Anti-Bribery Legislation in Brazil: Issues and Challenges Moving Forward

Washington D.C., July 19, 2012Moderator: Amy Conway-Hatcher, Partner at Kaye Scholer (Washington, D.C.)

Speakers:

BRUNO MAEDA, Co-chair of the Anti-Corruption Compliance Committee of the Brazilian Institute of Business Law (IBRADEMP);

CARLOS AYRES, Co-chair of the Anti-Corruption Compliance Committee of the Brazilian Institute of Business Law (IBRADEMP);

FERNANDO M. CALEIRO PALMA, Compliance Manager for South America - Office of Compliance and Ethics at Archer Daniels Midland Company (BRAZIL).

Agenda

Brazilian Anti-corruption Scenario1

Compliance Programs, Internal Investigations and M&A: Local Aspects

3

Draft Bill 6826/20102

IBRADEMP

• Brazilian Institute of Business Law­ Not-for-profit association­ Created in 2004­ With the main purpose of:

­ promoting and developing discussions in the business law arena­ contributing to the development of Brazilian law

­ Chapters in São Paulo, Rio de Janeiro, Minas Gerais, Rio Grande do Sul, New York and California

­ Different committees focused on specific areas of law

• Anti-corruption and Compliance Committee created in 2011­ Participants from the private sector (law firms and companies), audit and

forensic firms, universities and authorities

1. Brazilian Anti-corruption Scenario

Recent Enforcement Actions • Intensification of local prosecution of illegal conducts and corruption practices• Federal Police has conducted special operations to combat corruption, money

laundering, and related crimes

• Wiretapping, monitoring of e-mails, search and seizure raids• Cooperation with foreign governments• Sectors under recent scrutiny by Brazilian authorities

Year Operations Individuals arrested Public employees arrested

2011 266 2,089 261

2010 270 2,734 124

2009 288 2,663 183

2008 235 2,475 396

Source: Federal Police

Criminal Liability • Criminal Liability is personal

• Corporate criminal liability­ Just for environmental-related crimes­ New concept

Brazilian Constitution: 1988 Environmental law: 1998 Court decisions: 2005

­ Enforceability issues­ Standards for imposing liability

Result of a decision of the corporation legal or contractual representative Act done on behalf of corporation Actual benefit is necessary

­ Changes ahead?

• Corporations can face civil and administrative liability

Anti-Bribery Laws: Brazilian Criminal Code • Scope: Offer or the promise to offer to public employees any benefit that relates

to an express or implied request or suggestion that the public employee perform or refrain from performing, or even delays any act within the scope of his duties­ Offer or promise alone is sufficient

• Sanction: imprisonment from 1 to 12 years

• Criminal intent: necessary element of the crime

• Public employees:­ Not only individuals that render services in governmental offices or agencies­ Also employees that carry out a public function, job or office, even on a temporary

basis or without remuneration (e.g., doctors of public hospitals and professors of public universities)

­ Those who work for entities hired by public companies to execute activities that are typical of the public administration

• Facilitation payments are prohibited

Anti-Bribery Laws: Other Applicable Laws • Public Procurement Law: 1993

• Improbity Law: 1992

• The Code of Conduct of the Federal Government: 2001­ Not technically law (set of presidential guidelines)­ In principle, only applies to high-level public employees­ Can be used as reference with respect to all public employees by the

administrative authorities, and even by courts, to determine a standard of proper conduct

­ Guidelines for gifts, entertainment and hospitalities

• New Money Laundering Law: 2012­ No predicate offenses

International Anti-Corruption Agreements • Brazil is a signatory of three important conventions against corruption:

­ OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transaction: 2000

­ Inter-American Convention Against Corruption: 2002­ United Nations Convention against Corruption: 2006

2. Draft Bill 6826/2010

Context: OECD Convention • Ratification: August, 2000

­ 2002: Brazilian Criminal Code amended to prohibit corruption of foreign public officials

­ No conviction

• Phase 1: September 2004

• Phase 2: December 2007 (examining countries - Chile, Portugal)­ recommends that Brazil “take urgent steps to establish the direct liability of legal

persons for the bribery of a foreign public official”

• Phase 3: 2014 (examining countries - Belgium, Portugal)­ Concentrates on the following pillars:

progress made by on weaknesses identified in Phase 2 changes in domestic legislative since Phase 2 enforcement efforts and results

Draft Bill: Development • Presented by the Federal Government: March 2010

• Special committee created by the Brazilian House of Representatives to analyze the bill: September 2011­ Reporter: Carlos Zarattini (PT)

­ 10 meetings 5 public hearings OECD participation

­ Since May 2012, 5 attempts to vote the Draft Bill failed Strong pushback from Brazilian business community Lobbying efforts have not been made public

