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EVENTS AND ROUNDTABLES

ROUNDTABLE: GC Powerlist Discussion

Mexico City, DF - 24 July 2014

TIM GIRVEN [THE LEGAL 500]: Ladies, gentlemen, I would like to welcome you all to this, our first round table meeting here in Mexico; it is a pleasure to have you in attendance.

As we are all aware, these are particularly interesting times for the country, as the current administration presides over a considerable and far-ranging reform program affecting the banking and finance, oil and gas, telecoms and tax sectors, among others. Partially as a result of the opening up of the hydrocarbons area, these legislative changes are being accompanied by movements in the legal market, most clearly marked by the arrival of new foreign players such as Greenberg Traurig and, more recently, Hogan Lovells. Moreover, from the in-house perspective such changes are also occurring within the context of a regulatory and compliance workload that has grown enormously since the onset of the financial crisis, and which – furthermore – is increasingly reaching beyond the traditional regulated industries into all areas of business. All these topics are matters that I hope we can touch on during the course of our conversation, in particular in terms of the development of the role of the in-house lawyer and the hiring of external counsel.

ARMANDO RIVERA [DEBEVOISE & PLIMPTON LLP]: When you use an international firm – perhaps you have a preferred one in New York, a preferred one in Europe, etc – do you feel any obligation to work with that same firm in Mexico or do you have the liberty to choose who will provide the best service on a local basis?

RODRIGO PÉREZ-ELIZUNDIA [THYSSEN KRUPP]: In this market there are large firms that are good on some matters but not so on others; I imagine it is similar elsewhere, but as a result it’s difficult to allocate all legal matters to just one firm.

VICTOR VILLAFRANCA [GRUPO HERDEZ]: We also have a diversified portfolio of external legal firms, and in fact we prefer to use smaller law firms. They have proved to be much better for our requirements. The service, attention and follow-up on matters is more personalised than with large firms, which – not infrequently - let the issue slide because they have so many matters to deal with. So we’d rather use smaller legal firms.

TIM GIRVEN: Although in this regard one could argue that in the Mexican market there are no large firms. [Laughter] Surely this is something that will have to change over the next five-to-ten years due to the amount of work that will be generated here?

RODRIGO PÉREZ-ELIZUNDIA: Yes, due to the reforms, the changes in the energy sector and othes developments.

TIM GIRVEN: Due to the reforms but also because of clients’ needs. It is remarkable that none of the first-class firms have more than 60 or 70 lawyers, when BANAMEX, for example, has an in-house team of over 300. Obviously, the work is there, the demand is there.

RODRIGO PÉREZ-ELIZUNDIA: At ThyssenKrupp we are around 120 in the legal area, globally. There are 12 of us in the North American legal team.

VICTOR VILLAFRANCA: And how many in Mexico?

RODRIGO PÉREZ-ELIZUNDIA: In Mexico, c’est moi: it’s just me. [Laughter]

ARMANDO RIVERA: What projects do you have here currently in Mexico?

RODRIGO PÉREZ-ELIZUNDIA: It depends. ThyssenKrupp, which is well known in Mexico – for industrial plants, for elevators and for steel, among other areas – has six business areas globally. I’m at the Industrial Solutions area. Our company designs and builds industrial, chemical and petrochemical plants, among others, using different technologies.

[Mexico] is becoming increasingly consolidated as a very strong market for automobile manufacture and export. I think it’s now fourth in the world.

ARMANDO RIVERA: I presume you’re following what’s going to happen with the refineries, and that it might constitute a good business opportunity?

RODRIGO PÉREZ-ELIZUNDIA: Yes, of course, with the energy reform, we hope that we’re going to see a boom in the refining sector too.

ARMANDO RIVERA: And on the industrial plants front, well, there’s the BMW project in San Luis Potosí.

VICTOR VILLAFRANCA: Yes, and Audi’s new plant in Puebla.

RODRIGO PÉREZ-ELIZUNDIA: The country is becoming increasingly consolidated as a very strong market for automobile manufacture and export. I think it’s now fourth in the world.

ARMANDO RIVERA: I think that costs in China will continue to rise and the key differentiator is going to be the cost of transport.

RODRIGO PÉREZ-ELIZUNDIA: Yes, all of which make Mexico increasingly attractive principally as an exporter to the North American market.

ARMANDO RIVERA: There’s a difference between crossing the Pacific and simply getting on the train to cross the border. It will be very important for Mexico to build good railroads because, practically, you can’t saturate the highways sending vehicles north. You could send them to Veracruz or Madero and export them by ship, but the most efficient route is directly from Puebla or San Luis or Aguas Calientes: one railroad and you’re on the other side [ie: in the US] in a matter of hours.

RODRIGO PÉREZ-ELIZUNDIA: Definitely. I think the expansion of the railway system is a must for Mexico in order to further develop its economy. Actually, there are a couple of important railway projects going on. The Mexican labour force has been getting ever-more specialised, and has become very skilled and competitive in the automobile and auto-parts sectors.

ARMANDO RIVERA: And that is also resulting in an improvement in the quality of life as salaries become more competitive.

RODRIGO PÉREZ-ELIZUNDIA: A couple of years ago I found it interesting to see the Volkswagen symbol right beside some street names in the city of Puebla.

ARMANDO RIVERA: It’s the culture of certain companies to really reach out to so as to try and become part of the community and to gain its support. So, instead of thinking, ‘Ah, they’re the bad guys, the German imperialists’, people think, 'This is the company which is giving us employment, providing work, who are helping us'. In the United States, Volkswagen, to the contrary of what normally happens in the United States, was promoting a union: ‘We want our employees to be unionized. Please develop a union.' It’s simply part of the way the Germans operate - their work systems, corporate governance, everything - means that they are completely accustomed to giving the worker real weight and value.

RODRIGO PÉREZ-ELIZUNDIA: Yes, there is even some union or employees' presence on the boards of German companies.

When you’re a company of size, when you’re getting to the point of diversification, you can’t pretend to control your employees with a management-friendly union. It’s impossible and all you will do is turn people against you. It’s a symbiotic relationship at the end of the day.

ARMANDO RIVERA: But obviously what happened was that all sorts of people came out of the woodwork asking the company to block unionization because it would hit those competitors that didn’t want to permit unionization.

TIM GIRVEN: Yes, there are sectors in Colombia that are finding it difficult to understand the culture of a Free Trade Agreement signed with the US, which has brought unions back to many of the industries in Colombia. ‘But we’ve fought for years to stop the growth of unions’, they argue.

ARMANDO RIVERA: Let’s take the example of a local company, a company that’s 100% Mexican: they’ve realized that not only do you require a workforce but that you have to treat your employees well. Yes, you can form a pseudo-union in a small company, but when you’re a company of size, when you’re getting to the point of diversification, you can’t pretend to control your employees with a management-friendly union. It’s impossible and all you will do is turn people against you. It’s a symbiotic relationship at the end of the day.

RODRIGO PÉREZ-ELIZUNDIA: It’s not about destroying the source of employment.

ARMANDO RIVERA: We conduct our own analysis to learn what our clients like or dislike, and something that we hear is that the ideal is to find small firms for the work that you’re doing on a day-to-day basis (and here I’m in complete agreement with Victor), but that when a matter of a certain size or certain characteristics arises, one that require more capacity or a greater number of people, well, that’s when you - the client - goes to bigger legal firms.

RODRIGO PÉREZ-ELIZUNDIA: Of course. For instance, in the case of M&A transactions.

ARMANDO RIVERA: So, for example, if you are the buyer and you have to undertake a due diligence process in the blink of an eye so as to be able to compete; or if you are the seller, who has to undertake the auction in the case of a public M&A. Well, in either case you are going to want to lead, ideally, with as many lawyers as you can, certainly with four or five people on-point, and if you don’t have that number of people, that capacity, then you run the risk of not closing the deal.

RODRIGO PÉREZ-ELIZUNDIA: With your reputation is on the line...

ARMANDO RIVERA: That’s right.

TIM GIRVEN: Obviously this begs the question to which sizeable law firms can develop the capability to offer boutique-like levels of services and expertise in each of their departments. But I’d like to ask about something else: When you make these choices about which law firm one is going to use, whether you are going to go there because you want to work specifically with that lawyer and his team etc, to what extent do you take into account the structure of the firm? Whether it’s institutionalized and, if so, in what terms?

