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

Final Jeopardy and July 1, 2011

It’s Final Jeopardy and the category is “Compliance”. As your company’s Compliance Officer you are positively salivating at the prospect. So you go all in and bet everything you have on this last question. You stand abated as Host Alex Trebek poses the following question: “Which two countries had anti-corruption laws go into effect on July 1, 2011?” The Union Jack is firmly planted in your mind (if not a picture of the Bribery Act guys) so you confidently write down “What is the United Kingdom…” but then you realize you cannot think of that second country. You stumble and as the iconic tick, tock of the Final Jeopardy theme runs down…all you can think of is one of the BRIC countries. You know you are close but then the buzzer sounds. You dejectedly show your final answer and and Alex says, “Sorry, but it is the UK and Ukraine.”

So why couldn’t you think of the answer? It might be that corruption is so endemic in Ukraine that is difficult to imagine the government would have the brass to tackle the problem. In 2011, Ukraine ranked number 152 out of 182 countries listed on the Transparency International Corruption Perceptions Index (TI-CPI). You recall that corruption in the Ukraine actually got worse from 2010 when the country ranked 134 out of 178 countries listed on the TI-CPI. Perhaps you recall that corruption has been termed “Problem No. 1” for the country and that even the President of Ukraine has called corruption in his country, “a shameful phenomenon.”

Nevertheless you take your winnings from your second place finish in Jeopardy and go home to find out more this new law. In your Google search you find a law entitled, “On the Prevention and Counteraction against Corrupt Practices”. In your research you find that the Ukraine law has three main components: (1) it defines corruption and corruptive defenses; (2) it sets forth the relevant persons who may be held liable for corruption offenses; and (3) it imposes restriction on these relevant persons, while also setting out the liability factors.

Corruption and Corruptive Offense

Corruption is defined as the use of authority to offer, grant or receive improper benefits as well as requesting such activity. Corruptive offense is defined as an intentional act, not only involving governmental officials, as in the US Foreign Corrupt Practices Act (FCPA), but also between private actors, as is prohibited by the UK Bribery Act. The law includes the offering, granting or receiving of improper benefits, either directly or through a third party.

Parties Covered by Law

The Ukraine law has the same public/private dichotomy set forth in the UK Bribery Act. It defines government officials as those in both the federal, state or local authorities but adds an additional category of person equal to governmental officials. This new category includes officers of public law legal entities who receive wages or a salary from the state, even though they may not be a ‘governmental official’. Both of these categories of persons are covered regarding restrictions imposed as measures aimed at preventing and counteracting corruption.

Restrictions and Liability Factors

Not only can such persons, as noted above, not accept gratuities but their immediate families cannot profit from their positions. Lastly these restrictions hold for up to one year after such persons may have left the government. In addition to these restrictions, the following also apply.

• Gifts and Hospitalities – A person covered may not receive any gift in exchange for any decision, act or non-act. However, the law does allow a one-time gift, restricted to a value of 51% of one month’s salary. It should be noted that there were no restrictions on hospitality, such as travel, accommodation or meals.
• Special Screening – The law requires that all job applicants must declare any criminal history and make an annual declaration of property and income. However, there are notable exclusions to this requirement.
• Financial Control – With the annual declarations, as noted above, the information will be made publicly available. Government officials must also declare any foreign banks accounts they or their immediate family members may hold.
• Reporting Requirements – Government officials just declare all charitable amounts which they receive as gifts allowed under the law.
• Conflict of Interest – A covered official must take action to prevent any conflict of interest from arising but if such conflict does arise, it must be immediately disclosed.
• Code of Conduct – The law requires that a written professional ethics standard exist.
• Duty to Report Corruption – All persons covered by the law have a duty to report any corruption of which they may become aware. The law also has whistleblower protection.

You have now completed your review of this new Ukrainian law. As a Compliance Officer, you are pleased that Ukraine has entered the group of nations fighting corruption. You only wish you would have known about the law when it became effective and you would have not humiliated yourself on Final Jeopardy.

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The blog was based upon the article, “Ukraine’s New Anti-Corruption Law: Will it Really Stop Corruption in Ukraine?” by James T. Hitch, III and Yuliya Kuchma, published in the Fall 2011, Volume 45, Number 3 edition of The International Lawyer.

