Takeaways from the Anti-Corruption Chapter of the USMCA

The anti-corruption provisions in Chapter 27 of the United States-Mexico-Canada Agreement (USMCA) stand out as one of the noteworthy differences between the newly negotiated pact and its predecessor, the North American Free Trade Agreement (NAFTA). 

If ratified by the three signatories, Chapter 27 will oblige the United States, Mexico, and Canada to adopt or maintain anti-corruption measures while encouraging the promotion of anti-corruption organizations and campaigns, the training of public officials, and cross-border cooperation among enforcement authorities of the signatory countries.

To be sure, the fate of Chapter 27 remains far from certain. Like the rest of the USCMA, Chapter 27 will only go into effect if ratified by the legislatures of all three signatories, which in the United States means that the newly-elected Democratic House of Representatives must approve what would assuredly become one of the signature achievements of President Trump’s presidency. The Trump Administration is expected to submit the USMCA to Congress for approval in early 2019.

Although Chapter 27 contains the most explicit and detailed set of anti-corruption provisions of any free trade agreement to which the United States is a party, its commitments have nonetheless been criticized by some as empty and difficult to enforce. The question, therefore, is what Chapter 27 means in practical terms for companies and practitioners.

What Does Chapter 27 of the USMC Require?

The USMCA will not impose any direct obligations on companies or individuals. Instead, the free trade agreement will require the governments of Canada, Mexico, and the United States to adopt or maintain certain standards intended to prevent and criminalize corruption, including through the passage of new laws, as necessary, targeting both companies and individuals. As many have noted, Chapter 27’s anti-corruption measures are largely sourced from the Trans-Pacific Partnership Agreement (TPP) — from which the United States officially withdrew in January 2017.

Chapter 27 of the USMCA’s anti-corruption measures can be divided into three categories, namely: (1) legislative measures – i.e., laws or other legislative measures to criminalize bribery; (2) administrative measures – i.e., measures that the countries may undertake through executive-branch regulation or similar action, rather than new legislation; and (3) promotional measures – i.e., measures that are less concrete and harder to quantify, but call for the three countries to promote and encourage awareness and the adoption of certain anti-corruption practices while requiring no real specific action.

We summarize some of these key measures below:

Legislative Measures – will require the signatories to adopt or maintain legislative or other measures to criminalize:

• Bribery of a public official;

• Bribery of a foreign public official;

• Soliciting or acceptance of a bribe as public official;

• Embezzlement, misappropriation, or another diversion by a public official of property entrusted to the public official; and

• Aiding or abetting of or conspiracy in the bribery-related offenses listed above.

Administrative Measures – will require the signatories to adopt or maintain measures that provide for:

• Sound accounting and auditing standards for enterprises that prohibit recording “off-the-books” accounts, non-existent expenditures, and similar transactions;

• Protections for whistleblowers – i.e., persons who report offenses in good faith to competent authorities – from unjustified reprisal;

• The disallowance of tax deductibility of bribes;

• Adequate procedures for selection and training of individuals for public positions considered especially vulnerable to corruption;

• Appropriate policies and procedures to identify and manage conflicts of interest for public officials;

• Requirements that senior public officials declare outside activities, employment, investments, assets, and substantial gifts or benefits;

• Codes or standards of conduct for the correct, honorable, and proper performance of public officials;

• Procedures for removing public officials accused of corruption-related offenses;

• Measures to strengthen integrity and to prevent opportunities for corruption among members of the judiciary; and

• A requirement that no party shall “fail to effectively enforce” its laws adopted or maintained pursuant to the USMCA.

