Brazil: The Age Of Corporate Ethics – Good Governance Practices As A Response To The Anti-Corruption Act

1. Background

The pressure by society and foreign investors as a result of the negative effects of corrupt practices on the development of the country led to the enactment of the 12,846/13¹ Act. Since its enactment, the Act became the key provision in the creation of mechanisms to address such practices in the corporate environment.

While it is based on foreign laws (such as the US Foreign Corrupt Practices Act – FCPA and the UK Bribery Act), the Brazilian Act goes a step further. It is stricter than the foreign laws and provides for severe sanctions² as well as for strict liability³ of legal entities for unlawful actions perpetrated by third parties operating in their interest or for their benefit (such as vendors, business representatives, etc.). In addition, controlling, affiliated, and associated companies are jointly liable for the unlawful conduct of the parent legal entity.

Pursuant to the above law, an act that threatens national or foreign public assets, the principles of public administration or international commitments taken by Brazil is unlawful (for example the offer of an 'undue advantage' to a foreign or national public official⁴, either directly or indirectly).

The law addresses the administrative procedures in respect of investigating acts of corruption⁵. Also, the law makes it possible for the legal entity to enter into Leniency Agreements with the Public Authority engaging in the investigation of such acts⁶. Finally, the law also introduced the National Register of Punished Companies (CNEP, in the Portuguese abbreviation)⁷.

2. The expansion of legal entities liability for third party acts

The most far reaching feature of the act is the resulting necessity of the contracting legal entity to investigate and punish corruption practices perpetrated by third parties, who are treated as agents (Longa Manus) in the eyes of the legislators. Previously, companies were merely concerned about the compliance with internal conduct policy and regulatory rules. Now, the enactment of this law has forced the development of a well-structured compliance system that is able to prevent and mitigate the practice of corruption in business activity.

It is worth noting that the statute itself acknowledges that extenuating circumstances can mitigate the sanctions therein. Such extenuating circumstances include the company's implementation of internal procedures for effective application of ethics and conduct codes and an effective system for addressing complaints on alleged irregularities⁸.

3. Compliance measures in dealings with third parties

A number of factors must be taken into account by a company while developing compliance programs – for example, the company's size and commercial activity. Nevertheless, it is possible to make the following observations relating to the degree of third party compliance under the law.

Firstly, it is important to emphasize that the third party's contractual adherence to codes of conduct and corporate guidelines of the contractor is not necessarily sufficient to guarantee compliance with the law. This is because the third party often lacks the required structure needed for such compliance or the agreement between the parties does not provide for sanctions or corrective measures in cases of violation. A further issue that often leads to non-compliance is that the third party is rarely given sufficient time for potential adjustment.

The contracting legal entity can take a number of steps to minimize the risk in its dealings with third parties. These steps include: the taking out of an indemnity insurance policy in respect of contracting specific services, the drafting of clear rules of conduct, the training of its employees, and the inclusion of compliance clauses in relevant agreements. Among other requirements, the appropriate compliance clause should provide for periodic auditing at the third party's facilities, bonuses for goals achieved, fines, indemnities, and the right of subrogation in the event of an unlawful action.

A further factor that can inhibit the third party's compliance with anti-corruption laws is whether the company's code of conduct was unilaterally imposed on the third party or whether it is mutually agreed by the parties in advance of signing the contract. The means chosen by the contracting legal entity significantly affect the level of its compliance.

It is critical for the service provider to engage with the views and values of the contracting party and to establish a collegial relationship and a balance of rights between the parties. The parties must understand that only an ethical market can guarantee free competition and maximize financial performance. In addition, an ethical market prevents the waste of company resources and irreparable damages to the company's reputation and credibility. A position of trust between the parties and an understanding of the need for good governance practices will lead to less oversight and the avoidance of legal proceedings and conflicts.

4. Conclusion

Society irreversibly demands more transparency and as a result companies are required to comply with good governance practices. Attorneys play a critical role in guiding companies through the many obstacles and in drafting the best compliance policies pursuant to the business activity performed. While acting as both a consultant and an intermediary between corporate actors (employees, suppliers, shareholders) and public institutions, attorneys can help to draft anti-corruption policies (both mandatory and preventative in nature) and can assist in the internal and external due diligence process, contributing to the effective implementation of anti-corruption policies into the corporation's routines.

Footnotes

1 This act is effective as of January 2014 and it was supplemented by Decree 8,420/15 (effective since March 15).
2 A fine in the amount of 0.1%-20% of the gross sales of the last calendar year before the administrative proceeding were filed; taxes deducted. The amount of this fine shall never be lower than the advantage measured. Also, suspension or compulsory dissolution of the company; prohibition to obtain loans from public agencies or bodies and public finance institutions, or institutions controlled by the public authority for up to 5 years.
3 A rule specifying strict liability makes a person legally responsible for the damage and loss caused by his/her acts and omissions regardless of culpability.
4 Art. 5 of the 12,846/13 Act.
5 Art. 8-15 of the 12,846/2013 Act.
6 Art. 16 and art. 17 of the 12,846/2013 Act.
7 Art .22 of the 12.846/2013 Act. CNEP shall gather and publish the sanctions applied by the bodies of the Executive, Legislative, and Judiciary Branch containing information on the legal person, the type of sanction applied and final date of the limiting effect or disqualification of the sanction.
8 Art.7, Section VIII of the 12,846/2013 Act.

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.