Last Friday the Mexican government issued the National Law for Dominion Extinction in a direct attempt to ameliorate and control the product of illicit activities such as corruption and money laundering.
The new law effectively allows the federal government to transfer the ownership of any kind of property derived or presumptively derived (more on this later) from illegal activities without any indemnity or payout to its owner.
The Mexican government had faced a cumbersome battle against corruption with no clear sight of even deterring it. The layering of activities such as transfers, corporate shells, trusts, among others has made even more difficult the job of authorities to satisfy its burden of proof on criminal or civil procedures. However, the National Law for Dominion Extinction transfers the burden of proof to the owner of the assets and creates a strong presumption of illegality for any inexplicable income, property, or anything of value.
When a dominion extinction process is initiated, the defendant will have to satisfy an evidentiary threshold to defeat the presumption of illegality and obtain a good faith standing in relation to the assets; moreover the law establishes the burden on the defendant to demonstrate that they faced a demonstrable impediment to discovering the illegal nature of the acts that led to acquisition of the asset or assets in question.
The National Law for Dominion Extinction is civil in nature, however, the agency with powers to enforce it — the Public Ministry (Ministerio Público) — is formally part of the criminal justice system. The law will transfer ownership of actioned assets from their legal proprietor to the federal government, which will have the authority to sell the assets and use the proceeds for public service. The new law even grants power to the government to conduct a sale of the asset prior to any final judicial decision on the subject matter, something that has raised concerns of practitioners.
The legal proceedings are applicable against any asset derived from organized crime, money laundering, robbery, abuse of power, extortion, and kidnapping, among others. The new law will also apply to any licit asset derived from the illegal asset, such as interest payments, guarantees, or any kind of accessory, and to any licit assets that have been co-mingled with illegal assets in an attempt to conceal the illegality. More importantly, there is no requirement that the dominion extinction proceeding be initiated after a criminal trial has been decided. This means it can be a standalone process based on the authority’s discretion, affecting individuals and corporate entities alike.
It is very possible that the constitutionality of this law will be questioned in proceedings before the Supreme Court in the coming months, however, as it stands, it effectively grants the federal government the power to seize and control any asset the government deems a product of illegality, without any prior judicial decision, a fact that will surely trigger due process arguments.
More importantly, the National Law for Dominion Extinction places a high burden on any person or legal entity to make sure that through their compliance department, they have: (i) internal controls that can produce an auditable chain of title back to the source of any asset throughout the supply chain and (ii) have reliable third party monitoring with proper and exercised audit rights that can provide an effective defense against legal intrusion by the government.
Christian Leo Varelas is a dual qualified solicitor (Mexico and the UK) with LLM degrees at Vanderbilt University and Queen Mary University as well as an MBA at University of Greenwich. He has practiced at international law firms in litigation, corporate law and compliance. He designed, implemented and monitored compliance programs in different sectors and is currently the Head of the Compliance Coordination at the Mexican Social Security Institute. He can be contacted here.