Recommended steps for the protection of commercial relations between Central American companies and U.S. banks and clients when faced with a criminal investigation

How the relationship with U.S. partners and banking institutions is handled may be as relevant as the local criminal case.

By Alexander Aizenstatd

A simple press release about a criminal investigation against a company or one of its directors can have serious consequences, and if the company has a relationship with a financial institution in the United States, it can permanently damage it. It could even close the doors to the U.S. banking market if appropriate action is not taken.

It is increasingly common for companies to have points of contact with the United States, whether through banks providing financial services, customers or major suppliers. These in turn, are increasingly aware of the legal or reputational effects that their relations with companies in Central America may have. This is particularly important when the Central American company or some of its directors are the subject of a criminal investigation.

Some sophisticated U.S. entities, especially financial ones, have compliance departments comprised of professionals whose task is largely to reduce the entity’s legal and reputational risks. These risks are not only limited to the conduct of their officers, but also include the conduct of their customers or suppliers abroad. Under the Foreign Corrupt Practices Act (FCPA), a U.S. entity may be subject to significant fines, or even jail for improper acts in which it is involved abroad. At the same time, foreign entities can be fined in the United States. No company wants to risk being involved in such cases. But this is not limited to U.S. companies alone. Nine of the ten highest sanctions under the FCPA have been imposed on foreign companies. Sanctions are significant. The highest at the moment, imposed on Petrobras in 2018 was for 1.78 billion dollars. Therefore, compliance departments take this risk seriously.

It is not only the risk of sanctions under the FCPA, or participation in a criminal conspiracy that motivates compliance departments to be extremely cautious, it is also the reputational risk. For a bank, a press release about its relationship with a customer that is subject of a criminal investigation can negatively affect is share market price, even if it is only a customer. When a relationship with a Central American customer does not represent significant income for the company, but can represent a significant cost in terms of reputation, compliance departments will be more averse to the risk of continuing that relationship. For some, that may mean a lack of access to the U.S. banking system, or the loss of a significant customer. That’s why the measures the company takes in the face of a criminal investigation are indispensable to prevent further harm. Here are some recommendations.

Compliance departments generally monitor media news about their clients or partners and may obtain information about the investigation or accusation, or they may find out through other contacts in the country. Sometimes even prosecutors issue press releases or hold press conferences, and the compliance departments are on the lookout for these. The company should not wait for them to find out from one of these reports. If managers already have information about the investigation or allegations and believe they are relevant enough to risk the relationship, they should actively seek out their counterparts in the United States to inform them of the facts before they hear about it from the press. Even if they feel that the allegations have no further basis or may be misrepresented. One thing is the presumption of innocence as a legal principle and another is the risk they are willing to take. The compliance department may not want to take that risk and decide to cut the relationship before giving them a chance to explain, so the approach must be made soon. Also, one should consider that press statements or press releases are not always accurate. If the communication is not direct, it will be difficult to explain those inaccuracies later. If in an exercise of transparency and trust, the approach is made before they find out through the compliance department, that will make the news not come as a surprise, and it also allow executives who deal with the company on the business side to explain the entity’s position before the compliance department makes a decision. Compliance departments are reserved and will have no relationship with outside companies, so it’s important to move the information through the business side initially.

When dealing with financial institutions it important to be the first source of news. The Central American business culture sometimes encourages little external communication with the aim of preventing risks, that attitude in this case is a disadvantage. It’s best to go directly to them, to take the initiative and convey the situation, before they find out about it through other means. It is a sign of honesty and that the relationship is valued. In the end, it is what one would also value if in the position of the compliance department.

Such transmission of information ideally should be through a personal visit and if possible, request that someone from the compliance department be there as well. The information transmitted should be honest and reliable, verifiable by third parties. There is little point in making the first approach if the information is not entirely true, or if it is exaggeratedly optimistic. It must be transmitted in a simple, concrete and accurate manner. In order to do this, it is essential to have in your team a legal professional who knows both the Central American and the American legal systems, and who can communicate in both English and Spanish. Ideally, they should have some experience that gives them legitimacy in the eyes of the third party. This lawyer should not be related to the acts being investigated in the company and will not be the in-house lawyer of the company. The in-house lawyer may accompany you if necessary, but an objective external vision is ideal. A third party will be more objective and will be able to fulfill the purpose of transmitting information to safeguard the relationship without making an absolute defense of his employer. Sometimes you will have to issue reports to share with compliance departments, hence your objectivity will be valued.

Depending on the complexity of the issue and its possible points of contact with U.S. law it may be recommended to hire the services of a law firm in the United States as well. Firstly, to analyze the risks that may arise from the case, but secondly to act as interlocutors with U.S. compliance departments. It is important to keep in mind that the company must be transparent with these advisors and take into account that the firms themselves have compliance departments. This means that the issue can be an obstacle for them taking you as a client. Hence the importance of having a local attorney who is familiar with the Central American and U.S. context.

