Tag: Corporate Ethics & Compliance

Authors | Marcelo Leonardo Cristiano and Vinícius de Aquino Curti, partner and associate at Fraga, Bekierman & Cristiano Advogados |

 

During the past few years, Brazil has been breaking new ground in the fight against bad practices in public-private relations, and especially corruption. Among the new laws, regulations, guidelines, and concrete actions (in the administrative and legal arenas) being taken, a new situation is arising nationwide, which is characterized by the new legal and social-economic challenges faced by the Public Administration, the private sector, and, especially, law professionals.

The effects of the enforcement of the Brazilian anti-corruption legislation (including Law nº 12846/2013, also known as the Brazilian Anti-Corruption Law)[1] have not yet been faced, however, to their full extent. Among the issues meriting special attention is the examination of the potential consequences of the new anti-corruption legal and regulatory framework on the businesses of Brazilian companies[2], particularly the impact on their ability to compete directly with foreign companies[3], which are not, at this time, affected to the same extent by the investigative and punitive efforts  afflicting the former.

The core of the matter lies in the possibility that different treatments will be afforded to companies that are subject to a specific set of rules,- as well as investigations and the legal and administrative proceedings resulting therefrom -, and others also engaging in the Brazilian market, which adopt the same conducts, but are not subject to the same burden, due either to the practical impossibility of extending the Brazilian jurisdiction to encompass them (because of the difficulty to enforce the Brazilian rule of law against a company seated in a different country, for example), or to the fact that they – the other companies – have not yet been subject to specific investigations, simply by virtue of the ignorance of such practices by the competent authorities.

As a premise for this examination, corruption should be viewed as a global phenomenon, which cannot be sized and pondered exclusively on the basis of the Brazilian scenario. In fact, more recently, as a result of globalization, “the extent of the practices of corruption in a certain country is largely influenced, and even determined, by the conduct of the multinational companies operating there.”[4]

Therefore, the battle against corruption should be fought by the international community as a whole, with the strictness and severity that this battle mandates. Within the present scenario, however, not all countries punish their companies for corrupt practices abroad or manage to effectively punish a foreign company engaging in corrupt practices within their territories. Therefore, a number of companies successfully elude punishment or minimize the effects of the penalties applied in cases of corruption. According to the anti-corruption report produced by the European Commission, the member States of the European Union that effectively fight corruption within their borders have a difficult time refraining corrupt practices within their companies operating abroad, especially in countries where corruption is widely disseminated.[5]

Among the fields most impacted by corrupt practices, the segment of domestic and international public biddings – especially those involving major contracts – stands out. According to the Organization for Economic Cooperation and Development (OECD), 57% of all foreign official bribery cases happened within the scope of contracting with Public Authorities[6], which is a key issue in the worldwide fight against corruption.

News from all over, reporting on the restrictions imposed upon certain companies in Brazil and abroad, as a result of the probes and legal actions underway to investigate the practice of corruption in public bids (among other crimes), have put Brazil in the international spotlight. The Carwash Operation (“Operação Lava-Jato”) has sparked additional investigations all around the world[7], focusing primarily on the same Brazilian companies targeted by the operation in Brazil, which also operates in other jurisdictions. This was both inevitable and expected, in light of the increasingly strict anti-corruption and anti-money laundering environment established over the past two decades in the larger part of the developed countries. The Foreign Corrupt Practices Act (FCPA) and the Bribery Act 2010 are two goods examples of this. These two laws have been strictly enforced in the cases brought before the competent authorities, which is not to say that they do not also cause competitive distortions as a result of their non-uniform application.

Serving as examples of this potential competitive distortion are a number of multinational companies, operating in the United States of America (USA) – and, therefore, governed by the FCPA -, that have been heavily penalized by the U.S. Department of Justice (DOJ)[8] for irregularities attributable to local representatives or subcontractors in emerging markets such as Mexico and China[9], although studies show that the practice of corruption in those countries is widespread among private agents and the public authorities alike, without any form of broad, effective punishment of such behavior locally.[10]

In practice, it is enough that the company under investigation on the grounds of the FCPA for its global operations to be suspended, by the presumption of its strict liability for the conduct of subcontractors, even in foreign countries. Similarly, the Bribery Act 2010 can be construed as affecting the international competitiveness of British companies in light of the strictness of its application to them as compared with its application to companies from certain countries in which they operate.[11]

Turning the focus back to Brazil, it is a reasonable assertion that, after the enactment of the Brazilian Anti-Corruption Law in 2014, new – and necessary –  rules were imposed upon both public and private agents. However, it appears that Brazilian companies have been the most affected by it. In a new round of airport concessions sponsored by the Federal Government on 16.03.2017, the impact of the anti-corruption measures (without making light of the economic crisis, naturally) on a number of major Brazilian companies, which did not qualify to participate, became very clear.[12]

Based on the premise that the enforcement of the anti-corruption rules in Brazil affects mainly Brazilian companies, they appear to be at a competitive disadvantage in relation to foreign companies, especially in international public biddings and auctions open to foreign participants or other forms of international public contracting. This competitive distortion represents an additional layer, on top of the numerous penalties already applying to the investigated companies, but, in this case, there is a real risk that the Brazilian companies will collapse[13].

