Brazil: establishing effective compliance regimes
In June 2013 Brazil erupted in protests that gathered vast crowds in several cities across the country, with claims that varied in scope – from the increase in transportation fares to brutality of the police. One claim, however, was widely heard in unison: ‘enough with corruption!’ was the mantra insistently repeated by protesters, putting politicians from across the political spectrum under an uncomfortable spotlight.
It was a surprising wake-up call. The public desire for ethics and compliance loudly voiced in the streets is certainly not to be understood as confined to politics. Corporations should – or must – hear the call and act accordingly. As senior politicians face jail sentences, detection mechanisms become more sophisticated and legislation becomes more effective and enforceable, a culture of compliance is starting to replace the long-standing perception of impunity that has contaminated the business environment.
One reason in particular must drive this new mindset: it always takes two to tango.
Compliance programmes are not designed to make regulators happy. They make sure people follow the legal rules of a certain jurisdiction while they preserve the company’s culture and values no matter where they are doing business. Effective risk management is highly dependent on the company’s success in doing both.
A strong compliance programme allows people to identify when boundaries are crossed, alert management and respond to breaches appropriately. This is certainly a challenge in every jurisdiction and no less in a changing environment such as Brazil. Brazilian laws and case law have not provided much guidance so far with respect to the satisfactory content of compliance and ethics programmes.
Antitrust regulators tried to introduce a certified compliance programme in 2004, which was unsuccessful, as only one corporation has implemented the approved programme. More recently, compliance programmes have gained a lot of attention in light of the recent Anti-Bribery Law, enacted in the midst of the protests of 2013 and which came into force on 29 January 2014. The minimum requirements of anti-bribery compliance programmes are expected in a federal regulation that is yet to be enacted.
Despite the fact that compliance programmes cover a variety of legal matters, including corporate governance, money laundering, securities and health, safety and environment, this article will cover more specifically the two areas where there has been an attempt to regulate the terms of compliance programmes – antitrust and anti-bribery laws. This article will briefly describe the antitrust and anti-bribery legislation, the recent enforcement when applicable and the regulation of compliance programmes. The article ends with a general suggestion for effective compliance programmes taking into account the experiences of other jurisdictions.
The Antitrust Law
The antitrust agency responsible for curbing anti-competitive practices in Brazil is the Administrative Council for Economic Defence (CADE), an independent agency linked to the Ministry of Justice. It is bound by the application of the Brazilian Antitrust Law, or Law 12,529/11, which defines as an anti-competitive conduct, notwithstanding malicious intent, any act intended or otherwise able to produce the effects listed below, even if any such effects are not achieved:
- to limit, restrain or in any way injure open competition or free initiative;
- to control a relevant market of certain products or services;
- to increase profits on a discretionary basis; and
- to exert market power in an abusive way.
The referred to section also exemplifies the conducts that may be deemed a violation of the economic order:
- market allocation of products or services;
- limitation or restraints on market access by new companies;
- imposition of resale conditions to distributors;
- discrimination of prices or sale conditions;
- refusal to sell;
- predatory practices;
- tying arrangements; and
- abusive prices, among others.
Penalties for violators are harsh. Fines on companies range from
0.1 to 20 per cent of the gross revenue of the last fiscal year prior to the initiation of administrative proceedings and will never be less than the economic advantage obtained with the conduct. If it is not possible to apply such criteria, the authority may apply a fine that varies from 6,000 to 60 million reais. Other penalties include publication of the decision in the media, banning from public tenders for five years, prohibition from receiving incentives, subsidies, grants, donations or loans from public agencies and public financial institutions or from financial institutions controlled by the government for a minimum period of one year and a maximum period of five years.
Toughening up of antitrust enforcement and penalties
The number of cases decided by CADE last year amounted to double the number of anti-competitive conducts reviewed by the authority in the previous year. In addition, the number of convictions was also much higher than those of the previous years: while in 2013 CADE convicted the involved parties in 22 cases, this number amounted to only two convictions in 2012, one in 2011, four in 2010 and two in 2009, meaning that the 2013 convictions alone outnumber the total number of decisions of the past five years.1
In addition, CADE has also been more active in the detection and prosecution of new cartel cases, resulting in the opening of new investigations. A clear demonstration of CADE’s efforts in this regard is the publication of 14 new administrative proceedings in 2013 and the enforcement of several dawn raids to gather evidence of cartels, a measure that has been increasingly used by the authorities. Since the Brazilian Antitrust Law came into force on 29 May 2012, CADE has conducted seven dawn raids.