After the first contact with the bank, client or supplier, other periodical updates must be made, which depending on the case may be monthly or according to some important advance in local cases. It is important that these updates are constant, if possible in person and accompanied by some material that documents progress in the cases or reports of the lawyer hired for the purpose. It is important that contact be maintained even when there is no significant change to report.

The communication must be in good faith. These means not underestimating the work of the national authorities, so the blame must not be place solely on judges or prosecutors. This only weakens the legitimacy of the communication. It is possible to highlight technical errors, but not to dismiss everything as a political attack, even if the case contains some of those elements. The company may issue clarifications on inaccurate press releases or statements by the authorities, but neither the company nor its directors should engage in smear campaigns against the authorities involved in the case.

In addition to communication, the company must take internal measures. Investigate, separate the directors involved when it is prudent to do so, implement genuine policies that avoid future cases such as those under investigation, even when they have not occurred. It is not just a matter of communicating, but of proving that the company is taking effective measures that demonstrate its commitment to maintaining high standards of integrity, including compliance with laws and cooperation with authorities.

Each case will be different, but in my experience the most important thing is to treat the counterpart in the same way you would expect to be treated if you were in their place. U.S. companies understand that a manager can be the subject of an investigation or an accusation and that doesn’t necessarily mean he or she is guilty, but they in turn have to be accountable to their own compliance departments and shareholders. That’s why honest and transparent communication, before the news reaches them by other means, opens the door and gives them room for maneuver to presume good faith. A criminal case can take several years and may even be resolved favorably in many cases, but if the company does not take the necessary steps to protect its relationship with its U.S. counterparts, by the time it resolves the case it might be too late. Facing these situations head-on and honestly, with the help of an experienced outside counsel can prevent something already difficult from turning into something much worse.

Constitutional Court declares ILO Convention 45 on Underground Work for Women innaplicable

Constitutional Court declares ILO Convention 45 on Underground Work for Women innaplicable

“If we desire respect for the law, we must first make the law respectable”
                                                                                            Louis Brandeis.

By: Alexander Aizenstatd

It is an unacceptable contravention of the right to equality to deny a person access to an entire category of jobs only because she is a woman. Any rule that prevents a woman from accessing the employment of her choice, based only on her sex and not on her abilities, is discriminatory.

One would think that such rules are no longer in force, but that is not the case.

Article 2 of the International Labour Organization Convention 45 states that “No female, whatever her age, shall be employed on underground work in any mine…”. This rule prohibits women from accessing a whole category of jobs. A female geologist could not work in a mine. A female heavy machinery operator could not enter a tunnel and would have to be replaced by a man.

Convention 45 represents a continuation of entrenched practices of discrimination which held women to be less capable than men, who cannot engage in activities which, because of their danger, require special training and which have traditionally been performed by men. They are represented in such a way that, because of a supposedly fragile condition, they should be prohibited from engaging in activities that are lawful for men. These notions are now incompatible with full equality under the law.

Convention 45, which dates from 1935 but was ratified by Guatemala until 1960, is a law in force and, as a human rights treaty, part of the constitutional block (see Constitutional Court case 1822-2011). Like other norms in this sense, it disguises as a supposed protection for women a norm that in essence is discrimination. By supposing that men are more capable for a job, it unjustifiably prevents women from the job of their choice.

Convention 45 contravenes the rights to equality, the right of women not to be discriminated against and the right to work, all guaranteed by articles 4, 24, 43, 101 and 102(a) of the Constitution, 6(a) of the Inter-American Convention on the Prevention, Punishment and Eradication of Violence against Women, and 3 of the Protocol of San Salvador.

Convention 45 is a law in force and is applied in Guatemala. I understand that in mines, female heavy machinery operators cannot enter tunnels. Therefore, they drive at the entrance where they must be replaced by men. For this reason, they also are paid less than men. If a subway were built in Guatemala, in application of that rule, women would be prevented from working there as well.

Due to the above, with the help of two lawyers, Sofia Escriba and Marjorie Bosque, I brought an action challenging the constitutionality of Article 2 of Convention 45. This action was identified as case 1985-2019 at the Constitutional Court. It is important to clarify that the action did not seek to have the treaty declared unconstitutional, which would contravene obligations under international law, but to have it denounced in accordance with its own provisions.

The denunciation became more and more important because according to the text of the same convention it can only be denounced every 10 years. This means that, if it is not denounced in time, it remains in force for another mandatory decade before it can be denounced again. The next period begins in 2020, if it is not filed in that year it will remain in force until 2030.

