The Brazilian Clean Companies Act

March 2014  |  FEATURE  |  FRAUD & CORRUPTION

Financier Worldwide Magazine

Over the last 20 years, globalisation and enhanced international commercial activity has heightened the need for strong laws and safeguards for both individuals and commercial entities. Accordingly, anti-bribery and corruption measures and enforcement have intensified across the globe. Pre-existing international standards such as the Foreign Corrupt Practices Act (FCPA) have been joined by legislation such as the UK Bribery Act (UKBA) in an attempt to stamp out corruption around the world. 

The renewed focus on fighting the corrosive effects of bribery and corruption has not been confined to the Western developed nations. The BRIC countries in particular have committed themselves to developing robust and comprehensive anti-corruption legislation and enforcement structures. In 2011, China and Russia passed their own anti-corruption laws. Just two years later, Russia implemented an amendment to its anti-corruption law requiring companies operating in the country to create further internal controls to combat corruption. In 2013, China also increased its enforcement efforts against both local Chinese officials and foreign executives, particularly those operating within the pharmaceutical industry. 

Brazil, too, joined the anti-corruption movement in 2013 when the country launched its own robust legislation. At the end of January 2014 the Brazilian Clean Companies Act (CCA) came into effect. The Act represents an operational and compliance challenge for both Brazilian and foreign companies currently doing business in Brazil. It is an aggressive and broadly drafted piece of legislation which represents a firm statement of intent from the Brazilian government, which has been taking great strides to align itself with global trends in anti-corruption legislation. 

As an emerging market that has trade partnerships with a number of key developed nations, it is imperative that Brazil takes a firm stance on bribery and corruption. The Act will undoubtedly have significant implications for companies that operate in Brazil. Where previously only individuals could be held accountable for corrupt acts, under the auspices of the Act companies themselves can now be administratively and civilly liable for acts committed on their behalf. As such, companies operating within Brazil will have to take measures to ensure that their existing internal compliance procedures are in line with both Brazilian and international standards. 

Brazil, much like the other BRIC nations, represents an attractive proposition for investors. One need only look to the speed of the country’s recent economic development to see the level of potential within Brazil. Indeed, the country offers a number of both short and long-term opportunities to companies looking to invest. Over the next two years Brazil will host both the FIFA World Cup and the 2016 Summer Olympic Games. Despite the enormous cost associated with hosting these global events, both the World Cup and the Olympics have the potential to be incredibly lucrative to both Brazilian and international business. Longer term, Brazil has an abundance of predominantly untapped natural resources, a nascent industrial sector and an emerging middle class. Together these factors could prove to be the backbone of continued economic growth in the region. 

Despite the plentiful economic incentives of doing business in Brazil, operating in the largest economy in Latin America is not without unique challenges. A deep rooted, intrinsic culture of corruption can make Brazil a difficult environment for companies. The CCA was passed into law after three years of negotiation between the government and the anti-corruption community. Despite the length of the negotiating process, it was not necessarily the discussions that brought the law into effect. Arguably, the Act came in response to a number of highly publicised and damaging public protests throughout 2013. Increases in transportation fares, an apparent lack of appropriate infrastructure in the country, and notoriously underfunded, failing education and healthcare systems all contributed enormously to the sense of discord in the country. Against this backdrop of social discontent, a number of corruption scandals also emerged involving the alleged embezzlement of a substantial number of funds. Accordingly, the Act was approved by the Brazilian Senate on 4 July 2013 before being signed into law by Brazilian President Dilma Rouseff on 1 August. 

Although there had been discussions around the enactment of an anti-corruption bill in Brazil for a number of years, the protests undoubtedly expedited the process. Arguably, the creation of the Act was the next logical step in Brazil’s anti-corruption efforts. Bruno Drago, a partner in the compliance department of Demarest Advogados, believes the Act is clearly part of the evolution of Brazilian anti-corruption efforts. “In 1997, Brazil participated and signed the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, which originated this bill. Several years later, in December 2007, the OECD reviewed the national efforts made and recommended that the Brazilian government amend the national laws in order to impose liability on a company for acts of bribery and corruption, and to provide for effective sanctions,” he explains. 

Within the anti-corruption community, the FCPA and the UKBA are considered to be the benchmark, providing a blueprint for other nations wishing to enact their own similar legislation. To what degree then, is the Brazilian CCA similar to the FCPA and UKBA? According to Cynthia Catlett, a director at FTI Consulting Brazil, the Act was emboldened by the precedent set by the older, more established legislations. “Inspired by the FCPA and the UKBA, the Act is the first time a law in Brazil holds entities civilly and administratively liable for engaging in corrupt acts,” notes Ms Catlett. She adds that there are similarities and differences between all three statues. “All three statutes have harsh penalties or fines for non-compliance.

