For the Defense
Brazil's stringent new anti-bribery law, the "Clean Companies Act,"1 takes effect on January 29, 2014 and will, for the first time, subject Brazilian and multinational companies operating in Brazil to severe civil and administrative sanctions for bribing domestic or foreign government officials. The Act is comparable to (and, in a few key respects, tougher than) the U.S. Foreign Corrupt Practices Act ("FCPA") and the UK Bribery Act ("Bribery Act"). It imposes strict liability for violations of its provisions, prohibits "facilitation payments," and exposes companies doing business in Brazil to harsh penalties and fines.
Although compliance with the Act's provisions is important for all companies doing business in Brazil, it is absolutely essential for companies involved in activities surrounding the 2014 FIFA World Cup and the 2016 Olympics. Business transactions related to both events are likely to involve interaction with government officials (even at the local government level), which increases exposure to liability. Companies can mitigate their risks, however, by implementing meaningful compliance programs and timely disclosing any violations, no matter how small.
Background of the Act
The Act is an unprecedented step by Brazil to hold corporations liable for the corrupt conduct of their directors, officers, and agents. Bribery is a crime in Brazil; however, under Brazil's civil law system, corporations and other legal entities generally cannot be convicted of crimes because they cannot form the intent required to establish criminal liability. Accordingly, prior to the Act, the Brazilian government could only sanction individuals for corrupt conduct benefiting companies.
Former president Luiz Inácio Lula da Silva introduced a draft of this sweeping anti-bribery legislation in the Brazilian Congress in February 2010, but no action was taken on it until mid-2013. Commentators have noted that the Brazilian Congress finally passed the Act in response to widespread protests against official corruption and government spending in connection with the 2014 FIFA World Cup and the 2016 Olympics, both of which will be held in Brazil.
Importantly, the Act brings Brazil into compliance with its obligations under the Organization of Economic Cooperation and Development's ("OECD") Convention on Combating Bribery of Foreign Public Officials and the U.N. Convention Against Corruption, which it ratified in 2000 and 2005, respectively.
The Act applies to Brazilian companies, whether they are operating in Brazil or abroad, including Brazilian subsidiaries or agents of foreign companies. It also applies to foreign companies doing business in Brazil.
The Act proscribes the bribery of domestic and foreign government officials, as well as fraud in connection with public procurement activities. It expressly prohibits promoting, offering, or giving, "directly or indirectly, an improper benefit to a public agent . . . or . . . a third party related to [such agent]." And, within the public procurement realm, the Act forbids bid rigging, the submission of fraudulent bids, seeking to obtain any undue advantage, and impeding the administrative process. The Act also bans financing, paying for, or otherwise sponsoring prohibited conduct, as well as concealing from government investigators any such conduct. However, it does not reach commercial bribery.
Unlike the FCPA (and anti-bribery laws in many OECD countries), the Act does not contain a "facilitating payments" exception. A facilitating payment is a payment made to a government official to expedite the performance of routine governmental action (i.e. non-discretionary functions that the official is required to perform) rather than to influence the official himself.
Liability and Enforcement
Somewhat oddly, there is no specific government agency charged with enforcing the Act. Instead, cases involving the bribery of foreign (i.e., non-Brazilian) governmental entities will be prosecuted by Brazil's federal Comptroller General, the Controladoria-Geral da União ("CGU"), and cases concerning domestic bribery may be prosecuted by the highest authority of the relevant entity within the executive, legislative, or judicial branch of the Brazilian government.
Regardless of the enforcement agency involved, the Act imposes strict liability on violators of its provisions. To establish liability under the Act, the government needs to show only that the prohibited conduct was performed in the violating company's interest or to its benefit. In this way, liability under the Act will be much easier to establish than liability under the FCPA, as the FCPA requires the government to establish that the company's director, officer, employee, or agent acted with corrupt intent.
The Act also expressly provides for successor liability, as well as joint liability in certain circumstances. In the event that a violating company amends its articles of incorporation, merges with another company, or is acquired, sanctions may be imposed on the successor entity. However, if the offending entity was acquired, the successor's liability is limited to fines and restitution up to the value of the assets acquired. Separately, the Act imposes joint liability on parent companies and their affiliates or subsidiaries. In contrast to both the FCPA and the Bribery Act, the Act also imposes joint liability on all members of a joint venture.
