U.S.-Mexico Business Expansion: Law, Ethics & Compliance

Overview

It is important to note, from the outset, that there are many commercial benefits our company could reap by expanding internationally. Thus, the expansion into Mexico is not only timely but also well considered. However, in engaging in this expansion, the company ought to be aware of the pertinent aspects of both U.S. and Mexican law. With this in mind, this memo highlights the most likely compliance issues and concerns as they relate to the various aspects of law and ethics specific to Mexico.

Pertinent Aspects of U.S. Law

There are a number of laws and legal provisions relevant to our expansion into Mexico. Key among these include, but are not limited to, the USMCA (which replaced NAFTA), Customs and Border Protection (CBP) laws, and laws relating to corrupt practices and money laundering.

For 26 years, businesses operating in North America had to comply with the specific requirements of the North American Free Trade Agreement (NAFTA). However, beginning July 1 of this year, NAFTA was replaced by the United States-Mexico-Canada Agreement (USMCA). Failure to comply with the various provisions of the USMCA could have a negative impact on our operations as well as our reputation. It would therefore be prudent to ensure that we are aware of—and comply with—the rules of origin, prepare the company for relevant audits, and modify our compliance programs accordingly. There are, however, various NAFTA obligations that will survive under the new agreement. Examples of USMCA provisions we should be aware of include customs administration and trade facilitation, rules of origin and origin procedures, labor standards, intellectual property, and investment. For instance, with regard to labor, employers have specific obligations, especially as they relate to discrimination and coercion avoidance. Further, when it comes to certification of origin, we should maintain templates of the required certification documents.

With regard to customs and border protection, the company ought to be aware of the various laws enforced by CBP on behalf of the government's agencies. There are specific restrictions on goods that must not be permitted entry into the U.S. Some of these items include, but are not limited to, those likely to threaten public safety or occasion harm to the nation's flora and fauna. More specifically, CBP policies we ought to be aware of relate to the flow of cargo through the country's ports of entry (POEs) and the enforcement of customs and trade laws.

Another law we must be aware of is the U.S. Foreign Corrupt Practices Act. This is particularly important given that concerns have been raised over the level of corruption in Mexico. The law was enacted with the aim of "making it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business" (Department of Justice, 2020). We also ought to be aware of the money laundering laws currently in effect. This is a key consideration as it relates to the transfer of financial assets between the two countries. For instance, we would be expected to take all precautions to ensure that suspicious financial transactions are reported. Rules still in effect include the "know your customer" regulations.

Another relevant area of law is World Trade Organization (WTO) regulations. In basic terms, these are rules that seek to govern global and international trade—activity our company will essentially be engaging in by expanding to Mexico. Thanks to the various provisions of the WTO, the company would, among other things, be protected from forms of protectionism that the Mexican government could undertake via technical standards or regulations. WTO regulations also protect the company from discriminatory treatment. The key areas of greatest relevance are the Trade-Related Aspects of Intellectual Property Rights (TRIPS), the General Agreement on Trade in Services (GATS), and the General Agreement on Tariffs and Trade (GATT) (WTO, 2020).

We also ought to be aware of key employee rights as they pertain to our conduct of business in Mexico. Of great interest here is Title VII. The U.S. Equal Employment Opportunity Commission (EEOC, 2020) points out that "U.S. citizens who are employed outside the U.S. by a U.S. employer—or a foreign company controlled by a U.S. employer—are protected by Title VII." It should, however, be noted that persons who are not U.S. citizens are not afforded these protections. Title VII would therefore apply to U.S. citizens working in Mexico but would not apply to any non-U.S. citizens we hire in that country.

In the course of doing business, the company may also wish to protect its inventions and creations. To protect ourselves against infringement, we ought to be well versed in the relevant intellectual property laws—particularly as they relate to copyright, trademark, and patents. The U.S. Customs and Border Protection office would be valuable in our efforts to record copyrights and trademarks registered within the U.S. A U.S.-Mexico trade agreement relating to IP protection, as initiated by the WTO, is already in place. It would therefore help to be familiar with the Trade-Related Aspects of Intellectual Property Rights (TRIPS).

