Anticorruption Update – As Brazil Gets Serious, Mexico Twists in the Wind

Latin America is a region characterized by incredible diversity – in cultures, histories, and economic and political development. Only through oversimplification can the region be seen to move as a group (e.g., Nicaragua vs. Costa Rica vs. Panama or Brazil vs. Colombia vs. Venezuela). There’s also the Caribbean, which on its own provides a study in contrasts: Cuba, the last fully Communist country in the hemisphere, is closer to the United States than Puerto Rico, which is a U.S. territory, but not as close as the Bahamas, the second-richest country in the entire LatAm region (first place goes to Trinidad & Tobago). Look at the list of countries by GDP per capita – it’s full of counterintuitive results (why are El Salvador and Guatemala so much wealthier than Honduras and Nicaragua? How did Costa Rica get so rich?). And don’t forget countries like Belize, Guyana, and Suriname, which are among the many states in the region that defy categorization.

Brasil vs Mexico anticorruption - Copy

Brazil/Mexico vs. Corruption

So we should false equivalence when observing the region as a whole. Still, on rare occasions Latin America does provide a stark and dramatic contrast between two countries that, for purposes of the comparison, are similarly-situated. Here, I refer to Brazil and Mexico’s competing approaches to combating the rampant corruption found in each country.

As an aside, although Brazil manages to score much better on Transparency International’s Corruption Perceptions Index (ranked 69 vs. Mexico’s 103 out of 174), it is difficult to believe there is significant or fundamental difference in corruption levels. In its data, TI notes that Brazil’s scores from the various data sources are all over the map (ranging from 32-62) vs. Mexico’s (range of 29-42). Also, the data sources with that score Brazil higher than Mexico by the biggest margin are: Bertelsmann Foundation Transformation Index (BTI), ICRG Country Risk Guide, World Justice Project Rule of Law Index, and Global Insight Country Risk Ratings. The biggest divergence is with the BTI, where Brazil purportedly is nearly twice as ‘transformative’ than Mexico. But BTI, and the others in this group, have ‘fuzzier’ methodology than, say, the World Bank, Economist Intelligence Unit, and World Economic Forum. The BTI methodology is centered around a ‘framework’ that asks questions like – ‘how often are officeholders who abuse their positions punished’? – which are difficult to measure by numbers alone. So the ‘rule of law’ sections often rely on opinions from local experts, which raises additional questions. Not to say the BTI is invalid, just that it should be read with a grain of salt.

All that’s to say – I would argue that corruption is equally pervasive in Brazil and Mexico. Even TI in the Americas section of the CPI noted that Mexico and Brazil belonged to ‘the ugly’ category in the region.

Brazil – Operation Car Wash

In March of 2014, Brazilian Federal Police launched an investigation – dubbed Operation Car Wash – into allegations of money laundering. The investigation progressed into the summer of 2014, when federal prosecutors started to set their sites on Paulo Roberto Costa, the former director of refining and supply at Petrobras. Costa chose to cooperate with the investigators, and shared with them a tale of corruption so obscene and pervasive it even shocked Brazilians, 70 percent of whom believed corruption throughout their government to be ‘widespread’ before the Petrobras scandal unfolded. Following this lead, Federal police raided the houses of many current and former Petrobras executives and executives at the Brazilian construction companies that were involved in the scheme. And the investigation has not lost steam, with new arrests coming almost weekly.

Oligarchs Targeted

The case reached new heights, however, when Federal police arrested the heads of Brazil’s two largest construction companies (Odebrecht and Andrade Gutierrez), and it now appears that the two oligarchs will face criminal charges, something unthinkable to the average Brazilian one year ago. The investigation has also started to outgrow Petrobras and Brazil. Indeed, over the past week it spread to Electronuclear, Brazil’s state-owned nuclear power utility, and now investigators are following the evidence abroad, either to other emerging markets where similar schemes took place or ‘facilitator’ countries like Switzerland where the money was transferred. Other South American governments are doing their best to appear interested in identifying any wrongdoing within their borders, but without actually doing anything.

Heads Turn to the Congress and … the President?

The investigation has taken on such a life of its own, reaching sitting members of congress, and now now it even seems possible that it could result in criminal charges against former Pres. Lula and could prematurely terminate the presidency of Pres. Rousseff, whom 68 percent of Brazilians rate as ‘poor’ or ‘terrible’ (coincidentally, Rouseff was the Minister of Energy and Chairwoman of Petrobras when much of the criminal scheme unfolded.

Building the Rule of Law

Indeed, the Petrobras scandal is compelling because of the thrill ordinary Brazilians get from seeing the rich and powerful arrested and sentenced to imprisonment. But this is not mere voyeurism on their part – if the rich and powerful are beyond the reach of the authorities, the country lacks the rule of law. If the rich and powerful of the country consistently and semi-openly engage in criminal acts, Brazil suffers from impunity. The real excitement over the Petrobras case is its potential to be a decisive development that promotes trust in the law and deters future misconduct.

