Citigroup is facing criticism for potentially benefiting from Mexico’s controversial judicial reform, which critics argue might erode the rule of law.
For the first time under the country’s new judicial system, judges are elected. Over 2,000 judges were elected on June 1, with only 13% of voters participating. Many of the new judges reportedly lack the experience and qualifications expected for the job.
Critics worry this will create a path for political interference and cartel influence over the courts.
Fitch Ratings warned last year that “a material deterioration of the current judicial framework or weakening of government checks and balances could temper domestic and foreign investment appetite if the regulatory environment and legal framework is viewed as uncertain.”
Fitch added, “We believe these reforms overall would negatively affect Mexico’s institutional profile.”
Amid these changes, Citigroup is facing increased scrutiny.
While companies like Iberdrola are leaving Mexico, Citi is staying put. Critics argue the bank is in a strong position to take advantage of the unstable legal system.
Citi entered the country in 2001 by buying Banamex, a powerful and politically connected financial institution. Although the company has since spun off part of Banamex’s retail banking business, Citi continues doing business in Mexico.
The company is facing a billion-dollar federal lawsuit in the U.S. over its role in a fraud case involving Oceanografía, a bankrupt Mexican marine services provider, according to Reuters.
The lawsuit claims Banamex provided billions in advances to the company between 2008 and 2014, despite knowing that the firm was using forged documents and had immense debt. The plaintiffs also allege that Citi hid key information while collecting interest on the money.
A panel of American judges recently ruled that the case can move forward. One judge wrote that “it strains credulity to conclude that, assuming the plaintiffs’ allegations are true, Citigroup lacked awareness of (Oceanografia’s) activities.”
Meanwhile, Citigroup has also come under fire for its reported efforts to sidestep an arbitration decision in Mexico. Financial columnist Alicia Salgado reported that Citi is using a local court to evade a ruling against its pension unit, Afore Citibanamex.
Legal experts say this is dangerous.
Global Arbitration Review warned that “there exists a tangible risk that Mexico’s pro-arbitration position may shift once the democratically elected judges assume office.”
The outlet called the system “a house of cards – precariously balanced and susceptible to institutional transformation.”
Critics argue that Citi’s refusal to honor an arbitration award sets a bad precedent. They fear that as Mexico’s courts become more politicized, businesses that honor international rulings may struggle to compete with those that don’t.
