Pemex is Mexico’s Corruption Cash Cow with Cartel Ties

The state-owned petroleum giant Pemex paid $9 million in 2011 to have an oil rig towed halfway round the world, from the United Arab Emirates to the Gulf of Mexico. When government auditors looked at the contract, they turned up some problems.

The rig had the wrong equipment for the assignment, according to a report by Mexican congressional auditors. And the tow job itself was a fiction: The rig didn’t need to be moved. It was already in the Gulf of Mexico.

The auditors alerted Pemex in February 2013, urging it to discipline the employees who handled the contract. Pemex did nothing. About a year later, an explosion aboard the rig killed two workers. The cause of the blast is still under investigation by Pemex.

The rig deal, a Reuters examination finds, is typical of the way Pemex and the government respond to widespread signs of fraud in the company’s vast contracting budget: by looking the other way.

Reuters identified more than 100 Pemex contracts signed between 2003 and 2012, worth $11.7 billion, that were cited as having serious problems by the Federal Audit Office of the lower house of the Mexican Congress. The allegations ranged from overcharging for shoddy work to outright fraud. The deals were worth about 8 percent of the $149 billion in Pemex contracts registered in Mexico’s federal contracting database in that period.

Pemex almost always disregards these warnings. From 2008 to 2012, the most recent year of available data, the congressional auditors issued 274 recommendations that Pemex take serious action over contract irregularities – either press criminal charges, discipline employees or claw back money.

The company issued responses to 268 of the cases. In only three of them was action taken. The result: A handful of employees received suspensions. Pemex’s internal control office dismissed 157 of the cases. As of last month, 108 were unresolved.

“In Mexico, no one gets punished,” said Arturo Gonzalez de Aragon, a former head of the Federal Audit Office, known in Mexico by its Spanish acronym, ASF. “If you don’t punish anyone, impunity becomes a perverse incentive for corruption.”

Pemex receives a second layer of oversight, but there are holes there, too.

The Public Administration Ministry, an executive-branch watchdog agency known by the Spanish acronym SFP, stations a team of investigators within Pemex’s internal control office.

Among the contractors that slipped through this net was Francisco “Pancho” Colorado, an alleged associate of the Zetas, one of Mexico’s most murderous drug cartels. His company received tens of millions of dollars from Pemex even after the SFP sought to ban it for alleged fraud. He was later convicted in U.S. federal court on unrelated charges of laundering money for the Zetas, and is now appealing the verdict.

The failure to act on signs of fraud, say Gonzalez de Aragon and others familiar with Pemex, is symptomatic of lax oversight of the oil giant.

Congress’s Federal Audit Office auditors, they say, have no authority to levy fines or press criminal charges. They can only pass their recommendations to prosecutors or to the SFP investigators inside Pemex.

RELUCTANT INVESTIGATORS

The SFP investigators at Pemex, meanwhile, are reluctant to pursue cases against the officials they are supposed to regulate. These internal investigators technically are independent of Pemex, as employees of a separate federal agency.

But the federal agents – mainly lawyers and accountants – are effectively part of the oil giant. They are paid by Pemex and work in Pemex offices.

Pemex’s head of procurement, Arturo Henriquez, said the company acknowledges having suffered from fraud and waste “in the past.” But major changes are afoot, he said, that will cut the scope for abuse. Pemex is creating a centralized contracting unit that will make it harder for employees at the far-flung company to steer deals to favored businesses, he said.

“We are going to mitigate bad practices with a centralized, standardized process with due controls,” he said.

Pemex declined to comment on the specific cases described in this article.

Fraud and waste at Pemex are critical because of the major role the company plays in the Mexican economy. Pemex’s taxes and dividends finance about 30 percent of the federal budget. Contract abuse at the oil giant eats into the government’s ability to fund services from healthcare to road building.

Pemex’s trouble policing itself is taking on international importance as well. Mexico’s petroleum production is falling, and in an effort to rev it up, the country is about to open its oil reserves to foreign drillers. New laws will force Pemex to compete for oil acreage with foreign operators for the first time since 1938. Pemex, however, will remain responsible for awarding billions of dollars of service contracts.