All three statutes give credit for the existence of compliance programs and corporate integrity mechanisms. Similar to the UKBA and unlike the FCPA, the Brazilian law is not limited to corruption involving foreign officials. The Brazilian law is a strict liability law, where it is not necessary to prove intent. Much like the FCPA, the Brazilian law does encourage self-reporting,” she says. 

In many respects the Act’s similarities to the FCPA and UKBA are obvious. Essentially, the Act applies to any legal entity that does business in Brazil and it prohibits bribes to any official, domestic or foreign. Though still uncertain, this is expected to cover any individual who holds a governmental office at any level. Furthermore, the Act prohibits data manipulation and the blocking of government investigations. Facilitation payments are also forbidden under the Act. Strict liability is enforced for legal entities involved in corruption – proof that the punishable act was caused by an act or omission on the part of the legal entity is sufficient to subject it to sanctions. The act also introduces harsh administrative and civil sanctions that apply directly to legal entities’ income and assets. Violations of the Act can lead to civil fines of as much as 20 percent of a company’s gross billings, or if the prior year’s revenue cannot be calculated, up to $26m. “The purpose of the law is to follow the lines of the FCPA and the UKBA,” says Mr Drago. “However, decentralised application of the law, which is different to the FCPA and the UKBA, may jeopardise the objectives of the law.” 

Clearly, the Act is designed to build on the groundwork already laid by the FCPA and the UKBA, and accordingly, any companies which already have in place stringent compliance programs aimed at these pieces of legislation will be well placed to deal with any additional enforcement obligations contained within Brazil’s CCA. Those companies unable or unwilling to enact appropriate compliance measures will face a number of sanctions, according to Ms Catlett. “The Act lists the following as penalties for noncompliance: forfeiture of property, rights or securities representing the advantage or profit directly or indirectly obtained from the infringement; partial suspension or interdiction of activities; compulsory dissolution of the corporation; a ban on receiving government incentives for a minimum period of one and a maximum of five years; publication of the act and penalty in a public registry; and harsh financial fines ranging from 1 percent to 20 percent of the company’s gross revenue.” 

Enforcement of the Act will be a serious issue for businesses operating in Brazil, and in many respects it will place Brazil at the forefront of global anti-corruption enforcement efforts. For Mr Drago, the Act is vital given the deep-seated corruption currently at work in Brazil. However, the reality of enforcement efforts will truly define Brazil’s role in the war on corruption. “Corruption in Brazil is widespread,” he says. “In our view, it is not the enactment of a new law that will change culture and reduce corruption practices, but rather its effective enforcement. Thus, much will depend on how the Public Administration and the Public Prosecutor’s Office will enable their personnel to enforce the new law, how the judiciary branch will interpret and apply the new legislation, and how much new legislation strengthens or weakens its provisions. At the end of the day, the business community will respect the new law, prepare internal polices and monitor employee practices to the extent the new law is effectively enforced.” 

There appears to be a belief within Brazil that the country’s desire to effectively enforce the Act will define Brazil’s position on combating bribery and corruption. “This new law not only changes the country’s regulatory framework, but brings the country closer to OECD Anti-Bribery Convention requirements,” notes Ms Catlett. “That said, a law alone will not be sufficient to counter corruption in Brazil. It will be important for the country to enforce the law and create a precedent highlighting its importance and the country’s commitment to its application.” 

The signing of Brazil’s Act into law is another indication to multinational companies that they can no longer assume that compliance and bribery issues in emerging markets can be resolved simply by dealing with the US and UK authorities. Emerging markets are arming their own prosecutors with tools to combat bribery and corruption in their own jurisdictions. 

Given the strength of feeling among the Brazilian people, it is unlikely that we will see a reduction in efforts to prosecute bribery and corruption in the near future. As Brazil enters a crucial period in its history, questions remain regarding the degree to which the country will continue to emphasise its anti-corruption agenda. 2014 is a momentous year for Brazil – not only is the World Cup imminent, but it is also an election year. As the World Cup draws near, all public expenses related to the tournament will be disclosed, and when viewed in the context of 2013’s public protests, that could be a decisive moment for the future of Brazil’s economic development.

© Financier Worldwide

BY

Richard Summerfield