In early July, as millions of Brazilians flooded the streets to
protest against government corruption and waste, Brazil took the
final steps to enact a landmark anticorruption law. On August 1,
Brazilian President Dilma Rousseff signed Law No. 12.846, also
known as the Clean Company Law (the "Law"), which
establishes a corporate anticorruption regime that shares
characteristics with the U.S. Foreign Corrupt Practices Act
("FCPA") and the U.K. Bribery Act. The Law imposes strict
civil and administrative liability on Brazilian companies for
domestic and foreign bribery. International companies with a
presence in Brazil are also covered if they engage in bribery
within Brazil.
The Law will go into effect on January 29, 2014, 180 days from the
date of its publication in Brazil's Official Gazette, and will
have important and immediate implications for companies that
operate in Brazil. The new liability imposed on companies is in
addition to existing criminal liability for individuals who engage
in bribery of Brazilian and foreign public officials. The ability
of Brazilian prosecutors to target companies under the Law may mean
heightened exposure under existing law for officers, directors, and
employees of those companies. The Law also provides for an
enforcement regime that promises to be expensive for companies that
might become its targets.
The adoption of the Law caps a three-year process that mostly
predates the recent public outcry against corruption. Its longer
aim was to improve Brazil's compliance with the OECD Convention
on Combating Bribery of Foreign Public Officials, to which Brazil
(although not an OECD member) is a signatory. Approval of the Law
was widely regarded as an important move to align Brazil with other
nations with corporate anticorruption laws on their books, and it
demonstrates Brazil's significant commitment to the rule of
law.
These considerations and other recent events, such as the trial and
conviction of high-ranking officials of the former presidential
administration and members of Congress in a widespread corruption
case known as the "Mensalão," created an
atmosphere favorable to the Law's passage in April by the
Brazilian Câmara dos Deputados (House of
Representatives), where it had been stalled since 2010. Corruption
fatigue, boosted by the revelations of the Mensalão
and the huge expenditures associated with Brazil's hosting of
the World Cup and the Olympics, whose cost overruns many attribute
to corruption, provided impetus for the recent protests and ensured
the bill's swift passage in the Senate and its subsequent
signing into law.
Hence, the Law arrives in a heated atmosphere of heightened
attention to corruption and corruption enforcement, which may
influence how and against whom the Law is enforced. This is still
uncharted territory; questions still remain as to what extent
Brazil will step up its anticorruption enforcement, how it will
define the bases for leniency under the Law, and to what extent
Brazilian authorities will coordinate their enforcement activity
with other countries such as the U.S. and UK, whose anticorruption
laws—the FCPA and the U.K. Bribery Act—can reach
conduct in Brazil. Possible outcomes are discussed herein.
Below is a summary of the key provisions of the Clean Company Law
that companies should be aware of, as well as certain developments
and characteristics, unique to Brazil, that companies with a
presence in Brazil should strongly consider as they prepare for the
enforcement of the Law.
KEY PROVISIONS OF THE CLEAN COMPANY LAW
Application and JurisdictionThe Law, which has a jurisdictional reach slightly less
ambitious than that of the FCPA and the U.K. Bribery Act, governs
both the domestic and foreign actions of Brazilian companies,
including Brazilian subsidiaries of foreign parent companies. It
also governs actions within Brazil of non-Brazilian companies that
have an office, branch, or other type of representation in Brazil.
This includes both foreign companies that are legally established
in Brazil and those that are determined to be de facto in
Brazil, even if only temporarily.
Prohibited Conduct
The Law prohibits direct and indirect acts of bribery or attempted
bribery of Brazilian public officials or foreign public officials.
This includes not only the giving or offer of bribes, but also the
giving of any financial or other support to the bribe activity or
its concealment, and the use of third parties to execute or assist
the bribe scheme. The Law also forbids bid rigging and fraud in the
public procurement process. Lastly, the Law prohibits any tampering
with government investigations.
