Last month, a rare Foreign Corrupt Practices Act trial began in New York.
The case is U.S. v. Javier Aguilar. (See here for the prior post detailing the charges and here for an article providing an overview of the trial).
Last week, with the trial nearing its conclusion, the judge in the case (Eric Vitaliano – E.D.N.Y.) issued a meaningful decision concluding that employees of Pemex Procurement International Inc. (PPI) – a wholly-owned affiliate of PEMEX – are not “public servants” for purposes of the relevant Mexican law.
In doing so, Judge Vitaliano rejected the DOJ’s position that an entity is state-owned by virtue of its parent corporation being state-owned and stated that the “government does not easily give up the ghosts” and was “grasp[ing] at the straw.”
As to the relevant background, Judge Vitaliano noted:
“Count Three of the Redacted Indictment charges defendant Javier Aguilar with conspiring to launder money “with the intent to promote the carrying on of,” among other things, an “offense[] against a foreign nation involving bribery of a public official . . . in violation of the . . . Mexican Penal Code.” The parties contest the appropriate interpretation of the relevant provisions of Mexico’s criminal law relevant to this charge; more particularly, whether the individuals the government contends Aguilar bribed are covered by the anti-corruption net cast by the Mexican penal code. For the reasons discussed below, the Court concludes that those individuals, who are employees of PPI, a wholly-owned affiliate of PEMEX, the sovereign corporate entity created by the Republic of Mexico to own and control Mexico’s oil industry, are not “public servants” for purposes of the relevant bribery provision set forth in Mexico’s penal code.”
As Judge Vitaliano stated in a footnote:
“Count Three charges additional other “specified unlawful activities,” including felony violations of the Foreign Corrupt Practices Act (“FCPA”) related to bribery of Ecuadorian and Mexican officials, as well as an offense “against a foreign nation involving bribery of a public official . . . in violation of the Ecuadorian Penal Code.” All agree that principles of Mexican law will be relevant to the jury’s determination of whether the entities involved in the charged scheme— Petroecuador, Petróleos Mexicanos (“PEMEX”), and Pemex Procurement International, Inc. (“PPI”)—constitute “instrumentalities” for purposes of the FCPA.”
Judge Vitaliano began his decision as follows (certain internal citations omitted).
“To determine whether the government has made out a prima facie case on this aspect of Count Three, and if so, to instruct the jury on that charge, the Court must necessarily determine the elements of the relevant applicable bribery offense under Mexico’s penal code. The parties agree that the relevant bribery provision is set forth at Article 222(II) of the Mexican Federal Penal Code (“CPF”). […] That provision criminalizes paying bribes to “public servants.” […] Article 212 of the same Title defines “public servant” to include, in relevant part, “any person who holds a job, position or commission of any nature in the centralized Federal Public Administration or that of the Federal District, decentralized agencies, majority state-owned companies, organizations and entities assimilated to them, [and] . . . state productive companies.” […]
The parties agree, as they must, that employees of PEMEX itself fall within the ambit of Article 212: PEMEX is classified as a “state productive company” included in the list of entities within Article 212’s definition. It is further undisputed that for employees of PPI to be “public servants,” PPI must be either a “majority state-owned company” or an “organization or entity assimilated to” one. […] All are also in accord that the terms “majority state-owned company” and “organizations or entities assimilated to them” are undefined by the CPF. […] The interpretation of those terms is where the parties’ positions diverge.
Right off the start, the government and defendant are at loggerheads over a fundamental issue: the handling of undefined terms in the relevant portions of Mexican statutes. The government contends that the terms are not vague and thus should be left as they stand for the jury’s deciphering. […] Should the Court conclude that the terms are vague, the government suggests the Court turn to definitions found in various Mexican dictionaries. […] Singing from a different hymnal, defendant proposes that the terms be given the meanings ascribed to them by other provisions of Mexican law, as a court in Mexico would.
At any rate, though Mexican law is foreign, its construction for application in American courts and causes of action is not. Indeed, the Second Circuit has provided express guidance on the interpretation of Mexican law in such circumstances, explaining that, “Mexican law is much different [than American law], and its sources do not lie in precedent cases. As a civil law jurisdiction, Mexican courts consider the text of the constitution, civil code and statutory provisions as the primary source of law and given them preponderant consideration. Likewise, Mexican courts give substantial weight to administrative regulations.” […] That is because “[a] civil code is not a list of special rules for particular situations; it is rather a body of general principles carefully arranged and closely integrated.” […] Thus, “[i]t is only when no evidence of foreign law has been presented that the courts will decide cases in accordance with New York law.” […] Putting its guidance on the proper construction of Mexican law into practical effect, the Second Circuit in Curley referenced numerous Mexican codes—both civil and criminal—in its analysis of the Mexican law issue before it.
