Brazil’s President Dilma Rousseff has signed Law n. 12.846/2013, popularly called the “clean company law.”
The Law goes into effect on January 24, 2014. Both companies and public bodies have a very short timeframe in which to lay the groundwork for relearning how to do business in Brazil, as well as to adapt to the much stricter legal framework that the law creates.
WHO THE LAW APPLIES TO
The Law applies to virtually every company – either foreign or Brazilian – that is headquartered in Brazil or that has a local subsidiary or representation.
Although it is focused on companies, the law signed by President Rousseff emphasizes that individual administrators and managers will also be liable to the extent they have been found guilty of the illegal practices prohibited by the Law.
WHAT THE LAW SAYS
The new Law strictly forbids acts such as bribery, fraud in public procurement, bid rigging (and virtually any conduct that aims to restrict competition in public bids), fraud in contracts signed with public bodies, impairing public officer’s investigative activities, influencing or financing others to engage in illegal acts against the government, manipulating the economic-financial equilibrium of a public contract, and gathering any type of advantage from amendments or extensions of public contracts.
Notably, while the US Foreign Corrupt Practices Act only applies to payments to foreign officials and does not cover payments to US officials, the new Brazilian law covers conduct both domestically in Brazil and abroad.
It is also important to bear in mind that the Law expressly determines that corporations’ liability will be objective and strict. That is, in order to prove that the statute was violated, a prosecuting officer will not need to demonstrate that the company had any intention to breach the Law.
Fines for companies that are found guilty will range from 1 percent to 20 percent of the company’s gross turnover in the year before the investigation was launched. In the event it is not possible to calculate a fine based on this criterion, the Law sets forth that the fine may range from BRL 60,000 to BRL 60 million. The guilty company will be required to publish a copy of the decision in local newspapers, and the imposition of administrative fines will not exclude the company’s obligation to make reparations for damage it has caused through its illegal behavior.
President Rousseff vetoed three of the articles that had been in the original bill passed by the Senate. Her most material veto regarded an article that limited the fines that could be imposed on companies to the amount involved in the administrative contract. After the veto, fines for companies that are found guilty will extend across the range mentioned above – a far tougher approach.
In addition to the penalties above, the Law delegates powers to the Union, the states, the federal district and the municipalities to file court actions that would levy a further, extremely harsh set of penalties on infringing companies.
Among possible penalties:
(i) the company may be required to forfeit assets, rights or profits that were acquired as a result of the offense
(ii) company activities may be suspended or partially interdicted
(iii) the company may be dissolved - this compulsory dissolution will take place when it has been proved that the corporation has been used to facilitate or promote the practice of unlawful acts, or was formed to conceal or disguise illicit interests or the identity of the beneficiaries of the illegal acts
(iv) the company may be barred from receiving incentives, subsidies, donations or loans from public entities and public financial institutions for one to five years.
More importantly for companies contemplating acquisitions in Brazil, the Law states that liability due to illegal practices will remain if there are changes in the company’s articles of incorporation, or if the organization goes through any type of transformation, incorporation, merger or split. In the case of merger and incorporations, the liability of the succeeding corporation will be restricted to the payment of the fine and the reparation of any damages that have been caused; the other penalties listed by the Law will not apply, unless there is proof that the incorporation/merger involved fraud or simulation. Needless to say, due diligence efforts will need to be increased in respect of tracking possible signs of violation by the target of the conducts prohibited by the Law.
The Law extends liability to controlling, controlled and affiliated companies, as well as to members of public consortiums. In those cases, liability will also be limited to the payment of the fine and reparation damages.
WHO CAN BRING A CASE, AND HOW WILL PENALTIES BE DETERMINED?
Because the Law is such a landmark piece of legislation in Brazil, there are no precedents providing guidelines about how such harsh penalties will be calculated and imposed. Employing general language, the Law simply states that for the imposition of fines authorities will take into consideration such factors as the gravity of the infraction, the advantage a company may have received or hoped to achieve, whether the illegal act was consummated or not, the actual effect produced by the conduct, the economic status of the company and whether it has cooperated with the investigations.
One of the most pressing concerns arising from the Law is that it delegates powers to essentially any entity of Brazil’s public administration (at the federal, state and municipal levels) to investigate possible illegal acts. On the other hand, matters involving the executive federal power will be investigated by the General Controlling Office of the Federal Union (the CGU). Companies being investigated will have the opportunity to submit written defenses within 30 days after being served.
HOW CAN COMPANIES PREPARE?
Importantly, the Law sets out a number of factors that would mitigate the harshness of the penalties a company may face. Chief among them, in our view, is to have in place an effective internal compliance program and ethical code. The overarching goal of such a program and code, of course, would be to help individual companies develop a “clean” company culture. The Law seeks to incentivize this goal by making it a mitigating factor regarding potential penalties.
Using as a proxy the measures usually adopted to comply with the FCPA, companies will now have strong incentives in Brazil to implement efforts towards preventing and tracking red flags that indicate a suspicion or likelihood of corrupt conduct. Identifying sources of possible violations to the Law, for instance, will be key. Companies should consider interviewing certain officials in order to probe the potential indications of conduct which violates the Law. In some cases, financial due diligence may be required, in order to review accounting entries as well as implemented payment procedures relating to bidding for contracts with governmental agencies or other instrumentalities. On top of that, companies may consider obtaining information about any contracts (or subcontracts) they may have with any governmental agencies, as well as contracts with agents, consultants or other representatives.
The final version of the Law retains the leniency program originally set forth in the bill passed by the Senate, according to which companies will be able to negotiate with the government for full immunity or lighter penalties – if they cooperate with the investigation, provide evidence against other companies that took part in the illegal acts, and attest that illegal practices took place. However, even when a company receives full immunity from an administrative perspective, it will still be subject to fines for its misdeeds.
For more information about preparing to comply with the clean company law and putting in place appropriate internal compliance programs and codes of ethics, please contact André Marques Gilberto.*
* André Marques Gilberto is a partner in the Public Law, Antitrust and Regulatory practices at Campos Mello Advogados, based in São Paulo.