What Goes Downhill May Go Uphill in FCPA Compliance

Usually the question I am posed is how far down the chain must you go in your due diligence to ensure that your suppliers are in compliance with the Foreign Corrupt Practices Act (FCPA). I would pose that now, after the Petrobras scandal, a company may need to examine the flow in the other direction. I thought about this directional shift when I read an exhaustive report in the Sunday New York Times (NYT) on the Petrobras scandal, entitled “Brazil’s Great Oil Swindle”, by David Segal. The article reviews the genesis of and details the ongoing nature of the Petrobras scandal.

While I have previously written about the other Brazilian companies that have been caught up in the scandal, such as Oderbrecht, Camargo Corrêa and UTC Engenharia, Segal’s article detailed a level of immersion in corruption that should concern every US Company subject to the FCPA and catch the eye of Department of Justice (DOJ) prosecutors handling FCPA cases. It appears that the companies that had direct contracts with Petrobras also colluded in the old-fashioned anti-trust sense, so that not only did they control all the subcontract work done on any Petrobras project but they would also demand bribes from the subcontractors which they then passed up the chain to Petrobras executives and eventually Brazilian politicians. If this scheme turns out to be true, it literally could explode potential FCPA exposure for any US Company doing business on any subcontract where Petrobras was the eventual beneficiary.

Segal reported, “according to prosecutors, these companies stopped competing and started to collaborate. They formed a cartel and decided, in advance, which of them would win a particular deal. A charade competition was orchestrated, and the anointed winner could charge vastly more than it would in a free market.” Further, “A document obtained by prosecutors laid out what it called the “rules of the game.” The trumped-up bidding process was labeled a “sports tournament”, with an assortment of rounds and a “trophy.” There was a no-sore-loser codicil, too: “The teams that participate in a round should honor the rules that have been agreed on, even when they are not the winner.”

But the corruption did not stop simply at these non-Petrobras entities. These companies would demand bribes from their subcontractors that they passed up the line to Petrobras. Segal wrote, “From 1 to 5 percent of the value of a given contract was diverted to those on the receiving end of the scheme, a group that included 50 politicians from six parties, according to prosecutors. Money from cartel members took a circuitous route to politicians’ pockets, passing through ghost corporations whose owners made bribes look like consulting fees.”

Think about all of this for a minute. What happens when everyone and every company associated with a National Oil Company (NOC) is in on the corruption? I thought about this question when I read an article in the Financial Times (FT) by Andres Schipani, entitled “We were terrorized by the drop in oil prices”, where he discussed how the drop in world oil prices has negatively affected Venezuela more than any other top oil producing company. Part of the country’s trouble is the rampant corruption around its NOC PDVSA. Schipani quoted a former minster for the following, “The design of the political economy here only benefits the corrupt.” Moreover, the country is near the bottom of the Transparency International Corruption Perceptions Index (TI-CPI) coming in at 161^st out of 175 countries listed.

Most Chief Compliance Officers (CCOs) and compliance practitioners had focused their third party risk management program around third parties, first on the sales side and then in the Supply Chain (SC). However now companies may well have to look at other relationships, particularly those where the company is a subcontractor involved in a country prone to corruption with a NOC or other key state owned enterprise. Last year the Wall Street Journal (WSJ) in an article entitled “Venezuelan Firm Is Probed In U.S.”, by José De Córdoba and Christopher M. Matthews, reported that a US company ProEnergy Services LLC (ProEnergy), a Missouri based engineering, procurement and construction company, sold turbines to Venezuelan company Derwick Associates de Venezuela SA (Derwick), who provided them to the Venezuelan national power company. The article reported that the DOJ’s “criminal fraud section are reviewing actions of Derwick and ProEnergy for possible violations of the Foreign Corrupt Practices Act”. Derwick was reported to have been “awarded hundreds of millions of dollars in contracts in little more than a year to build power plants in Venezuela, shortly before the country’s power grid began to sputter in 2009”. All of this with a commission rate paid by ProEnergy to Derwick of a reported 5%.

The Brazilian investigation poses far more dire consequences for any US Company that did business with the cartel of Brazilian companies that had locked up the Petrobras work. It means that you need to go back immediately and not only review the underlying due diligence which you did (probably none); then review the contracts with those entities; and, finally, cross-reference to see if there were any contract over-charges which were rebated back to the cartel members. If so, you may well have a serious problem on your hands as any unwarranted rebates, refunds, customer credits or anything else that could have been readily converted into cash to be used to fund a bribe.

This second part is one thing that challenges many compliance officers. The compliance function does not always have visibility into the transactions assigned to specific contracts or projects like your company might be engaged in for Petrobras in Brazil. However it also speaks to the need for transaction monitoring as not simply a cutting edge technique or even best practice but a required financial controls tool that is also applicable to compliance internal controls as well.

As Brazilian prosecutors expand ever outward from Petrobras, US companies subject to the FCPA and UK companies and others subject to the UK Bribery Act would do well to review everything around their Brazilian operations, contracts and dealings. The Petrobras scandal has shown two clear trends to-date. First is that we are far from the end of this scandal. Second, the prosecutors have been fearless so far in following the corruption trail wherever it may go. If they follow it to US companies, they could prosecute them on their own in Brazil for violation of domestic anti-bribery and anti-corruption laws or turn the evidence over to the DOJ. The thing to do now is to get out ahead of this all too certain waterfall.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2015

DOCUMENT, DOCUMENT, AND DOCUMENT UNDER THE BRAZILIAN CLEAN COMPANY ACT

Ed. Note-it is always gratifying and a little flattering when someone else uses your mantra. So when today’s Guest Post author sent me a blog with ‘Document Document Document’ in the title, I was sold. Today Raphael Gomes, from the law firm of Chediak Advogados, discusses the need for documentation under the Brazilian Clean Company Act. 

It was only 14 months after Law No. 12.846/2013, Act, entered into force that Brazil finally issued regulations regarding its corporate anti-bribery statute, the so-called Clean Company Act. President Dilma Rousseff issued Decree No. 8.420/2015 on March 18^th, which provides for further regulations around the Clean Company Act, with focus on 5 areas: (i) procedural rules for the administrative enforcement of the Act against organizations; (ii) calculation of the penalties; (iii) leniency agreements; (iv) integrity (compliance) programs; and (v) sanctioned, banned, or restricted companies lists (CEIS and CNEP).

