Sao Paulo, Brazil – March 15, 2015: Protesters marching on Paulista Avenue against government corruption.On March 18, Brazil’s president Dilma Rousseff issued a decree that clarifies and facilitates enforcement of the country’s main tool against corporate bribery, the 2013 Clean Companies Act (“CCA”). This regulation was highly anticipated and came at a sensitive time, just a few days after massive protests against the government, and in the middle of a snowballing scandal at Petrobras that led to the first (or first high-profile) CCA enforcement actions.
Although the new rules brought no major innovations, they reaffirmed the system’s focus on deterrence and provided a clear path for companies to mitigate corruption risks.
The regime strongly encourages businesses to invest in compliance and prevention. Under the CCA and the decree, they are strictly liable for corrupt conduct, and having an effective integrity program is the most relevant (and one of only a few) factors that can mitigate the amount of fine imposed for violations.
Similar to the U.S. and other international systems, enforcement authorities in Brazil will evaluate whether companies have an independent compliance function, an appropriate tone at the top, written policies and procedures, effective training and communications, periodic risk assessments and audits, a third party due diligence process, strict financial and internal controls, and mechanisms for reporting and adequately responding to misconduct.
Another incentive for companies to detect and remediate potential misconduct is that lighter sanctions are possible if violations are not recurrent or continuous over time. Otherwise, because the law also rewards self-reporting, having a proper whistleblower mechanism and conducting internal investigations will become an ever more relevant risk management tool.
Although this framework clearly reflects Brazil’s efforts to match international anti-corruption standards, there is an important singularity: under Brazil’s strict liability regime, companies answer for the conduct of employees and third parties (including agents, JV partners, and predecessor entities) even if they took all reasonable steps to prevent violations. This increases their potential exposure substantially, especially in a country where the use of agents is so prevailing and where corruption is perceived to be widespread. To ensure an internal culture of integrity, corporations must place a special focus on training and controls, particularly for employees dealing with public officials.
As to third parties, companies must be extra cautious with partners old and new, using heightened due diligence and thorough background checks to weed out questionable business and confirm that there is a legitimate justification for any particular relationship.
This road map is especially important in light of the recent developments in Brazil’s compliance environment. Local anti-corruption enforcement efforts appear to be gaining momentum, while society is more active in demanding an end to impunity and is more able thorugh social media to bring substantial political pressure to bear.
This has already sparked the interest of international regulators (Brazil is reportedly cooperating with U.S. authorities in connection with the Petrobras probe) and, recalling that Brazil has always been a major area of focus for foreign enforcement actions (it is the country with the second-most links to ongoing FCPA investigations, for example), it seems that the level of scrutiny of business in that market will only grow. And this of course brings new challenges, but it also presents an opportunity for companies to make the necessary adjustments: implementing new policies, getting employees to engage, and reassessing third party relationships is much easier against the backdrop of a new law and a new political context.
In this sense, where reducing risk is the target, companies should take the new decree not only as a guide for change, but also as a trigger for timely action.
Editor’s note: An English-language version of Brazil’s new anti-corruption regulation is here.
Felipe Rocha dos Santos is an international specialist in Hughes Hubbard & Reed’s anti-corruption and internal investigations practice group in Washington, DC. The firm counsels multinational clients on issues spanning the full spectrum of anti-corruption matters, including designing and implementing compliance programs, conducting internal reviews, and acting before international regulators. The firm also prepares an annual publication containing a summary of FCPA settlements and criminal matters and an analysis of enforcement trends and lessons.