Bill Provides Important Incentives for Corporate Compliance Programs

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The millions of Brazilians protesting in recent weeks in cities and towns across Brazil have brought important and far-reaching corruption reform to one of the world’s largest economies. The implications for companies operating in Brazil will come fast, and will include incentives to operate an effective compliance program and establish a control environment that will detect potential wrongdoing inside a corporation.

Protests Highlight Corruption Concerns and Need for Reform

Protesters initially cited a bus fare increase as the motive for their ire. Yet as days passed, the root causes of the crowd’s anger turned to broader social issues such as economic fairness and the quality of civil services like health, education and transportation. Corruption and the mismanagement that protesters say blights Brazil and its political system became a focal point. Even as Brazil’s national football team struck a major win over defending World Cup champion Spain, cheers in the historic Maracanã Stadium were met with equally strong shouts outside the stadium walls calling for political reform.

The protesters supported the demands for reform by citing recent history, including last year’s trial of an elaborate vote-buying scheme that allegedly included congressmen, judges and a high-level advisor to the former president yet resulted, in the eyes of skeptical protesters, in little tangible punishment or political reform. Instead of change, protesters pointed to the fact that almost a third of Brazil’s Congress is facing charges in trials overseen by the Supreme Federal Tribunal, according to a prominent watchdog group.

As protests spread and grew, political leaders of all suits suffered swift declines in popularity and scrambled to find measures to meet the public demands. Municipal officials rolled back transit fare increases, and President Dilma Rousseff pledged additional investments in public transit projects. Congressional leaders began to move legislation that had languished for years to earmark oil royalties to education and public health care.

Corruption also became a key reform point. As initial measures, Brazil's Senate approved a bill establishing stiffer sentencing for certain corruption convictions, and the congressional lower house rejected a constitutional amendment intended to limit investigations into legislative corruption. In the midst of this activity, the Supreme Federal Tribunal ordered the arrest of a lower house deputy convicted on corruption charges three years ago, marking the first time under Brazil's modern constitution that the court ordered the arrest of a sitting congressman.

The Clean Companies Act

In Brazil, criminal liability is personal. With the exception of environmental crimes, corporations face only civil and administrative liability under a complex maze of regulations. After entering international treaties concerning corporate liability for crimes, Brazil has struggled for several years to pass legislation holding companies accountable for acts of corruption. Legislation introduced in 2010 went through study and several hearings, yet ­numerous attempts to bring the bill to vote failed.

This April, a bill establishing civil and administrative corporate liability finally passed the lower house of Congress. The bill appeared to languish until July 4, 2013, when the Senate took up and passed the legislation. The new law goes to President Rousseff for approval, and will come into force 180 days after it is published in the official gazette. The law is expected to take force in early 2014.

The bill addressing corruption by legal entities will complement existing laws in the Brazilian Criminal Code addressing bribery by individuals, which apply where criminal intent can be demonstrated that a person offered or promised any benefit to public employees that relates to an express or implied request or suggestion that the public employee perform or refrain from performing, or delay any act within the scope of his duties. Thus, if the new bill becomes law, individuals will face criminal liability and legal entities will face civil and administrative sanctions for bribery.

Foreign and Domestic Corporate Liability

The new law establishes strict liability for Brazilian legal entities, as well as foreign legal entities with a “registered office, branch or representation in the Brazilian territory.” The law prohibits bribery of public officials relating to local and foreign public administration. Specifically, the law establishes civil and administrative liability for corporate entities that “promise, offer or give, directly or indirectly, an undue advantage to a public agent, or third person related to him.” The law also prohibits bid rigging and other ­frauds in the public procurement process, as well as efforts to hinder investigations or audits by public agencies.

Sanctions for offenses, which the Organisation for Economic Co-operation and Development directed should be “effective, proportionate and dissuasive,” can range from one percent to 20 percent of the entity’s gross revenue from the prior year or R$ 6,000 (about US$3,000) to R$ 60 million (about US$30 million) if the revenue is too difficult to calculate. Firms found liable can be dissolved or suspended, or face forfeiture, debarment, loss of public contracts and prohibition on incentives and public financing. Offending firms can find information about the nature of the misconduct published in newspapers, providing a powerful incentive against misconduct.

Voluntary Disclosure and Cooperation

The bill has a provision to encourage the cooperation of the legal entity with the investigation of the violations, including by voluntary reporting to the authorities, before the initiation of a proceeding, as well as the disclosure of information during the course of the investigations. The bill also provides a leniency program for companies that first disclose wrongdoing and cease involvement in the unlawful practice. Fines can be reduced by up to 2/3 under the leniency program, and other sanctions may also be relieved.

Compliance Programs

Critically, the bill provides that a legal entity that has an effective compliance program in place will get credit for this effort. Specifically, “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” will be considered when applying any sanction, with criteria to be set by the federal government. The extent of credit is not yet known, but this incentive is similar to efforts by regulators in the United States and United Kingdom to encourage responsible corporate citizenship.

One of the bill’s lower house sponsors, Mr. Carlos Zarattini (PT-SP), emphasized that the legislation is important not only for its punitive aspect but also because it encourages companies to adopt good administrative practices in order to avoid infringing the laws, and also to correct errors through leniency agreements. “Now we not only have established a way to punish as induce companies to a correct practice,” Mr. Zarattini explained. Another sponsor, Mr. John Arruda (PMDB-PR), summarized that “[f]rom this law we are creating goals for that in Brazil to establish a culture of best practice in the private sector.”

Addressing Risk under the Clean Companies Act

Companies operating in Brazil will have a strong incentive to establish and strengthen compliance efforts when the Clean Companies Act takes effect. Establishing and operating compliance programs will be the best line of defense under the new law.

The experience of Demarest and Pepper in this important area of law can be of great value to clients. For example, Pepper has a great deal of experience in guiding our clients in international markets to ensure that compliance and risk management programs are properly designed and implemented so as to detect and deter corruption risks. This experience includes evaluating and designing effective programs to meet specific risks of clients’ international operations. Pepper is led by the former director of the Federal Bureau of Investigation – the premier law enforcement agency in the United States – and our staff includes lawyers with years of international law enforcement and compliance experience.

Engaging Demarest and Pepper to establish a compliance program will send a strong signal that a company is committed to conducting its business ethically and properly.