By Isabel Carvalho, Rafael Loureiro & Luciana Souto of Hogan Lovells
Even though the excitement of the Fifa World Cup had already faded away, in 2014 the international media once again turned its attention to Brazil. This time it was not to report on the thrills of the sport, but to show the country’s new-found efforts to wage a seemingly Herculean war against corruption.
What started out as an unassuming investigation by the federal police regarding allegations of money laundering at local gas stations and car washes (hat-tip to AMC’s series Breaking Bad) quickly became one of the largest anti-corruption investigations in history – dubbed fittingly as Operação Lava Jato or Operation Car Wash.
Sadly, such news has become commonplace in Latin America, as the region has traditionally been associated with widespread corruption and impunity – and Brazil is no exception. So what is different this time? What makes this investigation special or important? How does it impact the country and what does it say about Brazil?
Setting the scene
In Brazil, corruption has always been a part of political discussions and civil contention. Economic scholars have even pointed to issues that date back to colonial times, when Latin America was merely seen as a resource to be exploited by the Portuguese and Spanish crowns. More than 500 years have passed and the culture of the exploitation is still present in the country’s ruling classes and political parties. A relatively recent example is Brazil’s military dictatorship that lasted from 1964 to 1985 and during which the country’s rulers governed the country with an iron fist and were considered practically untouchable.
Regardless of any historic causes, since the end of the military dictatorship, Brazil has fought to strengthen key institutions, such as the federal police, public prosecutors and the judiciary, and also abandon the notion that government figures are above the law.
Therefore, notwithstanding any engrained cultural issues or the struggle of the ruling class to maintain itself in power and perpetuate their lack of accountability, in 2005 the country reached a tipping point with the Mensalão trial – a landmark case against corruption in Brazil. For the first time, politicians accused of crimes of money laundering and tax evasion in a vote-buying scandal were found guilty in a criminal trial and sentenced to prison. Although the case took almost nine years for convictions to be passed down and many sentences were later reduced, it illustrated the increasing political willingness to overcome the culture of impunity in Brazil.
The Mensalão scandal represented an optimistic turning point that indicated that changes to tackle corruption were gradually taking place. To a great extent, these changes reflect an unprecedented spotlight on public-sector corruption cases as well as the establishment of important legal precedent and developments.
Building on the momentum generated by Mensalão, the federal police and prosecutors are now undertaking one of the biggest and most complex anti-corruption investigations – Operation Car Wash. It is unveiling an alleged fraud and corruption scheme to embezzle assets from Brazilian government-run entities, such as Petrobras, a publicly-traded energy and petroleum company and perhaps others as well. In a nutshell, the authorities have been investigating allegations that contractors have been paying bribes and kickbacks to company officials, politicians and political parties in order to secure lucrative multi-billion dollar construction contracts.
“Operation Car Wash has made it a goal to seek out government officials and institutions and hold them accountable”
Remarkably, plea bargain agreements with the prosecution have exposed some of the largest Brazilian construction companies and their officers in the corruption scheme and revealed the existence of an alleged cartel to defraud procurement procedures. As a result, several officers of these companies are currently facing criminal charges and the companies may also be subject to administrative and civil sanctions.
Notably, the facts investigated have also involved the jurisdiction of United States. As some of these government-run companies trade their stock on the New York Stock Exchange and are registrant companies under the SEC, they are subject to the Foreign Corrupt Practices Act (FCPA) and the jurisdiction of the US Securities Exchange Commission (SEC) and US Department of Justice (DOJ).
Unlike previous corruption cases, in which private sector puppets were used as scapegoats for politicians and individuals with strong government ties, Operation Car Wash has made it a goal to seek out government officials and institutions and hold them accountable. In addition, high-ranking individuals from the private sector and their companies are also facing significant consequences due to their involvement in the corruptions schemes.
Seizing the opportunity
In view of this scenario, Brazil now has an unmet opportunity to effectively enforce and implement anti-corruption laws and robust compliance standards and also to demonstrate to the international community that the country is willing to go after its own government and leading industries in order to so. Although traditionally there has been a lack of investment in compliance programmes in Brazil, the issue is garnering attention and public and private entities’ approach to such matters is gradually, but effectively, changing. Within the country’s rising anti-corruption sentiment, companies are being increasingly requested to adjust their compliance efforts and ensure that their initiatives are effectively monitored and coherent with international standards.
It is then commendable that in January 2014, the Brazilian Anticorruption Law (Lei 12,846/2013) came into force imposing strict civil and administrative liability and harsh sanctions on private companies for acts of bribery, fraud on public procurement processes and obstruction of justice committed by their employees or agents against the national or foreign public administrations. Perhaps the most notable feature about the new law is not its novel provisions or sanctions, but the fact that it represents an important step in a continuing trend toward tougher anti-corruption standards in Latin America, addressing the public demand for increased government transparency and integrity.
In comparison with the FCPA and UK Bribery Act, there is a similar emphasis on corporate compliance programmes (outlined under regulation issued in March this year, ‘Decreto 8,420/2015’, or ‘Regulation’), while the standard of strict liability in the Brazilian Anticorruption Law allows authorities to impose sanctions without evidence of corrupt intent against the offending company or its employees. The new law underscores the value of corporate compliance programmes, potential benefits of self-reporting and severe civil sanctions and administrative sanctions for violations. As a result, Brazilian and foreign companies are carefully assessing their exposure in connection with the Brazilian Anticorruption Law. In this regard, three outcomes are noteworthy. There is a greater incentive for the development of robust internal controls and procedures to prevent fraud and corruption; an incentive for the adoption of compliance programmes in order to follow the new international standards, and a shift in the activities of foreign companies operating and investing in Brazil.
