Why Should Americans Care About the FIFA Indictments? Part IV – Corruption is a Global Scourge

Today, I conclude my four-part series on the above question posed to me recently by a colleague. In Part I, I responded that only the US government had the wherewithal and will to do so and that it continued the administration’s fight against the scourge of corruption. For Part II I focused on corruption on the pitch and how bribery and corruption ‘changes the truth of the game’ of soccer (AKA Football). In Part III, I reviewed why American citizens should care that US companies are not engaged in bribery and corruption. Today we look at reason number four of why Americans should care about the Department of Justice (DOJ) bringing indictments against the 14 named defendants who were all associated with the governing body of international soccer, the Fédération Internationale de Football Association (FIFA). Up today is the invidiousness of corruption, that it is not a victimless crime and how its scourge hurts countries.

Jack Warner, the former FIFA Executive Committee member and head of the North American regional soccer federation CONCACAF, is alleged to have received a $10MM bribe to swing votes to South Africa so that it could land the hosting of the 2010 World Cup. However Warner had (allegedly) been previously paid by Morocco for his votes. The Sunday Times, in an article entitled “‘Please, this is very secret’ –the explosive claims of bribery and vote-rigging that Fifa decided to kick into the long grass”, reported that two former FIFA officials, Ismail Bhamjee and Michel Bacchini told the paper that Warner had been paid $1MM by Morocco to secure his vote but Warner double-crossed the country by selling out to South Africa for $10MM. Where is a little honor among crooks? The answer may be in the character of Jack Warner, who is a Minister of Parliament in Trinidad and was once a government minister, but resigned because of fraud allegations. Is that the type of character you really want in your government? What do you thing that type of politician will do when faced with an ethical dilemma? (Hint-take the money)

What about South Africa and its role as an alleged bribe payor? South Africa originally denied any payment was made. However, in an article in the Sunday Times, entitled “Trinidad’s ‘Robin Hood’ plots escape from sheriff”, Tony Allen-Mills reported that the country later changed its story to say that the payment was made to Warner “to fund football development.” Even assuming it was a charitable donation, one can only conclude there were zero protections around the payment.

For we next were told that South Africa did not actually make the payment but FIFA did directly. Amazingly, and pulling a full 180 degree Bat-Turn from his previous positions, the Secretary General of FIFA, Jérôme Valcke said on Wednesday said that he had authorized a $10 million payment to Warner after a full 13 days of denying it. The Sunday Times also reported that US authorities were investigating former FIFA President Sepp Blatter about a meeting, where he was present, and this payment was discussed.

Whoever made the payments, Ed Thomas, in a BBC online article entitled “Fifa corruption: Documents show details of Jack Warner ‘bribes’”, reported that this $10MM was not used for any soccer development in Trinidad but was used by Warner himself. Thomas reported that three payments were made into CONCACAF accounts controlled by Warner, one on January 4, 2008, one on February 1, 2008 and a final payment on March 10, 2008; all adding up to $10MM. Thomas also reviewed documents to show how the money was either laundered and then paid back to Warner or simply used to pay Warner’s personal expenses such as personal loans and credit card bills.

To those who maintain that bribery is a victimless crime, simply imagine what a country like Trinidad could do with $10MM to invest in its soccer programs and infrastructure? How many youth academies could be funded with that amount of money? How many soccer fields could be built? The answers is lots and lots but when corruption is so endemic that a $10MM bribe can be paid with such ease, with no oversight or even questions being raised, it is the citizens of Trinidad who are the victims.

But more than simply Jack Warner and his corruption in Trinidad are at play here. Even world soccer power Brazil has welcomed the investigation into FIFA, as one of those arrested was José Maria Martin, the former head of Brazil’s soccer federation, the CBF. Writing in the Financial Times, (FT) Joe Leahy, in an article entitled “Arrests sparks hope of cleaner Brazilian game”, wrote, “For Brazil, his arrest prompted hopes that finally one of the dirtiest institutions, football, might be held to account.” He quoted Flávio de Leão Bastos Pereira, a professor of criminal law at Mackenzie University in Sao Paulo for the following, “This could stimulate the necessary changes in Brazilian football in terms of greater professionalism, ethics and transparency.”

Apparently endemic corruption reigned in the country that has won five World Cup championships for many years with multiple persons involved in the corruption. Unfortunately for some (at this point unknown) US company or companies, payments were made through a third party agent, “Jose Hawilla – the head of Brazilian based marketing company Traffic and one of the main paymasters behind the corruption at Fifa”. So much money went through Hawilla that in his guilty plea agreement he agreed to forfeit $151MM in his profits.