As to anti-bribery compliance programs, referred to as integrity programs under the Clean Company Act, the Decree defines the 16 elements of a complete program that will be taken into account in its evaluation by the enforcement authorities, which we have outlined in our post “Compliance Programs under the Brazilian Clean Company Act”.

About a month after the Decree was issued, the Federal Comptroller’s Office (Controladoria-Geral da União – CGU), the administrative body responsible for enforcing the Clean Company Act at the federal administration level, issued additional regulations regarding (i) the process for evaluation of the investigated company’s compliance program (Reg. 909 – Portaria CGU nº 909); (ii) procedural rules for the administrative enforcement proceeding or “PAR” (Reg. 910 – Portaria CGU nº 910); the rules for determining the company’s annual gross revenues for calculation of the monetary fines (CGU IN 01/2015); and (iv) the rules around the government’s restricted parties lists CEIS and CNEP (CGU IN 01/2015).

Pursuant to Article 18 of Decree 8420, a company that demonstrates to have a robust, effective compliance program in place shall receive a reduction in the monetary fines of up to 4% of the company’s gross annual revenues for the year preceding the opening of the PAR. This is the major mitigation factor under the Brazilian anti-bribery statute, twice as valuable as voluntary disclosure, and potentially three times as valuable as cooperation. In practice, in some cases the credit for a company’s compliance program may represent a discount of more than 99% of the monetary fine, lowering it to 0.1% of the gross annual revenues, the minimum fine allowed under the Clean Company Act.

DOCUMENT, DOCUMENT, AND DOCUMENT

Reg. 909 is of particular interest to the Compliance professional, for it provides guidance as to how the investigated company’s compliance program is to be evaluated by the Brazilian Federal authorities, for determining the percentage of credit the company is entitled to. It is a real eye-opener and makes us realize how global compliance and anti-bribery laws and best practices are becoming more and more aligned. Tom Fox constantly reminds us of his mantra: Document, document and document. Well, it looks as though Brazilian enforcers, particularly the CGU, have been reading Tom’s blog and have taken this mantra of his to heart.

In Reg. 909 the CGU sets forth that programs will be evaluated having two basic documents prepared by the company (the Profile Report and the Program Conformity Report) as the basis and starting point for their review. It further provides for that the company shall produce evidence that the program works and is a part of the company’s routine, and demonstrate how the program has worked to help the company prevent, detect, and remediate the very misconduct that is the object of the enforcement action.

The Profile Report should describe:

• the industry sectors and geographies in which the company operates;
• organizational structure, including internal hierarchy, decision-making process, boards, departments, and divisions;
• the number of direct and indirect employees;
• touch points with the government (national or foreign), highlighting:
• the importance of licenses, permits, or authorizations to its activities,
• the quantity and value of contracts with the government, and
• the frequency and relevance of the use of third party intermediaries in its interactions with the government;
• equity interests relating to subsidiaries, controlled, parent, and affiliated companies, as well as to JVs or consortia. 

Regarding the Conformity Report, Article 4 of Reg. 909 provides for that the legal entity shall provide information on the structure of the program, describing what elements of the program (listed on Article 42 of Decree 8420) where implemented, how they were implemented, and explaining the importance of the implementation of each element vis-à-vis the company’s peculiarities, as per the Profile Report .

The effectiveness of the company’s program may be evidenced by means of official documents, e-mails, written correspondence, statements, internal memos, minutes of meetings, reports, manuals, computer screen shots, video and audio recordings, photographs, purchase orders, invoices, accounting records, or any other documents, preferably in digital format.

Apparently, the Brazilian enforcers expect the companies to heavily invest in documenting all they can about their compliance programs, and intend to rely on document review for most of the process of evaluation of a company’s program. Not only does Reg. 909 require for the two reports mentioned above to be submitted along with the company’s administrative defense, but it also makes it crystal clear that being able to provide complete, clear, and organized documentation to demonstrate the effectiveness of the program will be key for companies to secure credits that may add up to four percent of a company’s annual revenues.

In paragraph 2 of article 4 of Reg. 909, the CGU expressly lists documents that should be created, copied, archived, retrieved, and submitted to the authorities in an organized fashion, in digital format, in case of an investigation.

CONCLUSION

The Brazilian Clean Company Act lists many conducts that are regarded as harmful to the public administration, which conducts include, inter alia, fraud and related misconduct involving government procurement, obstruction of government inspections or investigations, and, of course, bribery. The Act provides for strict liability for companies that benefit from violations, which renders it more likely than it was before the law passed for any company to be faced with investigations of potential violations, be it for conduct of its own employees or that of its third party intermediaries.

In such an environment, it is natural for companies not only be willing to put a robust compliance program in place, to prevent, detect, deter, and remediate instances of wrongdoing, but also to wish to secure the maximum credit of 4% when facing an enforcement action, in case all else fails.

Upon being notified by the enforcement authorities of the investigation, with the opening of the PAR, the company shall have a window of 30 days to submit the defense (article 16 of Reg. 910), including the defense arguments and evidence relating to the concrete facts and merits of the case. The defense shall also include the Profile Report, the Program Conformity Report and all the supporting documentation.

What one should look to avoid is that, in the middle of a perfect storm, in which the company’s compliance and legal professionals will have to deal with managing the crisis, interacting with the company’s PR and Investor Relations teams, informing all stakeholders, on a daily or weekly basis, of the issues at hand, the defense strategy, action plan and progress, with a very limited window of time to gather all information they can about the specifics of the case and prepare a defense, is to have to dedicate time, resources, and efforts to tasks that could have been dealt with in advance, under no time pressure.

We would therefore deem it advisable for companies operating in Brazil to prepare and have in their files, ready for submission at any time, both the Profile Report and the Program Conformity Report, along with all the evidence they can gather in advance, in an organized manner and in digital format, evidencing the effectiveness of its program. It is the Compliance Officer’s responsibility to work with the IT department to ensure that the company has a document archive and retrieval process in place to guarantee that documentation pertaining to the compliance program is safely stored in one centralized repository.

Your compliance program, documented and presented in a complete, clear, and organized manner, along with evidence of its effectiveness, may be worth up to 4% of your company’s annual revenues. Make sure you are ready to earn it.

