New developments on anti-bribery legislation in Brazil

October 2013 | PROFESSIONAL INSIGHT | FRAUD & CORRUPTION

Financier Worldwide Magazine

Anti-bribery rules are not new to Brazilian legislation, but, until very recently, the country did not have an organised system or an ‘Act’ such as the US Foreign Corruption Practices Act (FCPA). The country’s legal system in particular lacked a law providing for company liability arising from acts of bribery. This situation has just changed.

On 1 August 2013, President Dilma Rousseff signed Law n. 12.846/2013, referred to as the Brazilian Anti-bribery Law. The Law, published on 2 August 2013 and expected to enter into force on 24 January 2014, is an important step toward the systematisation of anti-bribery efforts in Brazil.

Historical context

As of 2007, there has been a significant change on the international and domestic scene, in which authorities have intensified the repression of illegal commercial practices.

Brazilhas followed the international trend, increasing enforcement against cartels and corruption in public bids. Companies under civil and criminal investigation have been subject to measures for obtaining evidence of illegal practices, such as search and seizure procedures and communication interceptions.

The application of FCPA has had a similar effect. Despite having been enacted in 1977, the FCPA has generated a significant increase in procedures and investigations as of 2007, with the application of multi-million dollar fines, debarment and suspension from doing business.

Law 12.846/13 reinforces the international trend of curtailing corrupt practices, with the aggravating factor of making legal entities liable for such practices, besides the persons involved in the act. Independent liability of the legal entity, together with joint liability of controlling, controlled companies and consortium companies, and succession liability following mergers or acquisitions, requires companies to adopt preventive measures.

Main changes under the Brazilian Anti-bribery Law

The most important modification established by Law n. 12.846/2013 is the liability of companies for acts of bribery committed by their representatives, employees, business partners, distributors and agents. Until now, only individuals were liable for such acts, based on laws related to administrative governance, white-collar crime and public bids, besides the Brazilian Criminal Code itself.

The new law applies to both Brazilian and foreign companies, provided that they have subsidiaries or representation in Brazil. It also applies to non-profit organisations, associations of natural persons or companies, consortiums and de facto enterprises.

The liability of the company is extended to its parents, subsidiaries colligated companies and partners in a consortium or joint venture.

The acts forbidden by Law n. 12.846/2013 are those adopted in the interest or benefit, exclusive or not, of the company or individual, in Brazil or abroad, that involves: (i) promising, offering or providing an undue benefit to a public employee or related person; (ii) committing fraud in a pubic bid (including bid rigging and other acts that are able to frustrate the competitiveness of a bid) or during the execution of a contract with the government; (iii) creating obstacles to the investigative or regulatory activities of public agencies or employees; and (iv) financing or sponsoring others in connection with the illegal activities mentioned above. Acts against foreign governments and international organisations are also included in the scope of the law.

Penalties include fine ranging from 0.1 to 20 percent of the company’s gross revenues in the year before the investigation commenced (besides the obligation to repair damages caused to the public administration and heritage), the publication of the decision in the press and in the company’s headquarters and website, the prohibition of public subsidies and benefits to the company for a certain period, the (total or partial) suspension of the company’s activities and, if certain extreme circumstances are applicable, the dissolution of the company. While fines and publicity can be imposed by the public administration, other penalties depend on a court’s final decision. In both cases the parties have the opportunity to argue their case.

The law gives powers to authorities in all spheres of government (federal, state and local government; direct or indirect entities) and also to courts to investigate prohibited behaviours. The law is clear when it states concurrent investigative and punitive powers in this field. How the system will work in practice is yet to be tested. In theory, all administrative authorities can create commissions to investigate acts of bribery in their jurisdiction and these commissions can be formed for each case (ad hoc commissions) – an aspect of the law that will probably be questioned regarding its constitutionality.

Leniency

Leniency, which was introduced in Brazil in 2001, in connection with antitrust investigations, is also available under the new law. Leniency is only applicable to the ‘first one in’, but it does not provide full immunity from administrative penalties, including fines. Besides, contrary to what happens in antitrust investigations, it does not provide criminal immunity or any kind of protection to individuals, despite the fact that confession of the illegal behaviour is mandatory. For these reasons, the leniency policy in the Brazilian Anti-bribery Law is not particularly consistent and should be improved in order to become attractive.