Interestingly, and probably for an entirely different set of reasons, Brazilian President Dilma Rousseff announced that she welcomed the investigation. In another FT article, entitled “Fifa corruption scandal threatens to engulf Nike as sponsors raise pressure”, Joe Leahy and Mark Odell reported that the President wanted an outside agency to investigation corruption around the CBF because soccer was run by private organizations and the public prosecutors had been unable to crack it. She was quoted as saying “I say that if it needs to be investigated, investigate it – all the world cups, everything.” This is certainly a refreshing change from her attitude towards the investigation into corruption at Petrobras.

The point to all this is that corruption is a global scourge. I, and many others, believe it is a component of political instability and terrorism. But the FIFA scandal shows how corruption, which may appear to be victimless and not appear to hurt anyone, can, does and has destroyed the fabric if not the soul of some of the world’s greatest institutions. Even if you simply think it is much to-do about a game, we all should have some expectation that games will be played fairly with the best team on any given day. Unfortunately the FIFA scandal shows that ‘fixing’ has been there for a long time. The world’s most popular game deserves better. As Americans we should all want to fight the scourge of corruption wherever it might appear and we certainly believe that there should be a level playing field for all who want to compete.

So to my friend who started me on this four-part journey of why Americans should care about the FIFA scandal, I hope that I have persuaded you why you should care. For the rest of you, I hope you have enjoyed this series. One of the joys of blogging and podcasting is engaging with readers and listeners. So keep those questions coming and you too can help me engage in the fight against the global scourge of bribery and corruption.

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

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.

Brazil and Anti-Corruption Legislation

As one of the world’s largest energy producing countries, many US companies have subsidiaries in Brazil, which are subject to the Foreign Corrupt Practices Act (FCPA). Most of these companies have translated versions of the US FCPA compliance program. Such translations often disregard the size, nature, and particularities of Brazilian business, as well as the local risks and legal requirements pertaining to the Brazilian subsidiaries. Although these programs add value to companies, provide more security to investors and avoid reputational damage, aside from other benefits, they are mostly implemented by Brazilian subsidiaries of American companies subject to the FCPA. It is unusual to find a Brazilian company not subject to the FCPA that has a compliance program in place.

In a recent article by entitled, “Compliance in Brazil: Current and Future Perspectives” published in the International Law Enforcement Reporter, Brazilian attorney Carlos Henrique da Silva Ayres discussed legislation introduced in Brazil last year which is designed to require Brazil to comply with international agreements for combating bribery to which Brazil is a signatory. This legislation, designated as draft bill No. 6.826/2010, addresses civil and administrative liability for corporations for corrupt acts relating to Brazil’s national and foreign public administration.

This legislation should bring Brazil directly into the international mainstream regarding legislation to prevent bribery and corruption. In his article Ayres details some of the significant provisions of the legislation, as follows:
• Respondeat Superior – The legislation embraces a notion that legal entities will be held liable for acts committed by any of its agents or any person who may represent a Brazilian entity. This is significant because under Brazilian law, with the exception of environment-related offenses, corporations cannot be held criminally liable for the acts and omissions of their employees and agents.
• Affirmative Defense – The legislation has something akin to the “adequate procedures” of the UK Bribery Act. Ayres notes that the bill provides “the existence of mechanisms and internal integrity procedures, audit and incentive denunciation of irregularities in applying the code of conduct and ethics within the legal entity,” in addition to other factors, will be taken into consideration when determining the sanctions to be applied.
• Credit for Cooperation – The legislation provides that “the cooperation with investigation of infractions, through means such as communication of the illegal act to the public authorities before the initiation of a proceeding, and the celerity to provide information in the course of the investigation” will also be taken into consideration when determining the sanction to be applied.
• Penalties – The legislation has penalties, both for corporations and individuals. These include fines against corporations of between 1% to 30% of the company’s gross revenue and debarment from public contracts, among other sanctions. Individuals could face jail time of up to 12 years per offense.

Ayres end his article by observing that this proposed legislation is another indication that Brazilian authorities are closing ranks in the international effort against bribery and corruption. Brazil is a signatory to three international conventions against corruption: The United Nations Convention against Corruption; The OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions; and The Inter-American Convention Against Corruption. Brazilian authorities have cooperated with representatives from the US Department of Justice (DOJ) and other anti-bribery and anti-corruption authorizes in international investigation. If passed, draft bill No. 6.826/2010 will likely continue develop in Brazil.
Carlos Henrique da Silva Ayres is an attorney in at Trench, Rossi e Watanabe Advogados, a Brazilian law firm associated with Baker & McKenzie. He specializes in white collar crimes and compliance matters.

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