The Law also defines "foreign public entities" and
"foreign public officials" to include, respectively,
entities directly or indirectly controlled by the public sector of
a foreign country, and individuals with even temporary or unpaid
employment at such entities. The Law's definition of
"foreign public entities" and "foreign public
officials" is thus explicit, where the FCPA has been implicit,
defining these terms by judicial or executive guidance. Unlike the
FCPA, therefore, the Law spells out a control test for determining
whether companies with state ownership qualify as public entities
for enforcement purposes.
Liability
Under the Law, companies are subject to strict civil and
administrative liability, in the form of restitution for damages,
administrative fines, and other civil penalties for the acts of
their directors, officers, employees, and agents when such acts of
prohibited conduct would benefit the company (directors and
officers are liable only to the extent of their fault). Moreover,
the Law provides that joint and several liability for fines and the
restitution for damages extends to the parent company, controlled
entities of the company, affiliates, and joint venture partners.
The Law also allows for the piercing of the corporate veil to reach
its officers and shareholders with management roles, whenever the
legal entity is used to facilitate, conceal, or disguise the
illicit conduct.
Similar to the FCPA and the U.K. Bribery Act, the Law also imposes
successor liability in the event of mergers and incorporations. In
both cases, the acquiring entity can be held liable for acts of
corruption implicating the acquired entity, even if such acts took
place prior to the date of the transaction. Successor liability is
limited to restitution and the payment of fines up to the value of
the assets transferred in the transaction. However, those limits
can be ignored if the prosecuting authorities are able to prove
that the transaction was executed with fraudulent intent.
Penalties
Administrative Fines. Administrative fines range
from 0.1 percent to 20 percent of the responsible company's
prior year's gross revenue (taxes excluded). If, however,
authorities are unable to assess the gross revenues for the prior
year, an alternative fine applies, which ranges from R$6,000
(approx. US$3,000) to R$60 million (approx. US$30 million). It is
important to note that the Law states that these fines can never be
lower than the benefit obtained by the responsible company.
Furthermore, the administrative sanctions levied against the
responsible company may be published publicly.
The calculation of the fines will be determined by an evaluation of
the offense itself (including its seriousness, the benefit sought
or obtained by the company due to the illegal act, the damages and
negative impacts caused by the act, and the economic situation of
the responsible company) as well as the company's internal
compliance program and the company's level of cooperation with
the investigation. The amount involved in other contracts that the
company has with the implicated government body apart from the one
subject to an investigation will also be taken into
consideration.
Judicial Penalties. On top of the
administrative fines, the Law also provides for severe judicial
penalties for responsible companies: disgorgement of benefits
obtained by the illegal act, suspension or partial interruption of
the company's activities, or dissolution of the legal entity.
Companies may also be banned from receiving government assistance
in the form of subsidies, grants, donations, or loans for a period
ranging from one to five years. Dissolution of the legal entity is
applicable only when the court determines that the company has been
customarily used to facilitate or promote the violation of the Law
or that the purpose of the legal entity is to conceal the true
identity of the beneficiaries of the acts.
Benefits of Compliance, Self-Reporting, and Leniency
Agreements
The Law provides incentives in the form of reduced fines for
companies that have implemented effective anticorruption compliance
programs, essentially codifying a form of leniency similar to the
consideration given to compliance programs in the United States
under the U.S. Sentencing Guidelines for Organizations and by the
U.S. Department of Justice when it decides whether to charge
organizations or when negotiating a plea. Even though the text of
the Law does not specifically provide an affirmative defense to
liability based on "adequate procedures" or other indicia
of an effective compliance program, as does the U.K. Bribery Act,
it recognizes internal integrity procedures, internal audits, and a
structure of reporting mechanisms as key components to an effective
anticorruption compliance program. Prior to the law going into
force, Brazil's Federal Executive branch is expected to publish
specific guidelines on what constitutes an effective compliance
program and how authorities will evaluate compliance programs and
weigh those considerations when levying penalties.
Furthermore, the Law allows administrative authorities to execute
leniency agreements with companies that self-report violations.
