In recent years, a number of BRIC countries – in particular Brazil, Russia and China – have committed to developing anti-corruption legal frameworks and enforcement structures in addition to foreign anti-bribery laws like the Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act of 2010 (UK Bribery Act). In 2011, China and Russia passed anti-corruption laws. Russia recently implemented an amendment to its anti-corruption law – effective January 1, 2013 – that requires companies operating in Russia to create internal corporate controls to combat corruption. Within the last year, China ramped up its enforcement efforts against both Chinese officials (e.g., the conviction of a former high-level communist party official, arrest of a former head of the Ministry of Railways and an investigation into the former chairman of PertroChina, the country’s largest oil company) and foreign executives (e.g., the raid and detainment of certain GlaxoSmithKline executives).
With its recent enactment of legislation known as the Clean Company Act (CCA), Brazil represents yet another BRIC country to expand its domestic anti-corruption efforts. The CCA, which will go into effect in January 2014, will have substantial implications for companies that operate in Brazil: whereas previously only individuals could be held liable for corrupt acts, companies can now be civilly liable for acts committed on their behalf. Violations of the law can result in severe penalties — up to 20 percent of the company’s gross revenue — and may also include other, more draconian sanctions.
This article provides an overview of the CCA, sanctions associated with violations of the law, how it fits into the international anti-corruption regime developed by the FCPA and UK Bribery Act and suggestions for companies developing compliance programs in response to it. As with every new international anti- corruption effort, companies operating in the new landscape need to be aware of the potential compliance risk and consider updating their internal compliance program in order to address that risk.
Brazil’s Clean Company Act
Application and Liability
The CCA covers both domestic and foreign actions of Brazilian companies, as well as foreign companies legally established in Brazil (i.e., subsidiaries, branches or offices in Brazil) and non-Brazilian companies that have “representation in the Brazilian territory” (i.e., companies determined to be de facto in Brazil, even if only temporarily). It does not contain any requirement that misconduct be committed by an employee of the company to be considered illegal, which means that companies potentially may be liable for third-party agents’ actions taken on behalf of the company.
The CCA makes it unlawful to promise, offer or give — directly or indirectly — an improper benefit to a public agent or to a third person related to the public agent or third person related to him. It also covers other misconduct, such as fraud, bid-rigging in public procurements, funding or subsidizing corrupt acts and tampering with government investigations. Violations of the CCA are subject to a five-year statute of limitations. The law splits civil enforcement between the public prosecutor (Ministerio Publico) and the highest executive, legislative or judicial authority affected by the conduct.
The meaning of domestic and foreign public agents is broad under the CCA, applying to anyone holding governmental office, regardless of his or her position or rank. It also explicitly includes individuals employed by entities controlled — directly or indirectly — by the government, such as state-owned or state-controlled companies. The definition even includes individuals employed at covered entities on a temporary or unpaid basis.
Although the CCA deals with certain activity considered criminal under Brazil’s Criminal Code if committed by individuals, it does not impose criminal liability on legal entities. Brazil has a long history of limiting criminal liability to individuals – except for environmental crimes – and the CCA does not change the criminal offenses of bribery or other relevant corrupt acts. It does, however, subject companies to civil and administrative liability for the acts of their officers, employees and agents (who, themselves, can be held criminally liable) that violate the CCA.
The CCA imposes joint and several liability on the parent company, controlled entities, affiliates and joint venturers for violations committed by any interconnected entity. It also imposes successor liability on an acquiring company in the event of mergers and incorporations, including potential liability for an acquired company’s pre-acquisition misconduct. The sanctions that can result from successor liability are limited to the value of the assets transferred; however, this limit can be ignored if the prosecuting authorities prove that the transaction was executed with fraudulent intent.
The CCA imposes administrative fines (such as civil penalties) and judicial remedies (such as disgorgement, suspension or interruption of the company’s operation or receipt of public subsidies or dissolution). The CCA does not impose any criminal sanctions, such as imprisonment.
Administrative fines cannot equal less than the benefit obtained by the company’s misconduct. The law would apply a strict liability standard for administrative liability (i.e., companies can potentially be held liable without a showing of intent, including liability for the acts of third parties without a showing that an individual within the company knew or approved those acts) for imposing administrative penalties and judicial sanctions involving forfeiture of assets, rights and other valuables. Administrative fines range from 0.1 percent to 20 percent of the company’s gross revenues (excluding taxes) for the prior year. In the event that enforcement authorities cannot calculate the gross revenue, an alternative fine can be imposed that ranges from R$6,000 (US$3,000) to R$60 million (US$30 million).
