INS), telecommunications (ICE, RACSA, JASEC, ESPH) and finance (BNCR, BCR, Banco Popular, BANHVI, INVU, INFOCOOP). They have significant market participation in parcel and mail delivery (Correos) and ports operation (INCOP and JAPDEVA). Six of those SOEs hold significant economic power with revenues exceeding 1 percent of GDP: ICE, RECOPE, INS, BNCR, BCR and Banco Popular. The 2020 OECD report “Corporate Governance in Costa Rica” reports that Costa Rican SOE employment is 1.9% of total employment, somewhat below the OECD average of 2.5%. Audited returns for each SOE may be found on each company’s website, while basic revenue and costs for each SOE are available on the General Controller’s Office (CGR) “Sistema de Planes y Presupuestos” https://www.cgr.go.cr/02-consultas/consulta-pp.html. The Costa Rican government does not currently hold minority stakes in commercial enterprises.
No Costa Rican state-owned enterprise currently requires continuous and substantial state subsidy to survive. Many SOEs turn a profit, which is allocated as dictated by law and boards of directors. Financial allocations to and earnings from SOEs may be found in the CGR “Sistema de Informacion de Planes y Presupuestos (SIPP)”.
U.S. investors and their advocates cite some of the following ways in which Costa Rican SOEs competing in the domestic market receive non-market-based advantages because of their status as state-owned entities.
According to Law 7200, electricity generated privately must be purchased by public entities and the installed capacity of the private sector is limited to 30 percent of total electrical installed capacity in the country: 15 percent to small privatelyowned renewable energy plants and 15 percent to larger “buildoperatetransfer” (BOT) operations.
Telecoms and technology sector companies have called attention to the fact that government agencies often choose SOEs as their telecom services providers despite a full assortment of privatesector telecom companies. The Information and Telecommunications Business Chamber (CAMTIC) has been advocating for years against what its members feel to be unfair use by government entities of a provision (Article 2) in the public contracting law that allows noncompetitive award of contracts to public entities (also termed “direct purchase”) when functionaries of the awarding entity certify the award to be an efficient use of public funds. CAMTIC has compiled detailed statistics showing that while the yearly total dollar value of Costa Rican government direct purchases in the IT sector under Article 2 has dropped considerably from USD 226 million in 2017, to $72.5 million in 2018, USD 27.5 million in 2019, and USD 7.1 million in 2020, the number of purchases has actually increased from 56 purchases in both 2017 and 2018 to 86 in 2019 and 83 in 2020.
The stateowned insurance provider National Insurance Institute (INS) has been adjusting to private sector competition since 2009 but in 2020 still registered 70 percent of total insurance premiums paid; 13 insurers are now registered with insurance regulator SUGESE: (https://www.sugese.fi.cr/SitePages/index.aspx). Competitors point to unfair advantages enjoyed by the stateowned insurer INS, including a strong tendency among SOE’s to contract their insurance with INS.
Costa Rica does not have a privatization program and the markets that have been opened to competition in recent decades – banking, telecommunications, insurance and Atlantic Coast container port operations – were opened without privatizing the corresponding state-owned enterprise(s). However, in response to the growing fiscal deficit, the current administration has signaled willingness to privatize two relatively minor state owned enterprises: the state liquor company (Fanal), and the International Bank of Costa Rica (Bicsa).
9. Corruption
Costa Rica has laws, regulations, and penalties to combat corruption. Though the resources available to enforce those laws are limited, Costa Rica’s institutional framework is strong, such that those cases that are prosecuted are generally perceived as legitimate. Anti-corruption laws extend to family members of officials, contemplate conflict-of-interest in both procurement and contract award, and penalizes bribery by local businessmen of both local and foreign government officials. Public officials convicted of receiving bribes are subject to prison sentences up to ten years, according to the Costa Rican Criminal Code (Articles 347-360). Entrepreneurs may not deduct the costs of bribes or any other criminal activity as business expenses. In recent decades, Costa Rica saw several publicized cases of firms prosecuted under the terms of the U.S. Foreign Corrupt Practices Act.
Costa Rica ratified the Inter-American Convention Against Corruption in 1997. This initiative of the OECD and the Organization of American States (OAS) obligates subscribing nations to implement criminal sanctions for corruption and implies a series of follow up actions: http://www.oas.org/juridico/english/cri.htm. Costa Rica also ratified the UN Anti-Corruption Convention in March 2007, has been a member of the Open Government Partnership (OGP) since 2012, and as of July 2017 is a party to the OECD Convention on Combatting Bribery of Foreign Public Officials.
The Costa Rican government has encouraged civil society interest in good governance, open government and fiscal transparency, with a number of NGO’s operating unimpeded in this space. While U.S. firms do not identify corruption as a major obstacle to doing business in Costa Rica, some have made allegations of corruption in the administration of public tenders and in approvals or timely processing of permits. Developers of tourism facilities periodically cite municipal-level corruption as a problem when attempting to gain a concession to build and operate in the restricted maritime zone.
Name: Armando López Baltodano
Title: Procurador Director de la Area de la Etica Publica, PGR
Organization: Procuraduria General de la Republica (PGR)
Address: Avenida 2 y 6, Calle 13. San Jose, Costa Rica.
Telephone Number: 2243-8330, 2243-8321
Email Address: evelynhk@pgr.go.cr
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
Haiti’s legislation encourages foreign direct investment. Import and export policies are non-discriminatory and are not based on nationality. Haitian and foreign investors have the same rights, privileges and protections under the 1987 investment code. The Haitian government has made some progress in recent years to improve the legal framework, create and strengthen core public institutions, and enhance economic governance. The Haitian Central Bank continues to work with the International Monetary Fund (IMF) and the World Bank to implement measures aimed at creating a stable macroeconomic environment. The IMF concluded its most recent Article IV economic consultation with Haiti in January 2020 (www.imf.org/en/countries/hti). In April 2020, the IMF loaned Haiti $112 million through its rapid credit facility mechanism to provide liquidity to Haiti for expenditures to address COVID-19.
While not discriminatory towards international investment specifically, the Haitian government’s economic policies fall short of providing a sound enabling environment for foreign direct investment. The Haitian Central Bank announced in August 2020 the intention to use up to $150 million of its international reserves to intervene in the foreign exchange market, resulting in a rapid appreciation of the country’s local currency, the Haitian gourde (HTG), relative to the U.S. dollar (USD). The gourde appreciated from about 121 HTG/USD to 62 HTG/USD over two months and began steadily depreciating in November 2020 to its rate of 80 HTG/USD as of April 2021. The gourde’s sudden and unexpected change in value has resulted in sustained increased costs for export-oriented businesses, including international investors.
Despite passing anti-money laundering and anti-corruption laws to ensure that Haiti’s legislation corresponds with international standards, the government has not strictly followed the legal framework of these laws, and has failed to incentivize investment in Haiti. In early 2017, the Parliament enacted legislation making electronic signatures and electronic transactions legally binding. Other pieces of legislation that may improve Haiti’s investment climate remain pending, including incorporation procedures, a new mining code, and an insurance code. Haiti’s Finance Ministry is implementing measures to improve revenue collection and control spending. The Ministry signed an agreement with Haiti’s Central Bank in November 2019 to strengthen fiscal discipline and limit government monetary financing. Despite these measures, the rate of monetary financing over fiscal year (FY) 2021 appears to be outpacing the annual budgeted amount of $462 million (3.6 percent of FY2021 IMF-projected GDP), standing at $377 million (3.0 percent of GDP) as of March 4, 2021, less than six months into the fiscal year. The Center for the Facilitation of Investments (CFI), which operates under Haitian Ministry of Commerce oversight, was established to promote domestic and international investment opportunities in Haiti. In concept, the CFI could streamline the investment process by: working with other government agencies to simplify procedures related to trade and investment; providing updated economic and commercial information to local and foreign investors; making proposals on investor incentives; and promoting investment in priority sectors. The CFI aims to offer tailored services to large international investors, but has been unable to operate at full capacity during the pandemic. In practice, the CFI has made limited progress to incentivize job creation and boost national production in agriculture, apparel assembly, and tourism. As an example, prior to the COVID-19 pandemic, Haiti’s Tourism Association reported a 60 percent loss of jobs in the sector in 2019.