I’m thinking about firms – and there are many here in the Mexican market - that have adopted the ‘eat-what-you-kill’ model, which has certain limitations or structural problems in the way it offer services. If a firm operates ‘eat-what-you-kill’ (even if, internally, it offers referral incentives), where is the drive to ensure best possible service levels? The partner who has generated the work has such an incentive, but what about his colleagues? Obviously, guaranteeing quality of service across the board is an issue for all service firms, but in this example it is appears to be a structural problem. Do you consider these sorts of issue? Is this a matter of concern or consideration?

MR EDGAR TRUEBA: Yes. What is certainly a preoccupation, what really concerns us, is the firm’s overall standard of quality. I mean, there are legal firms that have one, two, three - twenty partners who are very good, but the structure of the teams of associates is not necessarily adequate. And that means that the details, one or other important aspect of operational matters, for example, can get lost. Yes, the partners handle the strategic issues, ensure that the complex conceptual matters are covered – all that they undertake very well. But sometimes there are details in the documentation that are lost. Above all (and I’m specifically speaking about the banking sector with which I am familiar) when it comes to issuance processes, stock market processes, IPOs and bonds (any of the structures related to the stock market), obviously the title has to be right, the prospectus has to be correct and ready in time, the contracts, indeed, the whole structure when it comes to large syndications – because Mexican legal structures require one to have the Certificate of Association, the Powers and all other documentation ready. But not infrequently that work will not be undertaken by the partner but is delegated to an associate. As a result, sometimes - even at important legal firms - the quality of those deliverables is rather limited. So, one of the criteria is: we need people, definitely, but people of quality.

There are legal firms that have one, two, three - twenty partners who are very good, but the structure of the teams of associates is not necessarily adequate... We need people, definitely, but people of quality.

ARMANDO RIVERA: And at all levels.

EDGAR TRUEBA: Yes, a standard where there’s some degree of homogeneity at each level. I wouldn’t call the partner to ask him to send me a table with the client’s information, the subsidiaries, the deed, the power of attorney, etc. But one requires the whole package in order to enter into the syndication process and I guess that such requirements are similar in other industries.

ARMANDO RIVERA: If I can return to your point: it’s about providing a service that is both comprehensive and homogenous, because if you’re doing a deal, it’s basically vertical: the finance partner has his group that knows how to draft credit agreements, guarantee agreements, securities and pledges, etc, and that’s all very well. But what about when the role you are playing is not just that of the lawyer in charge of the financial or credit agreements, or just dealing with the M&A, but you also have responsibility for fulfilling an entire, additional series of regulatory requirements - where suddenly you are no longer just responsible for the deal, but where (in the middle of the operation) an FCPA [Foreign and Corrupt Practices Act] issue, for example, suddenly arises? Now, the partner you are dealing with probably knows the FCPA clause that goes into a credit agreement very well, but the questionable practices that have been discovered relate to the dividend, or perhaps person ‘X’ offered something to expedite an authorisation or a permit, etc. What happens then?

EDGAR TRUEBA: I’m trying to think of the example we need here, an operation with permits and environmental issues, consumer and health issues...

ARMANDO RIVERA: My question around such a case is: how important is it for you to be able to bring an FCPA expert to the table? Perhaps this is more relevant to New York than to Mexico, but a specialist in whatever, an environmentalist, an expert in criminal law...

TIM GIRVEN: Well, in fact, Galicia Abogados (your old firm, Armando), has a partner who - well, he’s off-counsel at present - who is specializing on FCPA matters. And I think this is symptomatic of the fact that that degree of specialisation is arriving here, too.

VICTOR VILLAFRANCA: Hogan Lovells also has specialist capability on FCPA matters. We work with them on anti-corruption and FCPA matters and with another, highly-specialised, smaller firm on the issue on the issue of money laundering.

TIM GIRVEN: Is that Bello Gallardo [Bello, Gallardo, Bonequi y García, SC]?

VICTOR VILLAFRANCA: No, Ortiz de la Concha, although we also work extensively with Bello Gallardo. But these are small-to-medium-sized legal firms. So, for example, on the purchase of Grupo Nutrisa that we undertook last year we went to larger legal firms, because it was an operation that involved many aspects. For example, Grupo Herdez is stock market quoted; so, too, is Grupo Nutrisa. So, we sought for a legal firm with a strong specialisation in stock market-related issues, another one for the buying and selling of shares, and another one for antitrust matters. I had to coordinate the work of all three, but we needed their specialisation and their experience to ensure the deal went smoothly.

ARMANDO RIVERA: Above-and-beyond firms with their own high-quality teams, one requires lawyers who can work together, who aren’t competing among themselves on your deal.

VICTOR VILLAFRANCA: Exactly.

ARMANDO RIVERA: So part of your function then, if you’re going to use several legal firms and multiple lawyers, is to manage that process, to be the mediator who coordinates between the firms.

VICTOR VILLAFRANCA: That’s right.

RODRIGO PÉREZ-ELIZUNDIA: Yes, it's also about the size of the deal and the amount of time you have. In some cases, if the deal is very sizeable, you might prefer to go to a large, full-service firm in order not to have interfaces with other firms; precisely to avoid timing and coordination problems, especially when time is of the essence, so that everything can be managed more quickly and coordinated.

Yes, it's also about the size of the deal and the amount of time you have. In some cases, if the deal is very sizeable, you might prefer to go to a large, full-service firm in order not to have interfaces with other firms; precisely to avoid timing and coordination problems, especially when time is of the essence, so that everything can be managed more quickly and coordinated.

ISABEL OCAÑA [DEUTSCHE BANK]: Well, in my case [from the perspective of the banking sector], I think two things are very clear: firstly, there are those clients who choose their lawyers. While we [the bank] can give an opinion, we can’t make the choice ourselves. So, in an IPO or an M&A, you can propose a law firm, but in the end, it is the client who makes the choice. And then there are those clients who are wed to a particular law firm; once again, generally there’s no way to persuade them otherwise. And finally, there are those firms that one uses oneself for one’s own matters [issuances, etc]. Certainly in that last scenario, in general one has the freedom to choose whom to use - as long as your head office doesn’t have an issue with the firm.

ARMANDO RIVERA: In the infrastructure sector, for example, or perhaps on financings including acquisitions via a competitive bidding process - that is, in cases where you have to develop a proposal and select a lawyer beforehand for the group of creditors - how do you undertake that selection process? As in-house counsel, do you see risks involved in having the lawyer representing the creditors imposed upon you? Is there an issue there or is it something you’re already accustomed to?

ISABEL OCAÑA: We’re used to it.

EDGAR TRUEBA: Normally, it’s consensual, at least in the banking sector. Usually there is an agreement among the banks regarding which legal firms to use; you get round a table and everyone proposes a couple of firms.

ISABEL OCAÑA: And the one that the majority chooses is selected.

EDGAR TRUEBA: You also begin by ruling firms out: ‘Well we have a conflict with them right now, another operation’, and so on. That’s the way it gets resolved.

ARMANDO RIVERA: But as in-house counsel, does it not represent a major problem having the sponsor of the deal promoting the use of one or other group of lawyers?

EDGAR TRUEBA: When you talk about the sponsor, are you referring to the lead arranger? I don’t have a problem with the leading bank making the proposals.

ARMANDO RIVERA: No, no - not the bank, the project sponsor.

EDGAR TRUEBA: The client’s legal firm?

ARMANDO RIVERA: Yes, your client telling you that this will be the lawyer on the side of the banks.

EDGAR TRUEBA: That’s a different issue. It depends on the size and nature of the transaction, its recurrence, etc, but for operations with complex structures we’d rather have a lawyer proposed by the banks.

ISABEL OCAÑA: A lawyer we can trust.

ARMANDO RIVERA: Something that I frequently see in the New York market is that the sponsor of an infrastructure project (for example, a public bid process for a highway or a port etc), a deal where you have to put together your proposal, your offer to win the concession, has necessarily to begin to plan the financing. So, what usually happens is: I have my lawyer on the side of the sponsor, and then my bank. I have the lawyer of the bank who will begin working on the papers of the commitment, but he will be from the other legal firm. Everyone will have his own legal firm, obviously. But in the end, the person who selected the bank’s lawyer was the client. I see this frequently.

ISABEL OCAÑA: It happens here too, but the truth is that we have a far smaller market so normally they choose the same lawyers and we already know them! [Laughter]

EDGAR TRUEBA: In our case we tell the client: ‘Alright, that’s fine. If you want to save on legal fees, fine; but here is the list of the four or five firms I feel comfortable working with.’

Everyone has their own niche and you get used to working with that. What can be difficult is when a lawyer who is used to representing banks is placed on the other side of the deal and simply doesn’t know what to do.