 

Recognizing the distortions caused by the application of virtually limitless penalties and the risk that those companies might not survive, the Brazilian Federal Court of Auditors (TCU, Tribunal de Contas da União), in an unprecedented decision, temporarily suspended the application of the penalty (declaration of ineligibility for a period of five years) against a number of companies implicated in the Carwash Operation^[14]. In light of the efforts by those companies to cooperate with the Public Authorities in the investigation of corruption practices^[15], the TCU postponed its final decision, so that the companies could sign a new leniency agreement with the Brazilian Federal Prosecution Service (MPF, Ministério Público Federal), specifying the forms of their collaboration toward the investigation of the unlawful practices within the proceedings underway before the TCU. This will allow the companies, for instance, to enter into and maintain contracts with the public authorities and secure financing and loans with public institutions.

This decision by the TCU raises a material issue in this discussion. It is a known fact that the Brazilian anti-corruption legislation is diffusive and establishes concurrent competencies so that the execution of a leniency or collaboration agreement with a given body does not necessarily ensure that the company will not be punished by other bodies.[16]

 

The concurrent competence to initiate and judge administrative proceedings involving corruption cases increases the burden imposed upon the Brazilian companies under investigation. Since each public body has its procedures and dynamics to investigate and try the cases – and, therefore, the companies might be punished at many different levels of the public administration -, the tendency is that the precarious state of the investigated companies will be perpetuated over the years. This situation produces legal uncertainty for the companies involved in the investigations and for public agents at all levels, which are left with the uncertainty of their power to execute agreements with the companies in question. So, the reinsertion of those companies in the market becomes much more difficult from an economic viewpoint, which puts them at a disproportionate and unnecessary disadvantage about other players on the market.

Further, about the matter of enforcement of the existing anti-corruption rules, a crucial example of the difference between the U.S. model (based on the FCPA) and the Brazilian model is the U.S. notion of “jurisdiction”. Countless foreign companies, many of which are not even established in the U.S., have been penalized by the U.S. DOJ on the grounds of the FCPA[17], with the application of heavy fines and criminal convictions. Besides this difference, any company that is punished by the U.S. executes a broad and general agreement and, therefore, is more likely to return to the market on equal competing grounds (except for the obvious pecuniary effects and the appearance of the punishment), contrary to what happens in Brazil.

Within this context, the application of the Brazilian anti-corruption mechanisms seems to have harmful effects on the competitiveness of Brazilian companies, to the extent that they are adversely impacted while foreign companies see opportunities to expand their businesses in Brazil – despite often relying on equally reproachable practices. It is worth to emphasize that there is no intention to defend a less strict application of the anti-corruption rules; on the contrary, they should be broadly and fully applied, so as to affect both Brazilian and foreign companies equally.

Moreover, although international anti-corruption agreements exist, which have been signed by Brazil (OAS, OECD, UN), and clearly establish mechanisms for international cooperation against corruption[18], Brazil appears to have a hard time implementing those agreements. Since, historically, Brazil has chosen to fight corruption in the criminal arena, the charging of legal entities in the civil and administrative arenas has prompted the development of the mechanisms for international cooperation outside the criminal arena, which, albeit provided in international agreements, have yet to be evaluated in practice[19].

 

Finally, before they can be used as arguments against the changes in progress, the issues raised should nurture a new phase of the international development of anti-corruption mechanisms. It is crucial that Brazil reinforce the ties of its collaboration with its international partners and open new channels with as many countries as possible, in order to enable certain imperative actions, such as the effective, multilateral sharing of information; the investigation of companies headquartered abroad, with the cooperation and engagement of Brazilian authorities; and the affording of equal treatment to Brazilian and foreign companies –  respecting, naturally, the practices of each jurisdiction -, clearly establishing that no restriction or conviction can be applied without due legal process, according to the provisions of each legal system.

