Suddenly anti-corruption enforcement seems to be a serious effort in Brazil—to the point that businesses working there might want to pay more heed to enforcement risks from Brazilian regulators themselves, plus the usual scrutiny from U.S. regulators policing against corruption in emerging markets.
The most high-profile example is the massive corruption probe surrounding state-owned oil company Petrobras, under investigation for awarding inflated contracts to construction and engineering companies, which then funneled kickbacks to Petrobras executives and politicians.
New developments in the case unfolded March 11, when Brazil’s Office of the Comptroller General (the anti-corruption enforcement body of the federal government) opened a case against 10 additional Brazilian construction companies that have contracts with Petrobras. Brazil’s Supreme Court also approved the investigation of 54 politicians for their alleged involvement in the kickback scheme. In total, more than 200 companies and 80 individuals now face possible charges, and few believe the problem ends there.
“These investigations likely will extend into other sectors of the economy,” says Salim Saud Neto, a partner in the Rio de Janeiro office of Tauil & Chequer. The Petrobras case could drag on for years, “depending on how the investigation unfolds,” he says.
And the Petrobras case is just a foretaste of increased anti-corruption activity to come in Brazil, Saud Neto adds. “We can expect much more enforcement going forward,” he says.
That would be a stark change for Brazil, long viewed as high-risk region for corruption. Transparency International, which issues an annual index ranking countries on perceived corruption risks, ranked Brazil 69 out of 174 countries. Furthermore, public protests against rampant political corruption continue, and all at a time when Brazil prepares to host the Summer Olympics in 2016.
“The lack of enforcement that was always there in the past won’t be tolerated much longer,” says Donna Fuller, a senior manager of Deloitte Financial Advisory Services. “Brazil really has too much at stake not to demonstrate a commitment to enforcement.”
“We can expect much more enforcement going forward.”
Salim Saud Neto, Partner, Tauil & Chequer
Concerns for Foreign Companies
U.S. companies are watching how the Petrobras investigation unfolds. Kelly Kramer, a partner at law firm Mayer Brown, says the “wild card” is what role the U.S. Justice Department and Securities and Exchange Commission will play as the case progresses. Both agencies are already investigating Petrobras for potential violations of the Foreign Corrupt Practices Act, and those investigations could expand to include Petrobras’ counter-parties that have securities traded in the U.S. financial markets, Kramer says.
What brings Brazil’s new anti-corruption enforcement regime into “relatively uncharted water,” Kramer adds, is the lack of cases where a foreign government launches a bribery investigation and brings charges over which the Justice Department has concurrent jurisdiction. And if Brazil does not bring any significant prosecutions against Petrobras or any co-conspirators, would the Justice Department or SEC then bring independent actions against the same targets anyway?
Although Brazil’s investigation is still in its early stages, “it implies that anyone who is doing business with Petrobras is either under scrutiny, or potentially is going to be facing scrutiny,” Kramer says. U.S. companies should carefully check to see whether they are doing business with, or through, any of the companies under investigation, he says.
At a minimum, Fuller advises that U.S. companies should conduct an online public source inquiry as part of their third-party due diligence exercises. In some of the larger cities in Brazil, such as São Paulo or Rio, finding information through public online records is relatively easy, she says.
BRAZIL’S ANTI-CORRUPTION LAW
Below is an excerpt from Brazil's anti-corruption law, detailing general provisions.
Article 1. This law provides for the strict civil and administrative liability of legal entities for acts committed against the domestic or foreign Public Administration.
This law applies to the business organizations and sole proprietorships, incorporated or not, regardless of the type of organization or the corporate model adopted, as well as to any foundations, associations of entities or persons, or foreign companies having office, branch or representation in the Brazilian territory, organized in fact or by law, even if temporarily.
Article 2. The legal entities will be held strictly liable, in the administrative and civil spheres, for the wrongful acts set forth in this law performed in their interest or for their benefit, either exclusive or not.
