Companies with business dealings in Argentina should be on high alert as the country’s largest corruption scandal ever continues to expand to multiple sectors and, possibly, into multiple regions.
Given the heightened risks associated with the so-named “notebook” scandal, compliance officers might want to enhance their due diligence efforts in the country.
Argentina’s massive notebook scandal is, as its name implies, a scandal that was uncovered when a newspaper in Argentina obtained eight spiral notebooks that contained meticulous records kept over a period of several years describing elaborate corruption schemes involving large cash payments made by construction companies to high-ranking officials in Argentina’s government in exchange for federal public works and road concession projects. The notebooks were maintained by the driver for a close advisor to the Minister of Federal Planning during the presidencies of Nestor Kirchner, from 2003 to 2007, and Cristina Fernandez de Kirchner’s two terms, from 2007 to 2015.
A new plea-bargaining law in Argentina that allows defendants who come forward with any new information to receive a reduced sanction has helped to broaden the scope of the investigation. More than 30 defendants are cooperating with the investigation, to date.
With the help of this plea-bargaining law, Argentine authorities have been able to uncover similar schemes in the transport and energy sectors, and it’s likely to expand to other sectors and schemes, said Guillermo Jorge, a partner at law firm Bruchou in Argentina, in a Webinar discussing the notebook investigation.
As of April 2019, 16 former public officials and 28 corporate executives have been indicted and confirmed on appeal. Another 75 defendants have been summoned to appear in court this spring. In total, more than $300 million in assets have been frozen.
It’s likely that the notebook investigation will yield only individual prosecutions, as opposed to corporate prosecutions, because corporate criminal liability for corruption was not imposed until Argentina’s Corporate Criminal Liability Law took effect in March 2018. Principles of Argentine criminal law prevents retroactive application of that law.
Companies might still, however, be prosecuted for other types of misconduct resulting from the notebook investigation, such as for money laundering and tax evasion. “It’s very likely that this investigation extends to the financial sector, too,” Jorge said.
Notebook vs. Car Wash investigation
Argentina’s notebook scandal shares many similarities with Brazil’s Operation Car Wash (Lava Jato) investigation. Both investigations involve the construction industry; grew from isolated investigations and now extend to multiple sectors; occurred over several years and touch numerous government officials; and create substantial corruption risks for companies. “You have a renewed effort in Brazil to pursue corruption, and we’re seeing a similar effort in Argentina,” said Jonathan Drimmer, former deputy general counsel and chief compliance officer at Barrick Gold and now a partner at Paul Hastings.
The biggest difference between the investigations is that business people in Argentina argue that, unlike Brazil’s car wash scandal—which was centered on bribery schemes orchestrated by the private sector—the cartel scheme in Argentina was organized by the top of the government and, thus, companies had no choice but to take part. “Businesspeople involved in the cartel, they feel extorted,” said Jorge. “They said if they didn’t join the cartel, the fate of their company was bankruptcy, basically.”
Another difference: While the car wash scandal had global implications that unfolded over several years, the scope of the notebook scandal, still in its early stages, is unknown. Brazil’s media has reported that U.S. authorities are collaborating with Argentina’s government by providing confidential information on several U.S. bank accounts allegedly used to hold bribe money for Kirchner. “So, we do have a domestic effort with U.S. authorities in assisting in these investigations,” Drimmer said.
Thus, while the investigation itself is currently centered in Argentina, the widespread business practices that underly the notebook scandal may soon expand to other countries. “If you’re a construction company or a transport company or an energy company that ends up getting implicated, the logical questions will be asked about other jurisdictions where similar practices occurred with these entities, as well as relevant business partners,” Drimmer said.
All of this is to say that the notebook investigation likely will start to expand over the next few years, and yet many companies are still in denial about the intensifying corruption enforcement landscape. “Most lack a sense of urgency about responding to the crisis,” Jorge said. “Few believe that compliance programs are a necessity, and most are not taking affirmative steps to make improvements.”
Moreover, Argentina is in an electoral year, and so many are probably hoping that a different president “will be a bit more flexible with the compliance conditions that this administration has been willing to impose,” Jorge added. “My own opinion is that this is not dependent on the next administration. This is much more dependent on market forces, because if companies want to act internationally or want to get financing from international banks or they want to join with foreign business partners, they will need sooner rather than later to implement strict anti-corruption compliance standards.”
During the Webinar, Drimmer discussed what the notebook investigation means for anti-corruption compliance programs and due diligence efforts of multinational companies doing business in Argentina. It’s also important to be aware of the business activities that are going to be altered “simply by the nature, size, scope, and direction of this particular scandal,” Drimmer said.
For example, expect delays in the launch of already awarded public-private participation contracts, if you are looking at joint ventures and partnerships within the country. “As multinationals are dealing with domestic companies, they are conducting diligence in relation to business activities for their local JVs and partners and sometimes customers and suppliers, and that’s also creating delays and significant impacts within financial systems more generally in Argentina.”
Thinking about Brazil’s Operation Car Wash and how it expanded from a relatively discreet investigation to one that is worldwide in scope with clusters of FCPA investigations, “I do think as a company you have to be mindful of that recent history and thinking about your own engagement in Argentina and with other companies that do business there,” Drimmer said. It’s not prudent to think of the notebook investigation as simply a regional issue, he said, but rather to think about what direction the investigation may take “and how you’re going to take steps effectively ahead of that.”
From a proactive anti-corruption compliance standpoint, companies should consider the following steps:
Identify whether companies or key individuals are, or might be, implicated by the scandal. Conducting robust due diligence is going to be critical—and not just on the company but also on key personnel involved in those companies that have already been involved in the scandal or where rumors are in terms of being implicated in the future, Drimmer said. That might include directors, controlling shareholders, and principals.
Conduct third-party due diligence. Given the direction that the notebook scandal is taking, another compliance measure that takes on special importance is requiring contract provisions with audit rights that you might want to exercise a bit more frequently, Drimmer said. Assessing a company’s connection to local unions, which may have government ties, is “also something to pay particular attention to with your local partners,” he said, as well as how they connect with government officials and others where additional compliance risks may lie.
Evaluate the third party’s compliance program and assist with creating or updating the program if necessary. Working with partners who are thinking about their own compliance programs consistent with Argentina’s new anti-corruption law also takes on greater importance. That may involve putting pressure on business partners to put their own compliance programs into place. Also, sponsoring roundtables, workshops, compliance training, and offering sample policies and procedures is an important way to gain comfort that your business partners are thinking about things in a compliance-minded way, Drimmer advised.
Conduct ongoing monitoring. The more you can maintain documentation around things like training and monitoring, “the happier auditors will be,” Drimmer said. Also, keep a close eye on invoices, making sure they’re detailed and they identify the goods and services being provided.
Enlist the help of a local compliance expert, when possible. “There is no question that having trained, experienced, and knowledgeable compliance personnel on the ground is incredibly helpful,” someone who can assist and guide the company through the nuances of local law, Drimmer said. Whether to enlist the help of a local compliance expert, however, will depend on the nature of the company’s operations, among other factors.
Given the heightened compliance risks associated with the notebooks investigation—the fact that it’s still in its infancy stages—“paying a bit more attention to specific aspects of diligence and to where this investigation is going,” Drimmer said, “does become a bit more relevant.”