A company that violates the CCA might also be liable for additional more severe judicially-imposed sanctions. These penalties – except for seizure or forfeiture of assets – require the prosecuting authorities to prove intent or other heightened fault on the part of the offending company. These sanctions include disgorgement of any improperly obtained benefits, suspension from engaging in business or, in egregious cases or where the purpose of the entity is to conceal the benefited wrongdoers, dissolution. Companies can also be banned from receiving government assistance in the form of subsidies, grants, donations or loans for up to five years.
Discretionary Standard In Determining Sanctions
The CCA can be unforgiving in many respects, holding companies strictly liable for the misconduct of their employees. Yet, Brazilian authorities have discretion to consider a number of factors in fashioning the appropriate sanction for CCA violations, including misconduct-related facts (e.g., the seriousness of the violation, the benefit sought or obtained by the misconduct and the amount of damages and negative effect caused by it), the company’s internal compliance efforts, its financial position, the level of cooperation provided by the company to enforcement authorities and the value of the other contracts between the company and the public entity.
The CCA discusses general compliance efforts that might persuade the Brazilian authorities to reduce penalties. The key indicia of those efforts include the company’s internal compliance program, audit capabilities, reporting policies and mechanisms and the existence and effectiveness of internal codes of ethics and conduct. These anti-compliance efforts, while persuasive, do not represent an affirmative defense to allegations of violations of the CCA. The Brazilian government plans to publish specific guidelines regarding what constitutes an effective compliance program and to what extent authorities will consider those programs when assessing penalties.
The law also permits enforcement authorities to enter into leniency agreements, but only with those companies that self-report violations, end the alleged misconduct, cooperate with the investigation (including identifying other implicated parties and facilitating the government’s evidence-gathering efforts) and admit their participation in the illegal activity. Companies that fulfill these requirements may receive a reduction of up to two-thirds of the total potential fines (except forfeiture/restitution), protection against the withholding of public subsidies and benefits and confidentiality regarding the specifics of the agreement and penalty.
Comparison to the FCPA and UK Bribery Act
The anti-corruption regime established by the CCA draws from the FCPA and UK Bribery Act. Yet, there are a number of important differences between the CCA and other foreign anti-bribery statutes, a few of which are discussed below:
- No accounting provisions. The CCA does not contain accounting provisions similar to the FCPA (i.e., books and records and internal controls provisions). The absence of these provisions is similar to the UK Bribery Act.
- Domestic and foreign misconduct. Whereas the FCPA is a foreign-focused statute, the CCA - like the UK Bribery Act – applies to both domestic and foreign misconduct.
- Scope of misconduct. Unlike the FCPA and UK Bribery Act, the CCA represents a more generalized anti-corruption law – incorporating the prohibition of fraud in government contracts and public procurement as well as hindering government investigations or audits – in addition to its anti-bribery sections.
- Strict liability. While the FCPA requires that illegal acts (other than books and records violations) be done with a corrupt intent, the CCA imposes strict liability for the imposition of administrative penalties and certain judicial sanctions involving the forfeiture of assets, rights or valuables. This is potentially similar to the UK Bribery Act’s imposition of strict liability on a company for “failing to prevent bribery” committed by its agents.
- Facilitation payments included. The CCA draws from the UK Bribery Act and departs from the FCPA by explicitly including facilitation payment – payments to foreign officials to expedite routine government actions – as illegal transfers.
- No corporate criminal liability. Whereas the FCPA and UK Bribery Act impose criminal liability on companies, the CCA only imposes criminal liability on individuals (except for environmental crimes). Legal entities, however, are still subject to civil and administrative liability for the acts of their officers, employees and agents (who can be held criminally liable) that violate the CCA.
- No affirmative defenses. Unlike the FCPA and UK Bribery Act, the CCA does not provide companies any affirmative defenses for (1) payments made legal under local law or (2) reasonable and bona fide business expenditures. Also, unlike the UK Bribery Act, an adequate internal compliance program is not an affirmative defense to violations of the CCA; but, as with the FCPA, a company’s compliance efforts are considered in fashioning the appropriate sanction.