ISABEL OCAÑA: Yes, everyone has their own niche and you get used to working with that. What can be difficult is when a lawyer who is used to representing banks is placed on the other side of the deal and simply doesn’t know what to do.

EDGAR TRUEBA: Or vice versa.

RODRIGO PÉREZ-ELIZUNDIA: How do you deal with that?

ISABEL OCAÑA: You have to explain it to them... take them by the hand! [Laughter]. But it’s considerably more work for the in-house counsel when you have a lawyer who is not accustomed to the role he’s playing; and it does happen.

EDGAR TRUEBA: I think that there is another, more delicate issue. In the case of the bank, it's where one finds oneself with a lawyer who is so pro-the-deal, so in favour of the operation, that one ends up having to negotiate with one’s own lawyer.

ARMANDO RIVERA: What compensation schemes do you regard as being of interest to you as in-house lawyers? Because you’re required to handle budgets and frequently, since the account is paid by the client (for operational costs, etc.), it can become very complicated. What have you seen in terms of compensation that has made your life easier?

EDGAR TRUEBA: Compensation schemes for the law firms? A cap, undoubtedly.

ISABEL OCAÑA: Yes, caps - by which I mean: we’re going to pay you up to this much. These can be difficult for a legal firm to accept and even harder to maintain.

VICTOR VILLAFRANCA: And moreover, they should be results dependent. We put a lot of emphasis on results and until we get to the next stage of a project, I won’t release the next tranche of payment. Any number of legal firms have come to us promising all sorts, only for their delivery times to prove excessively long. And then they send me their invoices, ‘Hey, pay me, pay me,’ to which I respond: ‘But what advances have been made?’

RODRIGO PÉREZ-ELIZUNDIA: We also prefer payment by project schemes with clear milestones, and whenever we accept hourly schemes, we always put caps on them and strictly control the quality of the deliverables. This is another reason to use different law firms depending on the specific business; with time, you get a feeling as to which law firms or lawyers may deliver the same or better quality for the same or lower costs.

ISABEL OCAÑA: For legal firms that one uses all the time, we try and standardize costs – this would be for straight-forward, day-to-day matters, not large projects. Normally we are using both small and larger full-service firms concurrently, but for the smaller legal firms that handle day-to-day corporate matters we try to standardize.

RODRIGO PÉREZ-ELIZUNDIA: With reference to what you were asking earlier, Tim, about smaller firms and when we look for a specific lawyer, it really depends a lot on the issue at stake. In my case, I prefer to use specialised firms for some specific tax, energy or labour issues.

TIM GIRVEN: Which is to say, all those sectors where specialised boutiques have long existed.

RODRIGO PÉREZ-ELIZUNDIA: Right, those are the areas in which we tend to look for the lawyer rather than the firm.

[Compensation schemes] should be results dependent. We put a lot of emphasis on results and until we get to the next stage of a project, I won’t release the next tranche of payment. Any number of legal firms have come to us promising all sorts, only for their delivery times to prove excessively long.

TIM GIRVEN: Thank you.

Perhaps we can turn to another topic: as in-house counsel today, in the wake of the financial crisis and with new financial challenges, with the arrival of the FCPA and other legislation with international ramifications such as the UK bribery act, what are your biggest challenges? Are your main concerns these regulatory matters? Is it compliance? Or, given that we’ve just mentioned caps and billing, is it the bottom line? Or is it the multiplicity of matters that means your attention is drawn away from strategic business matters towards smaller issues which in other circumstances you could, or would, seek to outsource in some way?

NOE PASCACIO [SCHLUMBERGER]: Well, in the case of Schlumberger, which is an oil services company, what we are currently focused on in Mexico is the reform of the entire regulatory energy framework. Now, speaking at a global or international level, I think that one of the most sensitive issues - and one that is frequently the most difficult for companies to manage - is the Foreign Corrupt Practices Act (FCPA). Why? Well, as a result of the numerous cases in the United States that we’ve all heard about, and because of what some have termed a witch hunt over there [in the US], companies have had to try and protect themselves as much as possible. Sometimes they’ve fallen short and sometimes they’ve gone overboard. What do I mean by this? Well (and this is based on my experience): suddenly there was a moment in Mexico where I found myself having to investigate whether the boss had spoken inappropriately to his secretary simply because a compliance report had been filed – which meant that we had to attend to it. And with that, well, I can barely begin to tell you, there were countless reports to deal with. Today, at a global level, we have been able to stem this. Now, the lawyer (and/or the legal department) only intervenes in relevant cases where there are potential issues of corruption or fraud involved. All other situations are left to different departments: primarily human resources, or otherwise – basically - the department where the issue has arisen. In the situation in which we found ourselves before, these matters took a huge amount of our time - in fact, it took a lot of the company’s attention. Nowadays I think it has been given its proper dimension, leaving us time to focus on the business, and to take care of the company, our [internal] clients, and whatever else one is doing.

RODRIGO PÉREZ-ELIZUNDIA: At ThyssenKrupp, the compliance issue is top priority! Its relevance is absolute. In fact, we operate a zero tolerance program: the company would rather lose a business opportunity – even if it’s a multi-million-dollar matter - than breaching compliance. The ThyssenKrupp global program entails an entire independent division with presence in every region.

ARMANDO RIVERA: Is it completely separate from the legal department - like a parallel organisation?

RODRIGO PÉREZ-ELIZUNDIA: Yes, an independent division.

ISABEL OCAÑA: This is the tendency.

RODRIGO PÉREZ-ELIZUNDIA: That's right, the worldwide trend is to separate the two functions.

NOE PASCACIO: We’ve yet to take that step.

EDGAR TRUEBA: Welcome to our world! [Laughter] In the banking sector the compliance issue has... well: we have compliance for everything. You have no idea! The regulatory scrutiny is incredible and since 2008 [with the onset of the financial crisis] it has only grown. The build-up has been steady and constant. The Foreign Corrupt Practices Act [FCPA] hasn’t had as much of an impact in the financial sector as elsewhere simply because - in effect - it already existed. We already lived with OFAC [the Office of Foreign Assets Control] and with conflict of interest rules; we already have regulatory schemes... For us now in the Mexican financial sector, especially in ‘first floor’ [consumer] banking, it is privacy matters that have become a really difficult issue.

ISABEL OCAÑA: Anything and everything related to sales practices... also money laundering.

The Foreign Corrupt Practices Act [FCPA] hasn’t had as much of an impact in the financial sector as elsewhere simply because - in effect - it already existed... For us now in the Mexican financial sector, especially in ‘first floor’ [consumer] banking, it is privacy matters that have become a really difficult issue.

EDGAR TRUEBA: All the compliance issues in general have become very complicated. I think it’s very interesting to hear colleagues from the industrial sector, from the 'nuts and bolts industries' [Laughter] giving their take on compliance issues, on whether for them its management is undertaken separately or not, and how they are dealing with it.

ISABEL OCAÑA: That’s why industry – and this is another trend - is taking people from the legal and compliance areas of the finance sector. Because there is a shortage of know-how. There is little or no experience in industry sectors and it’s very literally the case that the one truly over-regulated sector is the financial industry: we are ‘over-complianced’. [Laughter].

VICTOR VILLAFRANCA: In Grupo Herdez the compliance practice is virtually new. We simply didn’t have a compliance culture until just three years ago; I mean, zero. It began with private data protection, with FCPA, with money laundering – all of which has given us an incredible headache.

ISABEL OCAÑA: You just wait! [Laughter]

VICTOR VILLAFRANCA: And compliance remains part of the legal department’s responsibility at present so it’s a huge administrative load. Moreover, there are also numerous gaps in the legislation, as a result of which... well, for example: we undertake many intercompany operations, transactions between related parties. We have to report all those loans and there are many of them every month. So, on an ongoing basis, there is a series of reports which constitutes a huge volume of additional work. We are already thinking along the lines that this compliance requirement should be defined and developed as a separate function in the mid-term.

EDGAR TRUEBA: There is an entire global debate as to whether compliance should report to the general counsel, or whether it’s an independent function that should have direct access to the board.

TIM GIRVEN: What are your perspectives on that particular question?

EDGAR TRUEBA: I think it depends greatly on the size of the company. And the company’s circumstances. I’m the general counsel of a subsidiary of a global business in a regulated sector and where we can afford to have the luxury of separate legal and compliance divisions precisely because one is anchored within a global structure. For us, in the end, compliance reports to the General Counsel. But at the subsidiary-level, and at various other business units, well, they don’t necessarily have to be, or to maintain, the same relational level.

