Corporate reaction to Brazil’s anticorruption law

December 2013 | EXPERT BRIEFING | LITIGATION & DISPUTE RESOLUTION

financierworldwide.com

Without doubt, the issuance of the Anti-Corruption Law is considered a major paradigm change for Brazil’s regulatory framework in terms of disciplining misbehaviour in the relationship between the private and the public sectors.

In Brazil, it has been a long time since the introduction of laws had such a huge impact, capable of bringing about an immediate change in the behavior of private sector managers. Events like this have happened on occasion in Brazil, such as the introduction of the Consumer Defense Code, as well as the issuance of environmental protection laws and antitrust legislation, to name a few.

The creation of rules specifically forbidding suspicious and inappropriate conduct for the Brazilian subsidiaries of multinational corporations emerged as a trend around the middle of the last decade. The measures taken in response to foreign scandals such as Enron and WorldCom in the United States, with the extraterritorial enforcement of the Foreign Corrupt Practice Act (FCPA), influenced leaders of multinational companies to change their conduct and demand the same behaviour within their subsidiaries around the world.

Furthermore, combatting corruption has been a focus of debate among major Brazilian corporations since 2009. Special Committees on Ethics and Integrity were established internally as well as at associations to solidify concepts and create parameters for ethical and transparent conduct as an integral part of excellence in management.

Now the time has come to test the model of ethical management practiced by Brazilian companies and Brazilian subsidiaries of foreign companies that have created internal rules to discipline misconduct and corruption-fighting policies to comply with the new anti-corruption law.

Companies that have not yet decided on the best method to curb inappropriate behaviour among their employees have six months to deploy their compliance programs, enact codes of ethics and conduct, create compliance committees and communication channels, implement operating mechanisms and internal procedures, and encourage their stakeholders to crack down on irregularities and wrongdoing.

After the six month period from the introduction of the anti-corruption law has elapsed, it will become mandatory for private and public sector companies to fight corruption, insofar as unlawful acts will have serious consequences for them.

One aspect of Brazil’s anti-corruption law refers to factors that the authorities will take into consideration when issuing sanctions. Among these factors is “the existence of internal procedures, mechanisms, audit integrity and encouraging the reporting of irregularities and the effective application of codes of ethics and conduct in the framework of legal entities”. Going forward, it will clearly be important for Brazilian companies to deploy and maintain effective compliance and integrity programs in the event that they are investigated for suspicious activities, as the authorities may view the organisation in a more positive light when issuing penalties.

Leniency agreements are expressly regulated in the anti-corruption law. The law grants to federal, state and municipal Brazilian public authorities the power to conclude such agreements with legal entities that have committed illicit acts and admitted their involvement, and cooperate with the investigation and related administrative procedures.

A necessary condition for a leniency agreement is that the collaboration of a whistleblower results in identifying any other legal entities involved, and that useful information and documentation is obtained which prove that corruption has taken place. There must also be evidence that the whistleblowing entity is the first to confess and has completely ceased involvement in any infringement activities on the date of the agreement.

Brazil’s anti-corruption law, following the example of the antitrust law, has advantages for the company that reports illegal acts. One notorious case involved Siemens, which confessed to the existence of a cartel in bids relating to the Sao Paulo subway and other States, involving more than 10 companies. If the event had occurred after the anti-corruption law entered into force, the penalty could have been reduced by two-thirds.

There is still a long way to go before we have a deeper understanding of the Brazilian anti-corruption law. Regulatory instructions need to be issued and government authorities have yet to implement the legal provisions. Nevertheless, we are entering a new era for Brazilian businesses. They will need to adopt best practices to guide, inspect, investigate and penalise improper conduct of their employees and third parties.

Companies that have already implemented integrity and ethics programs have an advantage. Yet there is still time for all companies to prepare to face this new world of compliance when the anti-corruption law becomes enforceable.

A good starting point is to analyse the level of ethical behavior within the organisation, taking into consideration the main risks to which the company is exposed. Deploying a compliance program will demonstrate that the company is committed to combatting corruption and other illegal business practices.

Brazilian companies and subsidiaries of foreign companies operating in sectors such as pharmaceuticals and cosmetics, where the main client is the government, are already engaging law firms to conduct ‘compliance audits’. These firms have concluded that even without the new law in force, in view of the latest discussions on the matter, they may be the subject of an investigation at any time.

Recent cases, such as Eli Lilly in the United States, which involved Brazilian distributors winning bids in the country, resulted in a fine of about $30m issued to the US parent company, under the Foreign Corrupt Practices Act (FCPA). These types of cases will soon result in fines for Brazilian companies once the Brazilian anti-corruption law enters into force.

The Brazilian law affects not only companies that participate in bids, but any company that has a relationship with the public sector. Giving a ride to a public servant or politician may lead to a sanction under the new law, as might an institutional donation of computers to public schools. The provisions of the law encompass a wide range of activities and may include items that would not be treated as corruption.

For some companies, there will be concerns about the differences between Brazilian and international anti-corruption laws. A good example is the FCPA, according to which a company that reports cases of corruption committed by its suppliers will not receive any punishment, whereas such an act would not be recognised by the local Brazilian law.

On the other hand, financial institutions are concerned about suffering sanctions if they are found to have issued credit to a bid-winning company that later is discovered to have committed unlawful acts. Also, in mergers and acquisitions, companies need to be mindful that the due diligence process will need to include anti-corruption analysis from now on.

Regina Ribeiro do Valle is a lawyer at Balbino Fonseca Advogados. She can be contacted on +55 11 3284 0053 or by email: regina@balbinofonseca.com.br.

Regina Ribeiro do Valle

Balbino Fonseca Advogados