The case offered particular difficulties and is perhaps the only case where an international human rights treaty is clearly contrary to the Constitution and the right to equality contained in other treaties. My expectation was for the Court to resolve an incompatibility between two norms of constitutional hierarchy. It was also a clearly a unique opportunity for the Court to rule on the prohibition of discrimination against women.

From the outset, the case presented difficulties for the Constitutional Court. Generally, it takes 15 days to admit an unconstitutionality, in this case the Court took about 5 months for this process.

The other difficulty is that the Court has traditionally indicated that it will not hear an unconstitutionality presented against a treaty. But this case, because of the notoriety of the violation, had to test the limits of that jurisprudence.

Procedurally, the Court decided to suspend the proceeding. But the interesting thing about the case is not the suspension, but the its decision in that 13-page resolution, in which it declares that despite not resolving the unconstitutionality, it issues a directive for all public officials not to apply Convention 45.

The position is interesting, because it does not declare the treaty unconstitutional, but rather inapplicable for contravening constitutional rights. This has different jurisprudential effects, but in practice implies that this prohibition should not apply in Guatemala and women can be employed in these jobs. Indeed, on the basis of this ruling, an employer applying such prohibition would be considered discrimination.

There are other interesting issues of the ruling. The Court decides to suspend the procedure arguing that it cannot declare a treaty unconstitutional, since that would generate international responsibility. However, the Court declares it inapplicable. The action never requested a declaration of unconstitutionality, but rather a denunciation. The denunciation does not entail international responsibility, while on the other hand the non-application is a contravention that generates international responsibility. Although in this case the risks are minimal since the content of the treaty is widely recognized as discriminatory.

Another argument of the Court, quoting Victor Bazán, is in favor of an a priori preventive control of treaties, by means of an advisory opinion before entering into a treaty. This situation is useful and recommended for new treaties. But in the case under examination, it is a treaty prior to the Court itself and to a priori control in Guatemala. Therefore, this argument does not have much logic.

One issue of continuing concern is that the Court seems to recognize that international treaties exist in a sphere beyond constitutional control. Modern treaties generally reflect a congruence with human rights obligations, but this is not always the case, as the example demonstrates. There is also concern that the jurisprudence may generate international responsibility. In practice there is not much difference between declaring the unconstitutionality and inapplicability. Although the ruling fulfils the purpose of the action and is indeed a success, between to options the Court choose the option that violates international law. To not apply is to contravene, in order to avoid what the Court defines as a possible international responsibility with a declaration of unconstitutionality, it commits another with the same effect but one that is also a violation of international law. What would have been prudent and consistent with both national and international law would have been to order the denunciation of the treaty in accordance with its terms.

In this regard, it is a matter of concern that the area of jurisprudence outside constitutional control may be exploited by the legislative and executive branches in the future. They could sign a treaty with another country that allows indefinite re-election, under the shade of a political right. It would therefore be advisable for the Court to be more prudent in the face of other possible cases of treaties with human rights violations.

Interestingly, the Court, in spite of suspending the case, does recognize the unconstitutionality of the rule. To that effect, it indicates:

“It does not overlook the argument made by the plaintiff that the validity of the international agreement means that a conventional provision that discriminates against women continues to have effect, by regulating ´No female, whatever her age, shall be employed on underground work in any mine, which contradicts what is regulated in the Constitution and other conventional human rights statements.”

And the solution is given with the non-application of the norm when indicating:

“If any controversy arises over the application of Article 2 of Convention 45…, the respective public authorities must opt for the provision of law, whether constitutional or international, that is more favourable to women workers…”.

To get to that point and defend inapplicability, it tries to do so by means of a pro homine argument, which, while it may be a path, the example it gives is not the most fortunate. It tries to compare the case with the prohibition of applying the death penalty to pregnant women in the American Convention and the more favorable prohibition of applying it to all women in Article 18 of the Constitution. An example that instead of clarifying the issue, complicates it and has little practical application when the death penalty has been de facto abolished in Guatemala. Moreover, the laws of the Court’s example do not contradict each other; applying the prohibition to all women includes pregnant women. The case under study presented a contradiction, the prohibition of underground work for women and the prohibition of discrimination are incompatible. Perhaps the Court did not find a better example, but the one it uses does not seem to contribute much.

The Court concludes by deciding to transfer to Congress and to the Ministry of Foreign Affairs the concern about the timely denunciation of the Convention, which implies its recommendation for denunciation. This is indispensable to avoid international responsibility but also to adjust the legal system to human rights protection standards. I hope that the authorities, under the possible leadership of the Minister of Labour, will take the opportunity to denounce this agreement as a manifestation of the prohibition of discrimination against women as a State policy.

In the meantime, based on this resolution, the Court has already issued a normative selection guideline to all public authorities, ordering them not to apply the Convention. This criterion must also be respected by private entities in the hiring of their personnel, both in this and in other jobs.