Notably, Operation Car Wash would never have been possible without an adequate institutional framework in which the prosecutors can act. Put simply – the Federal Prosecutor office in Brazil – or Ministerio Publico – is functionally, even remarkably, independent from the executive and legislative branches. The practical effect is that by Latin American standards Brazilian prosecutors are well-insulated from political or administrative interference. It is difficult to imagine that, lacking this independence, Operation Car Wash would have evolved into anything other than a minor money laundering investigation.

Mexico – navegando con bandera de pendejo (more or less, ‘play the fool’)

And then there is Mexico. Like Brazil, in the past few years Mexico has struggled to maintain an adequate level of economic growth. Much of the blame was placed on corruption, deficient rule of law, and regulatory regimes that range from ineffective to actively harmful. Pres. Enrique Pena Nieto (“EPN”) took office basically promising to handle all of these problems. In a single six-year term. Without a constitutional majority in Congress. But EPN did manage to get the major reforms through, including one purporting to create a National Anticorruption System.

The critique of Mexico is not that it is unable to pass written laws with words in them, it’s that those laws often are rendered meaningless in the implementation of lack thereof. It is the inverse of the situation in Brazil – in Mexico, there were a lot of debates, revisions to drafts, signing ceremonies, etc., but all that activity only makes the lack of impact more striking. The theatrics surrounding the anticorruption reform are a cancer on the rule of law, as they give the impression to ordinary Mexicans that their leaders are either (a) oblivious to the futility of their efforts, and perhaps a bit dense, or (b) trying to fool their public audience.

It’s not like Mexico lacks the source material upon which a group of motivated prosecutors could mount an epic anticorruption campaign:

Ayotzinapa

The mass disappearance of the 43 Ayotzinapa students, which could not have happened without the support and assistance of local and perhaps federal/military authorities. Not only have the authorities not found the remains of the students, there’s reason to believe that the fragment of bone belonging to one of the students was ‘staged’ by federal investigators, according to the Argentine forensic team that conducted a joint investigation.

Casa Blanca

EPN himself was caught by journalists receiving benefits in the form of real estate from Higa Group, the largest government contractor in the state where EPN was governor before winning the presidency, and is also a fast-growing federal contractor now that EPN is president. And we are not talking about one modest apartment from 10 years ago, but multiple mansions that were given in the past few years. For good measure, Higa also gave a house to Luis Videgaray, Minister of Finance and head of EPN’s campaign, in 2012.

A full three months later, EPN announced that he was ‘ordering’ the Secretary of Public Administration (“SFP”) to investigate the issue. Awkwardly, by that time the SFP was supposed to have been abolished and replaced by the Anticorruption Commission from the stalled anticorruption reform. Needing to name a head of the SFP, EPN chose Virgilio Andrade, a former electoral lawyer and PRI official. Even worse, Andrade soon confirmed that he would not be investigating the houses acquired by the President, his wife, and the Finance Minister. Rather, Andrade stressed that he only had jurisdiction to review the contracts between Higa and the federal government, and look for signs of conflicts of interest. Five months passed without any sign of progress. The grumbling in the press and congress prompted Andrade last week to promise a report “soon, in just a few weeks.”

Unfortunately, not a single person in Mexico believes that Andrade will produce a report identifying improprieties, although virtually all Mexicans I talk to think the issue is obvious based on the facts we already know. The very dramatic, public, and drawn-out process is meant to conceal the underlying substance.

Infrastructure Projects Scandals

Most recently, there have been a number of scandals surrounding construction companies involved in major infrastructure projects in Mexico (e.g., Viaductu Bicentenario, Line 12 of the Mexico City Metro). In some cases, surreptitious audio recordings of contractor executives and government officials have been released publicly on YouTube. Although some local officials have timidly indicated they will investigate, nobody is jumping at the opportunity like their Brazilian counterparts.

Point of Divergence?

If Mexico’s prosecutors were provided the same degree of independence as their Brazilian peers, there is no reason to believe that they would not use their office to the same effect. Still, the Mexican authorities do not seem to be in a hurry to finalize the secondary laws for the anticorruption reform, and even once finalized the reform does not create the same enforcement mechanism that Brazil has. Although Brazil is clearly feeling the pain of corruption more openly and acutely than Mexico right now, I would argue that their efforts to genuinely tackle the issue could help transform the country for the better. In contrast, if Mexico continues to postpone similar measures, it will be unlikely to achieve the economic growth it needs to develop the country. As a result, the many similarities between the two countries may soon start diverging, with Brazil headed in the right direction.

This entry was posted in compliance, corruption, crime. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s