Limits on Foreign Control and Right to Private Ownership and Establishment
The Haitian government does not impose discriminatory requirements on foreign investors. Haitian laws related to residency status and employment are reciprocal. Foreigners who are legal residents in Haiti and wish to engage in trade have, within the framework of laws and regulations, the same rights granted to Haitian citizens. However, Article 5 of the Decree on the Profession of Merchants reserves the function of manufacturer’s agent for Haitian nationals.
Foreign firms are also encouraged to participate in government-financed development projects. Performance requirements are not imposed on foreign firms as a condition for establishing or expanding an investment, unless indicated in a signed contract.
Foreign investors are permitted to own 100 percent of a company or subsidiary. As a Haitian entity, such companies enjoy all rights and privileges provided under the law. Additionally, foreign investors are permitted to operate businesses without equity-to-debt ratio requirements. Accounting law allows foreigners to capitalize using tangible and intangible assets in lieu of cash investments.
Foreign investors are free to enter into joint ventures with Haitian citizens. The distribution of shares is a private matter between the two parties. However, the government regulates the sale and purchase of company shares. Investment in certain sectors, such as health and agriculture, requires special Haitian government authorization. Investment in “sensitive” sectors such as electricity, water, telecommunications, and mining require a Haitian government concession as well as authorization from the appropriate governmental agency. In general, natural resources are the property of the state, and the exploitation of mineral and energy resources requires concessions and permitting from the Ministry of Public Works’ Bureau of Mining and Energy. Mining, prospecting, and operating permits may only be granted to companies established and resident in Haiti, and the establishment of new industrial mines cannot take place until an elected parliament passes an updated mining law, along the lines of a draft law initially presented in 2017.
Entrepreneurs are free to dispose of their properties and assets, and to organize production and marketing activities in accordance with local laws.
Investors in Haiti can create the following types of businesses: sole proprietorship, limited or general partnership, joint-stock company, public company (corporation), subsidiary of a foreign company, and co-operative society. The most common business structures in Haiti are corporations. A draft law (Société de Droits law), which would facilitate the creation of other types of businesses in Haiti, such as LLCs, remains pending parliamentary approval when parliament is restored.
Other Investment Policy Reviews
Haiti’s last investment policy review from the United Nations Conference on Trade and Development occurred in 2012. In general, Haiti’s political instability, weak institutions, and inconsistent economic policies impede the country’s ability to attract and direct foreign direct investment.
The World Trade Organization’s (WTO) 2015 Trade Policy Review stated that Haiti’s Investment Code and Law on Free Trade Zones is fully compliant with the Agreement on Trade-Related Investment Measures. The full report can be viewed at https://www.wto.org/english/tratop_e/tpr_e/tp427_e.htm.
Business Facilitation
While the Haitian government has made efforts to facilitate the launching and operating of businesses, the average time to start a business in Haiti is 189 days, according to the World Bank’s 2020 Ease of Doing Business Report. At present, it takes between 90 and 120 days to complete registration with the Commercial Registry at the Ministry of Commerce and obtain the authorization of operations (Droit de fonctionnement). The Center for Facilitation of Investments (CFI), a public-private organization, also offers a service providing pre-registered and fully authorized companies in manufacturing, agribusiness, and real estate the opportunity to reduce their registration time. Once the Inter-Ministerial Investment Commission validates these established companies, the shares are transferred to the new owners.
Both foreign and domestic businesses can register at Haiti’s CFI: http://cfihaiti.com. All businesses must register with the Ministry of Commerce, the Haitian tax office, the state-owned Banque Nationale de Crédit, the social security office, and the retirement insurance office.
The Ministry of Commerce and Industry’s internet registry allows investors to search for and verify the existence of a business in Haiti. The registry will eventually provide online registration of companies through an electronic one-stop shop. In October 2020, CFI launched Spotlight, an initiative with the aim of promoting visibility of companies already established in Haiti and registered in the CFI database.
Outward Investment
Neither the law nor the Haitian government restricts domestic investors from investing abroad. Still, Haiti’s outward investment is limited to a few enterprises with small investments. These investors are generally businesspersons with dual citizenship and others of Haitian origin who presently reside in the country in which their firms operate. The majority of these firms are service providers and not investment firms. There is no current program or incentive in place to encourage Haitian entrepreneurs to invest abroad.
3. Legal Regime
Transparency of the Regulatory System
Haitian laws are written to allow for transparency and to be applied universally. However, Haitian officials do not uniformly enforce these laws and the bureaucratic “red tape” in the Haitian legal system is often excessive.
Tax, labor, health, and safety laws and policies are also loosely enforced. The private sector often provides services, such as healthcare, to employees that are not entitled to coverage under Haitian government agencies or institutions. All regulatory processes are managed exclusively by the government and do not involve the private sector and non-governmental organizations.
Draft bills or regulations are available to the public through “Le Moniteur,” the official journal of the Haitian government, and information is sometimes made available online. Le Moniteur contains public agency rules, decrees, and public notices that Les Presses Nationales d’Haiti publishes.
According to the World Bank, Haitian ministries and regulatory agencies do not develop forward regulatory plans, nor do they publish proposed regulations prior to their adoption. Haitian law does not require a timeframe for public comment or review of proposed regulations.
International Regulatory Considerations
Haiti is a member of the Caribbean Community (CARICOM), an organization of 15 states and dependencies established to promote regional economic integration. The CARICOM Single Market and Economy (CSME), created in 1989, aims to advance the region’s integration into the global economy by facilitating free trade in goods and services, and the free movement of labor and capital. CSME became operational in January 2006 in 12 of the 15 member states. Haiti, as a member of CARICOM, has expressed an interest in participating fully in CSME. However, to become eligible, Haiti must amend its customs code to align with CARICOM and WTO standards.
Haiti also adheres to the compulsory jurisdiction of the International Court of Justice on issues of international law, and of the Caribbean Court of Justice for the settlement of trade disputes within CARICOM.
Haiti is an original member of the WTO. As such, it has made several commitments to the WTO with regard to the financial services sector. These commitments include allowing foreign investment in financial services, such as retail, commercial, investment banking, and consulting. One foreign bank, Citibank, operates in Haiti. Haiti has committed to notifying the WTO Committee on Technical Barriers to Trade of all draft technical regulations. However, Haiti is not party to the Trade Facilitation Agreement.
Legal System and Judicial Independence
As a former French colony, Haiti adopted the French civil law system. The Supreme Court, also known as the Superior Magistrate Council, is the highest court of the nation, followed in descending order by the Court of Appeals and the Court of First Instance. Haiti’s commercial code dates back to 1826 and underwent significant revisions in 1944. There are few commercial laws in place and there are no commercial courts. Injunctive relief is based upon penal sanctions rather than securing desirable civil action. Similarly, contracts to comply with certain obligations, such as commodities futures contracts, are not enforced. Haitian judges do not have specializations, and their knowledge of commercial law is limited. Utilizing Haitian courts to settle disputes is a lengthy process and cases can remain unresolved for years. Bonds to release assets frozen through litigation are unavailable. Business litigants often pursue out-of-court settlements.
Haiti’s legal system often presents challenges for U.S. citizens seeking to resolve legal disputes. In Haiti, judges are appointed for a set number of years. Public prosecutors are direct employees of the Ministry of Justice and can be transferred or suspended by the executive branch at any time. There are numerous allegations of undue political interference. Additionally, there are persistent claims that some Haitian officials use their public office to influence commercial dispute outcomes for personal gain. The Haitian government receives international assistance to increase the capacity of its oversight institutions and the capacity of the national police.
