Global Investigations Review - The law and practice of international investigations

The Investigations Review of the Americas 2017

Brazil: white-collar criminal defence

08 August 2016

FeldensMadruga

In recent years Brazilian white-collar criminal defence has undergone significant changes, not only due to new legislation, but mostly as a consequence of law enforcement developments and precedents established through leading cases and criminal investigations.

In 2012, the Brazilian Supreme Court ruled on an unprecedented criminal case against 38 defendants accused of alleged acts of corruption, money laundering, embezzlement of public funds, among other criminal offences. The case, which became known as Mensalão (‘big monthly stipend’) in a reference to the allowances illegally paid to congressmen in exchange for political support, was then reported as the ‘trial of the century’, involving companies, banks, political parties and high-ranking public officials, including members of Congress and the once Chief of Staff of former President, Luis Inácio Lula da Silva.

By 2014, an operation conducted by the Brazilian federal police and federal prosecution, named ‘Operation Lava Jato’ (‘Operation Car Wash’), targeted at alleged acts of corruption involving contracts with state-owned petroleum company Petrobras, broke new grounds becoming the largest corruption and white-collar crime investigation to date in Brazil. Although Operation Lava Jato is currently ongoing, it has triggered additional criminal investigations and proceedings in other sectors and is already recognised as a landmark for white-collar criminal prosecution and defence in Brazil.

This chapter will discuss white-collar crime defence in Brazil focusing on the developments brought by the Mensalão case, the ongoing Operation Lava Jato and the current and developing law enforcement environment in the country.

Developments in law enforcement

Although criminal investigation and prosecution in Brazil have attracted worldwide media attention in the past couple of years, the signs of transformation in the Brazilian law enforcement actions, especially regarding white-collar crimes, had become apparent even before the Mensalão case. Independent courts, well-paid, motivated and independent public prosecutors, more effective police investigations, especially by the federal police, and a free press, among other factors, have made white-collar crimes, especially those related to corruption and financial activities, the focus of law enforcement. A considerable number of individuals, companies and public officials have been subject to investigation, prosecution (both civil and criminal) and to public exposure.

The increased use of mutual legal assistance in criminal matters, especially for the purpose of obtaining evidence from abroad, has also impacted the effectiveness of criminal procedures in Brazil. Brazilian authorities have established a closer relationship with foreign law enforcement leading not only to a more efficient and expedite sharing of evidence, such as banking records, but also to joint investigational efforts and at times multi-jurisdictional litigation.

Such changes are not restricted to prosecutors and the federal police. The Brazilian Supreme Court and the Superior Court of Justice are also assuming a prominent role in this scenario. Faced with several challenges arising from Operation Lava Jato, these courts have changed their understanding regarding the enforcement of key individual rights and procedural safeguards such as the right to privacy of communication and requirements for arrests and detentions before trial.

Most recently, the Supreme Court has overruled its long-term understanding that the execution of a criminal sentence should be conditioned to the final judgment in a judicial process. Contrary to several of its own precedents, the Court has ruled that requiring a defendant to serve sentence after a conviction by the appellate court does not violate the constitutional right of presumption of innocence. Therefore, stepping away from the traditional understanding that defendants may only serve their penalties upon a final non-appealable decision, the Supreme Court has established that defendants may start to serve their penalties upon a conviction confirmed by an appellant court.

Developments in the Brazilian legal framework

Successive changes in Brazilian legal framework in the past years have also impacted white-collar crimes prosecution and criminal defence. In 2010, an amendment to the Brazilian Criminal Code has changed the rules on the application of statute of limitations, reducing the reach of the limitation period.

In 2012, the anti-money laundering law (Federal Law No. 9,613/98) was amended to, among other changes, exclude an exhaustive list of specific predicate offences that had to be present for purposes of money laundering criminal prosecution. Upon the amended law, any crime under Brazilian law can be considered a predicate offence for money laundering, broadening the reach of the anti-money laundering law and its implications.