Another mechanism increasingly being used by CADE to detect cartels is the execution of leniency agreements. In view of the rise of fines imposed by CADE and the agency’s focus on cartels, companies involved in anti-competitive conducts are frequently seeking the authorities to blow the whistle on the existence of cartels in exchange for immunity.2
Fines have increased dramatically over the years to the point where the Brazilian authorities have gained an international reputation for being harsh on fines. In 2010, fines related to the industrial gases cartel amounted to no less than 2.2 billion reais (approximately US$1.1 billion at the time). Recently, in May 2014, cement companies were fined in 3.1 billion reais (approximately US$1.3 billion at today’s currency rate), in addition to divestment orders.
The Anti-Corruption Law
In response to both local and international demand,3 the Brazilian government enacted Law No. 12,846/13 (the Anti-Corruption Law), which came into force and effect at the beginning of 2014. The new law imposes heavy fines on companies that offer or pay bribes to public officials and act fraudulently in public bidding process. It also offers benefits to companies that admit wrongful practices and collaborate in evidence tampering by means of leniency agreements that may reduce applicable fines.4
The Anti-Corruption Law applies to any corporation, foundation, association or foreign company that has its registered office, branch or representation in Brazil and engages in any harmful act against ‘public administration’. Both foreign governments and public international organisations are considered in the term public administration.
The law also provides for an extraterritoriality approach, whereby the law applies to any wrongdoing carried out by a national legal entity against a foreign public administration, even if the wrondoing is committed abroad.
The administrative and civil liability of legal entities does not exclude the administrative and civil individual liability of its directors or officers or of any natural person who is a perpetrator, co-perpetrator or participant of the tort. Directors and officers shall only be held accountable in connection with a tort to the extent of their culpability. However, the big novelty introduced by this law is the fact that the company is objectively held liable for the acts of its representatives, meaning that neither intent nor culpability needs to be proven in order for the legal entity to be held liable.
In the event of a merger or amalgamation, the responsibility of the successor will be restricted to payment of a fine to the extent of the assets transferred. In addition, parent companies, subsidiaries, affiliates or co-members of a consortium, within the scope of the contract, may be jointly and severally liable for the corruption practices established in the law, such liability being limited to the payment of penalty fines and full compensation of the damages caused.
The Anti-Corruption Law prescribes a broader definition of wrongful acts against public administration in Brazil and overseas. Accordingly, the following acts are prohibited:
- to offer, promise or give an undue advantage to a national or foreign public official;
- to finance, pay, sponsor or by any other means facilitate such illegal acts;
- to use an interposed individual or legal entity to conceal or dissimulate the real objective or the identities of the beneficiaries of the acts committed; and
- to hinder or intefere in the government’s investigations or hearings.
In the context of public bids, the law also prohibits:
- frustrating or defrauding the competitiveness of a public procurement procedure by means of an arrangement, agreement or any other method;
- preventing, disturbing or defrauding the performance of any act in a public procurement procedure;
- removing or attempting to remove a bidder in a public procurement procedure by means of fraud or offering any kind of advantage;
- defrauding a public procurement procedure or any related contract;
- creating a legal entity to defraud a public procurement procedure or to enter into a government contract;
- obtaining fraudulently an undue advantage or benefit from an amendment to or an extension of a government, without authorisation under the law, or from the notice of the public procurement procedure or the related contractual instruments; and
- rigging bids, manipulating or defrauding the economic-financial balance of a government contract.
Another controversial provision brought by the new law concerns the possibility for the public administration to pierce the corporate veil, in cases where the legal entity is used abusively to facilitate, conceal or dissimulate the practice of those illegal conducts established herein, or whenever it is intended to create a asset confusion, thus extending the effects of the sanctions to managers and partners with administration powers.
It is still too early to say, but these broad definitions of wrongful acts may lead to abuses on the part of the public administration in initiating investigations and proceedings against corporations. Its provisions may lead to various interpretations, exposing companies to greater risks. These risks will be better measured when regulations are implemented, and jurisprudence and case law evolves.