ISABEL OCAÑA: At Deutsche what we have is exactly the opposite. At a global level, Compliance and Legal are completely separate, but in Latin America, since the teams are very small, it was decided (although it’s now on its way to be decided otherwise) that everything would be together as part of legal. So, for example, each country has a head of legal and compliance who, in turn, has a compliance officer who reports to him or her. Because, actually – and usually - it is the lawyer who is the head of the division and the latter has both compliance and legal areas. However, it was decided last November that Latin America would be ‘regionalized’, that is, that it would be split out of what was formerly the Americas, and that legal and compliance would be divided at a regional level. So, today I’m general counsel for Mexico but head of compliance for the region, and there is another person who is head of legal for the region. But in each country the teams currently remain combined. We are presently in the process of seeing how to divide them because, in reality, most of the workload is on the compliance side. The regional teams are, I would say, approximately 80% compliance officers and only 20% legal counsels. So, if we really do split them up, the general counsel is going to retain very few people and we are currently battling over what that will mean: are we going to be able to hire more people? Because at the banks – at least at this bank - they have the idea that you can sort of outsource the legal area; that you can have a general counsel who just coordinates and who uses external legal firms to do the work. But you can’t outsource compliance. So, for that reason, much of the load falls on the compliance side.

EDGAR TRUEBA: It’s not so much that you can’t outsource it, but the expertise for outsourcing is very limited.

The regional teams are, I would say, approximately 80% compliance officers and only 20% legal counsels. So, if we really do split them up, the general counsel is going to retain very few people and we are currently battling over what that will mean: are we going to be able to hire more people?

ISABEL OCAÑA: There’s a shortfall, certainly there is limited provision in particular areas.

EDGAR TRUEBA: I have seen the accounting firms, the large ones - KPMG, Deloitte, Ernst & Young etc - offering such services. They’ve come to us and offer... well, they undertake a presentation and tell us, ‘We are going to do gap analyses’, and then we’ll establish this and that...

ISABEL OCAÑA: Yes, but they are more about process engineering.

EDGAR TRUEBA: And more to the point it’s precisely the way we, as lawyers, do it anyway.

ISABEL OCAÑA: Yes.

EDGAR TRUEBA: I mean, we receive a new note; you take the note, you see what is required and what the situation is, you develop an action plan, deliveries and reporting...

NOE PASCACIO: There are several issues here regarding compliance that I think it is important to identify so as to see how one tackles them. Because one thing is your program and compliance structure per se, your department. Now, what are you actually going to do? You have a part that is what we call regulatory compliance, which in my case, being in a heavy industry - oil - is very related to environmental protection, health, hygiene and all that. Why? Because we have to comply with many regulations of that kind. But in general terms, it is focused on compliance with specific regulations in one’s particular business or industry. Then, you have the other area of compliance, which is prevention...

EDGAR TRUEBA: Your policies.

NOE PASCACIO: ...a hotline...

ISABEL OCAÑA: No, a whistle blower.

NOE PASCACIO: No, before, you have a whistle blower or a hotline or whatever, you have the policies, the guidelines, the tools – everything; and of course the training of the entire workforce or staff, which never ends.

ISABEL OCAÑA: There’s always someone new. And then they change the rules, they change the policy.

NOE PASCACIO: And finally you have the enforcement or implementation aspect: who conducts the investigation of specific reports in different situations. And for these three aspects, you need three very different skill-sets. The first one, regulatory, I believe the legal department can and should undertake because it’s about abiding by the law as we’ve always done. The second one, policy, requires a hybrid between legal, compliance and someone good at human resources and who knows how to train people. The third, compliance investigation, requires a very specific profile, one which is not necessarily the profile of a lawyer.

EDGAR TRUEBA: You need an investigator.

ISABEL OCAÑA: We have already separated that and have a special unit for investigations.

NOE PASCACIO: Yes, it doesn’t necessarily need to be a lawyer.

ISABEL OCAÑA: There are companies who have hired people from the FBI or who come from Kroll, even the Marines. Really.

NOE PASCACIO: And I think that that is the correct profile. In my case, this has been a struggle and I’ve had to tell my bosses: ‘It’s simply that I am not a police officer – so how can I help you?’ Nevertheless, at present in my company, we have compliance as part of legal. And at a regional or local level, the legal counsel is required to be the head of compliance too. So, yes, it’s also an issue of organisation and resources.

The lawyer’s task is actually to understand and to accompany the business people so as to prevent any possible situations or risks that may arise, to protect their interests.

ISABEL OCAÑA: Personally, I also see a problem in the schema where everything is located in the legal department: it’s simply that the lawyer will tend to gravitate towards the legal aspect - which is the work we like, what we understand and what interests us. So, you have a head of legal and compliance with a significant legal, transactional workload (which is what one enjoys doing) but who at the same time has a heavy compliance workload - and it is simply huge, it grows every day, because you have what the Mexican regulators require domestically, plus whatever is relevant coming from the United States and Europe - you’re under attack, so to speak, from everywhere. Given this huge burden, one tends to focus on what one likes; you’ll comply with what is essential but - as happens frequently with compliance departments - you will fail to go any deeper because you have so much work. So, it is a genuine challenge.

RODRIGO PÉREZ-ELIZUNDIA: Yes, I’m quite in favour of a split, with compliance becoming one area and legal another, simply because the compliance work takes an enormous amount of time. Of course both areas will always need to cooperate very closely.

NOE PASCACIO: And there’s another issue here besides time and work. As a lawyer, as a legal manager (at least this is my experience and in my case, I work extensively with engineers), one tries to integrate with the company’s executives and operatives in order to understand the business and have them trust you. So, when you then put on your compliance hat, people back off right away - they close up.

VICTOR VILLAFRANCA: Yes: ‘Don’t tell them anything, because anything you say will be used against you.’

NOE PASCACIO: And that puts you in a very complicated situation, because I think that the lawyer’s task is actually to understand and to accompany the business people so as to prevent any possible situations or risks that may arise, to protect their interests.

EDGAR TRUEBA: That’s one of the strongest arguments for separation.

NOE PASCACIO: Exactly.

EDGAR TRUEBA: Fundamentally we are talking about a conflict of interest...

NOE PASCACIO: Exactly.

EDGAR TRUEBA: ...the generation of a conflict of interest within the legal area. The legal department has what we could call its transactional side, which is looking for ways to do business, how to help and advance the business and, on the other hand, the compliance side, which in turn has two aspects: the checking, documentation and archiving of everything related to transactional and other business activity; and the part which is what we could call ‘the ethical imperative’. After all, we frequently talk about real versus perceived or apparent non-compliance.

ISABEL OCAÑA: An additional point is: who reviews legal? We all understand that one is supposed to have several lines of defence. In the financial sector we like to say we have three lines of defence. The first natural line of defence is the business itself; the second is compliance; and the third is auditing and the regulators, etc. If compliance and legal are combined, legal has no second line of defence.

ARMANDO RIVERA: Exactly. Who polices the police?

ISABEL OCAÑA: The second line of defence is lost and the only way you are going to know that legal has done something wrong is because you’re caught by an auditor or a regulator. So there really is a conflict of interest because in the end you are checking up on yourself.

ARMANDO RIVERA: What about a supervisory structure?

ISABEL OCAÑA: Do you mean one which carries out cross-checks on areas of compliance?

NOE PASCACIO: I think that compliance should, perhaps, accompany internal auditing because there are many issues that an internal auditor sees that the lawyer will not come across even if he tries. In that sense, I think there should be a certain link between internal audit capabilities and compliance.

In the financial sector we like to say we have three lines of defence. The first natural line of defence is the business itself; the second is compliance; and the third is auditing and the regulators, etc. If compliance and legal are combined, legal has no second line of defence.

EDGAR TRUEBA: And that would provide the third line: auditing would review compliance. It’s regulatory but it is the third line of defence. We are touching on supervisory procedures: these are a function of the supervision structures within every business unit and are part of the strengthening of controls within the business. It pushes the compliance function, not as a business supervisory matter, but rather as a responsibility of the actual business.