Promotional Measures – will commit the signatories to take the take the following steps:

• Raise awareness among public officials of relevant bribery laws;

• Recognize the harmful effects of facilitation payments – i.e., small payments for “routine government actions” of a non-discretionary nature – and encourage enterprises to prohibit or discourage the use of such payments;

• Promote the active participation of enterprises, civil society, non-governmental organizations, and community-based organizations and to raise public awareness of the existence, causes, and gravity of corruption – e.g. through public education programs, anti-corruption statements in companies’ annual reports, and protections for journalists seeking to seek, receive, publish, and disseminate information concerning corruption;

• Endeavor to encourage private enterprises to adopt or maintain sufficient internal auditing controls to assist in preventing, detecting, and remediating offenses; and

• Endeavor to strengthen cooperation and coordination among their respective anti-corruption law enforcement agencies and consider technical cooperation activities, including training programs.

These anti-corruption obligations are unusually detailed and extensive for an international treaty.  As anti-corruption practitioners are well-aware, there are already several anti-corruption pacts in place, including three to which Canada, Mexico, and the United States are already parties: (1) the Inter-American Convention against Corruption, (2) the Organization for Economic Co-operation and Development (OECD) Anti-Bribery Convention, and (3) the United Nations Convention against Corruption (UNCAC). However, many of the provisions of Chapter 27 of the USMCA are new, particularly with respect to the administrative and promotional measures.

How Will the USMCA’s Obligations be Enforced?

Chapter 27 of the USMCA stands out from past international anti-corruption agreements in terms of enforceability. Specifically, Chapter 27 explicitly permits the parties to initiate claims through the USMCA’s dispute settlement mechanism to challenge measures alleged to be inconsistent with the Chapter’s requirements. Like other disputes arising under the USMCA, anti-corruption related disputes may be resolved through consultation, conciliation, mediation, or even the establishment of panels as a neutral adjudicator of disputes. Accordingly, in theory at least, one USMCA party may someday be able to bring another USMCA party before an international panel to hold it to account for failure to live up to its anti-corruption obligations.

To be sure, there are clear limitations on the applicability of the dispute settlement mechanism to Chapter 27’s anti-corruption provisions.  Most notably, the signatories have explicitly excluded disputes arising out of parties’ failure to effectively enforce laws adopted or maintained pursuant to the agreement, likely due to sovereignty concerns. In addition, because the USMCA is ultimately a trade agreement, the dispute resolution mechanism only covers measures that affect trade or investment between the parties.

Chapter 27’s enforcement mechanism is very different from similar mechanisms in previous agreements.  To date, the most effective enforcement mechanism we have seen in an anti-corruption treaty is the peer-review monitoring system overseen by the OECD Working Group on Bribery. The Working Group process requires OECD members to periodically assess each other’s compliance with the anti-corruption commitments under the convention, including commitments to criminalize the bribery of foreign officials. Although there are no penalties as a result of these periodic peer-review assessments, the Working Group has proven to be a surprisingly powerful motivator for OECD members, appearing to drive legislative and administrative reform among countries simply through “naming and shaming.” Whether the USMCA dispute settlement will prove as effective as the OECD Working Group will be an important anti-corruption development to watch.

If Effective, How Will Chapter 27 Change U.S., Mexican, and Canadian Anti-Corruption Law?

The United States and Canada already have laws on the books that satisfy the legislative requirements of Chapter 27 of the USMCA, as well as government policies and procedures that satisfy many of the chapter’s administrative and promotional commitments. Notably, Chapter 27 appears to have been drafted with the U.S. Foreign Corrupt Practices Act (“FCPA”) and the Canadian Corruption of Foreign Public Officials Act (CFPOA) in mind.  For example, the USMCA reflects both the FCPA’s and CFPOA’s prohibitions on payments to foreign government officials/public officials, as well as both laws’ books and records provisions.

Accordingly, the biggest impact of Chapter 27 is likely to be felt in Mexico, which currently has the highest level of perceived corruption of the three signatories and lacks some of the anti-corruption measures currently in force in the United States in Canada, particularly with regard to foreign bribery, books-and-records, and internal-controls provisions. Therefore, if the USMCA is ratified and implemented, we anticipate some potential changes to Mexican law that would bring the country’s anti-corruption law more in line with the FCPA and CFPOA. In addition, Mexican President Andrés Manuel López Obrador made anti-corruption a key theme of his 2018 electoral campaign; his administration may thus be more likely than most to take the USMCA’s new training, selection, and conflict-of-interest requirements seriously.