Article 3. The legal entity's liability does not exclude the individual responsibility of its directors or officers or of any natural person who is the offender, co-offender or participant of the illegal act.
The legal entity will be held liable irrespective of the individual liability of the natural persons referred to in the caput.
The directors or officers shall only be held liable for illegal acts to the extent of their culpability.
Article 4. The responsibility of the legal entity remains in the event of corporate changes, transformation, merger, acquisition or spin-off.
In the case of mergers and acquisitions, the successor's liability will be restricted to the obligation to pay fines and full restitution for the damage caused, up to the limit of the assets transferred, not being applicable to it the other sanctions set forth in this law for acts and events that occurred before the date of the merger or acquisition, with the exception of cases of simulation or evident intention of fraud, duly proved.
Parent, controlled or affiliated companies, or, within the scope of the respective contract, consortium members will be jointly responsible for the acts provided for in this law. This responsibility shall be restricted to the obligation to pay fines and full restitution for the damage caused.
Source: Brazil’s Clean Companies Act.
One third-party risk specific to Brazil is that one business owner might routinely own multiple companies. “When you do due diligence on an entity there, it’s pretty important to understand the entire corporate structure,” Fuller says.
Conducting third-party due diligence in Brazil is especially important in the current enforcement environment, because Brazilian companies have not really conducted any serious third-party due diligence in the past. Historically, Brazilian companies have taken the position “that if they’ve outsourced activities to a third party, they’ve outsourced the risk as well,” Fuller says. The only way to counter those perceptions is to insist that a robust anti-corruption compliance program be in place, she says.
The problem for U.S. companies is that Brazilian companies have never been forced to implement an anti-corruption compliance program until last year, when the country’s new anti-corruption law took effect. Because Brazil’s anti-bribery law is only one year old, Brazilian companies are just now coming to develop a domestic culture of compliance, Saud Neto says. Fuller put it more succinctly: “They’re really building their programs there from the ground, up.”
So when compliance and risk executives in the United States contemplate the compliance culture that they expect from employees in Brazil, “they’re going to have to know that the work they’ll have to do in Brazil, along with the time and investment required, is quite substantial,” Fuller adds.
Another compliance hurdle that Brazil’s new enforcement landscape poses: the talent gap among compliance professionals. As Fuller explains, “One of the biggest challenges faced by companies in Brazil is finding qualified professionals to help shape and lead the compliance programs.”
Anti-Corruption Enforcement
To complicate matters even more, Brazil’s Clean Companies Act (CCA) goes further than the FCPA by prohibiting bribery of foreign and local government officials, while the FCPA prohibits bribery only of foreign officials. The CCA also imposes liability on companies for corrupt acts committed by their directors, officers, employees, and other agents; and prohibits other forms of corruption related to procurement fraud such as collusion or bid-rigging.
Corruption has always been prohibited under Brazilian law, but enforcement actions historically have been brought against only individuals. That’s still true today, Fuller says, “but now you have this really tough corporate law on the books.”
Although the law does not impose criminal liability like the FCPA, it does impose administrative and civil liability on companies following a finding of bribery—meaning that Brazilian authorities do not have to show corrupt intent to impose a sanction or fine against a company. “The standards for doing business in Brazil, even though the law hasn’t yet been enforced, are stricter than most other places, because there are no actual defenses built in for companies,” Saud Neto says.
No matter the outcome, the Petrobras case serves as an important “confidence-building exercise” for Brazilian authorities, Kramer says. Brazil now has in its arsenal not only a stringent anti-corruption law to enforce, but also a group of investigators with experience in conducting large-scale investigations.
The experience Brazilian enforcement authorities gain in the Petrobras investigation will greatly expand their ability to enforce the country’s anti-corruption law, Kramer says. “We’re in a new era when it comes to Brazilian enforcement of the anti-corruption law.”
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