MONEY LAUNDERING, DUE DILIGENCE, PEMEX AND THE OPENING OF THE OIL MONOPOLY IN MEXICO
From 2002 to 2004, Ferrari manufactured a limited edition batch of the Enzo, the most expensive model the iconic Italian company offers. While the car has a retail value of $700,000 USD, it is one of the few Ferrari models that immediately doubled - or tripled - its price upon leaving the dealership. Because only 399 Enzos were made, they currently trade anywhere from $1-2 million USD in after-market auctions. Buyers interested in purchasing their own Enzo must meet several strict requirements: successfully complete a difficult, one-time, one-of-a-kind driving test, live in a country that houses a Ferrari dealership, own at least two other Ferrari vehicles and, of course, demonstrate outstanding economic proficiency.
Last year, the leader of the Petroleum Workers Union of Mexico, Carlos Romero Deschamps, presented his son José Carlos a $2 million USD Ferrari Enzo as a birthday gift. The car was delivered to young José Carlos’ one of two apartment homes in Miami Beach, Florida, worth several million.
Now: how did a Mexican state official acquire the means to make such a gift - or rather - such a purchase?
Romero Deschamps’ daughter, perhaps a bit more modest than her younger brother, on the other hand, enjoys traveling around the world in private jets and yachts along with her three British pug dogs. She is known to frequently visit places such as Dubai, Russia, London, France and Italy, just to name a few. Thanks to social media, the public has also learned that during her trips, she particularly takes pride in sporting her French-made Birkin handbag, with an estimated price of $12,000 USD as well as her $5,000 USD limited edition Louis Viton bag, while opening a $1,000 USD bottle of French wine.
At home, she basically spends her time lodging, drinking and dining in Mexico’s most luxurious hotels and eateries: in fact, she is a loyal customer of one of Mexico’s top restaurants: the exclusive and costly Nobu, owned by Robert DeNiro.
Let us, then, rephrase the previous question: what kind of income does her father, Carlos Romero Deschamps, currently earn? Where does it come from?
We can begin to answer by recalling that even though in his early days Deschamps worked as a sandwich seller, an oil worker, and a chauffeur, he has now been the leader of the PWUM, PEMEX’s only worker’s union, for the past 20 years. He has managed to exclusively maintain that position only by illegal means, considering that union leaders are merely eligible for a single reelection. Even though he is a hardcore member of Mexico’s PRI party, he has survived three presidencies, including that of Vicente Fox and Felipe Calderon, both members of the PAN party, the historic rival of the PRI.
All in all, he has been involved with the Mexican congress for 34 years: never publicly elected but always chosen internally by members of the PRI.
Interestingly enough, Deschamps is not only one of the few Mexican senators that has never - no, not once - proposed a single initiative or any other sort of legislation (he has only signed several) but is also amongst the 10 senators with the lowest congress attendance history, a fact he firmly denies.
“They’re faking that information, I always make my presence obvious...look at me, here I am,” he responded when approached about his lack of appearance by a Mexican newspaper.
But in 2013 Deschamps suddenly attracted a very serious national and international gaze because he supported, promoted and, most importantly, signed one of the most - if not the most - important piece of legislation proposed during the current presidential cabinet of PRI’s Enrique Peña Nieto: the infamous energy reform, a series of intricate laws and regulations currently subject not only to public scandal and debate but notorious international interest, especially in the oil and energy investment sector.
The Mexican government is convinced that if PEMEX and the CFE compete with foreign private investment, not only will everybody experience considerable benefits but the country will also transcend its poor economic growth. Along with the labor, fiscal and education reform, the PRI’s energy reform (officially approved as of August 6, 2014) is being sold as the final blow to Mexico’s decades-long economic inefficiency as well as a triumphant return to the oil market of the first-world.
The energy reform, officials believe, will bring about never-before-seen economic progress, which, as we known, is widely held to be crucial for healthy nation-states and democratic law of the land.
“We’ve decided to overcome the myths and taboos to take a great leap into the future…a new history begins for our country,” said Peña Nieto on Dec. 20 of last year, when negotiation talks were still underway.
