This is the second regional spotlight issue of FCPA Update, following our August- September 2012 spotlight on the Asia-Pacific region. In this issue, we provide an overview of anti-corruption developments and risks in Latin America, as well as guidance for companies that conduct business or are headquartered in the region.1

I. Why Latin America Matters

A. U.S. Enforcement Efforts

In recent years, misconduct alleged to have occurred in Latin America has been the focus of a growing number of corporate FCPA dispositions and investigations. From 2005 to the present, 20 concluded FCPA corporate enforcement actions have included a Latin America component, representing approximately 20 percent of the total number of corporate FCPA enforcement actions during this period.2 Countries identified in these resolved actions include Mexico (8 actions), Brazil (5), Argentina (4), and Venezuela (4).3 In 2012 alone, four of the twelve resolved corporate FCPA actions – one third of the total – involved alleged misconduct in Latin America.4

Latin America also figures prominently in fact patterns underlying ongoing investigations by the U.S. government as have been disclosed in U.S. Securities and Exchange Commission (“SEC”) filings. These include five ongoing investigations that involve activities in Brazil, Argentina, Mexico, and other Latin American countries.5 In particular, allegations about widespread bribery by Wal-Mart’s largest foreign subsidiary, Wal-Mart de Mexico, have garnered a great deal of media attention, most notably in two lengthy investigative reports in The New York Times published in April and December of 2012.6 In addition to Mexico, Wal-Mart has disclosed ongoing inquiries or investigations involving its operations in several other countries, including Brazil.7 Also of note: Brazilian aviation giant Embraer – which is listed on the New York Stock Exchange and therefore qualifies as an issuer subject both to the FCPA’s anti-bribery prohibitions and its accounting provisions – is continuing an internal investigation into possible FCPA violations, and is cooperating with the U.S. Department of Justice (“DOJ”) and SEC.8 Embraer has not disclosed the geographic scope of its investigation.

In addition, allegations of misconduct in the region have been at the core of a number of criminal prosecutions and civil enforcement actions against individuals in recent years, including actions against 48 individuals initiated since 2005.9 These include resolved actions, such as guilty pleas by John W. Warwick and Charles Jumet of Ports Engineering Consultants Corporation for paying bribes to Panamanian officials, and jury convictions of several individuals who committed FCPA violations in Haiti, all of whom received prison sentences.10 The list of individual prosecutions related to Latin America also includes some charges that have been dismissed, namely the dismissal of the indictments of John O’Shea, formerly of ABB, and Keith Lindsey and Steve Lee of Lindsey Manufacturing, who had been charged for allegedly paying bribes to Mexico’s state-owned electric utility, the Comisión Federal de Electridad.11

B. Business Environment

It is not surprising that Latin American countries have been featured in a significant number of FCPA prosecutions. Countries in the region have become increasingly important economic players on the global stage, while corruption remains prevalent in some countries. Although current forecasts for economic growth in the region are not as promising as in recent years, most Latin American countries managed to avoid the worst effects of the international economic crisis.12 Brazil has the largest economy in Latin America, the second-largest in the Americas overall, and the seventh-largest in the world. (It briefly overtook the United Kingdom for sixth place in 2011 and is expected to do so again in 2014.)13 Mexico’s economy, which holds the number two spot in Latin America, grew at 3.9% in 2012,14 and some expect it to overtake Brazil within a decade.15 As costs rise in China, Mexico is becoming an increasingly important global manufacturing hub, currently exporting more manufactured goods than all other Latin American countries combined.16 Mexico has signed more free trade agreements than any other country in the world – four times more than Brazil and twice as many as China.17

Alongside this economic growth is the continued prevalence of corruption – or at least the perception of it – in a number of Latin American countries. Transparency International’s Corruption Perceptions Index (“CPI”) assigns scores ranging from 0 to 100, with higher-risk countries receiving lower scores and lower-risk countries receiving high scores. A sample of Latin American country CPI scores and rankings for 2012 appears in Table 2 below, listed from lowest to highest perceived risk of corruption.