With those principles in mind, the Court turns to other Mexican statutory provisions to determine the meaning of “majority state-owned companies” and “organizations and entities assimilated to them” as used in Article 212 of CPF. The only statutory text that defines those terms is the Organic Law of the Federal Public Administration (Ley Orgánica de la Administración Pública Federal “LOAPF”), enacted by Mexico’s Congress in 1976 “in response to a constitutional directive to define the various constituents of Mexico’s” executive branch. […] Since LOAPF’s enactment, the Mexican legislature has enacted numerous other statutes using the terms defined in LOAPF without then redefining those same terms in the new statutes. More to the point, just six years after LOAPF’s enactment, upon constitutional amendment directing the legislature to provide criminal penalties for acts of corruption by “public servants,” Mexico’s Congress enacted Article 212 of CPF (the definition of “public servant”) and incorporated into that definition LOAPF’s terms.
As teased above, one way that employees of PPI may be considered “public servants” under Article 212 is if they hold a job, position, or commission at a “majority state-owned company.” As part of its argument that the Court need not look to Mexican law to determine the meaning of that term, the government urges that PEMEX—itself wholly owned by the Mexican government— wholly owns PPI; therefore, PEMEX’s ownership of PPI indirectly renders PPI an entity wholly owned by the Mexican government. Put simply, according to the government, PPI is state-owned by virtue of its parent being wholly owned by the government of Mexico.”
A footnote then states:
“The defense contends that such an argument flouts ordinary principles of corporate law that the holder of a corporation’s shares does not also hold the corporation’s assets. As applied here, the Mexican government’s ownership of PEMEX’s shares does not make it the holder of PEMEX’s assets, including PPI.”
Judge Vitaliano continued:
“Notwithstanding any precedential requirement to consider Mexican law, the government’s theory comes with an already rejected tag. In Del Castillo v. PMI Holdings North America Inc., the Southern District of Texas analyzed whether another of PEMEX’s subsidiaries, PMI Comercio, was an “instrumentality of a foreign state” under the Foreign Sovereign Immunities Act by having the “majority of [its] shares . . . owned by a foreign state.” After concluding that PEMEX itself was an instrumentality of a foreign state, the court rejected the argument that PMI Comercio could also be an instrumentality of a foreign state merely by virtue of being wholly owned by an instrumentality of a foreign state (PEMEX).
In any event, whether in harmony with Curley or by persuasion of Del Castillo, it is necessary here to turn substantively to the definition of “majority state-owned” under Mexican law. As mentioned, LAOPF defines the terms used in Article 212’s definition of “public servant.” The definition of “majority state-owned” appears in Article 46 of LOAPF, which states that to be a majority state-owned company, the “Federal Government [of Mexico] or one or more parastatal entities” must “contribute or own more than 50% of the capital stock of the company.” Because PEMEX—not the Federal Government—owns PPI, […], PPI arguably might fall within Article 46’s definition of majority state-owned only if PEMEX is considered a “parastatal entity” under Mexican law, another question the parties vehemently contest.
A brief primer on the structure of Mexican government will, hopefully, prove beneficial. Like the United States government, the national government of Mexico has three branches, including an executive branch, known as the Federal Public Administration, which is spliced into a centralized sector consisting of the President and the cabinet departments, and a parastatal sector, akin to the United States’s administrative state. As part of the constitutional directive that Mexico’s Congress define the executive branch constituents, […], Articles 1 and 3 of LOAPF define the parastatal state and provide the types of entities that “make up the parastatal public administration,” including “decentralized organizations, state participation companies,” and others. […] The Third Title of LOAPF then sets forth various definitions for the parastatal public administration. […] Within the Third Title sits Article 46, the definition of “majority state-owned company.”
Prior to a legislative overhaul of Mexico’s domestic energy market that began in 2013, PEMEX was classified as a “decentralized organization,” fitting comfortably in Article 3’s definition of the parastatal public administration. […] However, pursuant to Mexico’s transformation of its energy market, the legislature enacted a bundle of new laws “and amendments to existing laws,” including the Organic Law of Petróleos Mexicanos (“PEMEX Law”). […] The PEMEX Law changed PEMEX’s status from a “decentralized organization”—a classification included in Article 1 and 3 of LOAPF as a parastatal entity—to a “state productive company” (also called a “productive state company”). […]
This change, the defense argues, strips PEMEX of its status as part of the parastatal apparatus, particularly where the legislature did not subsequently amend Articles 1 and 3 of LOAPF to include “state productive company” within the definition of parastatal entities. […] This non-amendment is especially salient in light of the changes the legislature did make. For example, the legislature amended other provisions of LOAPF, including Article 17, by adding the following italicized language: “parastatal entities of the Federal Public Administration, as well as the productive companies of the State, will provide spaces and services” in certain facilities irrelevant here. […] Thus, the inclusion of “productive companies of the State” indicates a clear demarcation between state productive companies—which PEMEX now is—and the parastatal entities. If “parastatal entities” encompassed “productive state companies,” the new inclusion of the latter would be surplusage.
Ultimately, however, whether PEMEX is a parastatal entity is not outcome-determinative to the Court’s conclusion as to whether PPI is or is not a majority state-owned company for purposes of Article 212. Simply put, there appears to be a separate statutory carve-out for PPI notwithstanding PEMEX’s classification. Among the changes effected by Mexico’s mid-2010s energy reform was to classify PEMEX’s subsidiaries as either “subsidiary productive companies” on one hand, or “affiliates” on the other. […] Article 15 of the PEMEX Law establishes the “subsidiary productive companies,” and states that those “majority state-owned companies” would “maintain their nature and operating regime.”[…] Article 15 explicitly lists four entities—PPI is not among them.
