Highlights:

• The Brazilian Anti-Corruption Law established sanctions on legal entities involved in corrupt and other illegal acts. Fines that range from 0,1% to 20% of the annual gross revenue and prohibition from receiving credit from public banks are among the sanctions established.

• The law provides for the strict liability of the legal entities and for successor liability in case of mergers and acquisitions.

• The adoption by the legal entities of an effective compliance program that comprises internal mechanisms and procedures of integrity, audit and incentives for the reporting of irregularities will be taken into consideration by Brazilian authorities when imposing sanctions.

• Federal Decree 8,420/15 establishes the criteria to assess compliance programs, which may reduce the penalties imposed by Brazilian authorities.

• The Office of the Executive Comptroller (CGU – Controladoria-Geral da União) has published Directives and Normative Rulings that address several subjects related to the Anti-Corruption Law: (i) evaluation of compliance programs; (ii) administrative proceedings phases and leniency agreements; (iii) criteria for calculating the monetary fine; (iv) public registries that shall publish the sanctions imposed; and reinforcement of CGU’s investigation structure, allowing it to be more effective in its operations and in the fight against corruption. 

MAIN ARTICLE

On January 29, 2014, Federal Law 12,846 (“Anti-corruption Law”) entered into force. The Anti-corruption Law provides for the administrative and civil liability of legal entities involved in acts against the national or foreign public administration.

The Anti-Corruption Law seeks to fill a gap in Brazil’s legal system by addressing corruption and corruption-related practices with more effective legal mechanisms, such as severe sanctions assessed based on a strict liability concept.

The law expands on certain requirements imposed by the U.S. Foreign Corrupt Practices Act (“FCPA”), and companies doing business in Brazil should closely analyze the differences between the two laws.

The Anti-Corruption Law was designed to address corruption in business transactions carried out by Brazil-based entities, as well as foreign entities that operate through an office, branch or representation in Brazil. Corruption is defined as “to promise, offer or give, directly or indirectly, an undue advantage to a public official or to a third party related to him/her”. Notwithstanding the focus on corruption, the Anti-corruption law prohibits several “acts against national or foreign public administration”, such as:

1. to hinder of investigations or inspections carried out by public entities;
2. to thwart or defraud, by means of an adjustment, arrangement or any other method, the competitiveness of a public bidding procedure;
3. to fraudulently obtain an undue advantage or benefit from an amendment to or extension of an administrative contract, without authorization under the law, or from the notice of public bidding or the related contractual instruments; and
4. to manipulate or defraud the economic-financial balance of an administrative contract.

The commitment of any of these acts subjects a legal entity to the imposition of severe sanctions. At the administrative level, companies are exposed to fines ranging from 0,1% to 20% of their gross annual revenue, and special public disclosure of the decision in means of communication widely distributed. Federal Decree 8,420/15 establishes objective criteria for fixing the fine. Several factors trigger the increase or reduction of the percentage applicable to calculate the fine. The percentage shall be increased, for instance, in case of (i) continuity of the acts (1 to 2%), tolerance or knowledge of the legal entity’s management (1 to 2.5%) and based on the value of the agreements held with the public administration (1 to 5%). On the other hand, factors that may reduce the percentage of the fine are, for example, (i) cooperation of the legal entity with the investigation (1 to 1.5%), (ii) self-disclosure (2%), compliance programs (1 to 4%). Also, CGU Internal Ruling No. 1/2015 established the criteria to calculate companies’ gross annual revenue.

In case a civil judicial proceeding is initiated, legal entities may be compelled to forfeit assets and rights obtained by means of corrupt practices, their business activities may be suspended, they may be prohibited from receiving incentives, subsidies, subventions, donations or loans from public entities, and they may even be compulsorily wind up. Besides, the Anti-corruption Law created the National Registry of Punished Companies (CNEP in the Portuguese acronym) which will consolidate all sanctions applied.

The Anti-Corruption Law also introduces new risks in merger and acquisitions transactions involving Brazilian companies. It provides for successor liability – liability for the payment of the fine and full compensation of the loss suffered by the public entity is transferred to the merged or acquiring company after the merger or acquisition. Thus, anti-corruption due diligence is increasing in Brazil and is becoming an even more usual practice. Since companies can be liable for the acts of third parties committed for the company’s benefit, anti-corruption due diligence on third parties is also a concern of many companies that do business in Brazil.

The legal due diligence investigation should be capable not only to identifying unlawful acts that have been committed, but also of pointing out vulnerabilities in companies’ internal procedures that require action to reduce the risk that improper or illegal conduct will occur.