• Legislative Process­ House of Representatives­ Senate­ Presidential approval

Draft Bill: Development • Role played by Civil Society

• Participation of Ibrademp­ Created a Study group

Participation of 20 legal professionals 4 working meetings More than 420 hours of work

­ Written reports submitted to the House

­ Public hearings

­ Discussions with enforcement agencies

­ Suggestions incorporated to the draft bill

• Changes presented by Congressman

Draft Bill: Key Features • Subjected Persons

­ Brazilian legal entities­ Foreign legal entities with “registered office, branch or representation in the

Brazilian territory”

• Prohibited Acts­ Related to local and foreign public administration­ Bribe of public officials

“To promise, offer or give, directly or indirectly, an undue advantage to a public agent, or third person related to him”

­ “Fraud” in public procurement settings­ Bid rigging­ Others

• Strict Liability­ Should be more easily applied than current laws

Draft Bill: Key Features • Sanctions (civil and administrative)

­ Fines 0,1% to 20% of the gross revenue of the previous year R$ 6,000 to R$ 60,000,000 Influence of new antitrust law

­ Debarment: from 2 to 5 years

­ Publication of the condemnatory decision

­ Prohibition to receive incentives and public financing from 1 to 5 years

­ Termination of contracts with public entities

­ Seizure and confiscation of assets and gains

­ Partial suspension or interdiction of its activities

­ Compulsory dissolution of the legal entity

Draft Bill: Key Features • Sanctions (civil and administrative)

­ OECD Convention seeks “functional equivalence” When criminal responsibility is not applicable, the Convention requires that bribery

of a foreign public official be punishable by “effective, proportionate and dissuasive” sanctions

At least comparable to sanctions for bribery of domestic public officials

­ Recent proposed changes to the Draft Bill Limited sanctions

Sanctions in the specific line of business involved in the wrongdoing

Can potentially create massive litigation around how business revenue are calculated

Likely will not pass OECD’s test of effectiveness, proportionality and dissuasiveness

Draft Bill: Key Features • Voluntary Disclosure and Cooperation

­ New feature in the Brazilian anti-corruption arena

The cooperation of the legal entity with the investigation of the violations, Including by voluntary reporting to the authorities, before the initiation of a proceeding, as well as the disclosure of information during the course of the Investigations

• Leniency Program­ Requirements

Legal entity is the first to come forward and confesses its participation in the unlawful practice;

Legal entity ceases its involvement in the unlawful practice; Public authorities did not have sufficient information about the illegal activity to

ensure the condemnation of the applicant; and The applicant agrees to fully cooperate with the investigation.

­ Benefits for legal entities Fines can be reduced up to 2/3 All the other sanctions (excluding restitution) are excluded

Draft Bill: Key Features • Compliance Programs

­ Existence of pre-existing and effective compliance programs will give credit to legal entities

­ Amount of credit?

­ Promote the compliance program in Brazil to reach beyond the companies that are subject to the FCPA and UK Bribery Act

­ Guidelines to be issued by Federal Government

­ Open questions

Draft Bill: Flaws • Overlap of laws

­ Public tender law­ Improbity law­ Antitrust law­ Impact on leniency program

• Extraordinary number of enforcement authorities­ Cases of involving foreign public administration: CGU­ Other cases:

Minister, Secretary, Administration Director, etc.­ Excessive fragmentation of efforts ­ Problems in achieving coherent outcome­ Lack of specialized expertise­ Potential conflict of interest­ OECD’s recent evaluations

• Other

Draft Bill: What is next? • Main points under discussion

­ Successor liability ­ Strict liability for the acts of employees and agents­ Sanctions and the method for calculating penalties

• Approach OECD’s Secretariat and request their opinion on the draft?

• Need to raise awareness of the civil society ­ Recent cases of important laws enacted based on pressure from public opinion

• Voting

• When the law is in place, government needs to apply it …

3. Compliance Programs, Internal Investigations and M&A in Brazil: Local Aspects

Compliance Programs: Risk Areas to Cover • Public bidding settings

­ Where government procurement takes place ­ Strict and formal procedures­ Main problems arise with improper:

Exclusion of bidders through RFP shaping or bid rigging Disqualification of competitors Declaration of waiver or unfeasibility of public bidding process

• Bureaucracy­ 120 days to start a business­ Licenses, permits, etc.