Such companies may benefit from a reduction of up to two-thirds of
the fines that could have been imposed (this reduction in fines
does not apply to forfeiture/restitution) and protection
against the prohibition on receipt of public subsidies and benefits
and the widespread publication of the penalty. Brazil's
specification of the range of benefit to be obtained through
cooperation distinguishes its law from U.S. practice under the
FCPA, where the degree of benefit to be obtained is generally up to
the U.S. Department of Justice during negotiation of deferred
prosecution agreements or pleas, or the courts in deciding whether
to accept a plea agreement.
To be eligible to benefit from a leniency agreement, the company
must be the first to come forward and report the violation, cease
the violating activity, cooperate with the government's
investigation and admit to having participated in the illegal
activity. There is also a requirement that the company's
contribution must lead to the identification of other parties
involved in the illicit conduct (if any), and that it eases the
authorities' access to evidence of the violation.
There is some uncertainty as to how effective the leniency
agreement will be, considering that it only grants the company
limited protection from prosecution of conduct regulated by the
Law. By admitting their participation in the illegal activities
under the Law, companies may open themselves to prosecution and
penalties under other applicable statutes and their admission can
be used as a powerful tool by prosecuting authorities to justify
steep penalties.
Statute of Limitations
Violations of the Law are subject to a five-year statute of
limitations.
ROUSSEFF'S VETOES
In signing the bill into law, President Rousseff vetoed three
notable provisions of the version that had been sent to her by
Brazil's Congress. First, Rousseff vetoed a provision that
would have limited the amount of the fine to the value of the asset
or service sought by the company through the illegal act, therefore
leaving the only ceiling for the fines to be 20 percent of the
responsible company's prior year's gross revenue. Her
second veto eliminated a provision that would have allowed
authorities to consider the conduct of the involved public
officials when calculating the fine. President Rousseff's last
veto removed the requirement for proof of fault or willful
misconduct for the imposition of the harsher civil penalties. These
penalties include suspension of business activities, dissolution of
the corporate entity, and a prohibition from the receiving of
government grants. The result of these vetoes is a Law more rigid
than what had been approved by Brazil's Congress, removing
language that softened the penalty structure for offending
companies.
Brazil's Constitution provides Congress with 30 days following
the receipt of the official communication of the presidential
vetoes to discuss and vote on whether to override them. The
Brazilian press has reported that the Congressional coalition
supporting the government has declared its disagreement with these
vetoes, which allegedly broke an agreement between the Executive
branch and Congress to ensure the swift passage of the Law.
However, Congress rarely overrides vetoes, and it remains unlikely
that it would do so in this instance.
ENFORCEMENT CONSIDERATIONS
Administrative ProsecutionEnforcement of the Clean Company Law is entrusted to the highest
executive, legislative, or judicial authority affected by the
conduct, giving rise to administrative enforcement as well as
enforcement by the public prosecutor (Ministério
Público) in cases where civil enforcement is sought.
This means that enforcement actions can be brought by affected
government regulators, such as IBAMA (environment), ANVISA
(health), ANP (oil and gas), and many others. Because of this,
interpretation and enforcement of the Law is likely to proceed in
haphazard and conflicting ways, according to differing procedures
and subject to differing policy influences. Civil prosecution by
the Ministério Público may give rise to
other problems. Under the Brazilian system, the
Ministério Público—which is made up of
public prosecutors at both the federal and state levels—is a
functionally independent part of the Federal Executive branch,
whose decision-making is not subject to approval or check. Each
individual prosecutor is free to initiate prosecution actions
according to his or her convictions under the law, with little
prospect of being overruled.
As written, the Clean Company Law will provide government agencies
and the Ministério Público with a strong
tool to investigate and prosecute companies doing business or
operating in Brazil for any corrupt activity within the Brazilian
territory and abroad. The enhanced public scrutiny of corruption in
Brazil, coupled with prosecutorial independence, may embolden
public prosecutors to seek high-profile companies against which to
enforce the Clean Company Law. However, it is too early to predict
whether government agencies will aggressively enforce the
Law.