Compliance by companies

The new law creates incentives for companies to adopt an effective compliance program, because this operates as a mitigating tool meaning penalties may be reduced.

In this context, the adoption of ethical codes, anti-bribery policies and compliance programs are of vital importance to companies.However, under Law 12.846/13, entities have to prove the effective application of such codes, policies and programs, in order to mitigate the application of penalties.

Such codes and programs should be revised periodically and spread throughout all layers of the organisation, from the board to trainees, through dissemination campaigns and distribution of booklets.

Companies should map the risks of anti-ethical conduct, including any suspicion of corrupt practices, and reinforce compliance training in those areas.

Another recommended measure is to create incentives to identify illicit conduct – for example, a hotline allowing employees to report suspicious behaviour to senior management (anonymously or otherwise). The company may also reinforce efforts to actively reduce corruption by offering bonuses and premiums. Reported practices will be investigated by commissions and the individuals involved punished, including with a ‘lessons learned’ section, as education reinforcement.

Revising and redrafting commercial contracts is also important under the new Law. Besides the usual representations and warranties, in which the party declares that it complies with anti-bribery laws, and applies ethical codes, policies and compliance programs, it is recommended that the contracting company perform its own independent investigation on the integrity of its partners.

The company may periodically search for information in public files (including the future National Registry of Punished Companies – CNEP, established by the law), such as claims filed against the partners, certificates and financial statements. It may also investigate (and even require) affiliation or enrolment with Brazilian ethic indexes and institutes.

If the company identifies signs of corruption – for example, claims involving the public administration, inconsistent cash entries or withdrawals, or a lack of certificates usually required in public bids – it may request suspension of the agreement and of payments, until the suspected practices are clarified or remediated; or it may request the termination of the agreement for cause.

Moreover, it is advisable to include a specific indemnification clause in agreements with partners, setting forth that if the contracting company is held liable for bribery acts of the contracted party (including affiliated companies, consortiums, managers and employees), it shall have a right to reimbursement.

Electing an independent compliance officer, responsible for drafting, revising and supervising the compliance program and reporting directly to the chief executive officer, is also recommended.

Financial officers, in turn, need to be especially aware of the contents of financial statements, cash entries and withdrawals, and accounting agreements with the government. Given the potential liability under the Brazilian Anti-bribery Law, it is mandatory that they reinforce control mechanisms auditing numbers and are active in fighting corruption.

Finally, companies should keep an organised file containing reports on control mechanisms and the application of ethical codes and anticorruption policies, which may be promptly presented to authorities in the event of an investigation.

Corporate transactions

Companies need to assess the risk of being held jointly liable for corruption acts committed by targets, especially regarding consortiums, affiliated companies and merged entities.

To avoid liability for the payment of fines and reimbursement of damages, the acquiring or surviving company should perform specific due diligence regarding the adoption and effectiveness of control mechanisms, integrity internal procedures, auditing and report incentives. Acquiring companies also need to ensure that ethical codes and compliance programs are effectively applied by the target.

Contracts should include representations and warranties of sellers and target for past corrupt practices, and establish their liability for any act, fact or omission prior to closing, even if disclosed or discovered thereafter.

Finally, it is important to remember that the parameters for evaluating internal procedures and mechanisms as mitigating factors for penalties under the Brazilian Anti-bribery Law is yet to be regulated by the Federal Executive Government. In addition, it should be mentioned that there is currently a new penal code being discussed in the Brazilian Congress, which is likely to impact the criminal liability of companies and managers.

Priscila Brolio Gonçalves and Denise Chachamovitz Leão de Salles are partners at Vella, Pugliese, Buosi e Guidoni. Ms Gonçalves can be contacted on +55 (11) 2117 3430 or by email: priscila.goncalves@vpbg.com.br. Ms Salles can be contacted on +55 (11) 2117 3442 or by email: denise.salles@vpbg.com.br.

Priscila Brolio Gonçalves and Denise Chachamovitz Leão de Salles

Vella, Pugliese, Buosi e Guidoni