Citigroup alleged last February that it was defrauded of more than $400 million by a major Pemex contractor that used fake Pemex invoices as loan collateral. Congressional auditors had issued multiple warnings over the years about the contractor, Oceanografia, but Pemex kept doing business with the firm. Pemex and Mexican prosecutors say that Pemex employees aren’t under scrutiny in the Oceanografia investigation, which is ongoing.

President Enrique Pena Nieto says he plans to replace the SFP with a more independent Anti-Corruption Commission. Two years into his administration, the initiative is stalled in Congress, where lawmakers are divided over the plan.

The anti-corruption initiative was part of a suite of reforms Pena Nieto announced upon taking office. The most ambitious proposal involved shaking up the energy sector and Pemex, but plunging oil prices and a series of domestic crises have complicated that agenda. Most recently, Pena Nieto, his wife and his finance minister have been mired in controversy after it emerged they had bought or used houses belonging to a government contractor in a high speed rail project.

Salvador Vega, an opposition senator and former head of the SFP, said the federal investigators inside Pemex have disciplined thousands of employees and some contractors based on their own inquiries, independent of the congressional Federal Audit Office. Ministry investigators, meanwhile, criticize the congressional auditors, saying they lack the technical expertise to understand oil contracts.

Jose Munoz, president of the lower-house committee of Congress that oversees the Federal Audit Office, says congressional audits are sound, written with the help of outside technical experts. The SFP’s Pemex unit dismisses or sits on congressional audit recommendations, Munoz said, because the internal investigators are too close to the Pemex employees they’re supposed to scrutinize.

A spokesman for the Federal Audit Office said the office supports the president’s idea of establishing an independent sanctioning body in place of the SFP.

A LETTER FROM ABOVE

A contract with Unigel Quimica illustrates the challenges involved in policing Pemex.

The company, a unit of Brazilian chemical maker Unigel, received a lucrative deal from a unit of the Mexican oil giant. Pemex Petrochemicals sold Unigel a chemical called acrylonitrile at a deep discount from 2009 through 2011, according to an investigative report by the SFP. The chemical is used to make plastics.

It isn’t clear why Pemex sold the material so cheaply. By giving Unigel the generous discount, Pemex lost $24.2 million from 2009 to 2011, according to the SFP report. Unigel made just over $30 million on the deal, the report says.

Two Pemex Petrochemicals officials approved the problematic portion of the contract. The two officials, Lorenzo Aldeco and Manuel Sanchez, did so without the approval of the legal department or their fellow managers, bypassing routine safeguards, the SFP report found. Aldeco later left Pemex and went on to become an executive at Unigel. Sanchez now runs the Pemex Petrochemicals unit.

The internal investigators recommended that Pemex Petrochemicals renegotiate part of the contract. In a separate audit report last year, congressional auditors called on Pemex to sanction the employees who supervised the deal, without naming names.

Instead, Daniel Ramirez, then head of the SFP investigative unit at Pemex, sent a letter to his SFP colleagues stationed at Pemex Petrochemicals, directing them to defuse the problems with Unigel, according to a copy of the letter seen by Reuters.

“You should work with the director of Pemex Petrochemicals to attend to and answer these recommendations, with the aim of avoiding them becoming definitive issues,” the letter says.

Sanchez, now the head of Pemex Petrochemicals, said there was nothing unusual about the letter. As for his role in greenlighting the Unigel deal, Sanchez said he signed off on an estimate of Unigel’s planned investment, which didn’t require legal review. The price of the contract wasn’t renegotiated, in spite of the SFP report’s recommendation, he said. Asked why, he compared his company’s relationship with Unigel to a “marriage”: “Not everything is perfect, perfect, perfect…. We realized that there are things to improve.”

Ramirez was named last month to the newly created position of general auditor for Pemex. He did not respond to requests for comment. Pemex’s press office declined to comment. The investigation into the Unigel contract is ongoing, according to internal Pemex investigators.

Aldeco left Pemex about six years ago and is now the chief executive of the Mexican unit of Unigel. He declined to discuss the contract, and said his hiring by Unigel does not pose a conflict. Aldeco said he had no idea he would one day work for Unigel when Unigel won the contract in 2007. He said he left Pemex in 2008, joining Unigel in 2012.

Jose Francisco Rivera is a former senior SFP investigator inside Pemex who examined Unigel. He said other federal agencies he worked at would have taken action on a Federal Audit Office finding of major problems with a contract.