It is important to note that the Brazilian Anticorruption Law does not overly impose compliance obligations, but creates compelling incentives for implementing compliance programmes while increasing the liability of entities that are located or do business in Brazil. Accordingly, companies must ensure they have adequate internal compliance programmes in place, as this reduces the likelihood of a breach and is considered an important mitigating factor if a breach occurs. Preventive measures are valued very similarly as in the UK Bribery Act and the FCPA. For instance, corporate integrity mechanisms, such as internal controls and codes of conduct, are taken into account when the authorities gauge applicable sanctions.
Hence, Brazilian companies that already had internal control mechanisms in place must ensure that they are in compliance with the provisions of the recent Brazilian Anticorruption Law and Regulation and foreign companies operating in Brazil must examine their policies and those of their local business partners to ensure compliance with local rules and market conditions/risks. This is particularly important for companies that intend to participate in public bids to provide services or goods to the Brazilian government, given that the Brazilian Anticorruption Law, differently from the FCPA or the UK Bribery Act, has a section dedicated public procurement. In addition to the new law, Brazil has also enacted a series of ancillary regulations that create objective criteria for evaluating compliance programmes, calculating sanctions and assessing mitigating factors. Although there are challenges in bringing Brazil’s anti-corruption enforcement into full effect, the compliance environment in Brazil is clearly maturing.
These first steps towards promoting compliance in Brazil were reinforced with the recent corruption scandals and consequent investigations. While Mensalão indicated an increased willingness to overcome political corruption, Operation Car Wash has shown the prominent role of prosecutors, federal investigators and judges in tackling corruption and preventing impunity in Brazil – both in the public and private sectors. Brazil is witnessing an unprecedented outbreak of legal activity with independent agencies showing remarkable capability in handling complex probes.
These recent legal developments and the outcome of the most recent investigations indicate unprecedented changes to the entrenched culture of impunity in Brazil. The Anticorruption Law brought a new legal perspective, making companies strictly liable for anti-corruption conducts. These factors have influenced Brazilian companies, and foreign companies with businesses in Brazil, into taking measures to diminish their risks and ensure that they are compliant with the law. In fact, companies in Brazil are increasingly investing in anti-corruption compliance programmes to prevent negative publicity and potential criminal and civil liability. In addition, precedents set by US authorities have served as important guidelines in evaluating compliance matters and have instigated fruitful discussions between private entities, scholars and the Brazilian government. To a great extent, although Operation Car Wash exposed a dark side of Brazil’s culture it also brought attention to these challenges and it is itself an example of a changing environment towards anti-corruption enforcement efforts in Brazil.
It is important to note that besides being harmful for the trust in the state and the legitimacy of the government, corruption could also damage the economic development of Brazil. The scandals and spreading investigations revealing common practices of distortionary regulation and bribery have severe impacts on the reputation of Brazilian companies, potentially reducing economic efficiency, growth and foreign investments.
As the largest state-controlled company and several of Brazil’s largest conglomerates have been heavily implicated in the investigation, such entities have reduced their activities and various other economic sectors have also been indirectly affected. Petrobras has currently banned these conglomerates from bidding for new contracts pending the investigations. If found guilty of bribery, such companies would also be automatically banned from participating in any public tender for the Brazilian government for a period of up to five years, regardless of the sector or industry. Because of the importance of these companies for the infrastructure development of the country, including railroads, highways and hydroelectric dams, the implications for the Brazilian economy have already been felt.
Given the uncertainty of the investigation’s results and the clear exposure of unprecedented corruption schemes, Brazil is now struggling to overcome the international markets’ adverse perception of its economy. It is inevitable that in the short term the country will face financial turmoil and foreign direct investments are expected to drop. Nevertheless, these issues may pose an opportunity for Brazil to conduct a major overhaul of the relationship between private companies, politicians and state-run entities. Similar to 2008, when the country was basically unaffected by the subprime mortgage crisis due to a highly-regulated banking sector, this is another chance for Brazil to show that it has strong institutions, which are capable of investigating and resolving matters that involve influential businesses and politicians.
Once the turmoil of the investigation has subsided and the country is able to show substantial enforcement of anti-corruption laws and implementation of effective compliance programmes, foreign investments and capital market activity are expected to increase – likely within the next two to five years. Thus, tackling corruption is a key part of making the Brazilian economy a true international player and also an opportunity to demonstrate that the country is heading in the right direction to effectively overcome its historical challenges.
About The Authors:
Isabel Carvalho is a partner and member of the Hogan Lovells Brazil Group, which operates in São Paulo and Rio de Janeiro, together with other lawyers across the globe. She began her career in London as an intern, spending six years working for a leading international law firm before moving to Brazil to help open that firm’s São Paulo office. Isabel has more than 20 years of experience in complex international capital markets and corporate transactions, finance deals, and general corporate governance advice, including the new Brazilian Anti-Corruption Law and U.S. regulatory issues (FCPA), as well as cross-border mergers and acquisitions. She heads the São Paulo office which focus on corporate, capital markets, compliance and investigation work
Rafael Loureiro practices principally in the area of international business and finance transactions. He has an international background, having previously worked as an associate with a Brazil-based law firm and as in-house counsel for a Brazil-based company as well as with Hogan Lovells in its Washington, D.C. office prior to moving to Rio de Janeiro. Rafael has experience in the United States, Latin America, and Africa and has advised clients on compliance issues, data privacy matters, large construction and real estate development projects, the structuring and drafting of complex agreements, oil and gas matters, and international litigation and arbitration matters.
Luciana Souto is a Business and Human Rights paralegal in Hogan Lovells’ London office, where she assists with cases concerning human rights disputes and corporate complicity in international crimes. She is originally from Brazil and has previously worked in positions at Vale and Schlumberger. She has an LL.M. in international legal studies from Newcastle University in the United Kingdom