Table 2: Transparency International Corruption Perceptions Index 2012: Rankings for Selected Latin American Countries

Click here to see table 2.

Another recent survey, the Americas Barometer poll conducted by Vanderbilt University, also indicates that the risk of corruption is high in a number of Latin American countries. Overall, approximately 20% of those surveyed in the region indicated that they have been asked to pay a bribe by police officers or other public officials within the past year.18 More than 40% of respondents in Haiti, Bolivia, and Ecuador said they had been asked to pay bribes over the past 12 months, compared to a low 6% in Chile (comparable to 5% in the United States).19 In Mexico and Brazil, the figures were 31% and 11%, respectively. 20

Corruption scandals in the region continue to make headlines. One of Brazil’s latest corruption scandals became international news in November 2012, when President Dilma Rousseff announced that she had dismissed a number of officials alleged to have been involved in an influence-peddling ring. Federal police conducted raids in Brasília and São Paulo and arrested six people, including the Deputy Attorney General, Jose Weber de Holanda Alves. He and twelve others, including a former senator, are currently under investigation.21

C. Increasing Efforts to Fight Foreign Bribery

While the U.S. government remains a driving force in penalizing companies for corrupt payments made outside its borders, it is not alone in pursuing anti-bribery enforcement in the region. Companies doing business in the region must also be mindful of the general anti-bribery statutes on the books in each country in Latin America, as well as more recent legislation and enforcement initiatives to combat foreign bribery.

Last year, soon after The New York Times’s story on Wal-Mart became global news, Mexico quickly moved to enact already-pending legislation to combat corruption in public procurement.22 In 2009, Chile criminalized bribery of foreign public officials committed abroad either by Chilean citizens or foreign nationals who “habitually reside” in Chile, and also made it a crime for companies to bribe domestic or foreign public officials.23 As discussed elsewhere in this issue, Brazil is currently considering significant reforms to its anti-bribery law. On January 4, 2013, Peru passed Law 29,976, which gave legal status to a federal anti-corruption commission created in 2010, the Comisión de Alto Nivel Anticorrupción, for the purpose of coordinating actions and proposing policies aimed at preventing and combating corruption in Peru.24

These three countries (Mexico, Chile, and Brazil), plus Argentina and (as of January 2013) Colombia have ratified the OECD Convention Combating Bribery of Foreign Public Officials in International Business Transactions (“OECD Convention”).25 In addition, most Latin American members of the Organization of American States have signed the Inter-American Convention Against Corruption (“OAS Convention”), as noted in Appendix 4. Although deployment of enforcement resources in many Latin American countries, as documented by the OECD in its reviews of the law enforcement programs of signatory countries, can appear less than vigorous,26 growing pressure from digitally-connected citizenries fed up with corrupt behavior will, in Latin America, as elsewhere, no doubt have increasing influence.

Beyond government law enforcement efforts, multilateral development banks have debarred a number of Latin American companies and individuals for engaging in fraudulent or corrupt conduct. The current list of firms and individuals ineligible to participate in contracts financed by the Inter-American Development Bank (“IDB”) includes several each from countries within the region, including Peru, Guatemala, Bolivia, Paraguay, Colombia, Mexico, Panama, and Nicaragua.27 Sanctioned individuals and entities also face crossdebarment by other multilateral development banks pursuant to the Agreement for Mutual Enforcement of Debarment Decisions, under which the World Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, and the IDB agreed to cross-debar companies and individuals found to have engaged in corruption, fraud, coercive practices or collusion.28 Accordingly, the other banks’ lists of sanctioned entities also include some of those the IDB has declared ineligible to be awarded any IDB-financed contracts.29

II. Compliance Concerns

Because Latin American countries differ substantially from one another in many ways, including resources, governance, culture, language, and the risk of corruption, there is no effective onesize- fits-all approach to anti-corruption compliance in the region. That said, companies doing business in Latin America should be aware of a number of recurring compliance concerns in the region that may lead to an increased risk of violating the FCPA or other applicable anti-bribery laws. Companies should also take steps to be informed about risks specific to the jurisdictions in which they operate or have sales. Outside advisers, including law firms and forensic auditors with firsthand experience in the region, can be helpful in evaluating risks, formulating effective compliance programs, and conducting investigations.