Laws and Regulations on Foreign Direct Investment
The Investment Code prohibits fiscal and legal discrimination against foreign investors. The code explicitly recognizes the crucial role of foreign direct investment in promoting economic growth. It also aims to facilitate, liberalize, and stimulate private investment, and contains exemptions to promote investments that enhance competitiveness in sectors deemed priorities, especially export-oriented sectors. Tax incentives, such as reductions on taxable income and tax exemptions, are designed to promote private investment. Additionally, the code grants Haitian and foreign investors the same rights, privileges, and equal protection. Foreign investors must be legally registered and pay appropriate local taxes and fees.
The code also established an Inter-Ministerial Investment Commission (CII) to examine investor eligibility for license exemptions as well as customs and tariff advantages. The Center for Facilitation of Investments (CFI) is the Technical Secretariat of the CII. The Prime Minister, or his delegate, chairs the CII, which is composed of representatives of the Ministries of Economy and Finance, Commerce, and Tourism, as well as those ministries that oversee specific areas of investment. The CII must authorize all business sales, transfers, mergers, partnerships, and fiscal exemptions within the scope of the code. The CII also manages the process of fining and sanctioning enterprises that disregard the code.
The following areas are often noted by businesses as challenging aspects of Haitian law: operation of the judicial system; publication of laws, regulations, and official notices; establishment of companies; land tenure and real property law and procedures; bank and credit operations; insurance and pension regulation; accounting standards; civil status documentation; customs law and administration; international trade and investment promotion; foreign investment regulations; and regulation of market concentration and competition. Although these deficiencies hinder business activities, they are not specifically aimed at foreign firms; rather, they appear to affect both foreign and local companies.
Competition and Antitrust Laws
There is currently no law to regulate competition. Haiti is one of the most open economies in the region. The investment code provides the same rights, privileges and equal protection to local and foreign investors. Anti-corruption legislation also criminalizes nepotism and the dissemination of inside information on public procurement processes. Haiti does not, however, have anti-trust legislation.
Expropriation and Compensation
The 1987 Constitution allows expropriation or dispossession only for reasons of public interest or land reform and is subject to prior payment of fair compensation as determined by an expert. If the initial project for which the expropriation occurred is abandoned, the Constitution stipulates that the expropriation will be annulled, and the property returned to the original owner. The Constitution prohibits nationalization and confiscation of real and personal property for political purposes or reasons.
Title deeds are vague and often insecure. The Haitian government established the National Institute of Agrarian Reform to implement expropriations of private agricultural properties with appropriate compensation. The agrarian reform project, initiated under the Preval administration (1996-2001), was controversial among both Haitian and U.S. property owners. There have been complaints of non-compensation for the expropriation of property. Moreover, a revision of the land tenure code, intended to address issues related to the lack of access to land records, surveys, and property titles in Haiti, has been pending in parliament since 2014. A partnership between the private sector, Haitian government, and international organizations resulted in a guide on security land rights in Haiti, which was translated in 2016 and can be found here: https://www.land-links.org/wp-content/uploads/2019/09/Haiti-Land-Manual-2.pdf.
Dispute Settlement
ICSID Convention and New York Convention
In 2009, Haiti ratified the 1965 International Convention on the Settlement of Investment Disputes between states and nationals of other states (ICSID). Under the convention, foreign investors can call for ICSID arbitration for disputes with the state. The Haitian government appears to recognize that weak enforcement mechanisms and a lack of updated laws to handle modern commercial disputes severely compromises the protections and guarantees that Haitian law extends to investors.
Haiti is not a signatory to the Inter-American-U.S. Convention on International Commercial Arbitration of 1975 (Panama Convention).
Investor-State Dispute Settlement
Haiti is a signatory to the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which provides for the enforcement of an agreement to arbitrate present and future investment disputes. Under the convention, Haitian courts can enforce such an agreement by referring the parties to arbitration. Disputes between foreign investors and the state can be settled in Haitian courts or through international arbitration, though claimants must select one to the exclusion of the other. A claimant dissatisfied with the ruling of the court cannot request international arbitration after the ruling is issued. The law provides mechanisms on the procedures a court should follow to enforce foreign arbitral awards issues.
While there is not a consistent history of extrajudicial action against foreign investors, a number of investment dispute cases have been reported by U.S. companies over the past 10 years, although the most recent expropriation claim occurred in 2013. Disputes most frequently related to disagreements between business owners and Haitian tax and licensing authorities, a lack of clarity as to land ownership and other disputed property claims, and disputes over the enforcement of government contracts and concessions. Although some businesses were able to resolve disputes through the court system or by otherwise settling with the Haitian government, business owners appear to have accepted their losses and abandoned other legacy cases.
International Commercial Arbitration and Foreign Courts
International arbitration is strongly encouraged as a means of avoiding lengthy domestic court procedures. In principle, foreign judgments are enforceable under local courts. In 2005, the Haitian Chamber of Commerce and Industry and the Inter-American Development Bank jointly developed the Haitian Arbitration and Conciliation Chamber, which provides mechanisms for conciliation and arbitration in private commercial disputes.
Bankruptcy Regulations
Haiti’s bankruptcy law was enacted in 1826 and modified in 1944. There are three phases of bankruptcy under Haitian law. In the first stage, payments cease to be made and bankruptcy is declared. In the second stage, a judgment of bankruptcy is rendered, which transfers the rights to administer assets from the debtor to the Director of the Haitian Tax Authority (Direction Generale des Impots). In this phase, assets are sealed, and the debtor is confined to debtor’s prison. In the last stage, the debtor’s assets are liquidated, and the debtor’s verified debts are paid prorated according to their right. The debtor is released from prison once the debtor’s verified debts are paid. In practice, the above measures are seldom applied. Since 1955, most bankruptcy cases have been settled between the parties.
Although the concepts of real property mortgages and chattel mortgages – based on collateral of movable property, such as machinery, furniture, automobiles, or livestock to secure a mortgage – exist, real estate mortgages involve antiquated procedures and may fail to be recorded against the debtor or other creditors. Property is seldom purchased through a mortgage and secured debt is difficult to arrange or collect. Liens are virtually impossible to impose and using the judicial process for foreclosure is time consuming and often futile. Banks frequently require that loans be secured in U.S. dollars.
5. Protection of Property Rights
Real Property
Foreign investors have noted that real property interests are affected by the absence of a comprehensive civil registry (cadastre). Lease agreement regulations are the same for locals and foreign investors. Many companies report that legitimate property titles are often non-existent and, if they do exist, they often conflict with other titles for the same property. Verification of property titles can take several months, and often much longer. Mortgages exist, but real estate mortgages are expensive and involve allegedly cumbersome procedures. Additionally, mortgages are not always properly recorded under the debtor or creditor’s name. Banks are also risk-averse to issue loans or mortgages. Squatting is not a common practice but was popular in the aftermath of the 2010 earthquake. As a factor in its overall Ease of Doing Business ranking, the World Bank ranks Haiti 182 out of 187 among countries globally on ease of registering property.
Intellectual Property Rights
Haitian law protects copyrights, patent rights, and inventions, as well as industrial designs and models, special manufacturers’ marks, trademarks, and business names. The law penalizes individuals or enterprises involved in infringement, fraud, or unfair competition; however, enforcement is weak. Some report that weak enforcement mechanisms, inefficient courts, and judges’ inadequate knowledge of commercial law may impede the effectiveness of statutory protections.
Haiti is a member of the World Intellectual Property Organization (WIPO). Haiti has completed accession to the Berne Convention for the Protection of Literary and Artistic Works and the Paris Convention for the Protection of Industrial Property. Haiti is a signatory to the Buenos Aires Convention of 1910, the Patent Law Treaty, and the Beijing Treaty on Audiovisual Performances.
