Fast and Furious: Corruption in Brazil and Upcoming World Cup and Olympics

I recently saw the latest installment of the Fast and Furious franchise, entitled “Fast Five”. In this installment, Vin Diesel as Dominic Toretto and Paul Walker as Brian O’Conner led a team which steals over $100 million from a Brazilian crime boss. One of the storylines of the movie is that this crime boss has corrupted the Rio police force through bribery. Of course this movie is fiction but one of the legacies of the most recent former Brazilian President, Luiz Inάcia Lula da Silva, is one of systemic corruption at the highest levels of power in the country. Sometimes truth is stranger than fiction indeed.

In a recent article in the Wall Street Journal (WSJ), entitled “Brazil Corruption Ills Expose Underside of Lula Legacy”, Paulo Prada reported on the corruption scandal which has engulfed the Cabinet of the current President (and handpicked successor of Mr. da Silva), Dimla Rousseff.  Prada reported that since June of this year, the following Cabinet Ministers have resigned amid the following allegations for the subsequent reasons (a/k/a the Corruption and Resignation Box Score)

Month	Minister Involved	Reason for Resignation
June	Chief of Staff (OK – technically not a Ministry	Alleged to have used public office to reap millions through a private consulting firm
July	Transportation Minister	Alleged to have exchanged commission for contracts
August	Agriculture Minister	Reports of widespread kickbacks throughout Ministry
September	Tourism Minister	Reports he used public funds for personal expenses
October	Sports Minister	Allegations of kickbacks from social programs
November	Labor Minister – no resignation as yet	Accusations that ministry officials were taking kickbacks

So if the Labor Minister resigns sometime this month it will be a stunning 6 for 6 over the past 6 months. What kind of odds do you think any Las Vegas casino would have given for that Pick 6 in May? Indeed, do you believe that any casino in Brazil would have even put such a Pick 6 on the odds board? While noting that “Corruption is nothing new in Latin American politics and certainly not in its biggest country”, this type and pattern of corruption would certainly appear to be breathtaking. Prada noted that the cost to Brazil for bribery is estimated to be 2% of the country’s economy or over $48 billion.

What does all this mean for a US company doing business in Brazil? A compliance practitioner would hope that any such company would at least be cognizant of this amount of reported corruption. The Transparency International 2010 Corruption Perceptions Index gives Brazil a rating of 3.7. Although this score is only the “perception” of corruption, it is certainly not the best of scores. On a more general note, the recently released Chadbourne Compliance Quarterly Special Report, authored by Scott Peeler entitled “A Study of Individual Liability under the Foreign Corrupt Practices Act”, listed the region where the most Foreign Corrupt Practices Act (FCPA) violations occurred as Mexico, Central and South America.

If there is an American company which is doing business in Brazil and is not aware of such information and findings, then its compliance program should be nimble and agile enough to recognize Brazil as a country in which the risk of FCPA violations could well be high and that management of such FCPA risk should be moved up a notch or two. The recognition of such increased risk is precisely what a Risk Assessment is designed to flesh out by looking at a variety of factors such as (1) Geography – where does your Company do business; (2) Interaction with types and levels of Governments; (3) Industrial Sector of Operations; (4) Involvement with Joint Ventures; (5) Licenses and Permits in Operations; (6) Degree of Government Oversight; and (7) Volume and Importance of Goods and Personnel Going Through Customs and Immigration. If your company meets some or all of these criteria, you next need to assess the robustness of your compliance program as it applies to and in Brazil. You may also want to do some internal controls testing and internal auditing to see if you have any issues with your Brazilian operations today.

After performing the Risk Assessment, my next suggestion would be to read Matt Ellis’ recent 4-part series on “Doing Business in Brazil” on his blog FCPAméricas. Matt has a ton of experience working in Brazil and he is fluent in Portuguese and Spanish. Lastly, give Matt a call and put him on retainer, you will need him.

As great as the business opportunities are in Brazil today, they are getting ready to explode with the upcoming 2014 World Cup and 2016 Olympics. There will be many, many American companies which have not done work in Brazil previously, who will be bidding on and/or doing work for these events. All of this bidding and work will be directly or indirectly for the Brazilian government so any company doing work on either of these two world class events should assume the FCPA applies in each and every transaction. Remember, the promise of a bribe equals actually paying a bribe under the FCPA. The bottom line for any US company doing or considering doing business in Brazil is that the reward may be great but the risks are equally great. But with all things FCPA, it is a risk and that risk can be managed. Compliance Departments are not, nor should they be, “The Land of No”. They exist to help companies manage the risk of FCPA compliance.

=============================================================================================

Episode 23 of This Week in FCPA is up. Check Howard Sklar and myself as we discuss the Lanny Breuer speech at the ACI National FCPA Conference, Olympus, the Bribery Act and more.

=============================================================================================

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, 2011

Is the FCPA working? Three dispatches from Latin America

Ed. Note-today we have a guest post from Matt Ellis, Principle and Founder of the law firm of Matteson Ellis Law, PLLC. He blogs at the  FCPAméricas Blog, a blog that explores corruption issues throughout Latin America and speaks to the companies and business-people in the region seeking to comply with international anti-corruption norms. 

In his August 12, 2011 article entitled “Recent Disclosures Raise Many FCPA Questions,” the FCPA Professor Mike Koehler asks whether increased FCPA enforcement has done anything to deter future violations. This question is timely, especially given that the FCPA is under fire by major organizations (such as the U.S. Chamber of Commerce) for the burdens it places on U.S. businesses.