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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, 2012

Apollo 1 and a Compliance Dozen – How to Design a Program for Foreign Business Partners

Friday, January 27 was the 45^th anniversary of the Apollo 1 disaster. As reported by Brian Vastag, in an article in the Washington Post entitled “45 years after America’s first space tragedy, lessons linger”, it was a “launchpad fire which killed three NASA astronauts during testing of the then-new Apollo capsule. Reviews found that the early design of the craft was fatally flawed. Faulty wiring probably sparked the blaze that killed Roger Chaffee, Gus Grissom and Ed White. Among other problems, engineers saved weight by filling the capsule with pure, low-pressure oxygen instead of air, which is 80 percent inert nitrogen.”

One of the clear pieces of guidance from the Department of Justice (DOJ) is that a ‘tick-the-box’ compliance program is not only insufficient; it will not protect a company if a Foreign Corrupt Practices Act (FCPA) violation is discovered. However, many compliance practitioners do not know what should be analyzed regarding foreign business partners. I recently attended the ACI FCPA Boot Camp in Houston, home of the Johnson Space Center. One of the presentations dealt with how to design an overall program to evaluate, contract with, and manage foreign business partners. Furthermore, the presentation focused on how to assess the information obtained through the due diligence process. The presenters discussed a 12 point evaluation process for reviewing, assessing, then contracting with and managing foreign business partners. The steps are as follows:

1. Consider reputation for corruption in the country. You clearly need to review information from governmental organizations, such as the US Department of Commerce and State. A widely used source is from non-governmental organizations, such as Transparency International. Additionally, there are private sources such as World Check’s Country Check and the FCPA Database that you can use to review and determine a country’s overall reputation for corruption.
2. Competence of foreign business partner. This is a two-part analysis. It includes a review of the qualifications of the candidate for subject matter expertise and the resources to perform the services for which they are being considered. However, it also in includes an identification of the representative’s expected activities for your company.
3. Determine the integrity of the foreign business partner. There are several different methods that can and should be employed for this inquiry. Initially there should be an internal point of contact with the potential foreign business representative who can be used to obtain documents and financial, commercial and compliance references. After obtaining this initial information, you should review US and non-US restricted party lists and other media/internet searches. Next you should, at a minimum, obtain comments back from all references and if needed interview these references. Lastly, you should consider conducting an interview with the candidate. This can be done in house or through a company which specializes in investigations.
4. Identify relationships between agent and foreign governmental official. This inquiry requires a detailed review of the ownership and officers/directors and key employees of the foreign business partner. You will need to obtain and review entity information and documentation. If this is in a foreign language you will need to have it translated. One last point here is that you may now need  to look at customers as well to ascertain past and present relationships with government agencies.
5. Business justification for use of agent and reasonableness of compensation. Here you should begin the entire process by requiring the relevant business unit which desires to obtain the services of any foreign business partner to provide you with a business justification including current opportunities in territory, how the candidate was identified and why no currently existing foreign business relationships can provide the requested services. Your next inquiry should focus on the terms of the engagement, including the commission rate, the term of the agreement, what territory may be covered by the agreement and if such relationship will be exclusive.
6. Ensure that answers provided by the representative or business partner to due diligence questions are accurate and complete. This is the old Ronald Reagan maxim of ‘trust but verify’. You must verify information received from the prospective foreign business partner with interviews of business references and background searches.
7. Ensure compliance with local laws. This means that both the relationship that you envision is legal within the foreign jurisdiction and that the foreign business partner will comply with all local laws.
8. Integrate FCPA contract safeguards. You will need to incorporate the DOJ required language, listed in its 13 point minimum best practices compliance program. These compliance terms and conditions are found in Attachment C of all Deferred Prosecution Agreements (DPAs), entered into by the DOJ since at least November, 2010.
9. Provide for continuing oversight. After you have performed your due diligence, evaluated it and then entered into the contract for services, now the real work begins. You must manage that relationship. I suggest that you do so through a business unit sponsor for all foreign business partners. Such person must be assigned to and be responsible for ensuring continuing oversight of the foreign business partner.
10. Maintenance of books and records. This requirement also has two parts. Clearly your company must maintain appropriate internal controls over all its foreign business partners but your foreign business partner must also maintain such accurate records. I would go further to add that you should audit these records to ensure compliance.
11. Seek guidance from DOJ. As I mentioned above there are several different resources available to the compliance practitioner for information relating to foreign business partners. These include the minimum best practices as set forth in Attachment C to each DPA; DOJ Opinion Releases; Securities and Exchange (SEC) enforcement actions. Also remember your company can avail itself of the Opinion Release procedure and request guidance from the DOJ via that mechanism.
12. Use consistent standards and common sense. You should not check your common sense at the door when you become a compliance officer. The surest way to get into trouble is by ignoring your own internal warning signs. If a relationship feels bad to you, or something does not quite ‘smell right’ about a proposed foreign business partner, listen to that sensation. It may be a situation where more due diligence is required or a situation where you should walk away. Additionally, you should use consistent terms and conditions across industries and services, such as with customs brokers and freight forwarders.

