While 2014 started with much fanfare over Brazil’s Lei da Empresa Limpaor “Anticorruption Law” (Lei no. 12.846/2013), also referred to as the “Clean Companies Act” (CCA), coming into effect, it seems that the remainder of the year was spent quietly with companies reviewing and developing compliance programs. Brazil’s CCA establishes civil and administrative liability for acts of corruption by individuals and corporations. Significantly, the CCA imposes strict liability. It also encourages the effective application of codes of ethics/conduct and the institution of internal systems and procedures of integrity-incentivizing auditing functions and reporting of irregularities.
As most would agree, the CCA’s most significant impact over the past twelve months has been its push in the voluntary development and implementation of compliance programs where none existed. Where programs aleady existed, the impact was to have those programs reviewed and made more robust. The carrot dangled was the CCA’s proscribing that the existence of such systems would be taken into consideration as a mitigating factor by the government/prosecutors when determining potential administrative sanctions. From a risk mitigation and management perspective, companies without compliance programs looked to quickly develop them, and those with existing programs looked to enhance them. On this point, it would seem that the CCA has had a marked and undeniable positive effect.
Although enactment of such a sweeping and severely punitive law was undoubtedly a significant step for Brazil, the world’s eighth-largest economy and fourth-largest democracy, in cleaning up its much-maligned public image as a corruption-littered country, the CCA’s positive effects have been perhaps overshadowed by what seems like daily news reports of widespread corruption. The reports of gross over-invoicing surrounding the 2014 World Cup came on the heels of reported public protests over whether taxpayer monies should be used to help pay for new stadiums and updating others. If that was not a divisive and inflammatory enough issue, it was only fueled when it was learned that in some cases these stadium costs were grossly overstated because the bill had to include the cost of doing business – i.e., bribes paid to assist in obtaining those lucrative contracts. Although the World Cup, for the most part, went off without a hitch and, from a public global view, can be seen as a success for Brazil and its overall image, the fodder over the exorbitant costs of the soccer stadiums continued long after the historic Germany versus Brazil semifinal match!
Garnering greater attention and more often reported in 2014 was the uncovering of the far-reaching tentacles of the lava jato corruption/bribery scandal. Lava jato is loosely translated as “carwash” and is appropriately named, given that what stands to be Brazil’s largest corruption scandal grew out of a much smaller setting – plain vanilla money launderingthrough gas stations that maintained a carwash business. It is very unlikely that local Brazilian police and investigating authorities had any clue as to the size of the elephant attached to the tail they were holding. The scandal can be traced deeply to government and political party officials and has recently led to protests calling for the resignation of Brazil’s president, Dilma Rousseff.
An election year in Brazil, 2014 was filled with fervent reporting of the corruption at state-owned oil and energy giant Petrobras. This corruption scandal has already led to the reported arrest of more than thirty individuals – at least three reported to be Petrobras executives. While the total dollar amount of the scandal is probably far from being known, it is worth noting that according to recent reports the Brazilian authorities were able to recoup more than R$140 million (Brazilian Reais, approximately $43 million USD) from the Swiss bank accounts of one Petrobras executive allegedly involved. On the corporate side, the news of widespread corruption in the contract-awarding process and beyond led to Petrobras reportedly temporarily banning more than twenty construction firms from bidding on new contracts. Not only does this alleged corruption threaten to tear the country apart, but it has led to a slashing by 60 percent of Petrobras’s share price over just the six months ending in February 2015.
Needless to say, many changes at Petrobras can be expected. In February 2015, Petrobras’s CEO and noted longtime ally of President Rousseff, Maria das Graças Foster, was replaced amid reports that she suggested the value of Petrobras’s assets should be reduced to account for corruption, inefficiencies and other irregularities. Petrobras’s board of directors, a board that reportedly has traditionally comprised politically aligned appointees, is being gutted. In January, a former Citibank CFO, Mr. João Adalberto Elek Junior, was appointed as Director of Governance, Risk and Compliance. In February, it was reported that Petrobras’s then-current board insisted on being relieved prior to the proposed transition period. More directors from the private sector are expected to be appointed in what might be a calculated strategy of lessening the government’s traditional domination over Petrobras, Dilma Rousseff’s former employer.
In early March 2015, the federal prosecutor delivered twenty-eight requests to Brazil’s Supreme Court seeking indictment of fifty-four individualsconnected to the lava jato scandal – forty-five of those individuals were politicians. That does not take into account the indictments filed against local governors.
Reports of corruption in 2014 involved other giants such as Embraer, one of the largest aircraft manufacturers in the world, which is located in the Brazilian city of São José dos Campos. Embraer is alleged to have paid bribes to officials in the Dominican Republic. What is significant here is not the payment of bribes but the fact that this marks one of Brazil’s first efforts to prosecute one of its own for alleged bribes paid outside Brazil and demonstrates its openness to collaborate with outside authorities (Brazil received help from the U.S. Securities and Exchange Commission and U.S. Department of Justice). Then there were the reported scandals in hydroelectric dams involving the construction company Camargo Correa, also reported as being one of Petrobras’s principal contractors.
The Pact against Corruption
With this backdrop, it should be remembered that President Rousseff, as part of her presidential election promises, vowed to lead the Brazilian political system in a pact against corruption. While the regulations in support of CCA enforcement have yet to be adopted, that is not likely far off. With the adoption of these regulations, the CCA’s “teeth,” it is believed that companies and individuals should receive more guidance as issues surrounding enforcement and leniency become clearer. Given Rousseff’s promise to propose and forward anticorruption legislation to congress in the first half of 2015, companies doing business in Brazil that might be lagging in the implementation of a robust compliance system should consider taking some steps in that direction.
Such steps might include:
- Performing an in-depth and all-encompassing self-risk assessment
- Identifying the level, degree and frequency of involvement with government officials and/or third-party entities that are linked to government officials
- Determining whether third-party agents are needed or used in business dealings
- Reviewing and revising due diligence protocols in Brazil-based M&A transactions (the CCA imposes successor liability)
- Reviewing and revising standard contractual provisions/representations and warranties to address CCA issues
- Reviewing partnerships and similar relationships due to risk of joint and several liability
- Regularly reviewing, updating and implementing (i.e., self-auditing) compliance programs supported by regular training.
While we await the CCA’s “teeth” to grow in and watch for its enforcement effort phase to take hold, especially on the corporate level, the recent uptick in the pursuit of corruption cases against individuals suggests that the goal of Brazilian law enforcement is accountability at all levels for bribery and corruption.