ISABEL OCAÑA: And compliance reviews that. After all, it takes a long time to develop a mature compliance structure. Ultimately, compliance begins with the business people and their knowing what they should be doing. What compliance has to do is to review, to ensure that they are in fact doing that. So, compliance shouldn’t have a policing function as such – or rather not once it’s mature (before that, in the beginning, you have to police everything!). But once the structure is mature, all it should require is that you sit down with them [the business units], understand their processes, and establish controls over those processes to ensure they are undertaken in accordance with the risk assessment that determined those processes. And what compliance has to do (and do before you have a case of non-compliance), is to tell you that you are failing. Whereas what auditing tells you is that you have failed, that you are in non-compliance and that now you have to solve it. And that’s when auditing sits down with compliance and says, look, this is what I saw, there is a problem here that we need to resolve. Compliance helps you solve issues; auditing doesn’t, it simply identifies them and tells you. Compliance solves the problem, or at least, it is supposed to.

EDGAR TRUEBA: Within this framework of supervisory processes compliance arrives and says, we’re checking this business area, let’s see what you are doing, what controls you have, and then sits down with you to fix the issue. It identifies what is lacking, what else needs fixing, etc, but for us this has been an evolution that has taken time.

RODRIGO PÉREZ-ELIZUNDIA: In our case, although our compliance program is very strict and brings along considerable regulation, a lot of paperwork and many controls, at the end of the day, I prefer to work in a company that’s very well-controlled by compliance and that does not have corruption problems. It gives you security, peace of mind.

ISABEL OCAÑA: And it is also something you can sell. I first joined ING a long time ago, when compliance was not yet a regulatory issue in Mexico and not all financial organisations had a compliance capability. So, sitting down with a client and telling them that we had a very well-defined compliance structure that reported to compliance in the Netherlands, rather than just back to the business, and which, moreover, reviewed everything - well, the clients – the smart clients - bought this as a factor. They’d tell us directly: 'I’m going to work with you because I know there’s someone who checks that you’re not stealing my money.' My point is that compliance is also a function that, if you sell it well to your company’s general manager, he will love instead of hate.

VICTOR VILLAFRANCA: At Grupo Herdez it’s been a rather difficult process understanding the concept of compliance because people are simply not used to it. We are not regulated. At present we report to legal, but we have proposed reporting to the board or reporting to the CEO. I’ve proposed it several times but as yet they’ve not yet allowed us to do so. A little while ago, when they were just beginning to draw up the compliance policies they asked: ‘If you had to explain compliance to a five-year-old child, what would you say?’ My response was: ‘Well, my work is to make sure that the others do their work correctly.’ They liked that and as a result we have advanced a little bit.

They asked: ‘If you had to explain compliance to a five-year-old child, what would you say?’ My response was: ‘Well, my work is to make sure that the others do their work correctly.’

ISABEL OCAÑA AND EDGAR TRUEBA: That’s it, that’s it...

VICTOR VILLAFRANCA: But it has remained difficult to advance in this area because there is a complete ignorance as to the concept of compliance in particular. So, it’s very slow.

EDGAR TRUEBA: And the discomfort felt at companies is different to that of operating in a regulated market or becoming a regulated entity.

VICTOR VILLAFRANCA: Undoubtedly.

TIM GIRVEN: If I could go back to one of your points from a few minutes ago regarding the change of attitude towards you as the in-house figure depending upon whether you were wearing your legal hat or your compliance one: As lawyers within companies, as the heads of legal departments, to what extent do you have to justify your existence, justify that you’re not an obstacle to business but rather an ally, a business partner? Is this still a problem, a daily struggle in your respective industries?

RODRIGO PÉREZ-ELIZUNDIA: My experience at ThyssenKrupp is that the lawyer is regarded with consideration and is seen as a business ally. Business people consult with the lawyer quite frequently... let’s just say the legal function has a seat at the table.

TIM GIRVEN: Does this come from the culture of the company or is it in the DNA of the business as a sector?

RODRIGO PÉREZ-ELIZUNDIA: Both, I think. It is part of the business but you also have to prove it: you have to show that you are adding value to what’s being decided. Normally, lawyers see things analytically and from a perspective that sometimes differs from that of business people; my experience is that they genuinely appreciate the logical approach and the analytical perspective that lawyers have of things and understand that our presence is something that complements the business quite well.

NOE PASCACIO: Before working at Schlumberger I was at a number of other companies dedicated to the same sector: engineering, construction, projects, etc, heavy industry as such. My experience in the sector allows me to say that the legal function was not in the original DNA of these companies at all. These were organisations consisting basically of engineers and, well, if they could conceive of something in three dimensions, they would build it. In time, all these businesses saw the need to have legal departments: firstly with a tight focus on the management, administrative and corporate aspects of the business and more recently with direct and increasing involvement in operations and the board. Now, as legal departments and as lawyers in these industrial sectors, even today there remain certain challenges. For example, when I hire a lawyer or a paralegal who comes from a law firm, I give them an entrance speech along the lines of: ‘I need you to take off your lawyer’s cap, put on your hard-hat, and understand what this business is doing; otherwise, you won’t be useful to me.’ It’s a significant change of culture and you can see it very clearly. They arrive and send a mail of - I don’t know - perhaps 50 pages...

ISABEL OCAÑA: Which nobody will read! [Laughter]

NOE PASCACIO: No, they won’t read it. In-house you need something five bulletpoints long that explains everything. So, it’s a challenge, but it’s a challenge that comes not just from practice or from the industry per se, but rather also has to do with our training as lawyers, at law schools, and sometimes in our first jobs - which are normally at law firms, notary offices or courts and where the legal work is very by the book.

ISABEL OCAÑA: Yes, it’s sort of pure law.

NOE PASCACIO: Suddenly, when you move in-house, you have to interact with other disciplines, other industries and other knowledge, and you have to adapt fast - certainly that was my experience.

TIM GIRVEN: How many of you went straight in-house rather than going into private practice?

ISABEL OCAÑA: I’ve always been in-house.

VICTOR VILLAFRANCA: Me too.

TIM GIRVEN: And why did you make that choice?

ISABEL OCAÑA: Because - with all due respect - I find it boring to be surrounded only by lawyers.

TIM GIRVEN: I won’t comment on that point!

ISABEL OCAÑA: You won’t comment on that point. [Laughter] I‘ve always found it very enriching to hear the points of view of those who studied something that you didn’t study, and who see things in a different way than you. If I were to sit down with Edgar and spend hours talking about a particular point, it’s going to be very interesting but I wouldn’t learn as much as if we sat down with a banker or an engineer, because they would give me completely different perspectives, and if you are open to those views, one can, as a result, develop much more creative solutions. Some people aren’t receptive but if you are open to understanding your client’s needs (because at the end of the day, let’s be honest, they are our clients, they are our internal clients), if you learn to listen to them, if you learn to put yourself in their shoes, then you can grow a lot.

TIM GIRVEN: As a follow-up to that, do you think that if private practice lawyers spent longer periods on secondment, working in-house, that it would be advantageous both for their growth as legal counsel and for you when you come to use their services?

ALL: Yes, definitely.

When I hire a lawyer or a paralegal who comes from a law firm, I give them an entrance speech along the lines of: ‘I need you to take off your lawyer’s cap, put on your hard-hat, and understand what this business is doing; otherwise, you won’t be useful to me.’ It’s a significant change of culture.

ARMANDO RIVERA: How much secondment do you use in your in-house departments?

ISABEL OCAÑA: The financial industry has headcount issues so the only way to resolve that, the only way to get additional people to help with your workload without adding an employee to the payroll, is secondment.

JUAN POSADA [BANAMEX]: There’s no doubt that an in-house who goes over to private practice is going to be the best external lawyer. He will understand your concerns, the way you communicate, and he’ll know how the bank operates.

ISABEL OCAÑA: And your time-lines.

JUAN MANUEL POSADA: Yes, your time requirements. Matters at the bank, certainly in our case, are generally for right now, this minute - or for yesterday. I think the whole industry is like that. Matters at law firms, however, are generally for tomorrow. And that’s a big difference, operationally.
I began in private practice at a law firm. I firmly believe that there are people who were born for law firms and other who were born for a company role, no doubt about it. Although I would add that overall, the combination of private practice and in-house practitioners is a successful one; as internal lawyers, we should also understand the efforts of the external lawyer and the processes and requirements that they have to fulfil. The big difference between the in-house and the private practitioner is business knowledge. It’s not law that separates us: we all know the law, that’s what we studied it for - a degree, a Masters, and so forth. In a similar way to you, Noe, the first thing I do with my interns is to send them to the bank-statements printing centre, just so they realise how many accounts, how many millions of bank statements the Banco Nacional de Mexico prints every day. So that then, when they have to submit an opinion, they are absolutely aware of the weight of the opinion they are providing, of how changing just one process can destroy the operation of a bank.

ISABEL OCAÑA: Or a business.