Haiti is not mentioned in the United States Trade Representative (USTR) 2021 Special 301 Report or the USTR 2020 Review of Notorious Markets for Counterfeiting and Piracy. For additional information about the national laws and points of contact at local intellectual property offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/.
7. State-Owned Enterprises
The Haitian government owns and operates, either wholly or in part, several State-Owned Enterprises (SOE). The Haitian commercial code governs the operations of the SOEs. The sectors include: food processing and packaging (a flourmill), construction and heavy equipment (a cement factory); information and communications (a telecommunications company); energy (the state electricity company, EDH); finance (two commercial banks, Banque Nationale de Crédit and Banque Populaire Haïtienne); and the national port authority and the airport authority. The law defines SOEs as autonomous enterprises that are legally authorized to be involved in commercial, financial, and industrial activities. All SOEs operate under the supervision of their respective sectorial ministry and are expected to create economic and social return. Today, some SOEs are fully owned by the state, while others are jointly owned commercial enterprises. The Haitian parliament, when it is functioning, has full authority to liquidate state enterprises that are underperforming. The majority of SOEs are financially sound. However, EDH receives substantial annual subsidies from the Haitian government to stay in business.
Privatization Program
In response to the economic difficulties of the late 1990s and mismanagement of the SOEs, the government liberalized the market and allows foreign firms to invest in the management and/or ownership of some Haitian state-owned enterprises. To accompany the initiative, the government established the Commission for the Modernization of Public Enterprises in 1996 to facilitate the privatization process.
In 1998, two U.S. companies, Seaboard and Continental Grain, purchased shares of the state-owned flourmill. Each partner currently owns a third of the company, known today as Les Moulins d’Haiti. In 1999, a consortium of Colombian, Swiss, and Haitian investors purchased a majority stake in the national cement factory. In 2010, a state-owned Vietnamese corporation, Viettel, officially acquired 60 percent of the state telecommunications company Teleco (now operating as Natcom), with the Haitian government retaining 40 percent ownership. The government has allowed limited private sector investment in selected seaports. Competition is generally not distorted in favor of state-owned enterprises to the detriment of private companies.
The Haitian government has allowed private sector investment in electricity generation to compensate for EDH’s inability to supply sufficient power, though it has had contractual disputes with multiple independent power producers. Only one independent power producer, partially U.S.-owned E-Power, generates electricity for EDH in Port au Prince as of 2021. In 2019, the Haitian energy sector regulatory authority, ANARSE, issued a series of prequalification rounds for concessionaires to take over and expand electricity production, transmission, and distribution for several of the country’s regional grids, including the grid serving the Caracol Industrial Park. ANARSE is expected to select concessionaires for the initial three grids and issue further tenders for additional regional grids in 2021.
The Government of Haiti created the National Commission for Public Procurement (CNMP) to ensure that Haitian government contracts are awarded through competitive bidding and to establish effective procurement controls in public administration. The CNMP publishes lists of awarded government of Haiti contracts. The procurement law of 2009 requires contracts to be routed through CNMP. In 2012, however, a presidential decree substantially raised the threshold at which public procurements must be managed by the CNMP, resulting in what companies have identified as a decrease in transparency for many smaller government contracts. Moreover, the government frequently enters into no-bid contracts, sometimes issued using “emergency” authority derived from natural disasters, even when there is no apparent connection between the alleged emergency and the government contract, according to foreign investors.
9. Corruption
Corruption, including bribery, raises the costs and risks of doing business in Haiti. U.S. firms have complained that corruption is a major obstacle to effective business operation in Haiti. They frequently point to requests for payment by customs officials in order to clear import shipments as examples of solicitation for bribes.
Haitian law, applicable to individuals and financial institutions, criminalizes corruption and money laundering. Bribes or attempted bribes toward a public official are a criminal act and are punishable by the criminal code (Article 173) for one to three years of imprisonment. The law also contains provisions for the forfeiture and seizure of assets. In practice, however, the law is unevenly and rarely applied.
Transparency International’s Corruption Perception Index for 2020 ranked Haiti in the second lowest spot in the Americas region and 170 out of 180 countries worldwide, with a score of 18 out of 100 in perceived levels of public corruption.
The Haitian government has made some progress in enforcing public accountability and transparency, but substantive institutional reforms are still needed. In 2004, the Government of Haiti established the Anti-Corruption Commission (ULCC), but the organization lacks the necessary resources and political independence to be effective. In 2008, parliament approved the law on disclosure of assets by civil servants and high public officials prepared by ULCC, but to date, compliance has been almost nonexistent.
Haiti’s Superior Court of Auditors and Administrative Disputes (CSCCA) is currently one of Haiti’s few independent government institutions, responsible for reviewing draft government contracts; conducting audits of government expenditures; and clearing all government officials, including those at the political level, to manage public funds. In November 2020, however, the Haitian government published a decree limiting the authority of the Audit Court. The CSCCA had issued three reports in January 2019, May 2019, and August 2020 citing improper management practices by the Haitian government and the alleged wastage of nearly $2 billion of the Petrocaribe funds. Public anger over the Petrocaribe scandal has since burgeoned into a grassroots movement against widespread corruption in Haiti.
Haiti is not a party to the OECD Anti-Bribery Convention.
Resources to Report Corruption
Any corruption-related activity can be reported to the Haitian Anti-Corruption Unit, responsible for combatting corruption:
Hans Jacques Ludwig Joseph
Director General
Unite de Lutte Contre la Corruption
13, rue Capotille, Pacot, Port-au-Prince, Haiti
Telephone: (509) 2811-0661 / (509) 2816-7071
Email: info@ulcc.gouv.ht
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
Mexico is open to foreign direct investment (FDI) in the vast majority of economic sectors and has consistently been one of the largest emerging market recipients of FDI. Mexico’s proximity to the United States and preferential access to the U.S. market, macroeconomic stability, large domestic market, growing consumer base, and increasingly skilled yet cheap labor combine to attract foreign investors. The COVID-19 economic crisis showed how linked North American supply chains are and highlighted new opportunities for partnership and investment. Still, recent policy and regulatory changes have created doubts about the investment climate, particularly in the energy and the formal employment pensions management sectors.
Historically, the United States has been one of the largest sources of FDI in Mexico. According to Mexico’s Secretariat of Economy, FDI flows for 2020 totaled USD 29.1 billion, a decrease of 11.7 percent compared to the preliminary information for 2019 (USD 32.9 billion), and a 14.7 percent decline compared to revised numbers. The Secretariat cited COVID’s impact on global economic activity as the main reason for the decline. From January to December 2020, 22 percent of FDI came from new investment. New investment in 2020 (USD 6.4 billion) was only approximately half of the new investments received in 2019 (USD 12.8 billion), and 55.4 percent came from capital reinvestment while 24.9 percent from parent company accounts. The automotive, aerospace, telecommunications, financial services, and electronics sectors typically receive large amounts of FDI.
Most foreign investment flows to northern states near the U.S. border, where most maquiladoras (export-oriented manufacturing and assembly plants) are located, or to Mexico City and the nearby “El Bajio” (e.g. Guanajuato, Queretaro, etc.) region. In the past, foreign investors have overlooked Mexico’s southern states, although the administration is focused on attracting investment to the region, including through large infrastructure projects such as the Maya Train, the Dos Bocas refinery, and the trans-isthmus rail project.
The 1993 Foreign Investment Law, last updated in March 2017, governs foreign investment in Mexico, including which business sectors are open to foreign investors and to what extent. It provides national treatment, eliminates performance requirements for most foreign investment projects, and liberalizes criteria for automatic approval of foreign investment. Mexico is also a party to several Organization for Economic Cooperation and Development (OECD) agreements covering foreign investment, notably the Codes of Liberalization of Capital Movements and the National Treatment Instrument.
The administration has integrated components of the government’s investment agency into other ministries and offices.
