Brazil: New Anti-Corruption Law Comes Into Effect

According to a study conducted by Fundação Getúlio Vargas (FGV) on the impacts of corruption in public policy in Brazil from 2002 to 2012, around BRL 40 billion were misused due to bad faith or bad management.

By the enactment of the new law, Brazil is now taking a stand against corruption.
The new regulation, also called the "Clean Companies Act" abroad, will now change the way people do business and deal with procedures in Brazil.

This is due to happen because the law provides for the strict liability of the entities. This means that a company can be held liable for an infraction regardless of proven negligence or misconduct of their managers and officers.

This possibility will impose on companies the obligation to be very strict in relation to whom they contract with and how they do it. In this sense, several Brazilian companies are already adopting procedures to investigate their contractors, suppliers and clients before entering into new agreements, as it is already standard practice in multinational companies.

Heavy penalties

Abroad, the Brazilian statute has even been described as harsher than similar remedies elsewhere, due to the size of the penalties.

The penalties imposed by the new Law include fines of 1 to 20 percent of the gross revenues of the previous year. If it is not possible to calculate the fine based on such a criteria, the law decides that the fine shall range between BRL 60.000 and BRL 60.000.000. Other penalties may also be imposed. The company can be denied the chance to seek public financing or subsidies for one to five years. Another penalty is the suspension of the company's activities and even dissolution of the legal entity.

The government's intention is that the possibility of facing such severe penalties will make the companies see that investment in compliance with the law is more efficient than undertaking the risk of a reckless behavior.

Foreign companies

Another relevant aspect of the law, specially for foreign companies that are studying acquisitions in Brazil is that it even makes shareholders liable for any illegal conduct of the company before the acquisition, incorporation, merger or spin-off. The liability in such cases will however be restricted to the payment of fines and full indemnification for the damage caused. In this scenario, a detailed and careful due diligence process is required to identify possible violations or corrupt acts.

Inspired by the U.S. Foreign Corrupt Practices Act and the Brazilian Antitrust Act, the new law provides the express possibility of a leniency agreement. In other words, the reduction of the penalty is possible if the company effectively cooperates with the investigations, identifying other wrongdoers, violators and offenders, undertaking and ceasing the harmful practice immediately.

According to the new rule, the existence of a compliance policy within the company may also reduce the punishment. For this purpose, it is necessary to have internal mechanisms and procedures of integrity, audit and incentive to report information against non-conformities or irregularities and an effective application of the codes of ethics and conduct within the legal entities' scope.

Uncertainties

One type of criticism against the new law is that there is some subjectivity in the law that generates uncertainty as to its application. One of the points raised is precisely that the evaluation parameters that will be used to measure if the compliance mechanisms and procedures are effective are still subject to subsequent regulation. 

Another unanswered question made by companies is related to the investigation of the application of the new regulation. The Law states that the federal, state and municipal governmental bodies will be allowed to regulate and inspect the prohibited conducts. This could cause contradiction, overlapping of inspections and, ultimately, costs for the inspected companies, creating room for corruption, which is exactly what the law intends to eliminate.

Companies doing business in Brazil will however have to prepare for this new scenario. Full transparency during business deals, negotiations and control of employees or outsourced agents who operate in the name of the company is essential.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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