Business consultants and other thirdparty sales facilitators. A key risk is the use of business consultants and other thirdparty facilitators, such as gestores in Mexico. Gestores featured prominently in the New York Times articles about Wal-Mart de Mexico, which reported that the company paid gestores tens of thousands of dollars per permit needed to open stores throughout the country.30 Distributors can also be used as a mechanism to pay bribes, as the SEC recently alleged in its enforcement action against Eli Lilly for bribes paid to Brazilian health officials.31

Government ownership and oversight. Another key risk is the degree of government ownership and oversight in certain sectors, particularly in natural resources. Energy giants Ecopetrol and Petrobras are majority-owned by the governments of Colombia and Brazil, respectively. Other state-owned energy companies in the region include Petroecuador (Ecuador), Pemex (Mexico), and PDVSA (Venezuela).

In several recent enforcement actions involving the pharmaceutical and medical device sectors, the DOJ and SEC have considered government-employed doctors and hospital employees in several Latin American jurisdictions to be foreign officials, including Mexico (Orthofix),32 Argentina (Biomet),33 and Brazil (Biomet, Eli Lilly).34 Similarly, veterinarians also have been considered government officials, as in the SEC’s enforcement action against Tyson Foods in 2011.35

Customs and currency controls. Import-export, customs and currency controls are a recurring risk in Latin America, where bureaucratic requirements for economic transactions generally impose significant hindrances to the free flow of capital. Bribes to local officials for the purpose of evading these controls, or, even just to speed up the many approvals that can be required, are a frequent source of compliance cases and played prominently in the Nature’s Sunshine “control person” liability case in 2009.36

Successor liability. Companies considering acquisitions in the region should be cognizant that they can be held liable for misconduct by the target, demonstrating the importance of adequate pre-acquisition due diligence. The risk of successor liability in connection with the acquisition of a company doing business in Latin America was illustrated by the Latin Node enforcement action in 2009. In June 2007, eLandia International acquired Latin Node, Inc., which was headquartered in Florida. It was only after the closing that eLandia discovered that its new acquisition had for several years been making improper payments to government officials in Honduras (as well as Yemen). Even though all of the improper payments – approximately $2.2 million in total – were made before the acquisition, eLandia still paid a criminal fine of $2 million after selfreporting and cooperating with the DOJ.37 Furthermore, eLandia shut down Latin Node and wrote off its entire investment.38

Infrastructure spending. Large infrastructure projects have formed the basis for past FCPA enforcement actions, such as those against Siemens Venezuela in connection with mass transit projects in Valencia and Maracaibo.39 Brazil is currently under pressure to quickly complete large infrastructure improvements in preparation for the 2014 World Cup and the 2016 Summer Olympics, and is also spending more than $500 billion for infrastructure investments as part of the Programa de Aceleração do Crescimento, or Growth Acceleration Program.40 Companies bidding for a piece of this bounty should be alert to potential requests for improper payments.

Language differences. Although it may seem like obvious advice, it is essential for companies to translate anticorruption policies into the local language, and to conduct training that employees, agents, and partners can understand. The failure to do so was highlighted in the SEC’s complaint against Orthofix, which alleged that Orthofix’s Mexican subsidiary, Promeca, had paid bribes to Mexican officials over a seven year period. The complaint noted: “Although Orthofix disseminated some code of ethics and antibribery training to Promeca, the materials were only in English, and it was unlikely that Promeca employees understood them as most Promeca employees spoke minimal English.”41 Indeed, companies whose regional compliance personnel lack working knowledge of Spanish and Portuguese can face very significant obstacles to achieving compliance. The ideal compliance organization, in which compliance issues are escalated at an early stage, remains difficult to achieve if compliance and internal audit and corporate security personnel lack language skills and familiarity with local norms and customary practices.