Of course, questions remain. For example, even after Mexico’s most recent anti-corruption development – the 2017 General Law of Administrative Responsibilities – Mexican anti-corruption efforts have often seemed to lack the structure and resources necessary for success. Measures implemented by Mexico under Chapter 27 of the USMCA could suffer a similar fate.

What Does Chapter 27 of the USMCA Mean for Companies and Compliance Departments?

Despite the uncertainty of the USMCA’s ratification and ultimate enforceability, there are a few key takeaways that smart companies and their compliance departments can act upon now or in the near future. For instance:

Leverage the USMCA to increase the buy-in for anti-corruption compliance – As anti-corruption practitioners are well aware, buy-in across a company’s various divisions is essential for effective compliance. And within international companies, buy-in on complying with foreign laws with extraterritorial reach, including the FCPA and CFPOA, can be complicated by the perception such laws constitute an affront to national sovereignty or do not appreciate the practical realities of business operations on the ground.  Chapter 27 of the USMCA can provide compliance personnel with leverage to support buy-in in several ways. For example, the agreement is the latest example of the continued increase in anti-corruption expectations around the world, which can help to underscore the growing business and legal risks of non-compliance. Chapter 27’s citation to various international treaties, instruments, and guidance as the justification for the inclusion of the anti-corruption provisions can help to counter the perception that anti-corruption law is primarily U.S.-based and therefore an infringement on national sovereignty when imposed outside of the United States.

Use Chapter 27 to help streamline compliance programs – If the USMCA goes into force, the United States, Mexico, and Canada will be obliged to harmonize any domestic anti-corruption laws and practices that are out of step with the agreement. This harmonization should ideally help to establish a more uniform set of expectations from prosecutors and regulators in the United States, Mexico, and Canada, allowing companies to streamline policies and procedures that previously had to be tailored based on jurisdiction. In anticipation of this harmonization, companies and compliance professionals in the region can use Chapter 27 to begin streamlining their compliance programs in each of these countries to meet the anti-corruption standards set forth in the USMCA.

Prepare for a potential increase in Mexican enforcement – Finally, Chapter 27 of the USMCA has the potential to increase anti-corruption enforcement in Mexico, which forward-looking companies can begin to prepare for now.  Companies need to be cognizant of the fact that an increase in local anti-corruption enforcement could prove to be a double-edged sword for many companies. On the one hand, the underlying corruption risk that companies face in Mexico may decrease as effective anti-corruption enforcement serves to reduce the frequency of improper requests or alter the cost-benefit analysis that may lead employees and agents to offer bribes.  On the other hand, enforcement risk may nonetheless increase despite this reduction in corruption risk as Mexican enforcement authorities join their U.S. counterparts in actively pursuing anti-corruption violations.  Smart companies can get ahead of the curve on both of these potential risks by implementing USMCA-compliant safeguards now.

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Richard Mojica is a member of Miller & Chevalier. He counsels U.S. and international companies on how to minimize the cost of importing merchandise into the United States through strategic customs planning and duty-savings programs.

Marc Alain Bohn is Counsel in the International Department of Miller & Chevalier and focuses on the Foreign Corrupt Practices Act (FCPA) and other areas of international corporate compliance, including export controls and economic sanctions.

Collmann Griffin is an Associate in the International Department of Miller & Chevalier and focuses his practice on anti-corruption and international trade law.

The authors are grateful to Alejandra Montenegro Almonte for her contributions to the this post. She’s a member of Miller & Chevalier and practices in the area of international corporate compliance across a variety of regulatory matters, focusing primarily on corruption and economic sanctions.