- Decentralized enforcement. Unlike the primary entity enforcement structure of the FCPA (the Department of Justice and the Securities Exchange Commission) and UK Bribery Act (the UK Serious Fraud Office), the CCA splits civil enforcement between the public prosecutor (Ministerio Publico) and numerous other authorities. The ability of multiple Brazilian governmental agencies to bring enforcement actions against companies exacerbates the potential exposure considering the potential for ambiguity in interpretations and procedures employed by different agencies.
The Brazilian anti-corruption law – although similar to the FCPA and UK Bribery Act – expands the international approaches in a number of fundamental ways. Perhaps most importantly, it covers both foreign and domestic bribery, thereby adding another potential layer of liability for companies operating in Brazil and subject to the FCPA or UK Bribery Act or both. For these reasons, it is important for companies to understand the outer-boundaries of their compliance risk in fashioning internal policies and procedures.
The recent globalization of anti-corruption laws, including the CCA, represents an excellent opportunity for companies to create or revisit their compliance programs. A number of suggestions for strengthening these programs include:
- Update current policies and procedures. Many of the new anti-corruption laws, like the CCA, offer substantial benefits to companies that have effective internal policies and procedures aimed at combating corruption. Since the CCA potentially expands a number of requirements imposed by the FCPA and UK Bribery Act, revisions might be necessary to bring companies into compliance with it and other anti-corruption legislation.
- Audit for red flags. For those companies with robust compliance programs, in-house counsel and compliance officers should consider auditing the effectiveness of their companies’ compliance efforts in order to identify any red flags that might expose the company to potential violations of recent international anti-corruption legislation.
- Monitor high-risk interactions. In addition to those industries – such as defense and aerospace – that typically involve government contracting, U.S. enforcement officials recently focused on the financial services, pharmaceutical, retail and energy industries. Companies in these industries or others that frequently come into contact with the Brazilian government or government- controlled companies should consider emphasizing monitoring efforts in order to identify potential issues before they become the focus of enforcement authorities.
- Monitor anti-corruption trends. International and domestic anti-corruption enforcement trends generally appear in the news media prior to most companies being subjected to enforcement actions – except in the cases of the unfortunate initial targets. In-house counsel and compliance officers should consider monitoring enforcement activities and news coverage to determine whether additional inquiry is appropriate for certain company divisions or activities.
- Emphasize anti-corruption due diligence. Companies contemplating acquiring Brazilian subsidiaries or otherwise investigating business opportunities in Brazil should take into consideration that most international anti-bribery laws, including the CCA, impose successor as well as joint and several liability. Pre-acquisition or pre-partnership due diligence represents an important measure that can help a company assess the corruption risk associated with the Brazilian target or partner.
Although these measures can help manage risks associated with corruption, companies should seek advice from seasoned counsel with anti-corruption legal experience in order to ensure a robust compliance program.
As with the other BRIC countries, Brazil represents tremendous short and long-term economic opportunity. In the short-term, Brazil will host the 2014 World Cup and 2016 Olympics. In the long-term, Brazil’s abundant natural resources, growing industrial sector and burgeoning middle class provide a foundation for continued economic growth. Yet the economic opportunities in Brazil are not without risk. The prevalence of partnerships between the government and industry and the historical trappings of corruption that continue to persist within its borders potentially make Brazil a difficult environment for companies to operate in without running afoul of various anti-corruption laws.
The widespread public support for and political commitment to developing anti-bribery structures in Brazil represents a fundamental shift in the anti-corruption regime and a potent new tool for the Brazilian government to combat corruption. Brazilian citizens have protested against government corruption. Criminal enforcement authorities recently tried certain officials of the former Brazilian President’s administration, as well as members of Brazil’s legislative body. The Brazilian Senate recently approved another anti-corruption bill that defines corruption as a “heinous crime.” As the government tries to catch up with public sentiment, Brazil will likely continue to emphasize anti-corruption efforts. Companies need to be aware of the new anti-corruption agenda in Brazil, as well as the compliance risk it presents for those without sufficient internal policies and procedures. Companies can manage these risks with effective internal compliance programs – including the suggestions discussed above – that will decrease the likelihood of violations or, in the event a violation occurs, alleviate the size and scope of penalties.