Under the strict liability, the legal entity is liable for the performance of these acts in its interest or for its benefit and is subject to the imposition of a sanction, despite whether or not an employee acted in the scope of his employment, whether or not a third party committed the act, or whether or not the compliance program was effective.

The managers and administrators of the companies involved in corruption can also be held liable for their acts, but the liability regime applicable to natural persons is subject to the terms of the culpability of such persons (i.e. it is not a strict liability regime).

When determining the sanction, however, the existence and effectiveness of compliance programs will be evaluated by the sanctioning authority. The cooperation of the legal entity with the investigation conducted by Brazilian authorities will also be taken into account in the imposition of sanctions.

Federal Decree 8,420 issued this year established the criteria the compliance program should follow (16 elements listed) to allow the companies to claim for a reduction on the penalties determined in the Brazilian Anti-Corruption Law. Among the main elements that contribute to an effective compliance program (and make possible the reduction of fines), we can point out: (i) senior management’s commitment to the program, (ii) implementation of policies and procedures to mitigate identified risks, which must be reviewed periodically, (iii) due diligence checks on third party suppliers and also prior to any corporate transactions, (iv) periodic training programs, and (v) the independence of the internal structure responsible for the compliance program, which must not only be accessible by communication’s channel, but also shall have the power to investigate non-compliant conduct and impose disciplinary measures, if necessary.

Small and micro companies must also implement a compliance program, but they don’t have to implement all those elements and in Directive No. 2,279/2015, Brazilian authorities have indicated what could specifically contain in their compliance programs.

Also, in order to benefit from a reduction in the fine, companies must submit a Profile Report, containing a description of the company’s internal structure, its interaction with government agents, and its shareholders, and a Conformity Report, describing in detail how the compliance program functions. Therefore, the adoption of an effective compliance program that not just avoids illegal acts but that also includes procedures and mechanisms in support of an eventual investigation can also reward the legal entity.

The highest authority of the government entity affected by corrupt practices (Ministers of State, directors of regulatory agencies, chief executive officers of state-owned companies, etc.) has the power to bring Administrative Enforcement Proceedings (Processo Administrativo de Responsabilização – PAR) to investigate and punish offences under the Anti-corruption Law. On the other hand, CGU has concurrent jurisdiction to bring administrative enforcement proceedings, and exclusive powers to review enforcement proceedings brought by other government authorities to ensure they are conducted in conformity with the law. The CGU also has exclusive powers to enforce the Anti-corruption Law when foreign government officials or entities are involved.

According to the rules under Decree 8420/15, if corrupt practices under the Anti-corruption Law also constitute offences under the Government Contracting Law (Law 8666/1993) or other legislation and regulations on government bidding procedures and contracts, all the offences will be investigated and processed together.

Furthermore, legal entities’ administrative liability under the Anti-corruption Law does not exclude any civil and criminal liability that the legal entity (or the individuals that act on its behalf) may have for their corrupt acts.

The Office of the Brazilian Comptroller-General (CGU – Controladoria-Geral da União) has just published this September two new Directives, No. 2,154/2015 and 2,167/2015, that create 2 new agencies to support special operations and investigations. Those agencies are: Special Actions Group that was created in each CGU state regional offices to be responsible for special operations in each region, and Special Operations Coordination Group within CGU to coordinate the actions of the regional Special Actions Group. The objective is to reinforce CGU’s structure, allowing it to be more effective in its operations and in the fight against corruption.

It is worth noting that CGU has authority to enforce Anti-Corruption Law when the violations concern the Federal Administration. It has also jurisdiction to review administrative proceedings initiated under the Law to examine their legality or to correct any violation. CGU is also responsible for imposing the administrative penalty of debarment as established by Federal Law 8.666/93.

The Brazilian framework on anti-corruption law and enforcement is evolving, following trends and concepts adopted internationally. Brazilian authorities are conducting several corruption investigations, such as “Car Wash Operation” involving illegal acts committed in contracts with Brazilian State owned oil company, Petrobras, and “Zealots Operation” involving illegal acts committed in judgments of corporate tax proceedings. Severe sanctions, strict liability and several public bodies and entities responsible for investigating and deciding the acts committed, dramatically increase corruption- related risks. Consequently, companies doing business in Brazil should carefully measure corruption-related risk with a view of avoiding the exposure to local and foreign regulators. We are currently experiencing a time of act and strict enforcement of anti-corruption laws in Brazil and this tendency will likely consolidate in the future.