JUAN MANUEL POSADA: We all have knowledge of the law: we studied it. It's specialist business knowledge that is the added-value and perhaps that’s what we - as in-house [banking] lawyers - look for in an external lawyer: a little bit more knowledge than the company he/she is advising.

ISABEL OCAÑA: And I think that legal firms are recognizing this more and more; they have more partners who have previously worked as general counsels in companies or at regulatory authorities. This was much more unusual before.

JUAN MANUEL POSADA: Yes, regulators too, of course.

ISABEL OCAÑA: And they’re the best external counsel you can have.

TIM GIRVEN: At the same time, is there a risk in having a type of revolving door?

NOE PASCACIO: I don’t think so. A risk... for the legal firms do you mean?

TIM GIRVEN: Yes.

JUAN MANUEL POSADA: No. Well, if you want to bring a lawyer into a company who has been at a law firm for 20-odd years then...

ISABEL OCAÑA: As did Walmart. [Laughter]

JUAN MANUEL POSADA: You can have the issue that he might not adapt - it may be difficult to get out of the habits of private practice and adjust to the demands of being in-house. Just as it would be difficult for us to enter a law firm. The difference is that at a law firm, you have a certain cushion in the sense that you give advice, you consult.

ISABEL OCAÑA: But you don’t make the decision.

JUAN MANUEL POSADA: Exactly. It’s the company’s in-house who makes the final decision.

MR VILLAFRANCA: The level of responsibility is distinct.

JUAN MANUEL POSADA: When you’re in-house...

RODRIGO PÉREZ-ELIZUNDIA: It costs your job, period.

JUAN MANUEL POSADA: Exactly.

RODRIGO PÉREZ-ELIZUNDIA: The law firm might lose the contract, but it is likely to have many others.

JUAN MANUEL POSADA: Yes, it may well cost them the client, but as you say, firms will have other clients. In-house, you lose your job. The very next day.

In our company, we are also very closely related to the business itself, to the extent that the areas overlap and one ends up undertaking business matters and attending to issues that are not legal work; I see this as a positive development.

RODRIGO PÉREZ-ELIZUNDIA: In our company, we are also very closely related to the business itself, to the extent that the areas overlap and one ends up undertaking business matters and attending to issues that are not legal work; I see this as a positive development. One ends up working so closely that you can barely distinguish legal from business.

JUAN MANUEL POSADA: We handle risk issues, legal risk, matters which are key issues in the financial sector. We draft financial clauses, interest matters, etc. Which is to say that we undertake pretty much everything. One develops an ample knowledge of other areas simply because one needs to know it.

VICTOR VILLAFRANCA: Yes, you are obliged to know the entire business and to provide support and to add value wherever necessary. For example, we’ve had to improve our internal processes because frequently, a given procedure was required to address so many different requirements to protect the company that it ended up hindering the businesses’ operations. So we’ve also had to evolve in that area and tell them, okay, we can improve on it in this way, we can do it via electronic means (right now, electronic means are booming).
On the other hand I’ve also had the chance to see external lawyers who are a bit over-zealous in negotiations. They don’t have a business vision of the matter in hand and focus purely on the legal aspects and that can cost one the closing of a contract. It’s an area where they should be more careful and focus as much on the overall business benefits [of closing the deal].

RODRIGO PÉREZ-ELIZUNDIA: I had a case in which we were in negotiations with a client who had brought his lawyers down from New York. We were negotiating a contract and on the first day we didn’t get beyond clause number three, precisely because of the client's lawyers. [Laughter] The client sent them back home and said, ‘Let’s negotiate among ourselves.’ We could then move forward fluently.

ARMANDO RIVERA: Speaking as a New York lawyer... [Laughter] Clearly it’s very important that the client and the in-house legal department speak to the lawyer beforehand so as to identify the limits, the framework of the negotiations. Perhaps simply to say: ‘Look, the goal of this negotiation is to sign the contract.’

RODRIGO PÉREZ-ELIZUNDIA: Of course, external lawyers need to be provided with all the business background and goals of the deal at the outset of the negotiation.

ISABEL OCAÑA: Yes, but sometimes it’s not so easy. I’ve had occasions, on IPOs and transactions, when I’ve had to say: ‘Excuse me, come to an agreement with your lawyer and then we can talk.’ Because the client and his legal counsel were fighting between themselves on the call. [Laughter] The same party!

ARMANDO RIVERA: That’s clearly part of the preparation (and the trust) that should be established between the lawyer and his client beforehand, before the process begins. If you only bring the lawyer to the table the day the negotiation starts, then you’ve already lost an opportunity to ensure that the lawyer understands the industry, understands the nature of the deal, and for the client to explain: 'Look, this is what’s really important to me.'

RODRIGO PÉREZ-ELIZUNDIA: Of course.

ARMANDO RIVERA: We in private practice have model documents that we like, that we’re used to seeing and have confidence in - a precedent if you like, and law firm lawyers like precedents. Why? Because then it’s easy to negotiate, it’s easy to say this is the market, these are the circumstances, and we need to use this. But it can happen that, because we’re using a precedent and because we’re trying to be efficient, we lose sight of what’s important to the client in the specific deal under discussion. So, good communication between the legal firm and the in-house department or the business people at the table is vitally important in order to understand client requirements and that on a given occasion, a pre-established formulation may not be the best option.

JUAN MANUEL POSADA: We internal lawyers administer risk. External lawyers cover risks. So, we can add clauses, beautiful clauses, but they are virtually impossible to implement in practice, certainly here in Mexico with the legal system we have. For example, a ‘right-of-sale’ clause - a classic New York clause - well, we apply them in practice, but I’d like to litigate them one day and see what happens. My point is that in-house lawyers have a bad image simply because we draft very short contracts.

We internal lawyers administer risk. External lawyers cover risks. So, we can add clauses, beautiful clauses, but they are virtually impossible to implement in practice, certainly here in Mexico with the legal system we have.

NOE PASCACIO: Or unorthodox.

JUAN MANUEL POSADA: Yes, unorthodox. We skip some standard clauses that would surprise a New York lawyer as much as not having a MAC or that the right of sale was missing. But the fact is that we know the business, we know the business risks, and we know the risks we’re ready to take.

ARMANDO RIVERA: A criticism that we, as law firms, receive from clients, clients big and small, is frequently along the lines of: ‘Sirs, you’re like BMW: you sell the 7-series and the 3-series. It’s good that you want to sell to me the 7-series and that it is available, but for me the 3-series is more than enough.’ The point being that the 3-series is what makes good business sense for them, but that sometimes this can be difficult for legal firms to grasp – or rather, to remain aware of. We are very focused, very by-the-book - we like to do things perfectly, but we have to understand this point of view. And we learn it based on hearing conversations such as this: that you don’t always need to have all risks covered. That there are risks that you are already used to taking, that are already incorporated into prices (‘this is going to cost that much’), and regarding which you’ve already undertaken the analysis. This is the element that we, as law firms, need to hear from you, and that you need to be sure we know.

NOE PASCACIO: And there’s another one which is very important. You, Isabel, just touched on it: costs and price structures. We’ve indicated that, ideally, the legal firm and the client have to be involved beforehand, before getting to the negotiating table, etc. The problem is that the client – especially clients without in-house lawyers - will tend to say: ‘No, call the lawyer at the last minute, and keep an eye on the clock, otherwise, it will cost us a fortune.’ They want you to arrive without knowing the business, without knowing the deal, but with everything ready to sign. So, both parties are seeking the impossible. The background on the side of the client or companies is that they don’t want you to spend 15 days or a month learning their business - or having them explain it to you - because that will cost them.

ARMANDO RIVERA: Well, what compensation schemes work for you? From what we were saying earlier it seems that caps are the preferred model, caps with stages. 'When we get to that stage, you can charge me up to this much. If we reach the following stage, that much,' and so on. In the infrastructure and projects area, it is not uncommon for the legal firm to also assume part of the business risk. If we close the deal, it’s so much – a success fee; if we don’t close, I discount so much. Alignment, the aligning of incentives...

NOE PASCACIO: This is actually the real issue, but it depends on the law firm and the lawyer. Some even get offended at the idea.

JUAN MANUEL POSADA: When I see a bill that says ‘Payment for study of legal concepts, payment for internal meeting’, I scratch it out right away. A lawyer who studies the law shouldn’t be charging it to me. He should charge it to his firm or to his school. We see it less and less because we demand more and more, but even today there are still law firms in Mexico that dictate fees claiming: study of law ‘X’, internal meeting ‘Y’.