In the administrative branch, companies held liable for wrongful acts under the law will have to pay a fine and the judgment will be published in the media. The amount of the fine will vary from
0.1 to 20 per cent of the gross revenue of the last fiscal year prior to the initiation of administrative proceedings. If it is not possible to apply such criteria, the competent authority may apply a fine that varies from 6,000 to 60 million reais.
One interesting point is that the existence of an effective compliance programme is going to be factored into the penalty’s calculation. For purposes of evaluating the amount of the applicable fine, the competent authority will take the following into consideration:
- the seriousness of the offence;
- the benefit earned;
- the consummation or attempt;
- the degree of injury;
- the negative effect caused by the unlawful act;
- the cooperation in investigations of the legal entity (leniency agreements); and
- the existence of internal control mechanisms (effective compliance programme).
In the judicial branch, competent authorities may apply the following sanctions:
- forfeiture of property, rights or amounts representing advantage or profit directly or indirectly obtained from the infraction, subject to the right of the injured party or a good-faith third party;
- partial suspension or interdiction of the activities of the company;
- compulsory dissolution of the company; and
- prohibition from receiving incentives, subsides, grants, donations or loans from public agencies and public financial institutions or from financial institutions controlled by the government for a minimum of one year and a maximum of five years.
The antitrust compliance programme
There are evident similarities in the structures of the Anti-Corruption Law and the Antitrust Law, starting with the penalties imposed on the violators (the same amounts, calculated in the same way). The whistle-blowing mechanism is another good example of how the experience of the Antitrust Law must have influenced the legislature in discussions about the new Anti-Corruption Law. The most evident influence is the incentive for the creation and enforcement of a compliance programme.
The antitrust authorities had introduced a similar system in 2004, with the Incentive Programme for the Implementation of Programmes to Prevent Violations to the Economic Order, also known simply as PPIs or antitrust compliance programmes. This Incentive Programme was created by the then Economic Law Office of the Ministry of Justice5 for the purpose of serving as (i) a guide to companies that wished to start a compliance programme and (ii) a certification mechanism for compliance programmes that met the conditions and criteria established in the PPI.
The minimum criteria established by the PPI for an effective compliance programme included:
- the creation of standards and procedures for the observation of competition laws by employees;
- the appointment of programme coordinators;
- the creation of repressive mechanisms to punish violators of the compliance rules; and
- the description of the supporting materials of the programme, such as videos, training materials, document policies, etc.
Additionally, as a condition for the certification of the compliance programme, the regulation requires that the trade associations to which the company is a member declare that its members do not violate the competition laws under its supervision. It also requires that the company goes through external competition law audits every two years.
The PPI certificate is valid for two years. When the regulation was enacted in 2004, the PPI was considered as a reduction factor for the calculation of fines in case of conviction for antitrust violations. Such reduction will not apply if the violation was performed or the company’s manager had knowledge of the violation and it is not reported within 30 days of the date when the company uncovers it. However, in 2009 the Economic Law Office of the Ministry of Justice revoked the enacted Ordinance No. 48, which revoked the article that allowed for the reduction of the fines when the company held a certified compliance programme.
The certification of the antitrust compliance programme by the Economic Law Office of the Ministry of Justice was a failure. Although companies have clearly established stronger compliance programmes over the years, they have considered the criteria for certification – which sometimes included third-party declarations such as the statement of trade associations about third-party behaviours – as too burdensome. The main incentive for going through the process of certification was eliminated when the reduction of fines was revoked in 2009.
Compliance in anti-bribery and corruption
The hesitation of the competition authorities regarding the granting of a reduction in the fine to companies with effective compliance programmes was finally replaced with a firm position from the Brazilian legislature when enacting the Anti-Corruption Law: the new federal law clearly establishes that an effective compliance programme will be taken into account for the purpose of the penalty’s calculation.
The federal law is still subject to further regulation. A draft of the bill regulation is under the analysis in the President’s Executive Office and is expected to be enacted soon. The new regulation should establish the minimum standards for the compliance programme to be considered eligible for the penalty reduction. These minimum standards, pursuant to a public statement made by the Head of the Office of the Comptroller General (CGU), relate both to the structure of the compliance programme and to the effectiveness of its implementation.