Yet in order to dismantle Mexico’s energy and power monopoly, headed by state-owned PEMEX and the Federal Commission of Electricity since Lázaro Cardenas' oil expropriation in 1940, Mexico’s energy reform requires several constitutional amendments - already approved -, primary laws - approved -, secondary laws - approved - and of course, the re-negotiation of PEMEX’s labor contracts as a crucial condition for the absorption of PEMEX’s $120 billion USD pension liability debt by the federal government; which would be paid, of course, by the Mexican public.
Interestingly enough, that last bit is still pending negotiation. It is a delicate process that, as several Mexican newspapers have reported, violates the labor accords of the union with the workers.
In fact, though Deschamps himself has remained incredibly silent about the whole tribulation, the PWUM announced that “they will not accept conditions from individuals outside of the union; the only ones that can approach labor issues are the union and PEMEX.”
They further explained that the only way the union will make a deal with the federal government is if PEMEX and its workers in fact agree about the pension re-negotiation terms in a year’s time. So far, a possible proposal entails that the federal government would pay an equal amount to the amount subtracted from the worker’s retirement fund. If the re-negotiation were for a 2% reduction in the GDP in terms of pension liability debt, then the federal government would assume another 2%. The original proposal - that the federal government assume PEMEX’s pension liability debt in its entirety - has now been discarded.
There are, however, several problems that are unlikely to be solved with the ease that the Mexican congress managed to resolve the other requirements of the energy reform, including - ironically enough - modifications to the Mexican constitution.
First of all, the CFE declared that 20,000 workers will be eligible to retire in the next five years, and close to 50,000 in the next six to ten years, as the financial times reported. Which means that the pension liability debt will inevitable increase in the near future, even if contracts are re-negotiated.
Furthermore, considering that Mexico’s public debt is currently close to 40% of GDP, if the federal government, upon pension re-negotiation by the PWUM, in fact assumes the proposed portion of the debt, it is possible - perhaps inevitable - that the public debt percentage in GDP will rise, which will definitely also be reflected in Mexico’s risk ratings.
How safe, then, will it be for foreign investors to secure their assets? How much risk will they be willing to assume on their own?
Not only that, but, financially, the whole ordeal is reminiscent of the infamous FOBAPROA, the Mexican bank bailout of the ‘90s, an event largely orchestrated by the PRI’s most repudiated - and wealthiest - president, Carlos Salinas de Gortari, which was undoubtedly one of Mexico’s biggest national scandals of the late 20th century. More alarming than the already questionable move by the federal government of taking on the faults of the private sector and making the public pay for them, was the fact that the debt was undeniable related to private and political corruption - to outright theft - by those in power: from the banking administration to the presidential palace.
The parallel is such that the pension liability issue has in fact already been dubbed PEMEXPROA by several newspapers, critics, and politicians. Shortly after the '95 bailout, most of Mexico’s banks were sold to foreign buyers - much like it is being currently advertised for PEMEX and CFE. Without the bailout, the sale would have been impossible then, just like the energy reform would be impossible now without the pension liability absorption by the federal government.
Potential foreign investment should simply not take on such high risks.
Thus we are led to the most difficult obstacle of the energy reform: currently existing corruption. The current crossroads speaks loudly about the overwhelming corruption that characterizes Mexican politics and business alike. Any and all business must confront - head on - questionable moves by part of business leaders, politicians, courts, laws and an overall corrupt governmental and financial system.
Even if the union re-negotiates the worker’s pension liabilities and seals a decisive deal with the federal government (which is likely to take place), to a large extent, the pension re-negotiation, as well as the actual process unveiled by the agreement, will indeed rest in the hands of none other than Deschamps and his allies, since he is, albeit his terrible reputation, the current leader of the PEMEX worker’s union.
Deschamps, as we briefly illustrated in the beginning of this report, possesses an incredible amount of capital that has not originated from honest - much less lawful - means.
As Forbes acknowledged, a Texas court just “issued a final judgement against PEMEX’s powerful Workers Union authorizing Texas’ company Arriba Ltd to collect millions of dollars in damages for breach of contract,” an amount oscillating between $426 billion USD and $1.4 billion, depending on the rate used to calculate interest.