The Sherman Act would also govern our operations in Mexico, particularly when it comes to activities likely to restrict competition and commerce in the marketplace. Specifically, as it relates to international operations and trade with Mexico, it would help to be aware of the provisions of Section 1 of the Act (15 U.S.C. §1) as well as Section 2 of the Act (15 U.S.C. §2). Finally, our conduct of business in Mexico would also be governed by the U.S. Export Administration Regulations, particularly given that advancing our interests into Mexico could involve the transfer of technology, software, or certain products from the U.S.

Legal Implications of Expanding into Mexico

From a legal perspective, the decision to launch operations in Mexico has both upsides and downsides. To begin with, it should be noted that "employment at will" is not recognized in Mexico (Gomez, 2018). In basic terms, employment at will means that an "employer does not need good cause to fire" (Gomez, 2018, p. 173). It therefore follows that in establishing operations in Mexico, our company will lose this flexibility. For instance, it would be challenging to dismiss workers who perform poorly, since we cannot terminate an employment relationship without providing an explanation—which is, in some cases, potentially litigious because "just cause" is subject to diverse interpretations.

We could, however, benefit from a favorable tax regime in Mexico. For instance, thanks to FIBRA E, the company could gain access to a number of tax benefits. According to Deloitte (2019), "dividends from operating companies to shareholders are not subject to certain provisions in the Income Tax Law (ITL) and can be paid free of Mexican dividend withholding tax" (p. 5). Further, as an operating enterprise, we would not be obligated to make provisional income tax settlements on a monthly basis (Deloitte, 2019, p. 5).

With regard to foreign investment, Mexico does not impose sweeping limitations or restrictions on capital repatriation or dividend remittance—a fact that is definitely of great relevance to us. We could also seek to set up operations in special economic zones to access a wide range of benefits relating to regulation, customs duty, and taxation. These special zones were created in 2016 in an attempt to attract investment and alleviate poverty within identified underdeveloped regions. For instance, imports into the identified zones attract a 0% value-added tax rate, and there is a tax exemption for export goods from these zones.

Thanks to NAFTA, and now USMCA, our enterprise would have enhanced rights as it ventures into Mexico—particularly as they relate to the elimination of investment and trade barriers between Mexico and the U.S. As a consequence, we are likely to benefit from minimized costs of commerce. Furthermore, given that Title VII advances protection to U.S. citizens in our employ in Mexico, we will be able to maintain human resources best practices and motivate skilled U.S. employees who agree to relocate. Lastly, the existing U.S.-Mexico trade agreement relating to IP protection is a strong incentive for our innovation efforts. Thanks to the IP chapter in the USMCA, we can leverage IP investments to further promote our competitiveness in the marketplace.

Conclusion and Recommendations

To ensure full compliance with Mexican laws, we should consider hiring a Mexican law firm to help us navigate the legal landscape. To a large extent, this may represent an additional cost, but it is a prudent investment given the complexity of the regulatory environment described throughout this memo.

References

Deloitte (2019). 1.0 Investment Climate. Retrieved from

Department of Justice (2020). Foreign Corrupt Practices Act. Retrieved from https://www.justice.gov/criminal-fraud/foreign-corrupt-practices-act

Gomez, O. D. (2018). Labour and Employment Compliance in Mexico. New York, NY: Wolters Kluwer.

Graycar, A. (2020). Handbook on Corruption, Ethics and Integrity in Public Administration. Northampton, MA: Edward Elgar Publishing.

Human Rights Watch (2020). Mexico Events of 2019. Retrieved from https://www.hrw.org/world-report/2020/country-chapters/mexico

Stuart, O. (2018). How will the shift from NAFTA to USMCA affect the auto industry? Retrieved from https://www.industryweek.com/the-economy/article/22026500/how-will-the-shift-from-nafta-to-usmca-affect-the-auto-industry

U.S. Equal Employment Opportunity Commission – EEOC (2020). Employee Rights When Working for Multinational Employers. Retrieved from https://www.eeoc.gov/laws/guidance/employee-rights-when-working-multinational-employers

U.S. Department of State (2019). U.S. Relations with Mexico. Retrieved from https://www.state.gov/u-s-relations-with-mexico/

WTO (2020). Understanding the WTO: The Agreements. Retrieved from https://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm1_e.htm