Violators of the Act are subject to a range of sanctions, including fines and judicial penalties. The civil fines available under the act are severe. An offending company can be fined between 0.1 and 20% of its gross revenue in the year prior to the government's investigation. If the gross revenue cannot be calculated, then the government may impose fines ranging between R$6,000 (about $3,000 USD) and R$60,000,000 (about $30,000,000 USD). The factors considered in imposing such a penalty include: the seriousness of the offense, the advantage gained, and the damage caused.
These penalty ranges notwithstanding, liability under the Act is not capped at R$60,000,000. Rather, the Act provides that fines may not be "less than the benefit gained" and that the application of penalties "does not exclude the obligation to fully indemnify the damage caused."
Apart from civil fines, the Act also allows the enforcing agency to impose an assortment of judicial penalties. These include the loss of assets, the imposition of injunctions, debarment, partial suspension of a company's activities, and even dissolution of the company. Violating entities also may lose any right they have to public incentives or subsidies, including loans from state-owned banks, for up to five years.
Leniency through Compliance Programs and Voluntary Disclosures
Brazilian companies and companies doing business in Brazil could face significant exposure under the Act. However, similar to violators of the FCPA, violators of the Act can substantially reduce their exposure by implementing strong compliance programs and making prompt voluntary disclosures.
The Act provides that violators may be entitled to a "credit" that can mitigate applicable sanctions. Unlike the Bribery Act's "adequate procedures" provisions, however, this "credit" is not a defense to liability.
The specific criteria for obtaining a credit are not yet known.2 But, at a minimum, the offending company will have to show that it has developed and implemented internal auditing procedures and mechanisms, provided incentives for the reporting of irregularities, and ensured the effective application of codes of ethics and conduct.
Violators can also reduce any applicable fines by two-thirds through voluntary disclosure. An entity is eligible for such a reduction only if it reports misconduct before it is discovered by the government, cooperates with any governmental investigation, and ceases all illegal conduct.
Looking Forward: 2014 FIFA World Cup, 2016 Olympics, and Beyond
As with any new law, there are a number of uncertainties attendant with the Act. Commentators already have questioned whether the Act will be enforced rigorously, and whether it will create, as the Brazilian Congress envisioned, a "compliance culture" among companies operating in Brazil. Some commentators also have been critical of the Act, contending that (1) the lack of a centralized enforcement authority is likely to lead to inconsistent rulings and standards; and (2) the Act gives too much discretion to too many agencies, creating the potential for abuse.
Those uncertainties aside, the Act takes effect in January 2014, and companies operating in Brazil must pay attention to the Act's existence. They also need to prepare to come into compliance with the Act's requirements. The importance of due diligence and compliance cannot be underscored—the Act's leniency provisions expressly incentivize companies to implement rigorous auditing and other compliance procedures, and companies are advised to follow suit and protect themselves from liability.
Because the Act differs from the FCPA and the Bribery Act—and particularly because it does not have a facilitating payments exception—a cookie-cutter approach to compliance will not suffice. Companies operating in Brazil must review and adjust their current compliance plans to reflect the Act's requirements. They must take into consideration the amount of interaction they are likely to have with government officials, as well as the local culture, and may even consider engaging counsel or accounting advisors for compliance advice.
These warnings particularly apply to companies that will be involved in the 2014 FIFA World Cup and the 2016 Olympics. Public outcry surrounding government spending on those events spurred the Brazilian Congress to pass the Act, and it is likely that enforcement agencies will be looking to crack down on any fraud associated with them. Accordingly, any companies entering public contracts related to the World Cup or the Olympics, or companies that will require visas, permits, or other types of government documentation must ensure that all aspects of their business transactions are above board and must scrutinize any and all potential business partners to avoid joint liability.
Companies not involved with the World Cup or the Olympics must plan for aggressive enforcement of the Act. The U.S. government has successfully prosecuted companies for FCPA violations in Brazil,3 and Brazilian officials will likely look to do the same under this new anti-bribery law.