The Brazilian Clean Company Act comes into effect

March 2014 | PROFESSIONAL INSIGHT | FRAUD & CORRUPTION

Financier Worldwide Magazine

Corruption is a worldwide plague that causes serious harm to the economy, business and society as a whole, given that the sums of money diverted by the few could benefit many people.

A study published by the powerful Federation of the Industries of the State of São Paulo (FIESP) in 2013 indicates that the cost of corruption in Brazil last year ranged from approximately US$18bn to US$29bn, or between 1.38 and 2.3 percent of the country’s gross domestic product.

In a country suffering from massive problems with public education, transportation and health, as well as several other infrastructure deficiencies, the enormous amount of money removed from the system by corruption hurts Brazil’s entire population.

The bill that resulted in the Brazilian Clean Company Act was stalled in the Brazilian Congress since 2010, and most observers expected it to be left forgotten there for years. However, the nationwide street demonstrations of June 2013 and the pressure on politicians forced President Dilma Roussef to sanction what is now known as the Clean Company Act.

The Act entered into force on 29 January 2014 providing for the strict administrative and civil liability of companies for acts of corruption involving public officials.

In Brazil, a number of statutes were already in force with the aim of preventing corruption, such as the Criminal Code and the Administrative Improbity Law, among others. However, it has always been difficult for Brazilian courts to enforce those provisions, as the public prosecutors had the burden of proving that the parties had intentionally violated the legislation. Through the new Act, it has become easier for the relevant authorities to sanction companies for acts of corruption.

According to the new statute, the following acts are considered illicit: (i) to promise, offer or give, directly or indirectly, an undue advantage to a public official or third person related to him or her; (ii) to finance, fund, sponsor or in any way subsidise the practice of illicit acts under the law; (iii) to use an intermediary legal entity or individual to conceal or disguise the identity of the beneficiaries of any wrongdoing; (iv) to in any way defraud the competitive nature of a public-bidding procedure; (v) to prevent, hinder or defraud the performance of any act of a public bidding procedure; (vi) to divert or try to divert a bidder by fraudulent means or by the offer of any type of advantage; (vii) to defraud a public bid or its resulting contract; (viii) to deceitfully form an entity to participate in a public bid or contract; (ix) to illegally benefit from changes or extensions of government contracts; (x) to defraud the financial-economic balance of government contracts; and (xi) to hinder the investigation or audit by public agencies, entities or agents, or interfere with their work, within the scope of the regulatory agencies and supervisory bodies of the national financial system.

Once the Brazilian authorities with jurisdiction to apply the law become aware of any of the acts listed above, companies involved in illicit practices will be subject to the following administrative penalties: (i) fines between 0.1 percent and 20 percent of their gross revenues in the fiscal year prior to the initiation of enforcement proceedings; and (ii) publication of the punishing decision in a newspaper with wide circulation.

The Clean Company Act also provides for sanctions that may be judicially imposed on the violators of the law, such as: (i) full disgorgement of the benefits illegally obtained; (ii) forfeiture of assets, rights or other values obtained as a result of the wrongdoing; (iii) partial suspension or interdiction of corporate activities; (iv) compulsory dissolution; and (v) debarment, which includes the prohibition from receiving incentives, subsidies, grants, donations or loans from public institutions, from one to five years.

Due to the challenges and the considerable resources that may need to be utilised by public authorities to investigate potential illegal acts, the new law introduced opportunities for companies to seek settlements similar to the leniency agreements commonly applied in antitrust violations.

According to the new law, as long as the Brazilian company involved in an illegal act is the first one to confess to the public authority the occurrence of such practice and ceases such practices, disclosing details, it may receive a reduction of up to two-thirds of the monetary fine set out in the law, among other minor benefits.

This apparent benefit notwithstanding, the challenge with the leniency settlement, in spite of the good intentions of the legislator, is that the benefits of a leniency agreement are restricted to the legal entity; in other words, the settlement does not cover the individuals involved in the corrupt practices.

In this scenario, there is little incentive for the executives of a corrupt company to contact the authorities, confess an illegal practice, provide the authorities with evidence of such practice, and seek a leniency agreement, when all the evidence obtained will be used by the authorities to incriminate and punish the individuals involved.

Although the legislators were not particularly successful in drafting the leniency provisions, the Act does provide for the mitigation of company liability if the perpetrator operates an effective compliance program. The new law provides that a robust compliance program will be taken into consideration by the authorities when applying a monetary sanction to a company that has infringed the Brazilian Clean Company Act. There is still no regulation clarifying the extent to which a compliance program may mitigate the amount of a fine, but the draft guidelines circulating in recent months indicate that the benefits will be significant (i.e., a reduction that may exceed two-thirds of the monetary fine).

In a country where companies with compliance programs are still rare, establishing a provision in the new law that encourages the creation and development of such a program is a welcome development.

The sanctions provided under the law are severe and have been well-received by Brazilian citizens. However, the question that remains is whether the law will be effectively enforced by the public authorities and the public prosecutor´s offices, and whether it will become an effective mechanism to fight corruption in Brazil. We keep our fingers crossed.

Isabel Franco is a partner and Eloy Rizzo is a senior associate at KLA-Koury Lopes Advogados. Ms Franco can be contacted on +55 11 3799 8189 or by email: ifranco@klalaw.com.br. Mr Rizzo can be contacted on +55 11 3799 8158 or by email: erizzo@klalaw.com.br.

Isabel Franco and Eloy Rizzo

KLA-Koury Lopes Advogados