The Brazil Anticorruption Environment—Corruption
as a "Heinous Crime"
Alongside the Clean Company Law, the strong anticorruption
sentiment in Brazil has also influenced Brazil's Congress to
take another significant step against corruption. The Senate
recently approved a bill (Bill No. 5900/13) that establishes
corruption as a "heinous crime," a legal concept that
allows for tougher punishments for corrupt practices, including
travel and other restrictions that could seriously hamper the
ability of executives and companies to carry out operations when
facing charges for this category of crime. This bill, which still
requires approval from Brazil's House of Representatives, would
apply to government officials who take advantage of their public
position to demand favors and to those who embezzle public funds.
It would also apply to individuals and institutions who offer
bribes to government officials. Approval of Bill No. 5900/13 is
further indication of the strong movement taking place in Brazil
against corruption.
Change Won't Happen Overnight
While the Clean Company Law represents a significant shift in the
legal structure against corporate corruption in Brazil, it may take
time for a clear enforcement landscape to emerge. Sustainable
investigations demand resources, and agencies will have to develop
enforcement procedures. Fragmented enforcement authority may give
rise to possibly conflicting decisions by the various government
agencies charged with enforcing the Law; government agencies may be
unable to devote adequate budget and personnel to enforcement
objectives outside their core competence; the filing of weak cases
in a rush to use the new authority may compromise enforcement
efforts; and an increase may be observed in requests for
cooperation by U.S. and U.K. authorities. Furthermore, the Federal
Executive branch is required by the Law to regulate how authorities
will evaluate compliance programs. Such measure will further
clarify enforcement objectives, as will outcomes in cases that are
actually filed and—in Brazil's civil law system—the
commentary these generate.
FCPA Considerations
Given the Law's liability provisions and hefty penalty
structure, companies facing enforcement under both the Law in
Brazil and under the FCPA in the U.S. may, when planning
negotiations with the U.S. Department of Justice, wish to factor in
the potential for penalties to be paid in Brazil. Companies in such
circumstances should consider whether the form of a contemplated
resolution in the U.S. (or any other jurisdiction) may provide a
predicate or create an incentive, by establishing facts or yielding
admissions, that give a roadmap for Brazilian authorities to take
action under the Law.
The Law may also provide a basis for joint enforcement activity by
U.S. and Brazilian authorities. The U.S. and Brazil are parties to
a Mutual Legal Assistance Treaty, or "MLAT," which
entered into force in 2001. The MLAT was designed to enhance the
United States' and Brazil's ability to investigate and
prosecute criminal matters. The avenue exists, therefore, for
Brazilian authorities enforcing the Law to seek assistance from the
U.S. where U.S. companies or persons are concerned, and for U.S.
authorities to seek the cooperation of Brazilian authorities in
matters they are investigating under the FCPA. The Law's
application of anticorruption enforcement to companies may provide
additional incentive for cooperation between Brazilian and U.S.
authorities in such cases.
Importance of Awareness and
Compliance
The Clean Company Law presents new risks for companies doing
business in Brazil. Its passage into law represents both a public
and a political will and enthusiasm for corruption to be more
effectively prosecuted in Brazil. The Law provides a new tool for
authorities to prosecute corporate corruption and bribery within
Brazil and abroad. However, as in other jurisdictions where similar
laws exist and are enforced, neither this new Law, nor its
enforcement, nor the public enthusiasm behind it will completely
eliminate corruption in Brazil. Given this fact, the availability
of new legal means to combat corruption, and the broadened
enforcement mandate among government agencies and public
prosecutors, it is critical that companies give more attention to
the risks and compliance requirements posed by the Law.
Companies with a presence in Brazil are strongly encouraged to
implement robust compliance programs to ensure an in-depth
understanding and constant awareness of the Law throughout their
business operations in Brazil and abroad. Such comprehensive
programs will help companies ensure compliance with the provisions
of the Law and may significantly ameliorate penalties in instances
where, despite these efforts, the Law is violated.
This Commentary was written in cooperation with
Mattos Muriel Kestener
Advogados.
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.