Ed. Note-I recent asked Rafael Mendes Gomes if he could give my readers some information about the recent regulations issued by the Brazilian government around the Clean Companies Act. Both he and Vitor Lopes da Costa Cruz responded with today’s guest post. 

According to the World Bank, Brazil is the world’s seventh wealthiest economy, with a Gross Domestic Product (GDP) of US$ 2.253 trillion in 2012. On the other hand, Brazil is ranked 69^th out of 175 countries in Transparency International’s 2014 Corruption Perception Index, and was recently shaken by investigations into a multi-billion dollar scandal involving the state controlled oil giant Petrobras, threatening to engulf the country’s most senior politicians—including its president. Brazil is also a signatory of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions – the “OECD Convention”.

The OECD Convention entered into force in 1999, and the OECD’s Working Group conducts peer reviews to evaluate the implementation of the Convention and effective enforcement of measures to prevent, detect, investigate and prosecute bribery, but Brazil was one of the last signatories to pass a law focused on the supply side of the bribes: business organizations. Law 12.846/2013, often referred to as the Clean Companies Act, took effect on January 29^th, 2014, and makes business organizations liable for illegal acts against national or foreign public administration, including bribery. An English translation of Law 12.846/2013 is available here.

The Clean Companies Act applies to any Brazilian business organization, company, foundation, association of persons or entities, formally organized or not, regardless of how they are organized or the corporate model they adopt, as well as foreign companies having office, branch, or representation in the Brazilian territory, even if informally and/or temporarily. The Act subjects companies to severe civil and administrative penalties and sanctions for bribing domestic or foreign government officials, and the fines can be of up to 20 percent of the company’s annual gross revenues.

In Article 7, VIII, the statute provides for that, in defining the penalties to be applied to an organization for violations of the statute, the enforcer will take into account the “existence of internal mechanisms and procedures of integrity, audit and incentive for the reporting of irregularities, as well as the effective enforcement of codes of ethics and codes of conduct within the organization” (free translation). The problem was that the statute did not provide guidance on what said mechanisms and procedures consisted of, or how much discount or credit would be granted to companies that have effective compliance programs in place. In the Sole Paragraph or Article 7, the statute sets forth that the criteria of evaluation of the compliance mechanisms and procedures were to be defined by Regulation to be issued by the Federal Executive Branch.

Finally, after over a year of the Clean Companies Act having entered into force, on March 18th, President Dilma Rousseff issued a Federal Decree (8.420/2015) regulating the statute, as a part of a series of anti-corruption measures to counter the increasing public opinion pressure against her administration. The Decree covers some of the crucial aspects of the Act, concerning the evaluation of compliance or corporate integrity programs, the administrative procedure for imposing corporate liability and assessing fines, and the rules regarding leniency agreements.

Of particular interest to companies doing business in Brazil is what the Decree sets forth that regulators and enforcers shall regard as the hallmarks of an effective compliance program, which guidelines are in our view closely aligned with international standards, mainly those provided by the FCPA Resource Guide and OECD’s Good Practice Guidance on Internal Controls, Ethics, and Compliance.

In this post we will focus on the available legal guidance in Brazil, regarding compliance programs, as provided for in the recently enacted Decree, outlining the hallmarks of a compliance program under Brazilian law:

1. Tone at the Top, translated as the commitment from the top executives of the company, including members of the board, evidenced by the visible and unequivocal support to the compliance program.
2. Ethics Code and written policies and procedures, enforced to all members in the organization, extended to third parties when applicable.
3. Periodic Training regarding the organizations Compliance Program.
4. Periodic Risk Assessment, aimed at making the necessary adjustments to the company’s compliance program.

As regards risk assessment, the Decree sets forth that the Brazilian Authorities shall consider the following when assessing the effectiveness of a Compliance Program, during an investigation:

• The number of employees;
• The complexity of the company’s internal hierarchy and the number of departments, governance bodies or sectors;
• The use of third parties intermediaries as consultants or sales agents;
• The industry or sector in which the company operates;
• The countries in which it operates, directly or indirectly;
• The level of interaction with the public sector and the importance of permits, licenses, and governmental approvals for its operations;
• The amount and location of legal entities that form the economic group; and
• Whether the company is regarded by law as a micro or small business.

5. Accounting Records that comprehensively and accurately reflect the company’s transactions.
6. Political Contributions. Transparency as regards donations and contributions to political campaigns, candidates and political parties
7. Relationship with the Public Administration. Specific Proceedings around prevention of fraud or irregularities in public tenders, in the performance of public contracts, and in the interaction with the public sector (including tax collections and inspections, governmental authorizations, licenses, and permits).
8. Compliance Officer: Independence, structure, and authority of the internal body responsible for implementing and enforcing the compliance program.
9. Confidential Reporting Channels (hotline), widely advertised to the company’s employees and third parties, and mechanisms for the protection of whistleblowers acting in good faith.
10. Disciplinary Action in case of violations and procedures to ensure the prompt interruption of the wrongful conduct or violation, and timely remediation of damages caused.
11. Third Party Due Diligence for the hiring of third party intermediaries, such as consultants, vendors, contractors, suppliers, and service providers, and, if applicable, the monitoring of the intermediaries’ activities.
12. M&A Due Diligence: M&A anti-corruption due diligence and risk assessment.
13. Monitoring and Continuous Improvement. Constant monitoring of the compliance program, in order to ensure its continuous improvement.

Having the Federal Executive Branch provided guidelines and clarifications on critical aspects of the Clean Companies Act, by means of the Decree in review, defining parameters and criteria for application of the statute, companies now have a clearer picture of what is expected from them, how investigations are supposed to be conducted, and how cooperation will take place. It is also true that enforcers are now better equipped, at least from the legislation standpoint, to fight corporate bribery.

Now Brazil has the challenge to demonstrate effective enforcement of such laws.

Authors:

Rafael Mendes Gomes is the partner in charge of compliance and anti-bribery at Chediak Advogados, with offices in São Paulo and Rio de Janeiro, Brazil. The firm offers legal assistance to both Brazilian and international clients across different industries and business sectors.

Vitor Lopes da Costa Cruz is a senior associate in the compliance and anti-bribery team at Chediak Advogados. He assists companies in the assessment, design, and implementation of compliance programs.