January 29, 2014, marked the beginning of a new chapter in Brazil’s anti-corruption efforts with the implementation of The Clean Companies Act (“the Companies Act”).1 Amid public protests against widespread corruption in Brazil, the Companies Act was signed into law in August 2013. This legislation enhances Brazil’s existing statutes, enabling civil and administrative actions to be brought against corporations involved in corrupt behavior, whether occurring in Brazilian territory or abroad. As such, both foreign companies that are legally organized in Brazil and companies determined to be de facto organized in Brazil — “on a temporary basis”—should pay close attention to the strict provisions of this law.2
Brazil is no “foreign” land when it comes to anti-corruption enforcement by both Brazilian and foreign authorities. Since 1998, for example, US regulators have investigated and/or charged approximately 16 publicly traded corporations with violations under US law (the Foreign Corrupt Practices Act or “FCPA”) emanating from conduct in Brazil. Since 2010, as a result of alleged FCPA violations involving conduct in Brazil, companies and individuals have paid out over $140 million in penalties and settlements. In one 2010 case alone — involving alleged bribes to Brazilian customs officials — a logistics company was forced to pay over $70 million to resolve an investigation by US authorities.
The risk of such investigations has touched multiple business sectors, including energy, defense, infrastructure, and consumer goods and services. A recent report by Forbes magazine estimates that the cost of corruption in Brazil could be up to $53 billion, just in 2013 alone.3 The arrival of the World Cup later this year will only increase the possibility of corrupt conduct involving Brazilian entities, and, in fact, the use of World Cup tickets as improper inducements has already started appearing on the radar of law enforcement agencies in the United States.
Brazil becomes the third Latin American country to enact legislation prohibiting foreign as well as domestic bribery by entities operating within its territory. Both Colombia and Mexico have also enacted similar legislation. Increased international cooperation among Latin American nations and the United States is expected as a consequence of the passage of these laws and recent anti-corruption efforts in the region. Indeed, in an official statement to the Brazilian Congress made in January 2014, President Dilma Rousseff indicated that Brazilian agencies in charge of prosecuting transnational bribery have been trained by exchanging “experiences with other countries like the U.S. and UK.”4
Some of the key aspects of the new Brazilian law are as follows:
In contrast with its US counterpart, the Companies Act holds corporations strictly liable “for acts committed against national or foreign public administration.”5 Accordingly, Brazilian regulators will not be required to show corrupt intent before imposing a sanction or fine against an entity. Prohibited conduct includes offering or giving, directly or indirectly, “an undue advantage to a public official or to a third party related to him/her.”6 This prohibition will likely be invoked to prosecute improper payments to the family members of government officials as well.
The Companies Act, like other anti-corruption statutes, expands the pool of potential violators through a successor liability provision. The Companies Act states that in the case of a merger or acquisition, the successor entity could be held liable for the “occasional damages”7 caused by the pre-merger entity from acts or events occurring prior to the date of the merger. Except in the case of fraud, such liability will be limited to the payment of fines and damages up to the value of the acquired assets.
In line with the FCPA, the Companies Act prohibits the use of a “third party, either an individual or a legal entity, in order to conceal or dissimulate the entities’ actual interests or the identity of those who benefited from the performed acts.”8 Consequently, distributors, agents, consultants and any other person acting on behalf of a corporation could cause such entity to breach the Companies Act. Accordingly, as has become the norm among compliance departments around the globe, effective due diligence is essential before engaging a third party that can expose a company to great risk.
The Companies Act’s provisions include severe penalties. Corporations found liable under the Companies Act could face fines of up to 20 percent of “the gross revenues earned during the fiscal year prior to the filing of administrative proceedings.”9 As for judicial proceedings, which can run concurrently with administrative proceedings, the penalties could be even more severe.
Specifically, companies found liable in court could lose “the assets, rights or valuables representing the advantage or profit directly or indirectly obtained from the wrongdoing[.]”10 For example, if the wrongdoing is associated with a merger or acquisition, the assets transferred could be affected by an adverse judicial finding. In addition, companies may face suspension of operations in Brazil and even “compulsory dissolution.”11
Compliance Mechanisms and Regulation
The Companies Act, like other anti-corruption laws, encourages the creation of compliance mechanisms. Companies that have effectively implemented robust compliance procedures increase the likelihood of reduced penalties in the event that they are found liable under the new law. However, the manner by which Brazilian authorities will evaluate such compliance procedures has yet to be fully identified by additional regulations from the federal executive branch.
With fines as high as 20 percent of a company’s annual gross billings and with penalties that range from suspension to mandatory dissolution, the Companies Act carries strict penalties. A company facing enforcement action under the Companies Act risks penalties that threaten its own viability.
The Companies Act also explicitly prohibits hindering “investigations or inspections carried out by public agencies, entities or officials, or . . . interfer[ing] with their work[.]”12 The Companies Act is devoid of examples, but it is widely assumed that destruction of documents after an investigation has commenced and making misrepresentations to government officials during an investigation come within the purview of this prohibition. Careful consultation with legal counsel is thus necessary to avoid running afoul of these strict obstruction provisions.
Corporations operating in Brazil are therefore advised to develop and/or update policies and procedures to combat the bribery of domestic and foreign officials while conducting business. Failure to do so may prove costly to both the Brazilian entity and its domestic and foreign affiliates.