The Apollo 1 tragedy still haunts NASA today. Vastag noted that “The tragedy is still etched on NASA’s collective psyche.” One NASA veteran, Travis Thompson, worries that the commercial companies which now lead most of American’s space efforts “have not absorbed the prime lesson of Apollo 1 — that bad design begets tragedy.” The 12 point program set out above will help your company to work through any issues with foreign business partners and by following it, you may well prevent your company from having its own compliance failure.

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, 2012

We’re No. 1: What Level of Due Diligence Should You Perform?

New Zealand is generally recognized as having some of the lowest instances of corruption across the globe, at least that is the perception. Over the past 3 years it has either been Number 1 or led outright the Transparency International Corruptions Perceptions Index with scores of

• 2010-9.3
• 2009-9.4
• 2008-9.3

It was, therefore, with some surprise that I came across a story referred to in yesterday’s Corruptions Currents blog by the Wall Street Journal (WSJ), on a website in New Zealand, Stuff.co.nz, entitled “NZ firms linked to money laundering” authored by Michael Field.

The article reported that companies created in New Zealand had been linked to “Russian crime, a Mexican drug cartel and Romanian extortion.” Additionally it reported that certain companies created in New Zealand had been tied to a company alleged to have smuggled arms into North Korea. These were accomplished by the creation of New Zealand shell companies which were used to move monies through to avoid detection.

The article reported certain international criticisms of New Zealand corporate registration protocols. The Canadian Financial Transactions and Reports Analysis Centre, “identified the “exploitation of New Zealand’s weak company registration laws” as a problem. International expert Martin Woods was quoted in the article as saying that shell companies were “ideal vehicles for money launderers, tax evaders and arms traffickers”. But the topper is the following line, “The government admits there is a problem but says it has had other priorities” but we do note that this final quote is not attributed.

The problem all of this raises for a compliance practitioner here in the US is how to evaluate a company for due diligence purposes? The Transparency International Corruptions Perceptions Index is a generally recognized index that many companies rely on to set the appropriate level of due diligence. New Zealand, with a sterling score of 9.3 or 9.4 and a ranking of Number 1 over the past three years, is a country that may be perceived to have one of the lowest levels of corruption in the world. However, the article in Stuff.co.nz demonstrates the need for active and strong due diligence in all places across the globe.

The article reports that one individual was, at one point, listed as a Director of over 300 New Zealand formed companies. Another person, listed as the Director of the New Zealand company alleged to have been involved with the shipment of arms to North Korea was “convicted of 75 breaches of the Companies Act for giving false addresses on registration forms”. Both of these examples cited in the article should give pause to companies when they set their due diligence levels. A traditional Level One US/UK database search may not be enough to protect your company.

You may need to move to a more sophisticated search such as one which makes a database search for in-county records. It is certainly important to know if and when a person holds multiple Directorships in various and not obviously related companies. This should raise a very big Red Flag.

The moral of this story is that due diligence is not a rote exercise. Care must be given in all phases. Simply because you are doing compliance due diligence for Foreign Corrupt Practices Act (FCPA) issues does not mean you can ignore money laundering and export control issues. I have written on compliance convergence and heard my colleague Howard Sklar talk on this several times. Your compliance program needs to be cognizant and integrated to evaluate and manage these risks for your company.

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