QUESTION ONE – When representing a client with significant business activities in foreign jurisdictions, what are some key risk-related concerns that arise in a cross-border context and how can a parent company minimise such risk?
Non-Mexican clients with operations in Mexico face a series of risks related to several factors. The first factor is assuming that things work the same way everywhere and culture. In this aspect, we’d refer to culture as a legal culture and compliance with legal requirements. Many clients do not understand the differences in legal systems and assume that the rationale for establishing a certain rule is the same everywhere. This lack of understanding can have serious monetary consequences. We recommend that clients engage with a consultant who can provide insight into how things work in order to avoid unnecessary risks.
A second factor is a control – either wanting too much or not having enough over the subsidiary’s operation. When there is too much control the operation becomes bureaucratic and slow, but when there is very little control, the operation is chaotic. This can have monetary as well as other legal consequences.
A third aspect is not clearly understanding how the funding and management of the subsidiary will work. Funding is a very important aspect for the success of the subsidiary. Understanding the consequences of where the funds come from and the tax treatment that comes with it is key. As well as the repatriation of funds coming from the subsidiary.
A fourth aspect when setting up operations in Mexico is the labour situation – understanding the legal obligations and limitations an employer has towards its employees can minimise risk, as well as understanding how unions work, their power in Mexico etc.
The fifth aspect is understanding the culture with regard to corruption and legal compliance. Although there is the legislation regulating corruption, defining gifts and what is considered corruption, many Mexicans are not fully aware of the extent of the law.
QUESTION TWO – What degree of control should a parent company have over its overseas subsidiaries? How does the degree of control impact the risk exposure level, and how can control issues be managed to minimise liability?
In our experience, when setting up operations it is important that the parent company has a team that is prepared to manage the initial stages of the subsidiary operations. As mentioned, it is very important to have local advice on how things work from a legal and accounting standpoint, and, in particular, on funding, repatriation of funds, taxes, accounting principles, payroll and benefits, anti-money laundering practices and corporate governance, among others.
Depending on what kind of operation the parent company has in Mexico, be it a joint venture, acquisition or stand-alone operation, in the beginning, it is important to have key people from the parent company supervising the operation. It is very important to have the systems in place from the beginning in order to reduce the exposure of risks of going into a foreign operation. Working closely during the beginning stage of the operation with local consultants who can assist in the implementation and understand legal compliance can be a key aspect in reducing exposure to risk. In addition, hiring key experienced employees will be an essential aspect of managing risk in a foreign operation.
QUESTION THREE – What constitutes the right balance between risk and liability for a company and its overseas subsidiary? What examples can you give?
Initiating an operation in a foreign country is a risk itself. In our experience, if a company gets proper advice prior to entering while entering and during the time they have operations in the country, the risk will be managed to the extent possible. Having good systems set up from the beginning is key to obtaining the right balance between risk and liability. By good systems we mean having a team that supervises the foreign operation, having the key people in the foreign operation and having good corporate governance policies. Training employees regarding values and ethics is always important. Providing training on key legal aspects is also important to ensure employees understand why compliance is so important for the company.
There is no one formula that works for each company. We have had companies that in addition to having all the systems in place have a team periodically travel to Mexico to meet with employees. In addition, they engage consulting firms to carry out periodic compliance audits. It all depends on the size and type of operation. For example, a manufacturing plant will have more risk associated with the import and export of products, while a services company will have more digital compliance requirements.
Key considerations for multinationals operating in highrisk industries and jurisdictions:
- Hire a local consultant that can provide insight into how things work in that particular jurisdiction.
- The parent company needs to exercise the right amount of control, have the right systems in place, hire key people and establish a team to supervise the foreign operation.
- Funding of the foreign operation: consider where the funds come from, how to repatriate and tax consequences.
- Corporate governance: having systems that allow for governance controls per parent company and local requirements.
- Understanding the legal obligations of the foreign operation. Specifically relating to taxes, labour and, depending on the operation environmental, antitrust, among others.
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