 

In addition, more effective forms of investigation and punishment of the companies involved in corruption must be conceived. The goal of the anti-corruption rules should not be, simply, to punish those companies, but, also, to educate and build a new market practice in Brazil. To this end, the rehabilitation and reinsertion into the market of the punished or investigated companies must be enabled by the Brazilian State, through dialog and cooperation among the public bodies competent to probe, judge, and apply punishment in corruption cases.

It is important that Brazil continue to advance in the fight against corruption, but it must not allow this fight to fatally wound its companies, especially those also operating abroad, within a highly competitive scenario. It is incumbent upon the Public Authorities and the private sector to work together, and to work with other jurisdictions, to ensure that the fight against corruption is efficiently and consistently developed. This seems to be the way to afford equal treatment to all of the parties on level playing field, thus allowing fair competition, without excessive disadvantage to any of the players, within an environment where competition is effectively free.

[1] The enactment of Law Nº 12846/2013 is arguably the most important legal milestone within this paradigm shift. Although several Laws were already in effect in view of refraining corruption in Brazil, such as the Administrative Impropriety Law (“Lei de Improbidade Administrativa”) (Law n. 8429/1992), the Bidding Law (“Lei de Licitações”) (Law n. 8666/1993), the Antitrust Law (Law n. 12529/2011), among others, the Anti-corruption Law, as Law 12846/2013 came to be known, focused on the treatment of crimes of corruption committed by legal entities within the scope of the Public Authorities. Cf CARVALHOSA, Modesto. Considerations on the Anti-corruption Law concerning legal entities: Law n. 12846/2013. São Paulo: Editora Revista dos Tribunais, 2015. p. 30.

[2] “Brazilian companies” are defined as companies incorporated in Brazil, regardless of their equity control.

[3] “Foreign companies” are defined as companies that are not organized (established) in Brazil.

[4] CARVALHOSA, Modesto. Considerations on the Anti-corruption Law concerning legal entities: Law n. 12846/2013. São Paulo: Editora Revista dos Tribunais, 2015. p. 99.

[5] Cf. REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT; EU ANTI-CORRUPTION REPORT, available at <https://ec.europa.eu/home-affairs/sites/homeaffairs/files/e-library/documents/policies/organized-crime-and-human-trafficking/corruption/docs/acr_2014_en.pdf>, accessed on 20.03.2017.

^[6] Cf. Preventing Corruption in Public Procurement. Organization for Economic Growth and Development, 2016. Available at <http://www.oecd.org/gov/ethics/Corruption-in-Public-Procurement-Brochure.pdf>, accessed on 20.03.2017.

^[7] A notable example is the case involving Odebrecht and Brasken, processed by the Department of Justice of the United States of America (DOJ). Complete information at < https://www.justice.gov/opa/pr/odebrecht-and-braskem-plead-guilty-and-agree-pay-least-35-billion-global-penalties-resolve>, accessed on 20.03.2017.

^[8] Rolls-Royce plc recently reached a settlement with the DOJ, by which it agreed to pay 170 million dollars to the U.S. government, for bribery of foreign officials, to ensure its competitiveness on the domestic markets. In addition to the fine, Rolls-Royce plc severed its business relations with the employees and agents involved in the corruption schemes. DOJ Article, dated 17.01.2017, available at <https://www.justice.gov/opa/pr/rolls-royce-plc-agrees-pay-170-million-criminal-penalty-resolve-foreign-corrupt-practices-act>, accessed on 24.03.2017.

[9] Acc. report circulated by Reuters in 2012, which addressed the difficulties faced by U.S. companies when operating in foreign markets, where their local companies are not strictly governed by the FCPA. Available at <http://www.reuters.com/article/us-china-bribery-idUSBRE83T01U20120430>, accessed on 20.03.2017.

[10] Cf. Corruption Perceptions INDEX 2016 published by Transparency International and available at <http://www.transparency.org/whatwedo/publication/corruption_perceptions_index_2016>, accessed on 20.03.2017

[11] Acc. article published in the British newspaper The Telegraph, on 25.04.2011, the year when the Bribery Act 2010 became effective, where Lord Goldsmith alerted to the risk that the strict enforcement of the law might cause economic disadvantages to British companies having business interests abroad, thus thwarting the British industry’s competitive capacity within the international market. Article available at <http://www.telegraph.co.uk/finance/yourbusiness/bribery-act/8472305/Bribery-Act-could-disadvantage-UK-firms-warns-Lord-Goldsmith.html>, accessed on 24.03.2017.

