Uncovering Fraud In Manufacturing Company’s Mexico Division: A Due Diligence Case Study

Kreller has completed more than 150 reports in Mexico in the last two years. This includes over 100 Level A reports and over 50 custom or special investigations, such as FCPA, corruption/kickback, conflict of interest, theft investigations, security vulnerability surveys, Kreller Level B (in-depth investigation) reports, and smaller-scope investigations.

Our lead investigator in Mexico spent 21 years as a Special Agent, Supervisory Agent, and Legal Attaché to Mexico City with the Federal Bureau of Investigation. He is a former U.S. Marine Corps officer and has a Juris Doctorate. He has worked in the private sector since 2004, specializing in due diligence investigations, fraud investigations, security assessments, executive protection, and training. He provides training and instruction to numerous federal agencies in Mexico and the U.S. Embassy. His local experience and valuable local network are essential when conducting sensitive investigations.

Challenges in Mexico for Due Diligence

• There is no central clearinghouse or database to search incorporation records. Each state and many cities have a Registro Publico (where incorporation records are registered), which must be searched in person. Therefore, you must determine where the company may be registered based on headquarters/address. However, despite being located elsewhere, many entities register in Mexico City as the capital city and business center.

• Registro Publico records must be requested via appliance, and the turn-around time varies between the same day and 15 business days (as in Mexico City). Registro Publico records are not available in a summarized format, which provides easy access to information such as registration date, address, shareholders, etc. Rather, the records are typically available as shareholder/board of director meeting minutes. They must be read thoroughly to track changes and determine current information. Additionally, the Registro Publico is not required to provide copies and/or access to all documents filed by companies. Therefore, there may be changes in shareholding or management that are not reflected in the documents provided by the Registro Publico. 

• The Secretaria de Educacion Publica (SEP), or Secretary of Public Education, is Mexico's national register for professional certifications and degrees. Records with the SEP do not include identifying information for individuals, such as date of birth or ID number. Unless you have the individual’s student ID number, it is difficult to confirm that an education record is for a particular individual rather than just a name match.
• Privacy laws in Mexico can be very stringent for security reasons. For example, when attempting to conduct bank references or education verification, the information may not be released even when you present a signed consent.
• In order to conduct certain checks on individuals, it is important to have the individual's full legal name, including the individual’s maternal surname (First Name, Father’s Paternal Name, Mother’s Maiden Name). 
• Often, it can be challenging to locate and identify information regarding individuals. Tax ID numbers (RFC-Registro Federal de Contribuyentes numbers) are provided by SAT- Servicio de Administración Tributaria. However, SAT does not consider this information to be a public record. The Clave única de Registro de Población (CURP–Unique Population Registry Code or Personal ID Number) is a unique identity code for both citizens and residents of Mexico. Research of CURP records requires a date of birth and/or state of birth to search. Lastly, state driver’s license databases can be searched for identifying information. However, driver’s license records don’t include identifying information such as residential address, date of birth, or ID number, so typically, any records found for a name are just name matches that cannot be confirmed as being for the individual under investigation. 
• Legal filings are limited to fundamental information such as the name and location of the court, the plaintiff and defendant's name, and the type of record. Additional case details can only be obtained if you are the attorney or a party to the case. Additionally, records don’t include identifying information.

Mexico Manufacturing Case Study

A former employee from the Mexican division of a multinational manufacturing company sent an email to a Senior Executive following his termination, alleging theft and mismanagement against the General Manager in Mexico. Kreller was asked to investigate the allegations by performing corporate due diligence in Mexico. 

Corporate Due Diligence in Mexico

During the due diligence investigations, Kreller interviewed the former employee, who indicated that he believed the general manager had committed fraud in purchasing several used machines. In addition, the former employee said that the GM was profiting from the sale of scrap and that some of the company’s parts were being sold in flea markets at prices below cost, and he believed they were being stolen from the warehouse. 

Kreller conducted a lifestyle inquiry regarding the GM to determine any discrepancies between his salary and his apparent lifestyle, any financial concerns or criminal records, and any discrepancies from his resume, such as education or licensure. Nothing of concern was located; however, research indicated that his wife came from a wealthy family. 

Next, a forensic accountant conducted a surprise audit at the facility in Mexico. However, after reviewing the files, it was determined that a full audit could not be undertaken due to a lack of supporting documentation and records. As a result, it was decided to concentrate on purchasing the used machines. Anomalies were discovered in the purchase of the used machines.

The Results

Due to Kreller’s due diligence investigations in Mexico, it was confirmed that the GM had purchased two used machines from a sole source who was an acquaintance of his rather than putting the purchase out for bid. This occurred after he received approval to purchase a new machine. In addition, the GM had been authorized to repair the company’s machine but bought two used machines and traded the company’s machines without consulting headquarters. An expert was contracted to evaluate the four used machines purchased from the GM and the two machines he traded. The expert indicated that the company’s overall loss in the purchase and trade of the machines was over $74,000 USD.

Enough evidence was developed against the GM, allowing management to proceed criminally against him for fraud. In addition, his termination was supported by the findings regarding his administrative shortcomings. The Controller, although not believed to have been complicit in the fraud, was also terminated as it was apparent he was in a position far beyond his capabilities and also had significant administrative shortcomings.   

Summary

Due to its proximity to the United States, Mexico can be a lucrative market for U.S. companies looking to expand their international footprint. However, information is decentralized with limited access, and it takes time to verify information properly. Corruption is rampant, and bribery is a common course. However, the business opportunity can be extremely enticing. By combining our local assets with our licensed investigators, Kreller can assist in uncovering any obstacles that may impede a beneficial relationship.