The Professor’s query also raises a broader question—how can levels of corruption even be measured? In an attempt to measure corruption, Transparency International gathers expert assessments and opinion surveys for its Corruption Perceptions Index. The World Bank’s Worldwide Governance Indicators project measures corruption in a similar manner by combining the views of numerous enterprise, citizen, and expert survey respondents in industrial and developing countries. Ultimately, these methods rely on subjective criteria and are limited by the inherent difficulties of applying consistent measures across countries. Assessing levels of corruption is not easy to do.

As a practitioner who has lived, worked, and conducted corruption investigations throughout Latin America for several years, I have developed my own perspective on the question. Following are three examples of how I believe the FCPA is making an impact in the region.

Compliance Programs at Work (Mexico). While conducting an internal investigation in a coastal town in Mexico for a major U.S.-based energy company, I observed an interesting phenomenon. Many oil and oil services companies were conducting their Gulf of Mexico operations from this particular town. Yet it appeared that local officials in the town had largely stopped demanding bribes. Why? The foreign energy companies operating there were some of the first to be hit by a wave of FCPA enforcement. As a result, they had developed and implemented advanced compliance programs to prevent their employees from paying bribes. I was there to assist with one of these programs—FCPA attorneys regularly conduct internal investigations to identify and assess the facts when an allegation of a corrupt payment arises. I learned from the foreign workers that, because of their strict internal prohibition against entertaining bribe requests from local officials, the officials had simply stopped asking. At routine traffic stops, the local police did not even bother to demand money because, if they did, the employee would ask to be taken to the police station where he or she would request a receipt for the payment. Workers were aware of the rules regarding foreign bribery because they had been subjected to FCPA training repeatedly. They also knew the consequences of paying a bribe because they had seen colleagues lose their jobs after doing so. The companies’ compliance programs were working together to send a message to local officials, which resulted in diminished requests for bribes.

Foreign Proceedings Inspired by U.S. Proceedings (Honduras).  In 2009, four executives from the Miami-based telecommunications company Latin Node Inc. pleaded guilty to FCPA violations in the U.S. District Court for the Southern District of Florida. The executives paid more than $500,000 in bribes to Honduran telecommunications officials to retain a valuable telecommunications contract. These U.S. prosecutions appear to have inspired the pursuit of justice in Honduras. According to the Honduran newspaper, La Prensa, investigators in Honduras have built their own “strong” case against the Hondurans involved in the scheme, encouraged by the U.S. proceedings. They have even requested that U.S. officials provide them with evidentiary assistance pursuant to the Article XIV mutual assistance provisions of the Inter-American Convention Against Corruption. Though Honduran courts have yet to begin official proceedings, action appears imminent. Perhaps as U.S. officials increase enforcement pressure, government officials in other parts of the region will be empowered to take action as well.

The FCPA as a Shield (Argentina). To a friend in Argentina—a U.S. citizen working as President of a major multinational corporation there—the FCPA serves as a shield. On several occasions, high-level Argentine officials have propositioned him for improper payments. When this happens, he stands behind the FCPA. He explains that making the payment would be illegal, would expose his company to significant liability, and would subject him to possible jail time. Given the history of high-level corruption cases in the country, my friend’s encounters are probably not unique. For example, the Siemens AG settlement dealt with multi-million dollar payments to high-level Argentine officials.  The payments were made to win a state contract for the development of national identity cards valued at around $1 billion. In the “maletinazo” case, Argentine airport customs officials found $790,000 in the suitcase of a Venezuelan businessman with ties to the Venezuelan government purportedly headed to assist President Cristina Fernández’s presidential campaign. I remember when the IBM case broke because I was living in Argentina at the time. In that case, U.S. officials brought an FCPA action against IBM when its subsidiary paid $4.5 million through an agent to Banco de la Nación Argentina officials. The payment was made to obtain a $250 million systems integration contract. As Tom Fox noted in his article “How to do Business in a Pure Pay to Play Country,” one of the FCPA’s three policy goals as set out in the preamble to the original 1977 legislation was to place U.S. companies in a better position to resist demands to pay bribes in countries where such activity is common. The Argentina example supports the assertion that this policy goal is being achieved, as the FCPA continues to provide executives with the shield they need to resist corruption.

While it is certainly true that progress in the battle against corruption is difficult to measure, perspectives like these are helpful in understanding the impact of enforcement efforts, even those that are difficult to quantify.

————————————————————————————————–

Matt Ellis is a new and welcome addition to the world of FCPA compliance and blogging. His focus is on the Americas and as you might guess from the title of his blog, he has extensive experience in South America. Subscribe to his blog at  http://mattesonellislaw.com/fcpamericas/ and check his website out at http://mattesonellislaw.com/.

————————————————————————————————–

They’re back for episode 18 of This Week in FCPA. Howard Sklar and I discuss the 1st year anniversary of Corruption Currents, the Wolfberg Report, the DOJ concession in CCI, KPMG and Dow Jones/ACAMS AML reports, News Corp (of course) and more. Check us out at http://thisweekinfcpa.wordpress.com/2011/10/03/episode-18/

————————————————————————————————-

It’s not too late to register for the upcoming World Check FCPA event in NYC on Thursday morning at the Sheraton Hotel and Towers. Come eat some breakfast and hear the wit of myself and the wisdom of Mike Volkov and Jim Feltman on the FCPA and Private Equity: the Gathering Storm. It’s all free. Register at https://ethisphere.site-ym.com/events/attendees.asp?id=179863