Limits on Foreign Control and Right to Private Ownership and Establishment
Mexico reserves certain sectors, in whole or in part, for the State, including: petroleum and other hydrocarbons; control of the national electric system, radioactive materials, telegraphic and postal services; nuclear energy generation; coinage and printing of money; and control, supervision, and surveillance of ports of entry. Certain professional and technical services, development banks, and the land transportation of passengers, tourists, and cargo (not including courier and parcel services) are reserved entirely for Mexican nationals. See section six for restrictions on foreign ownership of certain real estate.
Reforms in the energy, power generation, telecommunications, and retail fuel sales sectors have liberalized access for foreign investors. While reforms have not led to the privatization of state-owned enterprises such as Pemex or the Federal Electricity Commission (CFE), they have allowed private firms to participate. Still, the Lopez Obrador administration has made significant regulatory and policy changes that favor Pemex and CFE over private participants. The changes have led private companies to file lawsuits in Mexican courts and several are considering international arbitration.
Hydrocarbons: Private companies participate in hydrocarbon exploration and extraction activities through contracts with the government under four categories: competitive contracts, joint ventures, profit sharing agreements, and license contracts. All contracts must include a clause stating subsoil hydrocarbons are owned by the State. The government has held nine auctions allowing private companies to bid on exploration and development rights to oil and gas resources in blocks around the country. Between 2015 and 2018, Mexico auctioned more than 100 land, shallow, and deep-water blocks with significant interest from international oil companies. The administration has since postponed further auctions but committed to respecting the existing contracts awarded under the previous administration. Still, foreign players were discouraged when Pemex sought to take operatorship of a major shallow water oil discovery made by a U.S. company-led consortium. The private consortium had invested more than USD 200 million in making the discovery and the outcome of this dispute has yet to be decided.
Telecommunications: Mexican law states telecommunications and broadcasting activities are public services and the government will at all times maintain ownership of the radio spectrum. In January 2021, President Lopez Obrador proposed incorporating the independent Federal Telecommunication Institute (IFT) into the Secretariat of Communications and Transportation (SCT), in an attempt to save government funds and avoid duplication. Non-governmental organizations and private sector companies said such a move would potentially violate the USMCA, which mandates signatories to maintain independent telecommunications regulators. As of March 2021, the proposal remains pending. Mexico’s Secretary of Economy Tatiana Clouthier underscored in public statements that President López Obrador is committed to respecting Mexico’s obligations under the USMCA, including maintaining an autonomous telecommunications regulator.
Aviation: The Foreign Investment Law limited foreign ownership of national air transportation to 25 percent until March 2017, when the limit was increased to 49 percent.
The USMCA, which entered into force July 1, 2020, maintained several NAFTA provisions, granting U.S. and Canadian investors national and most-favored-nation treatment in setting up operations or acquiring firms in Mexico. Exceptions exist for investments restricted under the USMCA. Currently, the United States, Canada, and Mexico have the right to settle any legacy disputes or claims under NAFTA through international arbitration for a sunset period of three years following the end of NAFTA. Only the United States and Mexico are party to an international arbitration agreement under the USMCA, though access is restricted as the USMCA distinguishes between investors with covered government contracts and those without. Most U.S. companies investing in Mexico will have access to fewer remedies under the USMCA than under NAFTA, as they will have to meet certain criteria to qualify for arbitration. Local Mexican governments must also accord national treatment to investors from USMCA countries.
Approximately 95 percent of all foreign investment transactions do not require government approval. Foreign investments that require government authorization and do not exceed USD 165 million are automatically approved, unless the proposed investment is in a legally reserved sector.
The National Foreign Investment Commission under the Secretariat of the Economy is the government authority that determines whether an investment in restricted sectors may move forward. The Commission has 45 business days after submission of an investment request to make a decision. Criteria for approval include employment and training considerations, and contributions to technology, productivity, and competitiveness. The Commission may reject applications to acquire Mexican companies for national security reasons. The Secretariat of Foreign Relations (SRE) must issue a permit for foreigners to establish or change the nature of Mexican companies.
Other Investment Policy Reviews
There has not been an update to the World Trade Organization’s (WTO) trade policy review of Mexico since June 2017 covering the period to year-end 2016.
Business Facilitation
According to the World Bank, on average registering a foreign-owned company in Mexico requires 11 procedures and 31 days. Mexico ranked 60 out of 190 countries in the World Bank’s ease of doing business report in 2020. In 2016, then-President Pena Nieto signed a law creating a new category of simplified businesses called Sociedad for Acciones Simplificadas (SAS). Owners of SASs are supposed to be able to register a new company online in 24 hours. Still, it can take between 66 and 90 days to start a new business in Mexico, according to the World Bank. The Government of Mexico maintains a business registration website: www.tuempresa.gob.mx. Companies operating in Mexico must register with the tax authority (Servicio de Administration y Tributaria or SAT), the Secretariat of the Economy, and the Public Registry. Additionally, companies engaging in international trade must register with the Registry of Importers, while foreign-owned companies must register with the National Registry of Foreign Investments.
Since October 2019, SAT has launched dozens of tax audits against major international and domestic corporations, resulting in hundreds of millions of dollars in new tax assessments, penalties, and late fees. Multinational and Mexican firms have reported audits based on diverse aspects of the tax code, including adjustments on tax payments made, waivers received, and deductions reported during the Enrique Peña Nieto administration.
Changes to ten-digit tariff lines conducted by the Secretariat of Economy in 2020 created trade disruptions with many shipments held at the border, stemming from lack of clear communication between government agencies that resulted in different interpretation by SAT.
Outward Investment
Various offices at the Secretariat of Economy and the Secretariat of Foreign Affairs handle promoting Mexican outward investment and assistance to Mexican firms acquiring or establishing joint ventures with foreign firms. Mexico does not restrict domestic investors from investing abroad.
3. Legal Regime
Transparency of the Regulatory System
The National Commission on Regulatory Improvement (CONAMER), within the Secretariat of Economy, is the agency responsible for streamlining federal and sub-national regulation and reducing the regulatory burden on business. Mexican law requires secretariats and regulatory agencies to conduct impact assessments of proposed regulations. Assessments are made available for public comment via CONAMER’s website: https://www.gob.mx/conamer. The official gazette of state and federal laws currently in force in Mexico is publicly available via: http://www.ordenjuridico.gob.mx/. Mexican law provides for a 20-day public consultation period for most proposed regulations. Any interested stakeholder has the opportunity to comment on draft regulations and the supporting justification, including regulatory impact assessments. Certain measures are not subject to a mandatory public consultation period. These include measures concerning taxation, responsibilities of public servants, the public prosecutor’s office executing its constitutional functions, and the Secretariats of National Defense (SEDENA) and the Navy (SEMAR).
The National Quality Infrastructure Program (PNIC) is the official document used to plan, inform, and coordinate standardization activities, both public and private. The PNIC is published annually by the Secretariat of Economy in Mexico’s Official Gazette. The PNIC describes Mexico’s plans for new voluntary standards (Normas Mexicanas; NMXs) and mandatory technical regulations (Normas Oficiales Mexicanas; NOMs) as well as proposed changes to existing standards and technical regulations. Interested stakeholders have the opportunity to request the creation, modification, or cancelation of NMXs and NOMs as well as participate in the working groups that develop and modify these standards and technical regulations. Mexico’s antitrust agency, the Federal Commission for Economic Competition (COFECE), plays a key role protecting, promoting, and ensuring a competitive free market in Mexico as well as protecting consumers. COFECE is responsible for eliminating barriers both to competition and free market entry across the economy (except for the telecommunications sector, which is governed by its own competition authority) and for identifying and regulating access to essential production inputs.
In addition to COFECE, the Energy Regulatory Commission (CRE) and National Hydrocarbon Commission (CNH) are both technical-oriented independent agencies that play important roles in regulating the energy and hydrocarbons sectors. CRE regulates national electricity generation, coverage, distribution, and commercialization, as well as the transportation, distribution, and storage of oil, gas, and biofuels. CNH supervises and regulates oil and gas exploration and production and issues oil and gas upstream (exploration/production) concessions.
