Recent corruption scandals in Brazil and anti-corruption compliance trends for 2015

February 2015 | EXPERT BRIEFING | FRAUD & CORRUPTION

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Controversial news regarding corruption marked the end of 2014 in the Brazilian media and continues to make headlines in 2015. After a close re-election, the Brazilian government is facing what is already considered to be one of the biggest corruption scandals in the country’s history. This time, unlike other corruption cases in Brazil, not only were government institutions and officials placed under the magnifying glass, but the private sector too is facing a backlash from the implications of the involvement of some of country’s largest companies and their officers in the alleged scheme.

On March 2014, the Brazilian Federal Police launched an investigation entitled ‘Lava Jato’, referencing car-washing services traditionally offered in Brazilian gas stations. Originally intended to investigate illegal currency exchange operations and money laundering, the investigation ended up unveiling an alleged fraud and corruption scheme designed to embezzle assets from Petrobras, a publicly traded energy and petroleum company, controlled by the Brazilian federal government, its majority stockholder.

Many factors make Operation Lava Jato stand out from other embezzlement and corruption cases recently investigated in Brazil. Aside from involving one of Brazil’s biggest companies, the breakthrough of the operation took place when several of the individuals under investigation agreed to enter into plea bargain agreements with the prosecution. Although common in jurisdictions such as the United States, the use of plea bargains is not as disseminated in Brazil.

Operation Lava Jato shows that Brazilian authorities are turning their focus to the involvement of the private sector in acts of corruption, increasing the risk of doing business in Brazil. This is likely to influence anti-corruption compliance trends in 2015.

Plea bargain agreements in Operation Lava Jato opened the investigations to the alleged participation of private companies in the scheme, including the largest Brazilian construction companies, and their officers. Specific names and bank accounts allegedly used to make deposits were identified as a part of the plea bargains, including false contracts and invoices used to justify deposits and transfers to the accounts of alleged shell companies, which, according to allegations, never rendered any services in return. The plea bargains also revealed the existence of an alleged cartel-like operation designed to defraud procurement procedures by Petrobras. As a result, officers of some of the largest companies in Brazil had their temporary arrests declared and are currently facing criminal charges. The companies themselves may also be subject to administrative and civil sanctions.

The Lava Jato operation is also different from other corruption scandals in Brazil, as the facts investigated have involved the jurisdiction of United States.

Petrobras sells its stock not only in Brazil, but also on the New York Stock Exchange. It is therefore subject to the supervision of US Securities Exchange Commission (SEC) and to the terms of the Foreign Corrupt Practices Act (FCPA).

In fact, as informed by Petrobras itself on its website, in November 2014 the SEC issued a subpoena to Petrobras for documents related to an ongoing internal investigation. Potential FCPA implications may also be raised.

Petrobras is not the first case of a Brazilian company being subject to the jurisdiction of the United States in corruption cases. A Brazilian airplane manufacturer has also shown up in the list of companies under investigation by the American Department of Justice for potential violations of the FCPA. In that specific case, the investigations by the American authorities were the cause for the Brazilian prosecution to file charges under the offence of active corruption in international corruption transactions, defined under article 337-B of the Brazilian Criminal Code as “to promise, offer or give, directly or indirectly, an undue advantage to a foreign public official, or to a third party, in order to cause the foreign public official to conduct, omit or delay an official act related to an international commercial transaction”.

Although the criminal offence above has been included in the Brazilian Criminal Code since 2008, up until the current date, there have been no other cases where criminal charges have been formally brought under such offence. In fact, the OECD Report on the implementation of the OECD Anti-Bribery Convention in Brazil (Phase 3), issued in October 2014, makes specific reference to the indictments in the airplane manufacturer case, expressing significant concerns by the OECD examiners “regarding the extremely low number of foreign bribery enforcement actions in Brazil. In particular, the examiners are concerned by the seemingly passive approach and lack of significant investigative efforts taken by Brazil in the other existing foreign bribery investigations”.

Factors such as the outcome of Operation Lava Jato, the critique of the OECD report and the potential influence of investigations by American authorities in Brazil, have certainly ignited discussions related to the implementation of anti-corruption compliance programs at companies doing business in Brazil.

The concept of compliance has become a hot topic in the past months with the promulgation of Law 12,846/2013, in February 2014.

The new anti-corruption law – or the ‘Clean Companies Act’ as certain forums have named it – imposes administrative and civil sanctions on legal entities for acts against the public administration, national or foreign. The penalties under the law can be very harsh, ranging from prohibition from entering into contracts with government institutions, fines varying from 0.1 percent to 20 percent of the annual gross income of the legal entity to, in extreme cases, the dissolution of the company.

Several discussions have already taken place regarding the possible impact of the new law on the legal entities involved in Operation Lava Jato. The application of the law in such a context is not yet clear and considerations such as the date of the offences and the possibility of the retroactive application of the law must be made.

Other aspects of Law 12,846/2013, however, such as incentives for anti-corruption compliance programs, may cause an earlier impact in the day-to-day business of companies in Brazil which are likely to view compliance programs as an investment that may prevent exposure to operations such as Lava Jato or even international liability under the Brazilian Criminal Code and the FCPA.

In that sense, Law 12,846/2013 does not overtly impose mandatory compliance obligations for legal entities in Brazil. Instead, it includes specific language intended as an incentive for the implementation of compliance programs. Article 7 of the law establishes that “internal mechanisms and procedures of integrity, auditing and motivation to report irregularities and the effective enforcement of a code of ethics and conduct within the legal entity” (Law 12,846/2013, article 7, VIII), must be considered in the imposition of penalties.

The business environment is rapidly changing in Brazil. Although Operation Lava Jato has ignited and brought attention to such changes, the operation itself is a consequence of a changed environment. Brazilian authorities are clearly indicating their intention and ability to implicate the private sector in criminal investigations, especially for acts related to corruption. Additionally, cases such as that of the Brazilian aircraft manufacturer bring to Brazil a reality that companies from countries such as the United States have faced in the last decade: the possibility of facing liability for acts conducted abroad.

Law 12,846/2013 has not only increased the liability for legal entities doing business in Brazil, contributing to the changes described above, but has also introduced the possibility of minimising risks through the implementation of efficient compliance programs.

The current background in Brazil confirms that anti-corruption compliance efforts are increasingly becoming an important investment for companies that do not want to find themselves or their officers involved with negative news coverage and potential criminal and civil liability.

In 2015, it will be important to watch closely the implementation of Law 12,846/2013 by the Brazilian authorities and the potential side effects that are likely to come from Operation Lava Jato. Compliance trends are likely to arise following such events.

Ana Maria Belotto is a consultant at Feldens Madruga. She can be contacted on +55 61 3966 4850 or by email: ana@feldensmadruga.com.br.

Ana Maria Belotto

Feldens Madruga