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By Yin Wilczek
April 2 — U.S. companies doing business in Brazil must pay more attention to managing their risks in light of ongoing anti-corruption investigations within the country and a heightened regulatory regime, an attorney said April 2.
The three biggest risk areas involve government contracting, customs and regulation, and mergers and acquisitions, said Matteson Ellis, a member of Miller & Chevalier in Washington and founder and editor of the FCPAméricas blog.
Moreover, Brazil's anti-corruption statute—the Brazilian Clean Companies Act (BCCA)—explicitly provides credit for corporate compliance, unlike the Foreign Corrupt Practices Act, Ellis said during a webcast sponsored by The Network.
“So in some ways, compliance teams can make a stronger argument when they’re in Brazil for the need for compliance practices,” he said.
Brazil—Latin America's largest economy—has been roiled by an ongoing investigation by local and U.S. authorities into a massive kickback scheme that operated within Brazil's giant state-owned oil company, Petrobras, from 2004 to 2012. The wide-ranging probe has implicated sectors beyond the oil and gas industry, including aviation and construction.
Another state-owned company that has been touched by scandal is Embraer SA. In August, Brazilian authorities brought a criminal action against eight of the aircraft manufacturer's employees related to an alleged bribery scheme to provide planes to the Dominican Republic.
The BCCA—which took effect in January 2014—imposes corporate civil and administrative liability for bribes by individuals to government officials, including those outside Brazil. The statute imposes strict liability and levies significant sanctions for violations.
The Brazilian government March 19 issued regulations under the BCCA that explicitly provide credit for companies that have good compliance and governance programs. The regulations set out 16 components that Brazilian authorities will consider when evaluating a company's compliance program. These include:
• top level commitment;
• having specific policies and procedures with respect to third parties, public procurement and interactions with government officials; and
• transparency in political contributions.
These are “very dynamic times” in Brazil, Ellis said. He noted that government contracting in Brazil was at the root of a number of FCPA enforcement actions, such as those against aircraft services provider Dallas Airmotive Inc. and pharmaceutical company Eli Lilly & Co.
Ellis also noted that the mix of a highly modern private sector and weak government institutions has provided for a “unique blend of risks” in Brazil. Corruption schemes can be very sophisticated and involve many individuals, third parties and government agencies, he said.
Compared to other countries in the world, Brazil has a “very poor regulatory quality and this has direct implications for corruption risks,” Ellis continued. He noted, for example, that government officials have more discretion to clear goods through customs and to grant licenses, and companies often find themselves having to deal with several different officials, all of which can give rise to opportunities for improper payment requests.
Moreover, the size of the country and the need to traverse so many different government units increase the requirement to rely on third parties, Ellis said.
As to mergers and acquisitions, Ellis noted that while the economy in Brazil is contracting, there nonetheless continues to be M&A deals made. Companies outside Brazil see great potential in the country because of its large middle class and its huge oil reserves, he said.
One issue that may complicate pre-acquisition M&A due diligence is the fact that many companies in Brazil have been family-owned for decades, Ellis said. In addition, many compliance policies and concepts “that are perhaps second nature now in many parts of the world,” such as compliance integration, “are still somewhat new in Brazil, although that is beginning to change.”
Accordingly, companies buying Brazilian entities should ensure compliance integration—integrating the acquiring company's compliance infrastructure into the target company—starts “at the very beginning of the deal process” so that “all participants involved recognize that anti-corruption compliance will be a component of the acquisition and that after the acquisition takes place, there will be expectations of compliance improvements,” Ellis said.
With respect to the FCPA, Ellis said more needs to be done in two areas:
• risk assessments—companies must re-evaluate their anti-corruption risk profiles and tailor their compliance activities accordingly; and
• at the back end, companies must monitor, audit and test their compliance programs to make sure they are effectively implemented.
As for the BCCA, Ellis outlined three areas in which he saw the need for improvement:
• risk assessments;
• management of third party relations; and
• monitoring and testing of compliance programs.
Meanwhile, companies should continue to “keep an eye on the press reports” related to Brazil, Ellis said.
He noted that many of the companies implicated in the Petrobras investigation are involved in very significant work projects associated with Brazil's hosting of the 2016 Olympic Games. Brazilian authorities have identified $500 million in questionable spending related to the new Olympic stadium, which could place the government in the uncomfortable position of having to decide how to handle corporations that it may be relying on for the upcoming games, he said.
The anti-corruption developments in Brazil put the onus on companies doing business with entities named in the allegations to take steps to ensure their business is not “tainted as well,” Ellis said. If companies are using agents that are implicated in some of the scandals coming out of that country, they should follow up by performing more due diligence on that agent, such as thorough on-site interviews or examining the agent's books and records, he said.
To contact the reporter on this story: Yin Wilczek in Washington at email@example.com
To contact the editor responsible for this story: Ryan Tuck at firstname.lastname@example.org
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