In 2013, a new anti-corruption law (Federal Law No. 12,846/13) was adopted, specifically aimed at defining civil and administrative liability of legal entities for practices related to acts of corruption against both national and foreign public administrations. Under the new anti-corruption law, commonly known as the Clean Company Act, legal entities are strictly liable for acts of corruption. Acts of employees, agents and representatives can render a legal entity liable even if such acts were not institutional or authorised. Although the new anti-corruption law is not of a criminal nature, as under Brazilian law legal entities are in general not subject to criminal liability,1 its penalties can be quite harmful for legal entities, ranging from relevant financial fines to the ultimate dissolution of the legal entity.

One day after the enactment of the anti-corruption law, a ‘Criminal Organisation Law’ (Federal Law No. 12,850/13) was adopted, specifically regulating plea bargain agreements in criminal procedures. As will be discussed in further detail in this chapter, the possibility of plea bargains has substantially contributed to the extent and depth of Operation Lava Jato.

Environment under Operation Lava Jato

Several factors have contributed to the success of Operation Lava Jato. Through unprecedented extensive use of plea bargains, for instance, the law enforcement task force leading the investigations is collecting a relevant amount of information and evidence, continuously expanding the reach of the investigation and giving rise to other investigations and criminal proceedings that have stemmed from evidence collected through Operation Lava Jato.

The judge in charge of this case has authorised the monitoring of telephone and internet conversations, searches and seizures, coercive conductions, temporary detentions and the preventive arrests of individuals. Actions of searches and seizures have also been extended to the premises of Petrobras’ suppliers, including some of the largest Brazilian construction firms.

As of 27 June 2016, the prosecutors in charge of Operation Lava Jato report the following statistics:

  • 1,237 procedures;  
  • 608 searches and seizures;  
  • 73 preventive arrests, 87 temporary detentions, six arrests in flagrante;
  • 108 international legal cooperation requests (94 active requests to 30 different countries and 14 passive requests from 12 different countries;  
  • 56 collaboration agreements (‘plea bargains’) signed with individuals;
  • five leniency agreements signed with legal entities;
  • 43 criminal charges against 212 different persons; 
  • total amount of indemnification claimed so far 37.6 billion Brazilian reais (approximately US$10 billion); and
  • 106 criminal convictions.

The number of plea bargain agreements negotiated with individuals and leniency agreements by legal entities have not only contributed to a substantial amount of evidence gathering in the Petrobras case, but have also led to the opening of new investigations in different sectors. Today, aside from Operation Lava Jato, there are ongoing investigations regarding World Cup civil construction projects, the electricity sector and pension funds, among others.

Law enforcement on companies

As stated above, legal entities are in general not subject to criminal liability under Brazilian law and cannot be brought as defendants in criminal procedures. However, although not directly involved in criminal procedures, corporations are continuously facing the effects of criminal law in their day-to-day business.

As the Lava Jato numbers demonstrate, criminal law enforcement has knocked at the door of Brazilian companies through dawn raids, searches and seizures, arrest of their executives and employees, among other measures. Brazilian companies that typically relied on corporate lawyers are now also seeking the assistance of criminal attorneys for support with the side effects of criminal law. In that sense, Brazilian criminal lawyers have faced the challenge of adapting services traditionally rendered to individuals to assist corporations.

Civil and administrative procedures against legal entities may also at times become intertwined with criminal proceedings.

The actions of the Brazilian authorities in Operation Lava Jato, for instance, were originally focused on criminal investigations and on the conduct of individuals, which only indirectly affected the related companies. However, in February 2015, federal prosecutors filed civil improbity actions against some of the companies and individuals that allegedly induced, concurred with or benefited from the illicit enrichment of Petrobras’ employees. Through such civil actions, the federal prosecutors are seeking the payment of material and ‘collective moral damages’ (around 10 times the amount of the material damages) caused to Petrobras, plus sanctions of debarment from contracting with any government agency or entity and prohibition from receiving any tax or credit incentive from the government. Such administrative improbity actions demonstrate that the focus of Operation Lava Jato is not only to criminally prosecute individuals, but to also seek for the liability of related legal entities. From 2015, new civil actions on a similar basis have been filed against legal entities and additional actions are likely to follow.