To the contrary, PPI is classified as an “affiliate” pursuant to Article 61 of the PEMEX Law (as is PMI Comercio, see Del Castillo) […] And this makes sense, since “affiliates” are entities that “have the legal nature and [are] organized in accordance with the private law of the place of their incorporation or creation.” PPI is incorporated in Delaware and has its headquarters in Houston. See Public Procurement Review of Mexico’s state-owned oil company PEMEX, OECD Convention (Sept. 29, 2016) (“Incorporated in Delaware and authorized to carry out business in Texas, PPI is therefore out of the realm of Mexican law.”). Accordingly, it would be antithetical to read the delineation between PEMEX’s subsidiary productive companies (definitionally majority state-owned companies) and affiliates (like PPI) to permit a conclusion that affiliates are also majority state owned companies. At bottom, the PEMEX Law permits two mutually exclusive subsidiary classifications: if PPI is one, it cannot be the other.
Furthermore, should there be any lingering doubt, Article 61 specifically carves out of the parastatal state “affiliates”: “[they] shall not be parastatal entities.” […] Majority state-owned companies, however, are parastatal. […] To embrace the conclusion that PPI, an affiliate, is majority state-owned (and thus parastatal), would render yet another section of Mexican law meaningless.
Though under Mexico’s rules of statutory construction it can play no role in the context of a subsequent case, the Court does observe that during its consideration of this issue, a Mexican judge in what is considered a non-precedential opinion dismissed a criminal case against employees of a company called CFE International LLC, an affiliate of Mexico’s Federal Electricity Commission (“CFE”), on grounds that the employees were not public servants under Article 212 of the CPF. […] CFE, like PEMEX, is wholly owned by the government and classified as the only other productive state company alongside PEMEX. […] In other words, CFE International is to CFE as PPI is to PEMEX—the two have the same legal status and relationship vis-á-vis the respective parent companies. […] And CFE International, like PPI, is incorporated in Delaware with headquarters in Houston. In the case, employees of CFE International were charged with violating Article 217(I)(d) of the CPF, which makes it a crime for a “public servant” as defined in Article 212 to grant illegal discounts, exemptions, or deductions on amounts due to the government. […] The judge dismissed the case on grounds that, inter alia, the employee defendants signed the alleged illegal contracts as employees of CFE International, “which is a private company for commercial purposes incorporated in the United States [], which is entirely separate and independent from CFE. Hence, it cannot be considered that those who signed the contracts did so as public servants.”
The similarities are striking. What’s more, the CFE International employees were also CFE employees, a role that would have qualified them as public servants under the CPF. But because they signed the contracts at issue on behalf of CFE International, the affiliate company, they were not acting as public servants in that capacity and could thus not be held criminally liable under Mexico’s penal code. Regardless that the decision is without precedential bearing in deciding the issue presented here, it is squarely on all fours with this Court’s conclusion that PPI is not a majority state-owned company for purposes of Article 212.
The government does not easily give up the ghosts. It grasps at the straw that, although PPI is not a majority state-owned company, its employees should be considered public servants because PPI is an “organization” or “entit[y]” “assimilated to” a majority state-owned company.
Without itself defining the term, the government contends that PPI is “assimilated to” a majority state-owned company because its parent company is PEMEX. […] Even were the Court to accept the parent subsidiary relationship as sufficient to satisfy the definition of “assimilated to,” PEMEX itself is a state productive company, […] which is distinct from majority state-owned companies. Indeed, prior to PEMEX’s reclassification as a state productive company, the list of entities in Article 212’s definition of “public servant” included “majority state-owned companies.” When PEMEX became a “state productive company,” the legislature amended Article 212 and added “state productive company” to the list of entities, while maintaining “majority state-owned companies” in the same list. If PEMEX was a majority state-owned entity, the addition would be without meaning or effect.
In any event, the same provision of LOAPF that defines “majority state-owned company,” Article 46, also defines “those assimilated to majority state-owned companies” as “civil partnerships and associations in which the majority of the partners are agencies or entities of the Federal Public Administration.” According to Aguilar’s expert, Dr. Mureddu, who, the Court finds, is credible and her opinions persuasive, legal entities in Mexico may be either civil or commercial, but not both. PPI, a commercial entity, cannot likewise be civil, and therefore does not fall within Article 46’s definition of “those assimilated to” majority state-owned companies. Additionally, PPI is not a partnership, nor is it a “civil association” whose primary purpose is non-economic. Accordingly, PPI is not “assimilated to” a majority state-owned entity and that language does not provide an alternate basis to find that employees of PPI are “public servants” under Article 212 of CPF.”
In conclusion, the judge stated:
“In line with the foregoing analyses, the Court concludes that, because PPI is neither itself a majority state-owned entity nor assimilated to one, its employees are not “public servants” under Article 212 of CPF, as required for Article 222(II), Mexico’s criminal bribery provision.”