ISABEL OCAÑA: ...or document search! And you are always charged the partner’s rate even if he wasn’t present! What is more, you receive work, which, if it was reviewed by the partner - well remove him from the partnership! It becomes clear that the paralegal or a junior has undertaken the work and nobody else has reviewed it. One frequently has to have a lot of care with the work and how it is undertaken.

EDGAR TRUEBA: There is another issue here: sometimes the law firm can become overly involved in a business decision. For example, if I need a compliance certificate, a credit agreement or whatever, it’s not a monumental workload for the law-firm - perhaps there’ll be four or five things to discuss. Or if I send over a matter with 20 points, 18 are fine and there will be a couple to review. But in general, it’s the company’s own controls which are responsible for ensuring that everything is in place; I simply want to co-review those matters - particularly regulatory issues - where I regard it as an important safeguard to have a second opinion. But the firm seeks to become overly involved in the business decision; one ends up discussing a clause for an hour until it occurs to someone to ask: ‘What do you need and why do you need it?’ And the bank’s lawyer responds, ‘Well, it’s bank policy’. And policies, all these policies, exist for a reason - be it a legal requirement, a control mechanism, or a risk one is trying to forestall.

ISABEL OCAÑA: I think that in the end it’s a matter of education. What I’ve seen, in my experience, is that the stronger the internal legal department, the better law firms behave. Because internal departments are demanding. For example, I had to review contracts undertaken for Deutsche 12 years ago, and frankly, I could have wept because, of course, the [in-house] lawyer didn’t review them; he simply received them and said, ‘Firm ‘X’ has done the papers, pass them on to the client for signing’. Something else that used to happen frequently (one sees it less often now, but some law firms persist in doing so) is that they negotiate a contract with the client (including everything that is legally required), and then have it signed. Subsequently you, as in-house, get to see it and knowing the company’s operations find that while, yes, it can be done by law, it is not aligned with the company’s systems and policies, with business processes, and so simply cannot be done. As an in-house, one has to be able to say both: ‘I’m going to take this risk so let’s remove that clause’ and ‘I’m unable to sanction this, it’s impossible, so this also has to be taken out’.

JUAN MANUEL POSADA: Communication has been improved, there’s no doubt about that. Respect for the internal lawyer has also grown, although we’ve had to go to extreme lengths on occasions, making things very clear indeed – and my colleagues will confirm it. In my case if I don’t ask for it, I’m not going to pay for it. One asks: ‘Why?’ and ‘How has this happened?’ It has occurred because external lawyers have had such a good relationship with certain business areas that I would be left out of the loop. Evidently, that is not the responsibility of the external lawyer, because the executive had picked up the phone and called him or her. But the external hasn’t called me in, hasn’t involved me. Until one day, you say, ‘Okay: from now on, all legal invoices are signed by legal, and if I don’t request it, I’m not going to pay.’

Communication has been improved, there’s no doubt about that. Respect for the internal lawyer has also grown, although we’ve had to go to extreme lengths on occasions, making things very clear indeed

RODRIGO PÉREZ-ELIZUNDIA: If not, fees get out of control, they arrive from everywhere.

ISABEL OCAÑA: Business people get used to talking to the same lawyer, because he’s the one who handles all their deals, he’s easy to talk to and to run queries past etc, but you, as in-house, have no knowledge of it.

JUAN MANUEL POSADA: It’s an internal problem, an internal communication issue within the business, but we need to partner with external lawyer to correct it. The internal lawyer must have the weight that the importance of the role implies.

RODRIGO PÉREZ-ELIZUNDIA: And you also have to build the relevant relationships within your own company.

ARMANDO RIVERA: That’s one of the changes that I have seen at [in-house] legal departments. Before, it was: ‘Well, as a business, you have to have an internal lawyer’, but business operations and the internal lawyer remained distinct – you had the lawyer on one side, the business on the other.

JUAN MANUEL POSADA: The lawyer was basically regarded as being in the way.

ISABEL OCAÑA: And as an in-house the business never got you involved.

ARMANDO RIVERA: Today the internal lawyer takes a far more active role in negotiations and is more active on business issues in general.

JUAN MANUEL POSADA: We have undoubtedly evolved. Twenty years ago the internal lawyer at a large company was generally a trial lawyer.

ISABEL OCAÑA: Or an employment counsel.

JUAN MANUEL POSADA: Basically, they administered lawsuits.

NOE PASCACIO: No, and generally they bring a litigator’s approach to business matters; they review a contract thinking of how they’d defend it in court!

JUAN MANUEL POSADA: I review a contract thinking that I’m never going to have to fight. Because if I analyse a credit agreement with a client knowing from the beginning that in all likelihood I’ll have to fight him, then I’d rather not authorise it in the first place.

NOE PASCACIO: Exactly.

JUAN MANUEL POSADA: But there’s no doubt about it, the internal lawyer of 20 years ago was a trial lawyer, was an employment specialist, someone who lived up at 33,000 feet. Today, I agree, the internal lawyer has specialised to such a degree that in certain industries, you won’t find a better lawyer than the internal lawyer.

NOE PASCACIO: There are companies in my field where internal lawyers have become business-unit heads, even CEOs. That’s the case in several of the banks and some regard it as the next step.

ISABEL OCAÑA: That’s where we’re heading.

TIM GIRVEN: A last question: what do you see on the horizon during this second half of President Peña Nieto’s administration?

ISABEL OCAÑA: Well, there’s a whole range of things.

JUAN MANUEL POSADA: It’s certainly very encouraging – I’m speaking about the general scenario or background. The structural reforms that have been passed during the last year are reforms that this country had required for a long time. We should continue improving and refining them and I trust that the government and Congress will do so. In the case of the negotiation of the financial reforms, which were approved – or rather, published - last January, it was a very broad and all-encompassing reform which modified 33 laws and ran to more than 1,000 pages of documentation from the legislators; it is undoubtedly crucially important – the reform was absolutely necessary. Fundamentally it says: there won’t be more credit (because we’ve modified all those laws). What there will be is better credit.

EDGAR TRUEBA: On that front we should, perhaps, also mention the brokerage area, where we have definitely seen a reactivation of brokerage markets. I think that we are still missing regulation at a detailed level and this is a complex issue in which to get involved. We still do not have the equivalent of all the secondary laws. Certainly we are still receiving notes from the Central bBnk [Banco de Mexico] that are anachronistic and that don’t tie up with the spirit of the new reform.

RODRIGO PÉREZ-ELIZUNDIA: Then there’s the old and sometimes outdated commercial code...

JUAN MANUEL POSADA: Yes, trade. We needed, and we need - and all countries will need - a constant updating of their legal provisions. It’s a task for in-house counsel, private practitioners and citizens. It’s also a task for the government to modernize legislation so as to establish the framework necessary for those who have to apply it to be able to do so effectively. On the contrary - well, we already have these serious problems.

We needed, and we need - and all countries will need - a constant updating of their legal provisions. It’s a task for in-house counsel, private practitioners and citizens. It’s also a task for the government to modernize legislation.

ISABEL OCAÑA: Yes. What I would add from the business point of view is that private practice lawyers have looked upon the reforms that have taken place in Mexico in a very positive light. Analysts think it’s a plus that these reforms have been approved. Perhaps, as Juan Manuel suggested, they’re not perfect, but they are reforms that were needed and can be further improved. They constitute a genuine step forward and many people are now investing in Mexico or are looking at the country anew. Now, the danger is that delivery of the secondary reforms – the detailed regulation - has been slow and people can get frustrated. So, you risk going from a booming situation towards a scenario where people begin to lose faith, and that’s where you don’t want to be (especially in the financial sector), because the market would just dry up. And this is why there remains a certain caution in business circles. People are a bit fearful. For example, they see the energy reform, and everyone now wants to undertake issuances in the energy sector, but you have to wait - things can’t be done quite like that.

NOE PASCACIO: On this point, well, first, I’d like to clarify something because my company has very strict policies in this regard: this is my own personal opinion, and it is in no way the opinion of Schlumberger, ok?

TIM GIRVEN: Thank you.

JUAN MANUEL POSADA: I assume that…

ALL: Yes, we’re all speaking in a personal capacity.