And remember:

What does Thomas Fox say? Document, Document, and Document.

Author:

Rafael Mendes Gomes is the partner in charge of compliance and anti-bribery at Chediak Advogados, with offices in São Paulo and Rio de Janeiro, Brazil. The firm offers legal assistance to both Brazilian and international clients across different industries and business sectors.

rafael.gomes@clcmra.com.br

You can access Chediak Advogados Compliance and Anti-bribery web page here.

The Easter Rebellion and Petrobras’ $17 Billion Write Down

On this day, 99 years ago the Easter Rebellion began. If there is one event that is seared into history as a turning point for Irish independence from Britain, it was the Easter Rebellion. England had finally granted Home Rule to Ireland in 1914 but suspended implementation due to World War I. This did not appease the Irish nationals in the Irish Republican Brotherhood, who led the Easter Rebellion. On this day in 1916, on Easter Monday in Dublin, the Irish Republican Brotherhood, led by Patrick Pearse, launched their armed uprising against British rule. Assisted by militant Irish socialists under James Connolly, Pearse and his fellow Republicans rioted and attacked British provincial government headquarters across Dublin and seized the Irish capital’s General Post Office. Following these successes, they proclaimed the independence of Ireland, which had been under the repressive thumb of the United Kingdom for centuries, and by the next morning were in control of much of the city. Later that day, however, British authorities launched a counteroffensive, and by April 29 the uprising had been crushed. After the Rebellion, the English commander decreed the execution of its leaders creating martyrs in Ireland who are honored to this day.

In what may turn out to be a date almost as significant for the Brazilian energy giant Petrobras, yesterday the company announced the results of its audit to determine how much money it lost through the systemic bribery and corruption which is alleged to have pervaded the company. In an article in the Wall Street Journal (WSJ), entitled “Brazil’s Petrobras Reports Nearly $17 Billion in Asset and Corruption Charges”, Paul Kiernan reported that the State-run oil company wrote off “$2.1 billion of alleged bribe payments”. The remaining losses came from “graft and overvalued assets”.

Unfortunately for the company, “Petrobras Chief Executive Aldemir Bendine said in a news conference that additional revisions to the corruption-related write-downs are possible if prosecutors uncover more wrongdoing. But he also said an outside auditor approved Petrobras’s earnings “without any reservations.” That could ease investor concerns about the likelihood of major impairment charges in the future. “We were conservative with this number. We might not reach it, but it was a way to give credibility,” Mr. Bendine said. “We have made our best efforts to turn the page on this sad chapter that the company has passed through.””

Further, and perhaps more ominous for the country as a whole, “The events surrounding Petrobras have slowed both the construction sector and the oil industry, leading to reduced spending, thousands of layoffs and several bankruptcies.” However the article quoted the UK-based economic research group, Oxford Economics, as saying “Petrobras’s need to slash investments could “tip the Brazilian economy into a deeper-than-expected recession.””

Petrobras is the world’s most indebted major energy company. This audited statement was made due to “an April 30 deadline in Petrobras’s bond covenants that could have allowed the holders of billions of dollars of Petrobras debt to demand early repayment, a possibility that prompted Moody’s to yank the company’s investment-grade rating in February. Petrobras has been locked out of capital markets since late 2014 due to repeated delays in its financial statements.”

Petrobras of course claims that it is the victim here. While it cannot claim the tired and tested rogue employee defense, it can draw some support from another source. As reported in another WSJ article, entitled “Brazil’s Alleged Petrobras Corruption Not Widespread, Witness Testifies”, reporters Rogerio Jelmayer and Jeffrey T. Lewis wrote that in testimony before Brazil’s Congress, Augusto Mendonça Neto, president of Setal Engenharia, an engineering company that is a supplier to Petrobras, said that “The alleged corruption scheme at Brazil’s Petroleo Brasileiro SA grew out of an agreement among some of the country’s biggest construction companies to divvy up contracts from the state-owned oil company.”

They reported that “Mr. Mendonça Neto has acknowledged being part of the alleged scheme, and is cooperating with investigators. Mr. Mendonça Neto outlined the history of the conspiracy, saying it started in 1997 when a group of Brazilian construction companies got together informally to try to increase their bargaining power against Petrobras. Mr. Mendonça didn’t name the other companies involved. “The objective of these companies was to have a way to protect themselves, and they arranged things among themselves, so they would each have an opportunity” to win contracts from the oil company, he said. “They competed with the rest of the market. What they wanted was to not compete among themselves, because they were the most important [companies].” The group of companies initially had no control over who was able to bid on Petrobras contracts, but that changed after Petrobras executives joined the scheme in 2003 or 2004, Mr. Mendonça Neto alleged. Once they were on board, the group of suppliers grew to include more companies and together they were able to control which businesses got invited to bid on contracts, he said.”

He went on to testify that “The corruption at Petrobras was limited to three top executives and not spread throughout the company” naming three former Petrobras executives, Paulo Roberto Costa, Renato Duque and Pedro Barusco, as also being involved, and said that the rest of the company isn’t corrupt. “The only contact I had with corruption was with those three people I named, apart from that there was never anything,” Mr. Mendonça Neto told the committee. Petrobras “is a highly competent company, composed of people who are extremely prepared and competent.””

Whether the case is as Mr. Mendonça Neto has alleged, three people trying to extort the entire universe of Petrobras contractors or a broader scheme within the company to shake down those doing business with it or companies paying to play with Petrobras, it hardly matters for investors. Petrobras has already announced that it will not pay dividends for 2015. However that may not be enough for investors, as Keirnan reported, “More broadly, investors say the company needs to improve its governance. The Brazilian government, which is Petrobras’s largest shareholder, now nominates most of the company’s board, including its chairman. Brasília has ordered Petrobras to subsidize fuel prices in recent years while the company was simultaneously executing a massive investment plan, leading it to burn billions of dollars in cash.”

As important as the Easter Rebellion was for Irish independence, it was but one step which led to the creation of the Irish Free State in 1922. While this release of information regarding the cost of bribery to Petrobras and its shareholders will be but one in a long number of steps down (hopefully) the path of doing business legally and not corruptly.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2015

The Petrobras Scandal and Corruption of Political Parties Under the FCPA

When does bribery and corruption move from a business issue to a political issue to a national issue? Why should US companies be held to the gold standard of anti-corruption laws? Should the US government even care if US companies engage in bribery of politicians and political parties outside the US? I pose these questions as we see some of these issues now being played out in real time in Brazil.

