Corruption the biggest barrier for businesses in México

08 November 2018

Over half of all Mexican respondents to the global survey on fraud and forensic data by the professional service firm Ernst & Young believe that corruption is the greatest threat to doing business in the country.

If there is anything that the past half a century in Latin America has taught us, it is that corruption is the only stable factor of Latin life. In the post-dictatorship period of Latin history, there was a brief belief that democratic institutions would bring with them the prosperity seen in North America and Europe. What followed however was a deep rooted understanding that to get politics was awash and perhaps even, intertwined with corruption.

The past year may have been breaking point for a broken system. Whether change will follow is yet to be seen, but the two largest democracies in Latin America have used their political power to bring in leaders who at first, seem to have nothing in common. Looking beyond the veil, Mexico’s AMLO and Brazil’s Bolsonaro are both anti-institutional presidential-elects and vow to crack down on corruption.

Their election follow multiple scandals within their own countries as well as across the region. Think Peruvian President Pedro Pablo Kuczynski’s resignation on the eve of impeachment. Think of the eight Mexican governors up on charges of corruption. Think Operation Car Wash, the Petrobas scandal and the 12 year sentence of ex-Brazilian president Luiz Inacio Lula da Silva. All of there are solely examples from very recent history.

And their effect’s have not gone unnoticed. The region is prone to inflation. Political instability leads to economic fragility. Or rather, political stability attracts foreign investment and provides opportunities for society as a whole, beyond the political class. The results? Mexico’s incoming government, alongside their counterparts in Brazil and the battling Vizcarra administration of Peru are all taking a stand.

Corruption the biggest barrier for businesses in México

Corruption is simply a dishonest exchange and involves the misuse of power in the form of money or authority to achieve a certain goal. When this becomes a constant factor in politics or business, competition subsides and only a small group of people then benefit. In the Latin case – this has become such a rudimentary factor in conducting business that it has become institutionalised and that small monopoly are referred to as the ‘politics elite’.

“It is a common practice to use bribery to obtain contracts,” states the EY survey in relation to Latin America’s high level of fraud and corruption. “When there is an act of corruption in the public eye, it effects economics, business as well as social factors, it’s very expensive, especially because it affects the reputation of the company and the country as a whole”, warns Ignacio Cortés, the managing partner of EY in México.

But the question remains, what effect does corruption have on the economy? Firstly, corruption causes artificially high prices and reduces the checks and balances necessary to make informed decisions on contracts. Resources will also be allocated inefficiently in an corrupt economy, as tenders will often go end up with who’s willing to pay for them, not who is most qualified. The result of these factors, amongst others, is that societies with rampant corruption also have an uneven distribution of wealth.

The Mexican case

The above statements describe the situation in Mexico and is perhaps underpinned by the recent period of political violence which was dubbed the worst in modern Mexican history. If anything, the 93 murders of political candidates in the buildup to the Mexican elections exemplifies how institutionalised corruption is in the country at a local level. As the generation old Colombian saying goes, plata or plomo.

This institutionalised corruption, fraud and bribery dismantles democracy from the top down. It effects the credibility of non-corrupt institutions and gives businesses who engage in unsavoury practices get ahead. The prevalence of this type of behaviour in Mexico is exemplified by the EY report and the responses of the Mexican respondents.

The EY report suggests that over 70% of the respondents in Mexico believe that acts of fraud and corruption occur in a common way within companies. Over half of the respondents also acknowledge that corruption and fraud are the main risks for companies to do business in Mexico. In other emerging countries including those compadres in South America, this figure is an average of 29%.

“Corruption is not a cultural phenomenon but the result of a decadent political regime.”

– Andrés Manuel López Obrador

EY’s Cortés highlights the importance for companies who operate in Mexico, both local or international, to avoid engaging in this type of behaviour. “The integrity of a company is imperiously necessary to conduct business and now, in a global world it isn’t acceptable to do business with international companies who do not have anticorruption methods and models established within the law and the National System of Anticorruption in México (SNAM),” he insists.

Such a high level of acknowledgement for corruption make the issue the most important disruptor to conducting business in Mexico. A constant factor within the economic fabric of Mexico. The election of AMLO identifies an anti-political-elite sentiment and a chance to confront the issue head on. Shortly after being elected AMLO said “corruption is not a cultural phenomenon but the result of a decadent political regime”.

In the aftermath of the election, EY’s Cortés wrote to the consulting firm’s clients within the country and urged companies to join the fight against corruption. He said, “companies are jointly responsible for detecting and preventing corruption and bribery within their organizations”.

The EY Partner – who also heads the firm’s Forensic and Integrity Services (FIS) practice – concluded by saying, “Convinced of the importance and dedication that the fight against corruption deserves, we reiterate our commitment to this work. We will continue to demonstrate that we have the best team of professionals willing to create a real and positive impact on the future of Mexico.”