New trading relationships. As trade between Latin American countries and highrisk jurisdictions increases – for example, China has been Brazil’s largest trading partner for the past several years,42 and lends more to Latin American countries than the World Bank and the IDB combined43 – the risk increases that subsidiaries of U.S.-listed companies or U.S. domestic concerns operating in Latin America will face heightened U.S. regulatory scrutiny. Still other companies that trade goods or services in U.S. dollars or that may, as part of trade with other regions, transit goods through (or employ service providers in) the United States, face an increased risk that trading relationships originating in Latin America could implicate the FCPA or other transnational anti-corruption regimes such as the U.K. Bribery Act.

The risk that Latin American personnel, long trained to appreciate the risks in their home countries, might fall prey to practices in their firms’ operations outside Latin America is also an emerging threat. For example, if Latin American business entities covered by the FCPA are now entering into commercial transactions directly with Asian counterparties or are themselves projecting their businesses into other higher-risk jurisdictions, additional training and compliance checks may be necessary. Training on “local laws” might need to include the laws of Asian, Eastern European, and still other jurisdictions with which covered Latin American businesses are doing business.

III. Best Practices

Companies with operations in highrisk jurisdictions in Latin America should consult several key sources of guidance in developing or strengthening anti-bribery compliance and training programs. These include the following:

  • DOJ and SEC’s jointly-issued FCPA Guidance, formally known as “A Resource Guide to the U.S. Foreign Corrupt Practices Act,”44
  • U.S. Sentencing Guidelines (specifically, section 8B2.1),45
  • U.K. Ministry of Justice guidance regarding the prevention of bribery by commercial organizations,46
  • OECD Guidelines for Multinational Enterprises, most recently updated in 2011,47 and
  • The Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) Integrated Framework, which is not specific to antibribery compliance, but which identifies five components of effective internal controls that are helpful in this context: control environment, risk assessment, control activities, information and communication, and monitoring.48

In particular, the long-awaited FCPA Guidance describes the following elements of an effective compliance program:

  1. a commitment from senior management and a clear anti-corruption policy;
  2. a concise, accessible code of conduct as well as “policies and procedures that outline responsibilities for compliance within the company, detail proper internal controls, auditing practices, and documentation policies, and set forth disciplinary procedures;”
  3. oversight responsibility vested with senior executives who have sufficient authority, autonomy and resources;
  4. strong risk assessment and internal audit procedures;
  5. periodic training and advice on FCPA compliance;
  6. appropriate disciplinary procedures and positive incentives;
  7. risk-based due diligence on third parties;
  8. mechanisms for confidential reporting and efficient, reliable internal investigation;
  9. periodic testing and review of compliance procedures; and
  10. for mergers and acquisitions, thorough pre-acquisition due diligence and postacquisition integration.49

IV. Conclusion

With the United States only barely emerging from its severe recession, the continuing economic crisis in the Eurozone, the rapidly emerging events in the Middle East following the “Arab Spring,” and the dominance in business news of global trade issues between U.S. and European countries and Asia (particularly China), one risk to global businesses in 2013 is that anti-corruption compliance efforts in Latin America might take a back seat to other priorities. As those who live in or regularly do business in the region can readily appreciate, Latin America’s continued emergence as a center of global business activity requires a corresponding allocation of scarce compliance resources. If statistics, enforcement actions, and thirdparty evaluations of compliance risks are a guide, in-house compliance personnel at global and regional companies will need to work diligently to address the compliance challenges faced in the region.

Click here to see appendices