Mexico has seen a shift in the public procurement process since the onset of the COVID-19 pandemic. Government entities are increasingly awarding contracts either as direct awards or by invitation-only procurements. In addition, there have been recent tenders that favor European standards over North American standards.
International Regulatory Considerations
Generally speaking, the Mexican government has established legal, regulatory, and accounting systems that are transparent and consistent with international norms. Still, the Lopez Obrador administration has eroded the autonomy and publicly questioned the value of specific antitrust and energy regulators and has proposed dissolving some of them in order to cut costs. Furthermore, corruption continues to affect equal enforcement of some regulations. The Lopez Obrador administration rolled out an ambitious plan to centralize government procurement in an effort to root out corruption and generate efficiencies. The administration estimated it could save up to USD 25 billion annually by consolidating government purchases in the Secretariat of Finance. Still, the expedited rollout and lack of planning for supply chain contingencies led to several sole-source purchases. The Mexican government’s budget is published online and readily available. The Bank of Mexico also publishes and maintains data about the country’s finances and debt obligations.
Investors are increasingly concerned the administration is undermining confidence in the “rules of the game,” particularly in the energy sector, by weakening the political autonomy of COFECE, CNH, and CRE. Still, COFECE has successfully challenged regulatory changes in the electricity sector that favor state-owned enterprises over maintaining competitive prices for the consumer. The administration has appointed five of seven CRE commissioners over the Senate’s objections, which voted twice to reject the nominees in part due to concerns their appointments would erode the CRE’s autonomy. The administration’s budget cuts resulted in significant layoffs, which has reportedly hampered agencies’ ability to carry out their work, a key factor in investment decisions. The independence of the CRE and CNH was further undermined by a memo from the government to both bodies instructing them to use their regulatory powers to favor state-owned Pemex and CFE.
Legal System and Judicial Independence
Since the Spanish conquest in the 1500s, Mexico has had an inquisitorial system adopted from Europe in which proceedings were largely carried out in writing and sealed from public view. Mexico amended its Constitution in 2008 to facilitate change to an oral accusatorial criminal justice system to better combat corruption, encourage transparency and efficiency, while ensuring respect for the fundamental rights of both the victim and the accused. An ensuing National Code of Criminal Procedure passed in 2014 and is applicable to all 32 states. The national procedural code is coupled with each state’s criminal code to provide the legal framework for the new accusatorial system, which allows for oral, public trials with the right of the defendant to face his/her accuser and challenge evidence presented against him/her, right to counsel, due process, and other guarantees. Mexico fully adopted the new accusatorial criminal justice system at the state and federal levels in June 2016.
Mexico’s Commercial Code, which dates back to 1889, was most recently updated in 2014. All commercial activities must abide by this code and other applicable mercantile laws, including commercial contracts and commercial dispute settlement measures. Mexico has multiple specialized courts regarding fiscal, labor, economic competition, broadcasting, telecommunications, and agrarian law.
The judicial branch and Prosecutor General’s office (FGR) are constitutionally independent from each other and the executive. The Prosecutor General is nominated by the president and approved by a two-thirds majority in the Senate for a nine-year term, effectively de-coupling the Prosecutor General from the political cycle of elections every six years. With the historic 2019 labor reform, Mexico also created an independent labor court system run by the judicial branch (formerly this was an executive branch function). The labor courts are being brought on line in a phased process by state with the final phase completed on May 1, 2022.
Laws and Regulations on Foreign Direct Investment
Mexico’s Foreign Investment Law sets the rules governing foreign investment into the country. The National Commission for Foreign Investments, formed by several cabinet-level ministries including Interior (SEGOB), Foreign Relations (SRE), Finance (Hacienda), and Economy (SE) establishes the criteria for administering investment rules.
Competition and Antitrust Laws
Mexico has two constitutionally autonomous regulators to govern matters of competition – the Federal Telecommunications Institute (IFT) and the Federal Commission for Economic Competition (COFECE). IFT governs broadcasting and telecommunications, while COFECE regulates all other sectors. For more information on competition issues in Mexico, please visit COFECE’s bilingual website at: www.cofece.mx. As mentioned above, Lopez Obrador has publicly questioned the value of COFECE and his party unsucessfully introduced a proposal last year which would have dramatically reduced its resources and merged COFECE and other regulators into a less-independent structure. COFECE requires a quorum of at least three commissioners in order to act and currently has four out of seven commissioner seats filled. The current chairwoman of the agency’s term as chair will expire in September, which raises questions about whether leadership will change and whether, given the hostility to the agency, the president will nominate new commissioners.
Expropriation and Compensation
USMCA (and NAFTA) contain clauses stating Mexico may not directly nor indirectly expropriate property, except for public purpose and on a non-discriminatory basis. Expropriations are governed by international law and require rapid fair market value compensation, including accrued interest. Investors have the right to international arbitration. The USMCA contains an annex regarding U.S.-Mexico investment disputes and those related to covered government contracts.
Dispute Settlement
ICSID Convention and New York Convention
Mexico ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) in 1971 and has codified this into domestic law. Mexico is also a signatory to the Inter-American Convention on International Commercial Arbitration (1975 Panama Convention) and the 1933 Montevideo Convention on the Rights and Duties of States. Mexico is not a member of the Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID Convention), even though many of the investment agreements signed by Mexico include ICSID arbitration as a dispute settlement option.
Investor-State Dispute Settlement
The USMCA covers investor-state dispute settlement (ISDS) between the United States and Mexico in chapter 31. Canada is not party to USMCA ISDS provisions as access to dispute resolution will be possible under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (the “CPTPP”). U.S. and Mexican investors will have access to a very similar regime under the USMCA available under NAFTA. Foreign investors who are “part[ies] to a covered government contract” and belong to five “covered sectors”: (i) oil and gas; (ii) power generation; (iii) telecommunications; (iv) transportation; and (v) infrastructure will have access to ISDS per USMCA provisions but only after first defending their claims in local courts before initiating arbitration. A less favorable regime will apply to all other foreign investors under the USMCA, who can only access the USMCA’s ISDS system to enforce a limited number of claims and must first defend their claims in local courts before initiating arbitration. Investors will be able to file new NAFTA claims before July 1, 2023, provided that the dispute arises out of investments made when NAFTA was still in force and remained “in existence” on July 1, 2020.
Since NAFTA’s inception, there have been 13 cases filed against Mexico by U.S. and Canadian investors who allege expropriation and/or other violations of Mexico’s NAFTA obligations. For more details on the cases, please visit: https://icsid.worldbank.org/en/Pages/cases/searchcases.aspx
International Commercial Arbitration and Foreign Courts
The Arbitration Center of Mexico (CAM) is a specialized, private institution administering commercial arbitration as an alternative dispute resolution mechanism. The average duration of a CAM-conducted arbitration process conducted is 14 months. The Commercial Code dictates an arbitral award, regardless of the country where it originated, must be recognized as binding. The award must be enforced after presenting a formal written petition to a judge.
The internal laws of both Pemex and CFE state all national disputes of any nature will have to be resolved by federal courts. State-owned Enterprises (SOEs) and their productive subsidiaries may opt for alternative dispute settlement mechanisms under applicable commercial legislation and international treaties of which Mexico is a signatory. When contracts are executed in a foreign country, Pemex and CFE have the option to follow procedures governed by non-Mexican law, to use foreign courts, or to participate in arbitration.