Legal entities may also be subject to sanctions under Law No. 8,666/93, which governs contracts and procurement proceedings by government institutions, including government controlled companies. Under Law No. 8,666/93, government institutions, including state-owned companies, may initiate their own internal administrative proceedings and impose sanctions within the terms of the law. The following sanctions could be imposed on a legal entity found guilty under Law No. 8,666/93:

  • prohibition from contracting with the public administration for up to five years in case of electronic bidding; and
  • declaration of bad standing to contract with the public administration while the reasons that motivated this declaration are pending or until the rehabilitation of the legal entity before the public administration (which can only be required after two years and after payment of asserted damages).

The Federal Audit Court (TCU) may also initiate its own administrative proceedings and find grounds to declare a legal entity in bad standing to contract with the public administration and impose a fine of up to 100 per cent of the damages caused to the government entity (Law No. 8,443/1992).

Aside from liability under the Improbity Law and administrative liability for fraud against government procurement, a legal entity could also be liable to pay damages under civil law for tortious interference with businesses (ie, causing damages to a government institution or state-controlled corporation such as Petrobras or to a competitor). The penalties in such actions would consist of fines in accordance with the damages actually caused.

For acts conducted after 29 January 2014, the Clean Company Act could also be applied. The Clean Company Act may lead to administrative proceedings conducted by the General Controller’s Office (CGU) and other government agencies or to civil judicial actions against the legal entities, or both.

The following penalties may apply under the Clean Company Act: (i) a fine in the value of 0.1 to 20 per cent of the gross income of the company for the year previous to the year that proceedings are initiated; (ii) publication of rulings against the company; (iii) partial suspension or prohibition of the company’s activities; and (iv) in very serious cases, the dissolution of the legal entities. The calculation of the fines and the application of the sanctions listed above will vary according to specific factors related to the wrongdoings and damages caused by the company. Cooperation with the authorities and an effective compliance programme may, for instance, mitigate a final penalty.

Therefore, although technically legal entities cannot directly answer for criminal liability, the reality is that the tendency of law enforcement to seek the responsibility of legal entities involved in white-collar crimes is bringing white-collar criminal defence to directly or indirectly participate in civil and administrative proceedings.

White-collar criminal defence

The scenario described above has imposed new challenges for white-collar criminal defence in Brazil.

White-collar criminal defence in Brazil has long been known for rendering traditional criminal litigation services with a focus on procedural arguments, based mostly on lack of procedural compliance by law enforcement. Under such scenario, it has been common for cases to be dismissed solely on procedural grounds, rarely reaching an argument on the merits of the case. Past experiences and increased training, however, have made Brazilian law enforcement efforts increasingly more efficient in the conducting of investigations. Additionally, Brazilian courts, following precedents from the Supreme Court and the Superior Court of Justice,2 have become more ‘flexible’ regarding what they have considered to be minor misdemeanours by law enforcement. This has shown to be especially true in cases such as Operation Lava Jato, which has been at the forefront of public attention.

Consequently, Brazilian criminal defence is currently experiencing a shift from a criminal advocacy based on procedural arguments to a more factually based defence, with a closer look on the merits of cases, increasingly dealing with the need to analyse large volumes of data and encompassing a more global look at cases, including potential civil and administrative implications that a criminal defence may impose not only on individuals, but also on legal entities.

In addition, as discussed above, the increased civil and administrative liability of legal entities and the possibility of parallel procedures has increased the difficulty of establishing a defence strategy that encompasses all related procedures. Criminal procedures and related defence strategies can no longer be considered in isolation from other legal, judicial and even reputational implications that may not only cause damages to the client but to the conduct of the criminal defence itself.