“I’ve been in the public sector since 2004,” Rivera said. In his experience, “all the important recommendations from the Federal Audit Office were dealt with in a process that normally ended in a sanction for a public sector worker. That is, until I arrived at Pemex Petrochemicals.”

The oil giant’s watchdogs do sometimes act. In 2012, the Federal Audit Office found that Gutsa, a Mexican construction company, botched a $30 million Pemex contract to build a monument to mark the bicentennial of Mexican independence. Gutsa did not finish the monument in time for the anniversary, and the costs ballooned to more than $90 million, the office found. After a related investigation, three Pemex employees were fired by the SFP.

The Gutsa case itself followed an oversight, however. Gutsa won the monument deal despite having been banned from working with the government in 2007, after abandoning an unfinished road project. It won the contract while appealing the ban.

Reuters found that when Pemex’s internal inspectors do complete an investigation, it rarely results in action. The 160 completed probes resulted in no penalties for contractors. Three of the cases resulted in suspensions for Pemex employees, ranging from five days to six months.

THE PANCHO DEALS

Even when the SFP sanctions a contractor, companies can exploit loopholes to keep winning deals.

Reuters found that from December 2006 through September 2013, about 40 companies won a combined $88.1 million in Pemex contracts after Pemex’s internal SFP unit banned them.

Vega, the former head of the SFP, said he was surprised by those numbers. While the awards technically weren’t illegal, he said, Pemex should not grant contracts to companies who’ve been given notice of an SFP ban.

“It should be thoroughly investigated,” Vega said.

Among those companies was ADT Petroservicios, owned by Pancho Colorado.

Ministry investigators first banned ADT from winning contracts in 2009, over its alleged participation in a multi-million dollar fraud involving the cleanup of an oil spill. Reuters requested documents detailing the allegations against ADT under Mexico’s freedom of information act. The ministry said it was unable to release the documents, saying they were sealed in an appeals proceeding.

A Pemex contracting ban normally takes effect within a few days of a decision. ADT was able to postpone the ban for years by appealing it in court.

As a result, ADT won more than $35 million in additional contracts after Pemex investigators announced the ban. Pemex declined to explain why it opted to give fresh contracts to ADT during the appeal period.

Colorado found other ways around the ban, too. He formed another company, MTTM Servicios Petroleros, to skirt the impending ban of ADT, U.S. Internal Revenue Service special agent Michael Fernald told Reuters. In addition to the ADT contracts, MTTM won two contracts from Pemex worth $23 million in April and July of 2011.

The deals ADT went on to win in the interim included a $9.7 million contract for bridge, road and oil-well work awarded in August 2011. That award came two days before Pemex finally implemented the ban. The contract ran through 2013.

In March 2012, Pemex deposited a $4.6 million payment to Colorado’s accounts, according to IRS agents who helped prosecute him. That transaction, by chance, came just one day after Mexican federal police engaged in a fierce shootout with Zetas gunmen at Colorado’s ranch in Veracruz, while pursuing a cartel boss who had holed up there. Colorado wasn’t present at the time.

In May 2012, Colorado was indicted on charges of money laundering for the Zetas in the U.S. Western District Court of Texas in Austin. The U.S. Treasury designated ADT as a front for the cartel. Prosecutors alleged that Colorado laundered $10 million for Zetas members in the United States by purchasing race horses.

In the time between the implementation of the ADT ban in August 2011 and Colorado’s indictment the following May, Pemex deposited $9 million into Colorado’s bank accounts, according to IRS investigators.

It isn’t clear why Pemex officials were so keen to keep doing business with Colorado. At Colorado’s trial, a witness testified that in February 2012, he attended a meeting at a Pemex office with Colorado and a high-level Pemex official. There, the witness said, the two men discussed how Colorado could pay $5 million to the Pemex official. The witness didn’t say what the money was for or whether the payment took place. Pemex declined to talk about the case.

Colorado was convicted in 2013 and sentenced to 20 years in prison.

Chris Flood, a lawyer for Colorado, said his client denies the charges and is appealing the conviction. His attorneys have said he was not an associate of the Zetas, and that he paid for the horses with legitimate profits from ADT’s business with Pemex. Many of the key witnesses against him were criminals trading testimony for deals with U.S. authorities, Flood said.

Asked about Colorado’s dealings with Pemex, Flood declined to comment.

(Edited by Michael Williams)