NOE PASCACIO: Yes, because it’s important. But to get straight into the topic: Mexico was really falling behind in the energy sector. To such a degree that we were even behind countries like Cuba, a country without monetary resources. Cuba did what any of us would have done: it sought out the investment and said ‘You put the money in and go and search, and if you find something, you give me half’, and I didn’t have to make any expenditure. Mexico, however, didn’t do it like that. Mexico took the approach of 'I spend, I search and if I don’t find anything – well, I’ve spent it and that’s that... never mind'. That was a disincentive from any perspective. Now, like anything in business, it’s also an issue of (and here we should ask an economist based on some type of probabilistic, economic analysis): 'Well, if I invest in drilling ten exploratory wells and only one is productive, will the production from that one well compensate me for the entire investment? I don’t know, but the fact is that we – as a country - remain in that situation: spending on extensive exploration and making considerable investments that are not necessarily going to be recuperated because those bore-holes, those wells, are not in productive areas. There’s the case of the entire Chicontepec region, for example, which is a major problem because huge amounts of money were invested, astronomic amounts, and production in that whole area simply did not meet expectations: the investment simply didn’t make sense. Unfortunately, the process occurred under the old regulatory framework, where all the service companies were paid for drilling. You’d tell them, ‘Drill a hole here’, and if nothing came out, nothing came out. Now, you can say, well, here is your land, your area, go and look. And if something comes out, give me my share. I think that from that point of view, it is undoubtedly a big step we are taking. Now, obviously (and as with everything), you have to make the big reforms first, you have to open the door, but we also have to get into the details. One critical issue that is very relevant right now is land ownership.

You have to make the big reforms first, you have to open the door, but we also have to get into the details. One critical issue that is very relevant right now is land ownership.

What was the situation before? Well, Pemex was – effectively - the government: it would arrive in an area and basically say: ‘Get out, I’m going to work here’. For good or for bad. Why? Because if Pemex took an area, a productive area, it would be there forever. Pemex would hire me or whoever, and I would set to work there without any problems.
Then, there was an intermediate stage, when it said, well, this is my area, but now you do everything: you administer it on a day-to-day basis but it remains mine. Suddenly we had to deal with communities, with small landowners, etc. And negotiations with landowners have, historically, been a major source of corruption within Pemex. It’s certainly not an easy matter to handle when you enter as a private party.
So where are we today? Pemex is not going to expropriate anything else, and there are many Pemex fields that, since they were not productive or were under-utilised, have seen people return, build homes etc. Frankly, Pemex has a huge problem with land invasions and occupations.
And now it is the operators who have to face this situation. There were attempts to address this by inserting a ‘preferential rights’ clause for oil exploration and drilling in the reform but it was unsuccessful. And obviously, as we’re currently seeing with all these demonstrations, the farmers are saying: ‘Wait a moment: why are you going to expropriate or take the land away from me? Why does your business have preference over mine?’ Or, Wwhy will I not receive a benefit?’ This is an issue now and it is going to be an issue when they assign the first contracts.

RODRIGO PÉREZ-ELIZUNDIA: For our company, the energy reform is very attractive. There are great expectations and optimism, but at the same time, these expectations remain dependent upon the actual implementation of the secondary laws.

ARMANDO RIVERA: Did the reform in the fiscal area affect you much? Was it an issue in the industrial sector?

NOE PASCACIO: The fiscal reform? Well I think it effects all of us, but mainly in relation to human resources and what deductions you can and cannot make.

EDGAR TRUEBA: And taxes on capital.

ISABEL OCAÑA: globalisation is taking us in that direction, it is streamlining regulatory requirements and bringing legislation increasingly into alignment. Of course, in Mexico and other countries, you have local issues that make it very difficult to achieve full harmonization. Because if you want to promote the formal economy, you are at the same time drawing attention to informality. It’s a complicated scenario.

NOE PASCACIO: I also think it’s an issue of the intelligence and competitiveness of each country.

JUAN MANUEL POSADA: FACTA [the US Foreign Account Tax Compliance Act], for example, is going to be an issue. Fortunately it is being resolved in the best possible way because the Mexican government has become involved, but if they had left this up to us...

ISABEL OCAÑA: Up to us? We’d die! If, right now, when all you have to do is prepare information for Mexico’s tax authority, this constitutes a major headache, imagine what would be required if you had to send it direct to the [United States’] Inland Revenue Service. The workload would kill you.

NOE PASCACIO: That’s where I was heading. What we are seeing right now, as far as I can tell - you might know better - is the focus of the financial world shifting from New York towards London. Primarily because the United States is over-regulating (there are witch hunts and so on), and so people in other countries are saying: ‘No, wait, the less we go through there, the better. We’d be better off going through London...’

The focus of the financial world shifting from New York towards London. Primarily because the United States is over-regulating.

JUAN MANUEL POSADA: London’s going a similar way, though, no? [Laughter].

NOE PASCACIO: Yes, it’s going in the same direction but at least it’s a bit behind.

ISABEL OCAÑA: I mean, the United States implemented the Volcker rule and the Dodd-Frank Act which broke over our heads (and I say that personally [Laughter]), but then Europe followed up with the implementation of EMIR [European Market Infrastructure Regulation]. And they are going to bring in regulations which are very similar to FACTA. So, in the end, there won’t be anywhere to go. The only thing that will be easier or more convenient is to be dependent upon just one country. I, for example, am in the worst of all possible worlds because the bank has one American owner and one European owner. So, I get hit from both sides. What you will tend to do, I think, is to pick your demon, pick your poison. You’ll go to the United States or Europe, but not to both.

JUAN MANUEL POSADA: You’ll go to the more conservative one.

ISABEL OCAÑA: Yes.

ARMANDO RIVERA: But how do you know which one that is?

NOE PASCACIO: I think it’s an issue of rationality and common sense on the part of the regulators. After all, even though – as you were just saying - London is right behind New York, there undoubtedly remain differences: the legal and supervisory systems, the people you have there - their culture, their mentality - all these factors also influence a decision. After all, a system that is absolutely ‘by the book’, and where, if you stray a little bit, they’ll kill you, is not the same as one where they say, okay, well, I understand your business...

JUAN MANUEL POSADA: Regulators talk. Twenty years ago they didn’t, but today they speak to each other every day. They talk on a daily basis, they get together every so often - the Europeans, the Americans - and they share experiences and bring best practices to bear in the country where they’re located. And here they try to ‘tropicalise’ best practices into secondary regulations, or even, in the case of the transparency law, into primary legislation. It’s a global trend.

NOE PASCACIO: And it’s also a matter of cost. In the United States, nobody wants to go to trial because you’ll end up in the streets. The other day, I was listening to a lawyer who had been District Judge; it was a seminar on compliance and he now litigates against the Justice Department. And he said, you can beat the Justice Department. The problem is that, if I, as a lawyer, tell my boss it’s going to cost us $10m, the guy is simply going to tell me to forget it. We’d rather comply with what they tell us, and...

ISABEL OCAÑA: And pay $9m in fines, no?

NOE PASCACIO: Exactly.

VICTOR VILLAFRANCA: But it’s the reputational issue - rather than the fine - that can really hit you hard.

ISABEL OCAÑA: This is a new risk... or rather one that is only being recognised now, and it’s something that compliance officers should be proud of since it’s a risk that we’ve always said was there. Reputational risk is the worst risk because you can’t really get rid of it - the loss of confidence [in the company], appearance in the media in negative terms, etc.

JUAN MANUEL POSADA: And it’s a risk that externals have a hard time understanding. Business-practices risk, reputational risk - as internals we live the brand and for us it is the most important thing.

ARMANDO RIVERA: And it’s one of the risks that we are increasingly hearing about in our discussions with in-house lawyers. Above all, consumer companies have to be very careful with their brands. How much risk do I run of losing brand value? Because if the consumer loses faith in a product you’ve lost an entire market.

JUAN MANUEL POSADA: And that’s the issue. This is what internal lawyers are facing. Transparency and communication versus the legal liability. And transparency pays. Being transparent with the client, handling risk very closely with the client is the way forward, without doubt.

Participants

  • Isabel Ocaña – Head of Legal & Compliance (Mexico); and Regional Head of Compliance (Latin America) at Deutsche Bank
  • Noe Pascacio – Legal Counsel for Mexico & Central America at Schlumberger de México
  • Rodrigo Pérez-Elizundia – General Legal Counsel ThyssenKrupp Industrial Solutions (México and Latin America)
  • Juan Manuel Posada – Legal Director (Global Consumer & Commercial Banking division) at Banco Nacional de México (BANAMEX)
  • Edgar Trueba – Executive Director of Legal and Compliance at Morgan Stanley
  • Victor Villafranca – Senior Corporate Counsel at Grupo Herdez
  • Armando Rivera Jacobo - Counsel, Debevoise & Plimpton LLP
  • Tim Girven – Editor, The Legal 500 Latin America