The introduction of plea bargain agreements in Brazilian criminal proceedings has also opened an additional possibility for defendants facing criminal charges and introduced a new perspective for criminal attorneys. Prior to the regulation of plea bargain agreements, negotiations between the defence and the prosecution were rare in Brazil as the lack of regulation did not produce fully safe and trustworthy results for the defence. White-collar criminal defence was therefore predominantly focused on traditional litigation skills. From the regulation of plea bargain agreements and especially after their prominent use in Operation Lava Jato, criminal attorneys are now facing the need to step away from traditional litigation actions and to use negotiation skills to fully represent their clients before law enforcement authorities.

White-collar criminal defence and corporate leniency agreements

Plea bargain, leniency and general cooperation agreements are new concepts in Brazilian law and practice. In fact, the innovations and success of Operation Lava Jato have in large been related to information obtained from agreements with defendants. The great majority of the agreements reached with Brazilian authorities have been made with individuals under the umbrella of criminal proceedings. However, Operation Lava Jato is also innovating through the use of leniency agreements with legal entities, which include criminal immunity for their officers and employees with minor involvement in the illicit activities.

The Clean Company Act officially introduced the possibility of leniency agreements between legal entities and competent Brazilian authorities in cases of corruption, which is yet to be harmonised with similar initiatives by prosecutors. A certain lack of coordination between government agencies is visible in this scenario.

Leniency agreements and plea bargains in general have opened a new avenue for white-collar criminal defence. The possibility of coordinating a leniency agreement with the public prosecution has, in many instances, brought criminal lawyers to the negotiation table, presenting a higher level of legal security to eventual agreements, especially those related to ongoing criminal procedures, and preventing companies from having to negotiate separate agreements with different authorities.

White-collar criminal defence and corporate compliance

Although the concept of structured and formal compliance programmes is not new in Brazil, especially concerning the prevention of money laundering, recent developments have increased the participation of white-collar criminal defence in compliance-related matters. This is particularly true due to the Clean Company Act.

Money laundering compliance was introduced in Brazil back in 1998, through Law No. 9,613/1998, the ‘Brazilian anti-money laundering law’, through which not only the crime of money laundering was defined but also the administrative obligations for the prevention of money laundering were imposed.

Such prevention or compliance measures are mandatory to all subject entities, if not adopted the entity can face administrative liability, regardless of whether there has been an actual or indicated violation of the crime of money laundering.

Traditionally, non-compliance with anti-money laundering measures subjected the legal entity and its managers to administrative sanctions. Brazilian public prosecution has, however, exposed an understanding that under certain cases, the non-compliance of the entities subject to the terms of the anti-money laundering law may also lead to the criminal liability of individuals responsible for the legal entity. Although such understanding remains to be confirmed, white-collar criminal actions have been filed against individuals due to non-compliance matters, and has called the attention of white-collar crime defence attorneys.

Unlike the anti-money laundering law and regulations, the Clean Company Act does not impose mandatory compliance obligations. Instead, it includes specific language intended as an incentive for the implementation of compliance programmes. Article 7 of the law establishes that ‘internal mechanisms and procedures of integrity, auditing and motivation to report irregularities and the effective enforcement of a code of ethics and conduct within the legal entity’ (Law 12,846/2013, article 7, VIII), must be considered as a sentencing guideline.

Outlook and conclusions

Law enforcement environment is rapidly changing in Brazil. New laws, increased indirect effects of criminal law enforcement on corporations through measures such as searches and seizures and confiscation of assets, extensive international legal cooperation, strong civil and administrative sanctions, in addition to severe reputational damages, are imposing new challenges to white-collar criminal defence in Brazil. The extensive use of plea bargains and leniency agreements has also called for a new approach to criminal defence, especially in white-collar crimes.

Although Operation Lava Jato has ignited and brought attention to such changes, the operation itself is a consequence of a changed environment which has substantially increased the risk of doing business in Brazil through illicit activities.

Notes

1   
Under Brazilian law, legal entities are only criminally liable for environmental crimes.

2   
Highest Brazilian court for issues related to federal law.

Previous Chapter:Brazil: handling internal investigations

Next Chapter:Canada: 'R v Durward', the fallout