Having received international praise for their success in implementing banking controls, Mexico's legislators turned their attention to anti-money laundering in 2012. On 17 October the Federal Act to Prevent and Identify Illegally-Funded Transactions was passed and it came into full force in August 2013.

Article 17 of the Act identifies 15 commercial activities as 'vulnerable', meaning they have a high risk of being used for money laundering. These include: issuing credit cards, service cards, traveller cheques or pre-paid cards; construction; real estate; selling and buying vehicles, jewellery and precious stones and metals; the armouring of vehicles, not for profit organizations, gambling and sweepstakes, international trade, public notaries, and professional rendering of services amongst others.

Alejandro says: "This new law is going to affect many companies in Mexico and, at the moment, it is difficult to understand what is going to happen with the application of this law as no cases have come before the courts yet, so we have no guidance."

Julio adds: "The Act has established an obligation to file certain notices with the Ministry of Finance when carrying out vulnerable activities. What is unclear at the moment is to what extent some of the vulnerable activities should be considered as vulnerable; an intercompany loan is not the same thing as a pawn; however, depending on the interpretation they could both fall within the same vulnerable activity. There is a lot of uncertainty about how this law will be applied."

While it is usual in most jurisdictions for a delay between new legislation being implemented and courts offering guidance about interpretation, in this instance technical difficulties have made the situation more difficult. When the Mexican Ministry of Finance established the portal that notifications are made through, for certain vulnerable activities such as the rendering of services they only allowed individuals to file the notices. This means that firms of attorneys or accountants who might make filings as a corporation are unable to do so unless they do so as individuals, rather than as representatives of their firm. At the time of writing, a much-promised fix had not been implemented.

There are other issues with the new Act. Alejandro points out that the Act is considered as a criminal law, while the activities it covers are administrative. He also mentions that the sanctions are too high, since those range, in some cases, from fines – of MXN$600,000 to MXN$4 million (£28,000-£187,000) – to prison sentences of four to ten years.

The Act also requires service providers – such as attorneys – and other persons such as jewellers, not for profit organizations, art traders and public notaries to obtain information and carry out due diligence from people who are carrying out vulnerable activities and keep that information for five years. What makes this requirement complex is that it is not yet clear if this obligation applies to individuals within companies who are carrying out vulnerable activity, rather than the organisation's legal persona.

Because the Act aims to cover the movement of money from one source to another by following the chain from producer to distributor to client or consumer, it contains both a fiscal component and a tax component, raising further questions about what information is required and where.

Julio says: "We are advising our clients to be cautious and file notices just to make sure they are complying with the law and will not be subject to any future investigation."

There is also a conflict between the new Act and existing legislation – the new Act seeks to limit cash transactions in areas of vulnerable activity whereas Article 8 of the Mexican Currency Act provides for no restrictions on use of the peso. Interestingly enough, in a measure that does not seem congruent with these restrictions, the Mexican Government eliminated the 'IDE' tax originally in place to control deposits in cash of more than MEX $20,000.

All of this creates numerous questions over what effect limiting cash transactions will have in terms of taxation and application. It seems that the effect of the new Act will be to prevent cash being used to purchase jewellery art, real state and vehicles above a certain amount; it would set a precedent which could support future limitations.

With so many questions about the new Act it may take some time for courts to determine them all. Therefore, Basham is seeking a quicker resolution. Alejandro says: "We are considering filing constitutional proceedings against some of the provisions of the new Act. We would do this by filing an 'amparo' against the law – similar to a judicial review in the US and the UK. This would seek clarity from the Supreme Court on whether elements of the new Act are criminal or administrative in nature and examine some of the other questions surrounding it."

Basham, Ringe y Correa is one of the leading full-service law firms in Latin America. Established in Mexico in 1912, Basham draws on a century of experience to assist its clients in conducting business throughout Mexico and abroad. The firm's clients include prominent international corporations, many of them on the Fortune 500 List, medium-sized companies, financial institutions and individuals. Partner Alejandro Catala and senior associate Julio Copo spoke to AI about Mexico's new legislation.

Originally published in Acquisition International, January 2014

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