Earlier this month, a Wall Street Journal (WSJ) article by Rogerio Jelmayer and Jeffrey T. Lewis, entitled “Brazil Graft Probe Reaches Higher Up” said that “A widening investigation into alleged corruption at Brazil’s state-controlled oil company edged closer to President Dilma Rousseff on Wednesday when police arrested her ruling political party’s treasurer. The official, João Vaccari Neto, was charged with receiving “irregular donations” for the Workers’ Party from some suppliers to the oil company” [Petrobras]. Moreover, one cooperating witness, Pedro Barusco, “told a congressional hearing in March that he amassed nearly $100 million in bribes as a part of the alleged bribery schemes and the Workers’ Party may have received twice as much.”

But the corruption scandal appears to be much broader than simply one politician. Another WSJ article, by reporters Paulo Trevisani and Paul Kiernan, entitled “Brazil Attorney General Seeks Corruption Probe Approval”, said that the Brazilian Attorney General “has asked the Supreme Court for permission to proceed with investigations against an undisclosed number of politicians”. He asked for “28 probes involving 54 persons”. Interestingly, this part of the Brazilian corruption probe is separate and apart from the “team of prosecutors who have been working on the case from the southern Brazilian city of Curitba”. The reason is that under Brazilian law “special treatment is afforded to high-ranking authorities, whose cases my be heard by the Supreme Court.” This anomaly required “any evidence pointing to government officials or lawmakers had to be sent to” the Brazilian Attorney General.

As the corruption scandal continues to morph, allegations have reached the level of last year’s Brazilian Presidential election. Mary Anastasia O’Grady, also writing in the WSJ, in an article entitled “An Escalating Corruption Scandal Rocks Brazil”, said that interviewed defeated Presidential candidate Aécio Neves, head of the Social Democracy Party of Brazil, told her that he lost the election because of “organized crime”. This was not some dark mafia plot but came about from “alleged skimming operations at the government-owned oil company.” She went on to note, “Prosecutors allege that Petrobras contractors were permitted to pad their contracts and remit the excess as kickbacks to the oil company, which passed hundreds of millions of dollars to politician and, more importantly the PT.” The PT is the ruling party currently led by Brazilian President Rousseff.

It has not yet been reported that any US companies are under investigation by the Brazilian Attorney General for the bribing of politicians or a political party such as the President’s Workers’ Party. However, for any US companies that have been engaged in trying to influence elections in Brazil through campaign contributions, the Foreign Corrupt Practices Act (FCPA) specifically incorporates politicians, political parties and candidates for political offices as foreign government officials for purposes of the Act. In the 2012 FCPA Guidance it states, “The FCPA’s anti-bribery provisions apply to corrupt payments made to (1) “any foreign official”; (2) “any foreign political party or official thereof ”; (3) “any candidate for foreign political office”; or (4) any person, while knowing that all or a portion of the payment will be offered, given, or promised to an individual falling within one of these three categories. Although the statute distinguishes between a “foreign official,” “foreign political party or official thereof,” and “candidate for foreign political office,” the term “foreign official” in this guide generally refers to an individual falling within any of these three categories.”

Additionally, politicians and political parties are incorporated into the FCPA through the accounting provisions of the FCPA. As further stated in the FCPA Guidance, “Additionally, individuals and entities can be held directly civilly liable for falsifying an issuer’s books and records or for circumventing internal controls. Exchange Act Rule 13b2-1 provides: “No person shall, directly or indirectly, falsify or cause to be falsified, any book, record or account subject to [the books and records provision] of the Securities Exchange Act.” And Section 13(b)(5) of the Exchange Act (15 U.S.C. § 78m(b)(5)) provides that “[n]o person shall knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record, or account ….”. The Exchange Act defines “person” to include a “natural person, company, government, or political subdivision, agency, or instrumentality of a government.”

The most well known FCPA enforcement action involving bribes paid to politicians was the Halliburton/KBR enforcement action. For those of you who may have forgotten this case, which has the third highest FCPA fine of all-time, Halliburton subsidiary KBR admitted that a consortium which it led paid Nigerian officials at least $132 million in bribes for engineering, procurement and construction contracts awarded between 1995 and 2004 to build liquefied natural gas facilities on Bonny Island, Nigeria. The consortium was named TSKJ and consisted of subsidiaries of the following entities: KBR; Technip, a French company; ENI, an Italian company; and JGC, a Japanese company. There was also a corrupt agent involved in paying the bribes, Jeffrey Tesler and another Japanese company Marubeni Corporation.

BONNEY ISLAND SETTLEMENT BOX SCORE

Entity	Fine, Penalty and Disgorgement of Profits (in $ millions)
Halliburton (KBR)	$579
ENI	$365
Technip	$338
JGC	$218
Marubeni Corp	$50
Jeffery Tesler (the Bag Man)	$149
Total	$1,699

 

So for those of you keeping score at home, there has been, and could be fines, penalties and profit disgorgement of over $1.699 billion. This figure does not include the amount paid out by these corporations for attorneys’ fees, forensic costs and other professional fees, which can be only speculated about.

 The Petrobras scandal continues to morph and to grow way beyond the bounds of simple commercial bribery. One of the goals in the passage of the Act was to prevent US companies from illegally influencing foreign officials and foreign elections through the payments of bribes. The Petrobras scandal may well demonstrate to the world community how important it is to remember that now is certainly not the time to try and weaken either the FCPA or its enforcement going forward. If there is ever to be a truly level playing field in commerce across the globe, it will be by enforcement of anti-corruption laws such as the FCPA that makes it safe for US businesses to compete on the global stage and compete on the basis of quality, not bribe paid.

