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 publicly questioned the value of specific anti-trust and energy regulators. Furthermore, corruption continues to affect equal enforcement of some regulations. The Lopez Obrador administration has an ambitious plan to centralize government procurement in an effort to root out corruption and generate efficiencies. The administration estimates it can save up to USD 25 billion annually by consolidating government purchases in the Mexican Secretariat of Finance (Hacienda). Under the current decentralized process, more than 70 percent of government contracts are sole-sourced, interagency consolidated purchases are uncommon, and the entire process is susceptible to corruption. 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.
The Federal Commission on Regulatory Improvement (COFEMER), 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 COFEMER’s website: www.cofemer.gob.mx. The official gazette of state and federal laws currently in force in Mexico is publicly available via: http://www.ordenjuridico.gob.mx/.
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. 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 technically-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.
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. The administration appointed four 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 political autonomy. The administration’s budget cuts resulted in significant layoffs, which has reportedly hampered the agencies’ ability to carry out its work, a key factor in investment decisions.
The Secretariat of Public Administration has made considerable strides in improving transparency in government, including government contracting and involvement of the private sector in enhancing transparency and fighting corruption. The Mexican government has established four internet sites to increase transparency of government processes and to establish guidelines for the conduct of government officials: (1) Normateca (http://normatecainterna.sep.gob.mx) provides information on government regulations; (2) Compranet (https://compranet.funcionpublica.gob.mx) displays federal government procurement actions on-line; (3) Tramitanet (www.tramitanetmexico.com) permits electronic processing of transactions within the bureaucracy; and (4) Declaranet (https://declaranet.gob.mx/) allows federal employees to file income taxes online.
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 is nominally independent from the executive. Following a reform passed in February 2014, the Attorney General’s Office (Procuraduria General de la Republica or PGR) became autonomous of the executive branch, as the Prosecutor General’s Office (Fiscalia General de la Republica or FGR). The Mexican Senate confirmed Mexico’s first Fiscal on January 18, 2019. The Fiscal will serve a nine-year term, intended to insulate his office from the executive branch, whose members serve six-year terms.
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), Economy (SE), and Social Development (SEDESOL), establishes the criteria for administering investment rules.
Competition and Anti-Trust 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.
Expropriation and Compensation
Mexico may not expropriate property under NAFTA, 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 for violations of this or any other rights included in the investment chapter of NAFTA.
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
Chapters 11, 19, and 20 of the existing NAFTA cover international dispute resolution. Chapter 11 allows a NAFTA Party investor to seek monetary damages for violations of its provisions. Investors may initiate arbitration against the NAFTA Party under the rules of the United Nations Commission on International Trade Law (UNCITRAL Model Law) or through the ICSID Convention. A NAFTA investor may also choose to use the domestic court system to litigate their case. The USMCA contains revisions to these chapters, but will not enter into force until all three countries have ratified the agreement.
Since NAFTA’s inception, there have been 17 cases filed against Mexico by U.S. and Canadian investors who allege expropriation and/or other violations of Mexico’s NAFTA obligations. Details of the cases can be found at: https://www.state.gov/s/l/c3742.htm.
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 an arbitration process conducted by CAM 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 a formal written petition is presented 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.
Mexico’s Reorganization and Bankruptcy Law (Ley de Concursos Mercantiles) governs bankruptcy and insolvency. Congress approved modifications in 2014 in order 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 32 out of 190 countries for resolving insolvency in the World Bank’s 2019 Doing Business report. The average bankruptcy filing takes 1.8 years to be resolved and recovers 64.7 cents per USD, which compares favorably to average recovery in Latin America and the Caribbean of just 30.9 cents per USD. “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/.