Bankruptcy Regulations
Mexico’s Reorganization and Bankruptcy Law (Ley de Concursos Mercantiles) governs bankruptcy and insolvency. Congress approved modifications in 2014 to shorten procedural filing times and convey greater juridical certainty to all parties, including creditors. Declaring bankruptcy is legal in Mexico and it may be granted to a private citizen, a business, or an individual business partner. Debtors, creditors, or the Attorney General can file a bankruptcy claim. Mexico ranked 33 out of 190 countries for resolving insolvency in the World Bank’s 2020 Doing Business report. The average bankruptcy filing takes 1.8 years to be resolved and recovers 63.9 cents per USD, which compares favorably to average recovery in Latin America and the Caribbean of just 31.2 cents per USD. The “Buró de Crédito” is Mexico’s main credit bureau. More information on credit reports and ratings can be found at: http://www.burodecredito.com.mx/ .
5. Protection of Property Rights
Real Property
Mexico ranked 105 out of 190 countries for ease of registering property in the World Bank’s 2020 Doing Business report, falling two places from its 2019 report. Article 27 of the Mexican Constitution guarantees the inviolable right to private property. Expropriation can only occur for public use and with due compensation. Mexico has four categories of land tenure: private ownership, communal tenure (ejido), publicly owned, and ineligible for sale or transfer.
Mexico prohibits foreigners from acquiring title to residential real estate in so-called “restricted zones” within 50 kilometers (approximately 30 miles) of the nation’s coast and 100 kilometers (approximately 60 miles) of the borders. “Restricted zones” cover roughly 40 percent of Mexico’s territory. Foreigners may acquire the effective use of residential property in “restricted zones” through the establishment of an extendable trust (fideicomiso) arranged through a Mexican financial institution. Under this trust, the foreign investor obtains all property use rights, including the right to develop, sell, and transfer the property. Real estate investors should be careful in performing due diligence to ensure that there are no other claimants to the property being purchased. In some cases, fideicomiso arrangements have led to legal challenges. U.S.-issued title insurance is available in Mexico and U.S. title insurers operate here.
Additionally, U.S. lending institutions have begun issuing mortgages to U.S. citizens purchasing real estate in Mexico. The Public Register for Business and Property (Registro Publico de la Propiedad y de Comercio) maintains publicly available information online regarding land ownership, liens, mortgages, restrictions, etc.
Tenants and squatters are protected under Mexican law. Property owners who encounter problems with tenants or squatters are advised to seek professional legal advice, as the legal process of eviction is complex.
Mexico has a nascent but growing financial securitization market for real estate and infrastructure investments, which investors can access via the purchase/sale of Fideicomisos de Infraestructura y Bienes Raíces (FIBRAs) and Certificates of Capital Development (CKDs) listed on Mexico’s BMV stock exchange.
Intellectual Property Rights
Intellectual Property Rights (IPR) in Mexico are covered by the the Mexican Federal Law for Protection of Industrial Property (Ley Federal de Protección a la Propiedad Industrial) and the Federal Copyright Law (Ley Federal del Derecho de Autor). Responsibility for the protection of IPR is spread across several government authorities. The Prosecutor General’s Office (Fiscalia General de la Republica or FGR) oversees a specialized unit that prosecutes intellectual property (IP) crimes. The Mexican Institute of Industrial Property (IMPI), the equivalent to the U.S. Patent and Trademark Office, administers patent and trademark registrations, and handles administrative enforcement cases of IPR infringement. The National Institute of Copyright (INDAUTOR) handles copyright registrations and mediates certain types of copyright disputes, while the Federal Commission for the Prevention from Sanitary Risks (COFEPRIS) regulates pharmaceuticals, medical devices, and processed foods. The Mexican Customs Service’s mandate includes ensuring illegal goods do not cross Mexico’s borders.
The process for trademark registration in Mexico normally takes six to eight months. The registration process begins by filing an application with IMPI, which is published in the Official Gazette. IMPI first undertakes a formalities examination, followed by a substantive examination to determine if the application and supporting documentation fulfills the requirements established by law and regulation to grant the trademark registration. Once the determination is made, IMPI then publishes the registration in the Official Gazette. A trademark registration in Mexico is valid for 10 years from the date of registration and is renewable for 10-year periods. Any party can challenge a trademark registration through an opposition system, or post-grant through a cancellation proceeding. IMPI employs the following administrative procedures: nullity, expiration, opposition, cancellation, trademark, patent and copyright infringement. Once IMPI issues a decision, the affected party may challenge it through an internal reconsideration process or go directly to the Specialized IP Court for a nullity trial. An aggrieved party can then file an appeal with a Federal Appeal Court based on the Specialized IP Court’s decision. In cases with an identifiable constitutional challenge, the plaintiff may file an appeal before the Supreme Court.
To improve efficiency, in 2020 IMPI partnered with the United States Patent and Trademark Office (USPTO) to launch the Parallel Patent Grant (PPG) initiative. Under this new work-sharing arrangement, IMPI will expedite the grant of a Mexican patent for businesses and individuals already granted a corresponding U.S. patent. This arrangement allows for the efficient reutilization of USPTO work by IMPI. The USPTO also has a Patent Prosecution Highway (PPH) agreement with IMPI. Under the PPH, an applicant receiving a ruling from either IMPI or the USPTO that at least one claim in an application is patentable may request that the other office expedite examination of the corresponding application. The PPH leverages fast-track patent examination procedures already available in both offices to allow applicants in both countries to obtain corresponding patents faster and more efficiently.
Mexico has undertaken significant legislative reform over the past year to comply with the USMCA. The Mexican Federal Law for Protection of Industrial Property (Ley Federal de Protección a la Propiedad Industrial) went into effect November 5, 2020. The decree issuing this law was published in the Official Gazette on July 1, 2020, in response to the USMCA and the CPTPP. This new law replaced the Mexican Industrial Property Law (Ley de la Propiedad Industrial), substantially strengthening IPR across a variety of disciplines. Mexico amended its Federal Copyright Law and its Federal Criminal Code to comply with the USMCA. The amendments went into effect July 2, 2020. These amendments should significantly strengthen copyright law in Mexico. Still, there are concerns that constitutional challenges filed against notice and takedown provisions as well as TPMs in the amendments may weaken these. provisions.
Still, Mexico has widespread commercial-scale infringement that results in significant losses to Mexican, U.S., and other IPR owners. There are many issues that have made it difficult to improve IPR enforcement in Mexico, including legislative loopholes; lack of coordination between federal, state, and municipal authorities; a cumbersome and lengthy judicial process; relatively widespread acceptance of piracy and counterfeiting, and lack of resources dedicated to enforcement. In addition, the involvement of transnational criminal organizations (TCOs), which control the piracy and counterfeiting markets in parts of Mexico and engage in trade-based money laundering by importing counterfeit goods, continue to impede federal government efforts to improve IPR enforcement. TCO involvement has further illustrated the link between IPR crimes and illicit trafficking of other contraband, including arms and drugs.
Mexico remained on the Watch List in the 2021 Special 301 report published by the U.S. Trade Representative (USTR). Obstacles to U.S. trade include the wide availability of pirated and counterfeit goods in both physical and virtual notorious markets. The for Piracy and Counterfeiting listed several Mexican markets: Tepito in Mexico City, La Pulga Rio in Monterrey, and Mercado San Juan de Dios in Guadalajara. Mexico is a signatory to numerous international IP treaties, including the Paris Convention for the Protection of Industrial Property, the Berne Convention for the Protection of Literary and Artistic Works, and the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights.
Resources for Rights Holders
Intellectual Property Rights Attaché for Mexico, Central America and the Caribbean
U.S. Trade Center Liverpool No. 31 Col. Juárez
C.P. 06600 Mexico City
Tel: (52) 55 5080 2189
National Institute of Copyright (INDAUTOR)
Puebla No. 143
Col. Roma, Del. Cuauhtémoc
06700 México, D.F.
Tel: (52) 55 3601 8270
Fax: (52) 55 3601 8214
Web: http://www.indautor.gob.mx/
For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .
7. State-Owned Enterprises
There are two main SOEs in Mexico, both in the energy sector. Pemex operates the hydrocarbons (oil and gas) sector, which includes upstream, mid-stream, and downstream operations. Pemex historically contributed one-third of the Mexican government’s budget but falling output and global oil prices alongside improved revenue collection from other sources have diminished this amount over the past decade to about 8 percent. The Federal Electricity Commission (CFE) operates the electricity sector. While the Mexican government maintains state ownership, the latest constitutional reforms granted Pemex and CFE management and budget autonomy and greater flexibility to engage in private contracting.
Pemex
As a result of Mexico’s historic energy reform, the private sector is now able to compete with Pemex or enter into competitive contracts, joint ventures, profit sharing agreements, and license contracts with Pemex for hydrocarbon exploration and extraction. Liberalization of the retail fuel sales market, which Mexico completed in 2017, created significant opportunities for foreign businesses. Given Pemex frequently raises debt in international markets, its financial statements are regularly audited. The Natural Resource Governance Institute considers Pemex to be the second most transparent state-owned oil company after Norway’s Statoil. Pemex’s ten-person Board of Directors contains five government ministers and five independent councilors. The administration has identified increasing Pemex’s oil, natural gas, and refined fuels production as its chief priority for Mexico’s hydrocarbon sector.
CFE
Changes to the Mexican constitution in 2013 and 2014 opened power generation and commercial supply to the private sector, allowing companies to compete with CFE. Mexico has held three long-term power auctions since the reforms, in which over 40 contracts were awarded for 7,451 megawatts of energy supply and clean energy certificates. CFE will remain the sole provider of distribution services and will own all distribution assets. The 2014 energy reform separated CFE from the National Energy Control Center (CENACE), which now controls the national wholesale electricity market and ensures non-discriminatory access to the grid for competitors. Still, legal and regulatory changes adopted by the Mexican government attempt to modify the rules governing the electricity dispatch order to favor CFE. Dozens of private companies and non-governmental organizations have successfully sought injunctions against the measures, which they argue discriminate against private participants in the electricity sector. Independent power generators were authorized to operate in 1992 but were required to sell their output to CFE or use it to self-supply. Those legacy self-supply contracts have recently come under criticism with an electricity reform law giving the government the ability to cancel contracts it deems fraudulent. Under the reform, private power generators may now install and manage interconnections with CFE’s existing state-owned distribution infrastructure. The reform also requires the government to implement a National Program for the Sustainable Use of Energy as a transition strategy to encourage clean technology and fuel development and reduce pollutant emissions. The administration has identified increasing CFE-owned power generation as its top priority for the utility, breaking from the firm’s recent practice of contracting private firms to build, own, and operate generation facilities. CFE forced several foreign and domestic companies to renegotiate previously executed gas supply contracts, which raised significant concerns among investors about contract sanctity.
The main non-market-based advantage CFE and Pemex receive vis-a-vis private businesses in Mexico is related to access to capital. In addition to receiving direct budget support from the Secretariat of Finance, both entities also receive implicit credit guarantees from the federal government. As such, both are able to borrow funds on public markets at below the market rate their corporate risk profiles would normally suggest. In addition to budgetary support, the CRE and SENER have delayed or halted necessary permits for new private sector gas stations, fuel terminals, and power plants, providing an additional non-market-based advantage to CFE and Pemex.
Privatization Program
Mexico’s 2014 energy reforms liberalized access to these sectors but did not privatize state-owned enterprises.
9. Corruption
Corruption exists in many forms in Mexican government and society, including corruption in the public sector (e.g., demand for bribes or kickbacks by government officials) and private sector (e.g., fraud, falsifying claims, etc.), as well as conflict of interest issues, which are not well defined in the Mexican legal framework.
Complicity of government and law enforcement officials with criminal elements is a significant concern. Collaboration of government actors with criminal organizations (often due to intimidation and threats) poses serious challenges for the rule of law. Some of the most common reports of official corruption involve government officials stealing from public coffers or demanding bribes in exchange for awarding public contracts. The current administration supported anti-corruption reforms (detailed below) and judicial proceedings in several high-profile corruption cases, including former governors. However, Mexican civil society asserts that the government must take more effective and frequent action to address corruption.
Mexico adopted a constitutional reform in 2014 to transform the current Office of the Attorney General into an Independent Prosecutor General’s office in order to shore up its independence. President Lopez Obrador’s choice for Prosecutor General was confirmed by the Mexican Senate January 18, 2019. In 2015, Mexico passed a constitutional reform creating the National Anti-Corruption System (SNA) with an anti-corruption prosecutor and a citizens’ participation committee to oversee efforts. The system is designed to provide a comprehensive framework for the prevention, investigation, and prosecution of corruption cases, including delineating acts of corruption considered criminal acts under the law. The legal framework establishes a basis for holding private actors and private firms legally liable for acts of corruption involving public officials and encourages private firms to develop internal codes of conduct. The implementation status of the mandatory state-level anti-corruption legislation varies.
The new laws mandate a redesign of the Secretariat of Public Administration to give it additional auditing and investigative functions and capacities in combatting public sector corruption. Congress approved legislation to change economic institutions, assigning new responsibilities and in some instances creating new entities. Reforms to the federal government’s structure included the creation of a General Coordination of Development Programs to manage the newly created federal state coordinators (“superdelegates”) in charge of federal programs in each state. The law also created the Secretariat of Public Security and Citizen Protection, and significantly expanded the power of the president’s Legal Advisory Office (Consejería Jurídica) to name and remove each federal agency’s legal advisor and clear all executive branch legal reforms before their submission to Congress. The law eliminated financial units from ministries, with the exception of the Secretariat of Finance, the army (SEDENA), and the navy (SEMAR), and transferred control of contracting offices in other ministries to the Hacienda. Separately, the law replaced the previous Secretariat of Social Development (SEDESOL) with a Welfare Secretariat in charge of coordinating social policies, including those developed by other agencies such as health, education, and culture. The Labor Secretariat gained additional tools to foster collective bargaining, union democracy, and to meet International Labor Organization (ILO) obligations.
Mexico ratified the OECD Convention on Combating Bribery and passed its implementing legislation in May 1999. The legislation includes provisions making it a criminal offense to bribe foreign officials. Mexico is also a party to the Organization of American States (OAS) Convention against Corruption and has signed and ratified the United Nations Convention against Corruption. The government has enacted or proposed strict laws attacking corruption and bribery, with average penalties of five to 10 years in prison.
Mexico is a member of the Open Government Partnership and enacted a Transparency and Access to Public Information Act in 2015, which revised the existing legal framework to expand national access to information. Transparency in public administration at the federal level improved noticeably but expanding access to information at the state and local level has been slow. According to Transparency International’s 2020 Corruption Perception Index, Mexico ranked 124 of 180 nations. Civil society organizations focused on fighting corruption are increasingly influential at the federal level but are few in number and less powerful at the state and local levels.
Business representatives, including from U.S. firms, believe public funds are often diverted to private companies and individuals due to corruption and perceive favoritism to be widespread among government procurement officials. The GAN Business Anti-Corruption Portal states compliance with procurement regulations by state bodies in Mexico is unreliable and that corruption is extensive, despite laws covering conflicts of interest, competitive bidding, and company blacklisting procedures.
The U.S. Embassy has engaged in a broad-based effort to work with Mexican agencies and civil society organizations in developing mechanisms to fight corruption and increase transparency and fair play in government procurement. Efforts with specific business impact include government procurement best practices training and technical assistance under the U.S. Trade and Development Agency’s Global Procurement Initiative.
UN Anticorruption Convention, OECD Convention on Combatting Bribery
Mexico ratified the UN Convention Against Corruption in 2004. It ratified the OECD Anti-Bribery Convention in 1999.
Resources to Report Corruption
Contact at government agency:
Secretariat of Public Administration
Miguel Laurent 235, Mexico City
52-55-2000-1060
Contact at “watchdog” organization:
Transparencia Mexicana
Dulce Olivia 73, Mexico City
52-55-5659-4714
Email: info@tm.org.mx