But the morphing of the Petrobras bribery scandal into the Brazilian political scene may also demonstrate how commercial bribery can work to corrupt a democratic political system. If the money paid from bribes for commercial contracts worked its way into the Brazilian election, this would be perversion of the democratic process. It is this commercial issue that demonstrates why businesses, particularly US businesses, have a role in the international fight against bribery and corruption. It also seems to me to be a straight line from commercial bribery to political corruption to the explosion of terrorism against such corruption. While the FCPA may not have been passed with this connection to terrorism in mind, it is certainly an important US government tool in that fight as well.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2015

The Intersection of the FCPA, TI-CPI and Tax Appeals in Brazil

The Transparency International-Corruptions Perceptions Index (TI-CPI) is released each year in November. The TI-CPI rates Brazil as 69^th out of 175 countries on its index, coming in with a score of 43 out of 100. I wonder if TI might consider an interim report this year on Brazil? As things keep going, more and more corruption is alleged to be a part of the everyday fabric of the country. While the Petrobras and related scandals have been well chronicled, the overall stench of corruption just keeps spreading and spreading.

Recently it was announced yet another set of investigations around corruption has begun. This time it involves the Brazilian Finance Ministry’s Administrative Council for Tax Appeal. In an article in the Wall Street Journal (WSJ), entitled “Brazil Probes New Bribery Allegations”, Paulo Trevisani reported that this is an “arbitration board that hears appeals from taxpayers who dispute how much they owe the [Brazilian] government.” The investigation would appear to be widespread as “Prosecutors said 74 companies and 24 individuals are under investigation.”

Interestingly not only is the Finance Ministry investigating the allegations but also the Brazilian internal revenue service, the Brazilian federal police and the Brazilian federal prosecutors office. In what would seem to indicate the inherent conflict of interest in the Finance Ministry investigating itself, Trevisani reported the “Finance Ministry said the alleged scheme wasn’t systematic but rather, involved “isolated acts” carried out by a small group of government tax officials. When prosecutors announced the investigation on March 26 they said that losses to the nation’s treasury totaled $6.1 billion over 15 years.” Oops.

While the entities and individuals under investigation have not been named, “a leading investigator on the case said companies under investigation include Ford Motor Brazil, a unit of Ford Motor Co.; JBS, the world’s largest meatpacker, the Brazilian unit of the Spanish bank Banco Santander SA; and Brazil’s second largest private-sector bank, Bradesco SA.” You may recall from an earlier blog post I noted that Brazil’s third largest state-owned bank Caixa Econômica Federal (Caixa) is also under investigation for corruption.

However, this new corruption scandal is the first time that non-Brazilian companies have come under investigation outside of the Petrobras scandal. The WSJ article noted, “Brazil’s tax system is among the most onerous and complex in the world. Penalties can be steep. That has fostered an environment where corruption can flourish, [un-named] experts say. “Taxes in Brazil are so high and complicated that it is easy for companies to get in trouble with the taxman,” the leading investigator told The Wall Street Journal. The investigator said frequent tax disputes created opportunities for ill-intentioned public servants to profit by helping firms circumvent red tape. Prosecutors say the probe began in 2013 after they received an anonymous letter describing details of the alleged scheme.”

An article in forbes.com, entitled “Ford On List Of Companies Suspected Of Brazilian Tax Fraud” by Kenneth Rapoza, went further than the WSJ article when it laid out the list of “companies are under investigation for taking part in various tax bribery schemes” and then listed the amounts they allegedly avoided paying. The Top Ten list is:

• Santander: R$3.3 billion
• Bradesco: R$2.7 billion
• Ford: R$1.7 billion
• Gerdau: R$1.2 billion
• Light: R$929 million
• Banco Safra: R$767 million
• RBS: R$672 million
• Camargo Correa: R$668 million
• Mitsubishi: R$505 million
• Banco Industrial: R$436 million

An article in businessinsider.com, entitled “Brazil uncovers multibillion-dollar tax fraud”, reported that this investigation, dubbed Operation Zeal, had uncovered that “the [tax] body managed to obtain tax appeals board rulings in the companies’ favor by either cutting penalties or waiving them altogether. In return, officials allegedly received bribes from some 70 companies believed to have benefited from the scheme. A written statement issued by Brazilian federal police stated “The investigations, begun in 2013, showed the organization acted within the body sponsoring private interests, seeking to influence and corrupt advisors with a view either to securing the cancellation or reduction of penalties from tax authorities”. Moreover, “Police said the scam could have netted the companies as much as 19 billion reais ($5.9 billion) but evidence uncovered so far amounts to around a third of that amount.” Finally, and perhaps most ominously, the article said, “Federal police organized crime chief Oslain Campos Santan said the total sums could end up being “as much” as that involved in the Petrobras scam”.

This new Brazilian corruption scandal recalls the Foreign Corrupt Practices Act (FCPA) enforcement action against the Houston-based Parker Drilling Company. According to the Department of Justice (DOJ) Press Release issued at the time of the announcement of the conclusion of the matter, the company was issued a tax assessment on its drilling rigs. The Press Release went on to state, “According to court documents, rather than pay the assessed fine, Parker Drilling contracted indirectly with an intermediary agent to resolve its customs issues. From January to May 2004, Parker Drilling transferred $1.25 million to the agent, who reported spending a portion of the money on various things including entertaining government officials. Emails in which the agent requested additional money from Parker Drilling referenced the agent’s interactions with Nigeria’s Ministry of Finance, State Security Service, and a delegation from the president’s office. Two senior executives within Parker Drilling at the time reviewed and approved the agent’s invoices, knowing that the invoices arbitrarily attributed portions of the money that Parker Drilling transferred to the agent to various fees and expenses. The agent succeeded in reducing Parker Drilling’s TI Panel fines from $3.8 million to just $750,000.”

So with all of the above that has been written about in the past few weeks, where do you think Brazil should be on the TI-CPI? While its rating of 43 out of 100 may not seem too low or perhaps more accurately too much perceived corruption, it may be time for a mid-year reassessment. Certainly if you are a Chief Compliance Officer (CCO) or compliance practitioner you may wish to perform your own reassessment. If you have any dealings with the Brazilian Finance Ministry’s Administrative Council for Tax Appeal, you need to perform an internal investigation starting today on all information you can find about the process and results. For if the results were extremely favorable the reason for the achievement may have violated both Brazilian law and the FCPA.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2015

Brazilian Corruption Scandal Expands Past Petrobras – Is a FCPA Country Sweep Next?