[12] At this auction, all of the winners are worldwide industry giants. Together, Fraport (Germany), Vinci (France) and Zurich (Switzerland) administer 51 airports worldwide. Meanwhile, Odebrecht, which was a member of the consortium named “Aeroportos do Futuro” (Airports of the Future), which won the Rio de Janeiro Galeão Airport in 2014, is negotiating is withdrawal from RIOGaleão, in which it still holds interest, in light of its difficulties to effect the payments of the concession and to secure financing, due to its involvement in the Carwash Operation. Acc. report available at <http://economia.estadao.com.br/noticias/geral,pressionada-odebrecht-prepara-saida-do-galeao,10000079366>, accessed on 28.03.2017.

[13] Acc. report available at <https://noticias.uol.com.br/politica/ultimas-noticias/2017/03/05/mercado-de-construcao-pode-ir-para-maos-estrangeiras-dizem-entidades-e-especialistas.htm>, accessed on 24.03.2017, which focuses on the gap on the market left by Brazilian companies punished by the Carwash Operation, which is being occupied by foreign giants, such as, for instance, the Chinese company State Grid. Also, ref. to article available at <http://www.gazetadopovo.com.br/economia/empresas-estrangeiras-injetam-r-120-bilhoes-em-aquisicoes-no-brasil-5tgta9olb2ray57lhuecr4i43>, accessed on 28.03.2017, which reports on how foreign companies are taking advantage of the Brazilian economic crisis and the difficulties faced by Brazilian companies to pay their debts, to acquire new assets in Brazil.

[14] Decision 483/2017 – TCU – Plenary Hearing. Available at <http://portal.tcu.gov.br/data/files/16/B5/85/0D/33CFA51010B6DEA51A2818A8/016.991-2015-0%20-%20angra%203.pdf>, accessed on 22.03.2017.

[15] In his vote, Reporting Justice Bruno Dantas expressed the following opinion: “So, it would not be reasonable that the company volunteer information to assist in the administrative investigation without being somehow benefited. If that were the case, in addition to frustrating the fair expectation and the reliance on the State, the message that would be conveyed by the TCU to the general market is that the execution of leniency or collaboration agreements is not beneficial. On the contrary, it is incumbent upon this Court to contribute to afford legal security to all such agreements, so as to encourage other companies to also collaborate and enforce the nationwide strategy to defeat corruption.” Decision 483/2017 – TCU – Plenary Hearing.

[16] Acc. article available at <http://www.cgu.gov.br/noticias/2015/03/cgu-abre-processo-administrativo-contra-dez-empresas-envolvidas-na-lava-jato>, accessed on 30.03.2017. Please note that, legally speaking, if they are convicted for the practices listed in art. 5 of Law 12846/2013, the punishment applicable to the companies may be as severe as their mandatory dissolution, in addition to other penalties, according to art. 19 of the mentioned Law.

[17] Please note that several Brazilian companies, such as Odebrecht S.A., Braskem S.A. and Embraer S.A., for example, were penalized by the DOJ in 2016. Ref. to the biggest FCPA cases in 2016 at <http://www.whistleblowergov.org/securities.php?article=FCPA-Enforcement-Actions-2016-Top-10-Whistleblower-Oppty_108>, accessed on 24.03.2017.

^[18] In the OECD Convention on Combating the Bribery of Public Officials in International Business Transactions, Art. 9 establishes that: “1. Each Party shall, to the fullest extent possible under its laws and relevant treaties and arrangements, provide prompt and effective legal assistance to another Party for the purpose of criminal investigations and proceedings brought by a Party concerning offences within the scope of this Convention and for non-criminal proceedings within the scope of this Convention brought by a Party against a legal person. The requested Party shall inform the requesting Party, without delay, of any additional information or documents needed to support the request for assistance and, where requested, of the status and outcome of the request for assistance. ” (emphasis ours). In the United Nations Convention against corruption, ref. to articles 43 through 50. In the Inter-American Convention against Corruption, Art. XIV establishes that: “1. In accordance with their domestic laws and applicable treaties, the States Parties shall afford one another the widest measure of mutual assistance by processing requests from authorities that, in conformity with their domestic laws, have the power to investigate or prosecute the acts of corruption described in this Convention, to obtain evidence and take other necessary action to facilitate legal proceedings and measures regarding the investigation or prosecution of acts of corruption.(emphasis ours).

[19] CRUZ, Hamilton Cota; and BEZERRA, Camila Colares. “Combating corruption: international conventions and mechanisms” in Temas de Cooperação Internacional / Secretaria de Cooperação Internacional. 2. Ed, ver. E atual Brasília: MPF, 2016. Available at <http://www.mpf.mp.br/atuacao-tematica/sci/dados-da-atuacao/publicacoes/docs/16_004_temas_cooperacao_internacional_versao_2_online.pdf>, accessed on 28.03.2017.