The story goes like this: in 1984, Texas’ Arriba Ltd agreed to purchase, in order to refine, 6 million barrels of residual oil from PEMEX, a deal managed by PEMEX’s PWUM and a deal that, on the Mexican refinery part, was never fulfilled because, neither on the contract terms or the past 30 years, did Arriba Ltd receive the 6 million barrels of oil specified in the contract.
The contract, written dubiously, with too much leeway for action against the union for breaching the agreement, has contributed to the fact that the union has eluded its legal responsibility and instead has resorted to “cons, frauds, misrepresentations” and acted with “an absolute sense of impunity,” a course of action that could be surprising for a U.S. corporation but that is not very rare for Mexican firms.
Even after the court’s ruling, however, the PWUM is not legally required to answer for the fraud committed inside of Mexico. The court can only authorize the seizing of certain assets outside of the Mexican territory.
But perhaps more important than the court’s decision itself is the fact that the ruling actually specifies that the assets to be seized are not just those belonging to the PWUM but to Deschamps, to his relatives and associates, both directly and indirectly. Thus it has been legally recognized - not just in Mexico, but also in the U.S. - that Deschamps and the PWUM operate simultaneously, or at least that Deschamps serves himself from the union, exploiting it in2 order to gain personal economic profit.
On trial, U.S. attorney Carlos A. Ryerson actually testified against Deschamps and two other union officials for keeping $1.5 million USD in cash that was meant to pay for his work. The details of his testimony include the fact that he physically saw Deschamps and union’s treasurer withdraw the cash money from a Banamex in Mexico City and count it, only to pay him $1 million USD of the $2.5 million USD agreed on the contract.
Deschamps, then, already has a history of fraudulent dealings with U.S. oil companies. How can foreign investment companies feel safe that their assets will be secured when he will be at least in some way involved?
We must also remember that in 2000, Deschamps was involved in a serious corruption scandal involving the oil worker’s union. The Federal Electoral Institute (IFE) in fact confirmed that the PWUM diverted $90 million USD from worker’s funds in order to illegally fund the presidential campaign of PRI’s Francisco Labastida Ochoa, Deschamps close political companion. Deschamps himself in fact created the fund in 1997, and by 1998 it had already raised close to $180 million USD.
Yet the union has never been clear about numbers: in the years that followed, regardless of the large list of benefits declared, it was always (and continues to be) uncertain how many workers were retired and how many actually received pension benefits.
What is definitely clear, however, is that a large amount of money was and continues to be used to finance the expense of its leaders. So much so that the fund, supposed to account for the 80,000 current PEMEX workers, is now empty; hence the pressing need for the recently approved bailout by the federal government.
Notwithstanding the overwhelming evidence against him, by 2006, the Mexican federal government officially absolved Deschamps from the crimes associated with the money embezzlement of PEMEXGATE because too much time had elapsed before he was proven guilty. This illustrates the fact that corrupt politicians and businessmen in Mexico have and continue to operate with absolute impunity.
There are simply no laws designed to combat corruption and theft. Lawmakers themselves are the source of the problem, they are, first-hand, the people that benefit directly from Mexico’s systems of corruption.
It’s a problem inevitably related to the overwhelming money laundering issue that currently plagues Mexico. No effective legislation against money laundering has been actually passed, and the current one is not effectively enforced. Mexican congress will never elaborate, much less pass laws that will allow for transparency in the financial sector as well as the banking sector.
It is imperative, then, that potential investors be advised about the current and upcoming dangers of the oil business in Mexico. If and when U.S. companies make a decision to seriously invest in the forthcoming oil business opening in Mexico, they must be sure to conduct proper due diligence, it is a crucial move to ensure the safety of their assets, a successful business experience and to avoid future sanctions.
Investors must be sure to identify Mexican sub- companies that will be involved in the oil deals. Who will pick and choose the collaborators? Will it be Deschamps and his allies? Pemex?
Failure to conduct proper due diligence, of knowing first hand the current and previous history of the business collaborators will likely result in an unsatisfactory outcome. The risk of money laundering is too high when we take into consideration the individuals and the companies potentially involved, which, after looking at Mexico’s history and current money laundering problem, are filled with examples of fraudulent activity.