The Brazilian corruption scandal took a new turn last week, when the Brazilian government announced that it was investigating the country’s health ministry and the state-owned bank Caixa Econômica Federal (Caixa). As reported by Rogerio Jelmayer and Luciana Magalhaes in the Wall Street Journal (WSJ), in an article entitled “Corruption Scandal in Brazil Gets Bigger”, the schemes were similar to those used in the Petrobras scandal, where inflated contracts were awarded to contractors who kick backed the overcharges to those in position to award the business.

This expansion of Brazilian government investigation is also the first reported instance of companies outside the energy sector or those doing business with the Brazilian state-owed enterprise Petrobras being investigated by the Brazilian government. Over the years there have been several Foreign Corrupt Practices Act (FCPA) enforcement actions regarding US companies doing business in Brazil. With this expansion of the Petrobras corruption scandal to other government departments and state-owned entities, a new chapter may be opening. This new chapter may bring not only Brazilian domestic bribery and corruption scrutiny but also draw the attention of US or UK regulators, such as the Department of Justice (DOJ), Securities and Exchange Commission (SEC) or the UK Serious Fraud Office (SFO).

In the health ministry the area of contracts under investigation were those for advertising. The WSJ article said, “the cost of advertising contracts was inflated by as much as 10%, prosecutors said, with the surplus also passed along to politicians. The health ministry said all its advertising contracts meet the legal requirements, and it will investigate the allegations and cooperate with police and prosecutors.” It certainly is comforting when the government says it will cooperate with investigators.

But perhaps more interesting was the timing of the allegations against the country’s third largest state-owned bank Caixa. While the allegations around the scope and extent of the bribery were similar to those made against the Brazilian health ministry, the declarations of these new investigations coincided with the announcement last week by the government Finance Minister Joaquim Levy and Caixa Chief Executive Officer (CEO) Miriam Belchior for “an initial public offering [IPO] in the insurance joint venture it has with French insurer CNP Assurances.”

What do you think the comfort level will be for institutional investors about now in this IPO? I wonder if under IPO rules and regulations in Brazil, whether the CEO must certify either the financial statement as accurate or that there is no evidence of corruption in the organization? Even those in Brazil recognize the gravity of these allegations against Caixa. Luis Santacreu, a banking analyst at the Brazilian rating agency Austin Ratings, said that he thought this announcement would make the IPO more difficult and “the allegations against Caixa show it needs to improve its governance.”

These two developments demonstrate the difficulties that international companies may have in doing business in Brazil going forward. It is not difficult to believe that a country sweep on those doing business in Brazil, with the Brazilian government or with Brazilian state-owned enterprises, may well be coming. Given the recent 2014 World Cup and the upcoming 2016 Olympics, it would not seem too great a stretch for the DOJ or SEC to begin to look at US companies with significant amounts of commerce with and in Brazil.

While we have not seen evidence of country sweeps to-date, there has been evidence of industry sweeps in FCPA enforcement. The FCPA Professor, in a blog post entitled “Industry Sweeps”, posted an article from FCPA Dean Homer Moyer, entitled “The Big Broom of FCPA Industry Sweeps”. In his article, Moyer said that an industry sweep is the situation where the DOJ and/or SEC will focus “on particular industries – pharmaceuticals and medical devices come to mind — industry sweeps are investigations that grow out of perceived FCPA violations by one company that enforcement agencies believe may reflect an industry-wide pattern of wrongdoing.” Moyer further wrote, “Industry sweeps are often led by the Securities and Exchange Commission (“SEC”), which has broad subpoena power as a regulatory agency, arguably broader oversight authority than prosecutors. They are different from internal investigations or traditional government investigations, and present different challenges to companies. Because the catalyst may be wrongdoing in a single company, agencies may have no evidence or suspicion of specific violations in the companies subject to an industry sweep. A sweep may thus begin with possible cause, not probable cause. In sweeps, agencies broadly solicit information from companies about their past FCPA issues or present practices. And they may explicitly encourage companies to volunteer incriminating information about competitors.”

As a compliance professional, one of the key takeaways from the Brazilian corruption scandal is that you should take a very hard and detailed look at your company. With the spread of Brazilian investigations around corruption, we can see that these scandals are not be limited to only the energy or energy-related service industry. One of the first things you can begin to do is to review the list of third parties who might work with the Brazilian government or with Brazilian state-owned enterprises. You should begin by asking such questions as:

• What is the ownership of the third party? Is there a business justification for the relationship?
• Is there anyone in the company who is responsible for maintaining the relationship? Is there ongoing accountability?
• How is the relationship being managed?
• Are you engaging in any transaction monitoring?
• Are you engaging in any relationship monitoring?
• What is the estimated or budgeted size of the spend with the third party?

While the GlaxoSmithKline PLC (GSK) investigation has reverberated throughout the China, I think that the Brazilian corruption scandals will be with us for some time. As bad as it seems about now, and it certainly appears bad, there are many lessons that the compliance practitioner can not only draw from but use for teaching moments within your company. For if you are doing business with the Brazilian government or with Brazilian state-owned enterprises it may not be “if you are subject to a FCPA sweep” but only “when”.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2015

International Anti-Corruption Enforcement Efforts

While the US Foreign Corrupt Practices Act (FCPA) is still the most widely recognized and enforcement anti-bribery and anti-corruption law across the globe, there have been a number of initiatives which will lead directly to greater anti-bribery and anti-corruption enforcement. This increased enforcement will lead to increased risks for companies that do not have anti-bribery and anti-corruption compliance programs in place. This post discusses the efforts of other countries to enact and enforce legislation to curb bribery and corrupt across the globe.

China 

Over the past 18 months, GlaxoSmithKline PLC (GSK) was embroiled in a very public, very nasty bribery and corruption investigation. It culminated in the conviction of GSK and the assessment of a $491 million fine, criminal conviction of four senior GSK China subsidiary managers and the criminal convictions of two ancillary GSK-hired investigators. The entry of the Chinese government into the international fight against corruption and bribery is truly a game-changer. While there may be many reasons for this very public move by the Chinese government, it is clear that foreign companies are now on notice. Doing business the old fashioned way will no longer be tolerated. This means that international (read: western) companies operating in China have a fresh and important risk to consider; that being that they could well be subject to prosecution under domestic Chinese law.

The international component of this investigation may well increase anti-corruption enforcement across the globe. First of all, when other countries notorious for their endemic corruptions, for example India, see that they can attack their domestic corruption by blaming it on international businesses operating in their country, what lesson do you think they will draw? Most probably that all politics are local and when the localities can blame the outsiders for their own problems they will do so. But when that blame is coupled with violations of local law, whether that is anti-bribery or anti-price fixing, there is a potent opportunity for prosecutions.