• Tax­ High cost and time-consuming system­ Issues related to expediting the process, reducing costs and special tax regimes

• Recent cases

Compliance Programs: Best Practices • Training, Training, Training

­ Compliance is still not part of the culture­ In-person vs. online / local language­ Both of third parties and employees­ Special attention to training on:

Anti-corruption Public tender Internal Policies Interaction with government officials

• Interaction with public entities­ Business-hours and professional places­ Communication should include reference to projects

• Exit interviews

Compliance Programs: Best Practices • Monitoring third parties

­ Attention to “boilerplate” language for extra discounts­ Access reasonableness of discounts/commissions to third parties and their

margins­ Requests for advance payments/commissions/unusual reimbursement of

expenses­ Financial accommodations; ­ Undisclosed sub-agents or sub-contractors; ­ Monitoring should not be left only to local personnel working with 3rd party

• Due diligence­ Background checks are important… but not sufficient­ Check past allegations and reputation (including shareholders and main officers)

not only for bribery but also other compliance issues (e.g., bid rigging)­ Evaluate technical and value-adding capacity ­ Evaluate ability to deliver (organizational resources; structure)

Compliance Programs: Best Practices • Need of appropriate contractual terms

­ Audit Rights Mere reference to audit rights is not enough Need to be clear and detailed, otherwise enforceability can be extremely difficult and

time-consuming. Very problematic in the context of internal investigations Should expressly provide:

all types of information and documentation to be provided right to interview people delivery format of documentation selection of auditors definition of scope record keeping

­ Obligation to third parties actively report: Final prices in public tenders Motions or appeals filled alleging corruption, bid rigging or limited competition Subpoenas, investigations, and certain claims

Internal investigations: Local Challenges • Relevant aspects of labor laws

­ Individuals under investigation and witnesses have the right to: Not attend an internal interview Remain silent Not tell the truth (lie)

­ Except in specific situation, employees cannot be terminated for cause for refusing to cooperate

­ Interviews should be carefully conducted in order to avoid moral damage claims Never conduct any investigation interview alone Aggressive interview techniques should be avoided

­ Avoid embarrassment of the investigated employees, interviewees and other people and exemplary measures

­ Importance to take cultural differences into account

­ Caution in possible retaliation against the informer (whistleblower)

Internal investigations: Local Challenges • Relevant aspects of labor laws

­ Termination of employees Termination with or without cause? Risks Timing is essential

­ Consistency in the application of sanctions (resulting from the investigations)

• Privacy issues­ Privacy is a constitutional right­ E-mail and Internet monitoring have been admitted

Express notice to employees is required (importance of internal policy) Private data (safest position is to review with consent)

­ Court order is required to have access to bank and tax information­ Improper access to private data might subject violators to civil and criminal

liability

• Litigation holds

• Documentation to review­ Records of administrative proceedings

Contain entire history of the procurement process Possible to see all participant competitors, questions and answers,

cancellations/postponement, disqualification of bidders, appeals, final bids and prices

Essential to cross information from administrative proceeding with email, other documentation, and information from interviews

Flow of technical specs and RFP information with public official or intermediaries; technical arguments to disqualify competitors, etc.

­ Records of Police investigations Access can be challenging Early access is crucial Usually contain useful information

­ Search Terms Importance of local input

Internal investigations: Local Challenges

Internal investigations: Local Challenges • No duty to report

­ In general terms, there is no duty to report

­ Companies take a more conservative and defensive approach

­ Except in antitrust cases, cooperation with authorities can render the company no legal advantage

­ Companies that cooperate might be debarred, fined, etc.

­ Challenges to conciliate cooperation with foreign authorities with no cooperation with local authorities

­ Changes ahead?

• Political Contributions

• Use of odd coded language

• Use of “despachantes”

• Exchange of technical specifications with public officials or intermediaries

• Questions and motions from competitors

• Unreasonable explanation to use third parties in public tenders

• Participation in public tenders directly and indirectly

• Price Registration sales

• Reseller collusion

• Off-Shore accounts

Internal investigations: Local red flags

• Increasing number of M&A transactions­ Vertical and horizontal acquisitions

• Anti-corruption due diligence usually not done

• Resistance by Brazilian companies­ Often targets take due diligence as something personal

• Local input is essential­ Risk assessment­ Cultural issues

• Assessing compliance culture of target company

• Why acquisitions collapse?

M&A Due Diligence: Local Challenges

M&A Due Diligence: Where to look? • CGU’s list of debarred companies

• Legal­ Improbity and Civil Actions law suits­ Subpoenas and criminal investigations­ Attention with procedural issues

• Tax­ History of tax assessment and fines­ How special tax regimes were obtained

• Labor­ Extra payments­ Incentive / flex cards

• Licenses and Permits

• Political contributions

Q&A

THANK-YOU!

Ibrademp – Brazilian Institute of Business LawAnti-corruption and Compliance Committee

+ 55 11 3255-0399compliance@Ibrademp.org.br