With respect to the structure of the programme, the minimum requirements are likely to include, according to the statement of the Head of the CGU:
- commitment and support of the senior management of the company;
- standard policies of behaviour and ethics;
- periodic training sessions of employees and executives;
- periodic risk assessment;
- creation of hotlines for reporting breaches;
- monitoring and enforcement of internal controls and compliance policies;
- enforcement of disciplinary measures in case of breach;
- analysis and monitoring of third-party reputation; and
- transparency of donations to candidates and political parties.
With respect to the effectiveness of the programme, the minimum requirements are likely to include, according to the statement of the Head of the CGU:
- prompt and spontaneous communication of the violation to the public administration;
- dismissal of the involved employees in the violation before the notification of the public authority; and
- evidence of no involvement, awareness or tolerance of the senior management of the violation.
The Head of the CGU reported that the size of the company and number of employees will also be taken into consideration when analysing the compliance programme. The draft bill is reported to include a reduction of two-thirds of the administrative fine.
Creating an effective compliance programme
As the antitrust regulation has not been successful and the antibribery regulation is yet to be enacted, companies have been left on their own to design, implement and enforce effective compliance programmes in Brazil.
There are several elements that contribute to the success of an effective compliance programme. The first and more important is the commitment and full cooperation of the senior management of the company in its design, implementation, supervising and maintenance.
Another key element is the appointment of the right person or group of people to be accountable for the implementation and monitoring of the compliance programme. It is highly advisable that this job is handed to a senior executive or group of executives (in this case, the compliance committee), with total independence and authority, full access to the senior management and deep knowledge about the internal structure of the company. The executive or group of executives must be in a position to hold confidentiality of the suspicious activities reported to them.
Compliance programmes must be tailored to the specific needs of each company and their business activity. This is particularly true for antitrust compliance programmes, which have to take into account the market structure and, most importantly, common business practices of the industry.
Compliance programmes must, above all, be simple and understandable, to employees across all areas and hierarchy levels of the company.
An effective compliance programme must be capable of educating and training executives and employees about risks that they and the company are exposed to. For that purpose, the programme must rely on presentations and seminars that must include real-life situations instead of only theoretical examples. The materials may include videos, online training sessions, workshops and other activities that trigger the interest of people in the subject matter. Commonly, employees are tested after trainings and grades are considered in their professional evaluations.
Mechanisms of internal communications also must be established to allow the immediate reporting of suspicious activities to the compliance officer or committee. Confidentiality and anonymity is absolutely crucial for the success of the instrument. Disciplinary mechanisms must be created and duly implemented across the entire company, irrespective of the hierarchy level of the individuals involved.
A regular and periodic monitoring of the compliance programme is of vital importance to the programme’s success. Identified violations must be immediately fixed. Periodical external audits are helpful for that purpose. The programme must be periodically revised and updated in accordance with the authorities’ latest findings.
An effective programme must also establish a document retention policy, which takes into account obligations provided by tax and commercial laws and clearly instructs people not to destroy them.
Last but not least, a strong compliance programme must cover all areas to which the company is exposed, ranging from corporate governance to environmental laws, from tax regulations to money laundering, from bribery and corruption to antitrust.
Compliance and ethical behaviour may be the only adequate response to the local demand for a revised way of doing business in Brazil. When boundaries are crossed, companies have a lot at stake: reputation, brand, stock. But also their values. Compliance programmes can be an alarm bell and give senior management the opportunity to respond properly before things get worse.
Compliance programmes are about to get proper direction from the authorities in Brazil for bribery and corruption but also more generally on their effectiveness and structure. Companies should be attentive to the message that the regulation is sending with the content of their compliance programme and act accordingly.
- Information obtained at CADE’s annual reports and statistics, made available at www.cade.gov.br.
- The Brazilian Leniency Programme was first introduced in our legal system in 2000, and was regulated by Law 8.884/94, section 35-B and Ordinance MJ No. 456/2010. Since May, 2012, the Brazilian Leniency Programme is regulated by the new Brazilian Competition Law, Law 12.529/11, section 86 and 87.
- Brazil owed the OECD member countries a response to the loopholes identified by the international community in its programme to combat bribery and corruption since the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions that had taken place in 2010.
- It is important to mention that, although it is already in force, there are provisions under such law that still need to be regulated by the government.
- Ordinance No. 14 of 6 December 2004.