One of the audit failures of GSK was around well known compliance risks in China, including (1) event abuse planning; (2) mixture of legitimate and illegitimate travel; (3) other collusion with travel agencies; and (4) parallel itineraries. So those risks are well known and have been documented. While the cost of monitoring is high and would involve the tedious work of verifying millions of receipts by calling hotels, airlines and office supply stores and scrutinizing countless transactions for signs of fraud; if your compliance risks are known for a certain profile, then you should devote the necessary resources to making sure you are in compliance in that area.

Brazil 

While GSK was a harbinger of international anti-corruption investigations and enforcement actions based on domestic anti-bribery laws; Brazil and its state-owned energy company Petrobras may become the world’s largest corruption investigation. In a New York Times (NYT) article, entitled “Scandal Over Brazilian Oil Company Adds Turmoil to the Presidential Race”, the scandal was detailed by a former Petrobras official, Paulo Roberto Costa. Mr. Costa was the person who oversaw the company’s refining operations. He has admitted to having engaged in the receipt of bribes for at least a 10 year period “equivalent to 3 percent of the value of the deals from the Brazilian construction companies that obtained the contracts” to build refineries. This amounted to literally millions being “stashed in bank accounts in Switzerland and the Cayman Islands.” He “inflated budgets for new projects” by 3% and then had that amount kicked back to him as bribes. The allegations were verified “through an associate, Alberto Youssef, a black-market money dealer who testified that he helped launder funds in the scheme. Mr. Youssef, who has also accepted a plea deal, testified that more than a dozen of Brazil’s largest construction companies had paid hefty bribes to obtain lucrative Petrobras contracts.” Interestingly, Brazilian President Rousseff “has also effectively acknowledged the prevalence of corruption inside the executive suites of Petrobras, while denying that she had known about the kickbacks when they were taking place.”

The scandal has not only engulfed suppliers to Petrobras in Brazil. It has now moved to the international stage. From shipyards in Singapore, which have been alleged to have paid bribes to Petrobras, to Rolls Royce in Great Britain which has been alleged to have paid bribes for the sale of turbine engines; this scandal truly is international in scope and may engulf more companies going forward. In addition to violations of Brazilian law, the US government has reportedly opened an investigation, as Petrobras USA is a US stock-exchange issuing entity and subject to the FCPA. Indeed, in the US there are already multiple shareholder derivative lawsuits against the US entity for mis-representing its true value because of the corruption allegations against the company in Brazil.

The Petrobras scandal continues to make news almost daily and its repercussions continue to reverberate across the globe. The FCPA Blog, in an article entitled “Swiss AG freezes $400 million in Petrobras bribe probe”, stated that in Switzerland alone there are nine open investigations into alleged money laundering tied to Petrobras. In mid-March the Office of the Attorney General of Switzerland (OAG) announced that they had issued an order to freeze $400 million of assets allegedly tied to a Petrobras corruption scheme. The FCPA Blog further stated the OAG announced “The release of over $120 million reflects Switzerland’s clear intention to take a stand against the misuse of its financial center for criminal purposes and to return funds of criminal origin to their rightful owners.”

The domestic Brazilian Anti-Bribery Law, the Clean Company Act, enacted into law in 2014, is uniquely designed for oversight by internal audit. Compliance programs will be evaluated on three prongs: the structure of the program; specifics about the legal entity; and an evaluation of the program’s efficiency. The first prong will include consideration of the existence of mechanisms for reporting suspected or actual misconduct, training, code of conduct, policies and procedures, periodic risk assessments, and application of disciplinary measures against employees (including senior management too) involved in wrongdoing. Under the second prong, the compliance risks associated will be considered. Compliance programs should be tailored to the company’s risks; “one-size-fits-all” programs will not be accepted. The third prong will consist of a case-by-case verification, that it is not simply a paper program.

Finally, and no doubt spurred by the Petrobras corruption scandal, the FCPA Blog also reported, in another article entitled “After protests, Brazil president issues anti-graft regulations”, that Brazilian President Dilma Roussef issued a presidential decree with regulations under the Clean Company Act. The new regulations issued address some of the crucial questions concerning the administrative procedure for imposing corporate liability and assessing fines. It also set out the criteria for determining fines, evaluating compliance programs, and entering into leniency agreements. Finally, the decree also provides that books and records accuracy and completeness will be a key criterion for evaluating compliance programs, no doubt inspired by the FCPA accounting provisions. As the FCPA Blog said, “The regulations under the Clean Company Act are a critical milestone in the effort to restore credibility to Brazil’s federal government, in light of its past commitments to fighting corruption in the corporate world.”

Conclusion 

What does all of the above mean for a global company? It means that some law that prohibits bribery and corruption will cover your business. It will not and does not matter if you are a US, UK or Brazilian company doing business outside of your home country, somewhere a law prohibiting bribery and corruption will cover your actions. Even if you are not covered by the FCPA, the UK Bribery Act or the Clean Company Act, if you are doing business in a local country you can still be subject to prosecution under its domestic anti-bribery laws. This means that there will be greater enforcement going forward and greater cooperation between enforcement agencies.

For businesses the only response to this plethora of new laws is to implement and enhance a best practices anti-bribery/anti-corruption compliance program and there are several examples that companies can follow to do so. In the US, the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) provided their suggestions with their Ten Hallmarks of an Effective Compliance Program; the UK Ministry of Justice (MOJ) has provided commentary on the Six Principles of an Adequate Procedures compliance program and the Organization of Economic Cooperation and Development (OECD) has put forth its Good Practice Guidance on Internal Controls, Ethics, and Compliance.

All of these anti-bribery/anti-corruption regimes set forth easily digested concepts that a company could implement. However, there must be more than simply a paper program in place. A company must actually do compliance for it to be effective. By making compliance a part of normal business practices, it will be possible to prevent, detect and then remediate any bribery or corruption issues that may arise.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2015

Compliance Programs under the Brazilian Clean Companies Act

Ed. Note-I recent asked Rafael Mendes Gomes if he could give my readers some information about the recent regulations issued by the Brazilian government around the Clean Companies Act. Both he and Vitor Lopes da Costa Cruz responded with today’s guest post. 

