Brazil Prepares to Hand Out Red Cards in Anticipation of World Cup

There is increased focus globally on anti-corruption enforcement and authorities across the Americas are leading the charge. A number of countries have enacted new laws focusing on improper business conduct, many of which extend beyond the prohibitions of the Foreign Corrupt Practices Act (FCPA). In this post, we will focus on Brazil's "Clean Companies Act" that went into effect in late January 2014. It has important implications for any company that currently does business in Brazil or is interested in investing in South America's largest and -- spurred by this year's World Cup -- most visible market.

(As background, see this Expansion Insights post on transparency in the Americas to find where Brazil and other Americas countries rank in terms of corruption).

Key Provisions of the New Law

The new law applies to virtually all companies doing business in Brazil regardless of whether they are foreign or domestic. The law provides incentives to whistleblowers and applies to a broad range of acts committed in Brazil or abroad. Importantly, the law establishes more onerous standards than the United States' FCPA in a number of aspects. Unlike the FCPA, the new Brazilian law provides that:

• Prosecuting authorities do not need to prove that a company intended to violate the law; liability is established simply by showing that the prohibited conduct occurred

• Bribes to local officials are as prohibited as those made to foreign ones

• So-called "facilitating payments", designed to speed the work of government officials, are not exempted from the law

Penalties

Penalties can be severe and can be imposed on both individuals and companies. They include substantial fines, widespread public disclosure (that could cause significant reputational damage), suspension of business activities, loss of public funds and other public incentives, and compulsory dissolution. Moreover, the law provides for joint and several liability for companies in the same group or in partnership, in addition to successor liability.

Mitigation

Like the FCPA, Brazil’s new law accounts for mitigating circumstances that can serve to lessen any penalties and sanctions. Brazilian authorities are allowed to enter into leniency agreements, for example, with companies that voluntarily disclose violations of the law, confess their involvement, cooperate with authorities, and cease involvement in the prohibited conduct. The effect of leniency can be substantial, including a reduction of up to two thirds of applicable administrative fines, the ability to avoid widespread publication of a liability finding, and the ability to continue to receive public funds and incentives.

Implications

Although the Clean Companies Act cannot be divorced from a broader trend that we have seen for many years while supporting our clients' expansion and growth in Latin America, we believe it has the potential to represent significant new challenges for all companies doing business in Brazil. Below, we list just a few of these challenges and implications, all of which underscore the importance of caution and due diligence for expansion-minded businesses looking to enter and/or grow in Brazil.

• First, because it is new, coupled with the intense international scrutiny of Brazil stemming from the 2014 World Cup and 2016 Olympics, Brazilian authorities may be aggressive in utilizing the law and in cooperating with their counterparts in the United States and elsewhere.

• Second, because the law vests a multitude of authorities with enforcement powers, it will be difficult to predict or even assess any patterns in how the law will be applied, at least for some time.

• Third, companies that conduct business in Brazil need to reevaluate their business practices and compliance programs in light of the new law to ensure that they comply. At a minimum, they need to enhance the training of their employees on the new law.

• Fourth, businesses should be aware of the law’s impact on internal company investigations, in part because of the mitigating opportunities and consequences around self-disclosure.

• Finally, due diligence will take on increased importance for companies contemplating partnerships, mergers, or acquisitions in Brazil or with companies that do business there.

As we were preparing this post, we saw significant news coverage of the several business scandals facing Brazilian oil giant, Petrobras. See here. It remains unclear if the Clean Companies Act will be applied retroactively to these scandals, but we will monitor developments.

For a printable PDF version of this post, click here

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Scott Hoing is a founding partner of Nextant LLC, a consulting firm specializing in assisting companies expand their businesses in international markets, with a strong focus on Latin America. Scott practiced as an attorney in a leading international law firm in Washington, D.C. and London, concentrating on international economic regulation and transactions. He also held positions as an executive and associate general counsel of a Fortune 100 company, where he served as secretary to the Audit Committee of its board of directors. Scott’s expertise centers around business and legal strategy development, regulation and compliance. Scott's email is: shoing@nextant.com

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Nextant has extensive experience in assisting leading clients through its Market Expansion and Business Optimization services. For more information on how Nextant can assist your company in socializing a market entry and initiating sales, please visit our website at http://www.nextant.com

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