According to the World Bank, Brazil is the world’s seventh wealthiest economy, with a Gross Domestic Product (GDP) of US$ 2.253 trillion in 2012. On the other hand, Brazil is ranked 69^th out of 175 countries in Transparency International’s 2014 Corruption Perception Index, and was recently shaken by investigations into a multi-billion dollar scandal involving the state controlled oil giant Petrobras, threatening to engulf the country’s most senior politicians—including its president. Brazil is also a signatory of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions – the “OECD Convention”.

The OECD Convention entered into force in 1999, and the OECD’s Working Group conducts peer reviews to evaluate the implementation of the Convention and effective enforcement of measures to prevent, detect, investigate and prosecute bribery, but Brazil was one of the last signatories to pass a law focused on the supply side of the bribes: business organizations. Law 12.846/2013, often referred to as the Clean Companies Act, took effect on January 29^th, 2014, and makes business organizations liable for illegal acts against national or foreign public administration, including bribery. An English translation of Law 12.846/2013 is available here.

The Clean Companies Act applies to any Brazilian business organization, company, foundation, association of persons or entities, formally organized or not, regardless of how they are organized or the corporate model they adopt, as well as foreign companies having office, branch, or representation in the Brazilian territory, even if informally and/or temporarily. The Act subjects companies to severe civil and administrative penalties and sanctions for bribing domestic or foreign government officials, and the fines can be of up to 20 percent of the company’s annual gross revenues.

In Article 7, VIII, the statute provides for that, in defining the penalties to be applied to an organization for violations of the statute, the enforcer will take into account the “existence of internal mechanisms and procedures of integrity, audit and incentive for the reporting of irregularities, as well as the effective enforcement of codes of ethics and codes of conduct within the organization” (free translation). The problem was that the statute did not provide guidance on what said mechanisms and procedures consisted of, or how much discount or credit would be granted to companies that have effective compliance programs in place. In the Sole Paragraph or Article 7, the statute sets forth that the criteria of evaluation of the compliance mechanisms and procedures were to be defined by Regulation to be issued by the Federal Executive Branch.

Finally, after over a year of the Clean Companies Act having entered into force, on March 18th, President Dilma Rousseff issued a Federal Decree (8.420/2015) regulating the statute, as a part of a series of anti-corruption measures to counter the increasing public opinion pressure against her administration. The Decree covers some of the crucial aspects of the Act, concerning the evaluation of compliance or corporate integrity programs, the administrative procedure for imposing corporate liability and assessing fines, and the rules regarding leniency agreements.

Of particular interest to companies doing business in Brazil is what the Decree sets forth that regulators and enforcers shall regard as the hallmarks of an effective compliance program, which guidelines are in our view closely aligned with international standards, mainly those provided by the FCPA Resource Guide and OECD’s Good Practice Guidance on Internal Controls, Ethics, and Compliance.

In this post we will focus on the available legal guidance in Brazil, regarding compliance programs, as provided for in the recently enacted Decree, outlining the hallmarks of a compliance program under Brazilian law:

1. Tone at the Top, translated as the commitment from the top executives of the company, including members of the board, evidenced by the visible and unequivocal support to the compliance program.
2. Ethics Code and written policies and procedures, enforced to all members in the organization, extended to third parties when applicable.
3. Periodic Training regarding the organizations Compliance Program.
4. Periodic Risk Assessment, aimed at making the necessary adjustments to the company’s compliance program.

As regards risk assessment, the Decree sets forth that the Brazilian Authorities shall consider the following when assessing the effectiveness of a Compliance Program, during an investigation:

• The number of employees;
• The complexity of the company’s internal hierarchy and the number of departments, governance bodies or sectors;
• The use of third parties intermediaries as consultants or sales agents;
• The industry or sector in which the company operates;
• The countries in which it operates, directly or indirectly;
• The level of interaction with the public sector and the importance of permits, licenses, and governmental approvals for its operations;
• The amount and location of legal entities that form the economic group; and
• Whether the company is regarded by law as a micro or small business.

5. Accounting Records that comprehensively and accurately reflect the company’s transactions.
6. Political Contributions. Transparency as regards donations and contributions to political campaigns, candidates and political parties
7. Relationship with the Public Administration. Specific Proceedings around prevention of fraud or irregularities in public tenders, in the performance of public contracts, and in the interaction with the public sector (including tax collections and inspections, governmental authorizations, licenses, and permits).
8. Compliance Officer: Independence, structure, and authority of the internal body responsible for implementing and enforcing the compliance program.
9. Confidential Reporting Channels (hotline), widely advertised to the company’s employees and third parties, and mechanisms for the protection of whistleblowers acting in good faith.
10. Disciplinary Action in case of violations and procedures to ensure the prompt interruption of the wrongful conduct or violation, and timely remediation of damages caused.
11. Third Party Due Diligence for the hiring of third party intermediaries, such as consultants, vendors, contractors, suppliers, and service providers, and, if applicable, the monitoring of the intermediaries’ activities.
12. M&A Due Diligence: M&A anti-corruption due diligence and risk assessment.
13. Monitoring and Continuous Improvement. Constant monitoring of the compliance program, in order to ensure its continuous improvement.

Having the Federal Executive Branch provided guidelines and clarifications on critical aspects of the Clean Companies Act, by means of the Decree in review, defining parameters and criteria for application of the statute, companies now have a clearer picture of what is expected from them, how investigations are supposed to be conducted, and how cooperation will take place. It is also true that enforcers are now better equipped, at least from the legislation standpoint, to fight corporate bribery.

Now Brazil has the challenge to demonstrate effective enforcement of such laws.

Authors:

Rafael Mendes Gomes is the partner in charge of compliance and anti-bribery at Chediak Advogados, with offices in São Paulo and Rio de Janeiro, Brazil. The firm offers legal assistance to both Brazilian and international clients across different industries and business sectors.

rafael.gomes@clcmra.com.br

Vitor Lopes da Costa Cruz is a senior associate in the compliance and anti-bribery team at Chediak Advogados. He assists companies in the assessment, design, and implementation of compliance programs.

vitor.cruz@clcmra.com.br

You can access Chediak Advogados Compliance and Anti-bribery web page here.