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By Joan Meyer and Fernando Corrêa da Costa
Joan Meyer is the chair of Baker McKenzie’s Compliance, Investigations & Government Enforcement Practice in Washington. She advises corporate clients on a range of global compliance matters, including comprehensive risk minimization strategies, the structuring of transactions to minimize fraud, corruption, money-laundering and other compliance risks, and manages teams in conducting compliance reviews and internal investigations and audits.
Fernando Corrêa da Costa is a legal adviser in U.S.-Brazil cross-border matters and a member of Baker McKenzie’s Compliance, Investigations & Government Enforcement Practice in Washington. He advises international corporate clients in compliance and dispute resolution matters, including criminal investigations by the Department of Justice, Securities and Exchange Commission, and other government agencies.
By Joan Meyer and Fernando Corrêa da Costa
Lava Jato—Operation Car Wash—is transforming the legal landscape in Brazil. The anticorruption probe began as an investigation of allegations that officers of state-controlled oil company, Petrobras, accepted bribes in exchange for awarding contracts at inflated prices to a multitude of construction companies and other businesses. Operation Car Wash revealed systemic corruption across the public sector involving losses of more than USD $15 billion and, as of the time of this article, has led to more than a thousand warrants, dozens of pretrial detentions, and over a hundred convictions. Brazilian authorities have recovered more than USD $3 billion to date and the investigation is ongoing.
The aggressive response by prosecutors in Brazil to evidence of corruption is cascading through Latin America and has resulted in the initiation of numerous new investigations by other countries of corruption outside Brazil.
Operation Car Wash underscores the importance, and practical effect, of the Clean Company Act, which Brazil enacted in 2013. The legislation marked the beginning of corporate liability for corruption not only in theory, but also in practice. Although companies are not subject to criminal liability in Brazil, the Clean Company Act establishes civil and administrative penalties for companies that engage in corrupt conduct, without requiring proof of intent. As Brazil adjusts to the new reality of rigorous anticorruption enforcement, a system that incentivizes companies to disclose evidence of corruption and cooperate with enforcement authorities is taking shape. In many respects, this incentive structure parallels established law enforcement procedures in the U.S. These parallels have important implications for multinational corporations concerning how they should address both known and potential misconduct.
The benefits of disclosure and cooperation that were clear in the U.S. are becoming increasingly clear in Brazil. The U.S. Sentencing Guidelines (USSG) have long provided for a culpability score reduction of up to five points for the timely disclosure of misconduct and full cooperation with the enforcement authorities. If companies comply with these procedures, they may be eligible for substantial reductions in criminal penalties.
The U.S. Department of Justice (DOJ) also has a longstanding practice of awarding increased penalty reductions for disclosure and cooperation beyond those provided for in the USSG in settlement agreements. And, in April 2016, the DOJ announced a one-year FCPA Pilot Program that quantified the additional penalty reductions that it will award companies after disgorging ill-gotten gains. Companies that satisfy the program’s cooperation and remediation criteria may receive penalty reductions of as much as 25 percent below the USSG range. Companies that make a voluntary disclosure in addition to cooperating and remediating can receive a penalty as much as 50 percent below the USSG recommendation, and will be considered for a declination in which no criminal penalties are assessed. These substantial benefits of disclosure and cooperation in the U.S. lead many companies to cooperate with U.S. authorities in identifying and remediating corruption issues. While DOJ is currently evaluating the efficacy of the Pilot Program and may make some changes, it recently announced that the program has been successful and that it will be extended for an indefinite period.
In Brazil, the Clean Company Act allows companies that cooperate with authorities to receive up to a two-thirds reduction in penalties and also remain eligible to bid on government contracts. These benefits are significant and it is becoming increasingly common for Brazilian companies that violate the Act to view them as essential to their financial survival. At the time of this writing, more than ten companies have obtained penalty reductions by executing leniency agreements pursuant to which they paid fines, committed to cooperate with prosecutors, and agreed to improve internal controls and compliance programs. For example, Camargo Corrêa and Andrade Gutierrez, two of Brazil’s largest construction companies, entered into leniency agreements with Brazilian prosecutors, whereby they agreed to pay fines in the range of USD $200 million and USD $285 million, respectively, and to cooperate with related investigations.
Companies are also entering into joint bribery resolutions with the U.S. and Brazilian authorities. In January 2017, Rolls-Royce agreed to pay more than USD $800 million to settle with Brazilian, U.S. and U.K. authorities over bribery allegations in multiple countries. Recently, two Brazilian multinational corporations, Odebrecht SA and its subsidiary, Braskem SA, entered into cross-border resolutions with authorities in the U.S., Brazil and Switzerland and agreed to pay a combined USD $3.6 billion in penalties and disgorgement. Thus, companies in the U.S. and Brazil are now recognizing that they have strong incentives to cooperate with authorities in both countries, although it is not yet clear to what extent voluntary self-disclosure will be viewed as an important factor in evaluating cooperation and mitigating penalties in Brazil.
The benefits of settling a case rather than litigating it are widely recognized in the U.S. and are now understood in Brazil. One of the benefits of a settlement in the U.S. is that it allows a company to stipulate to a succinct statement of facts that is announced in a single press release. In contrast, a trial can do significant harm to a company’s reputation and good will with customers by generating headlines over an extended period of time as damaging evidence is presented in court. Taking a case to trial against the government can present risks that cannot be fully controlled by the company. Pursuing a settlement, on the other hand, gives a company a relative degree of influence over the outcome of a case and may allow it to negotiate which facts, including mitigating facts, will be publicly disclosed, what penalties will be paid, and whether parent and subsidiary companies should be treated as equally culpable.
In Brazil, it remains to be seen whether settlements with the government will allow companies to influence outcomes or mitigate negative press. While it is true in theory that a settlement may allow a company to stipulate to a limited properly scoped statement of facts, there is an increased risk in Brazil that individuals involved in the settlement negotiations, or who are separately represented, may make unauthorized disclosures. Moreover, the Brazilian process thus far has been more “transparent” than in the U.S. with critical documents made available to the press and prosecutors willing to be more candid about the progress and results of an investigation. This transparency may reduce the perceived value of a settlement in Brazil. Nevertheless, a company operating in Brazil still has strong incentives to seek a settlement rather than litigate, despite the absence of the more established structure available in the U.S.
Notwithstanding the fact that a failure to disclose potential misconduct to government authorities can lead to increased penalties in the U.S. and Brazil, some companies may hesitate to disclose, hoping that the misconduct will not be independently discovered. In the U.S., there are two primary reasons why authorities may learn of undisclosed misconduct. First, federal prosecutors are very active in investigating corruption, and an investigation of misconduct by one company in a particular industry can often lead to the discovery of misconduct by other companies in the same industry sector. Second, the Dodd-Frank Act includes a whistleblower provision that provides substantial financial incentives for individuals who report to the government misconduct at publicly traded companies.
In Brazil, corruption has been a longstanding practice that often went unpunished. However, the risk that undisclosed conduct will be discovered and prosecuted has increased dramatically in recent years. New technology, an integrated international banking system and international cooperation among multiple jurisdictions have all made it much easier for enforcement authorities to discover corrupt activities. The Car Wash probe has demonstrated that an investigation of one company can expose a web of corruption involving many other actors.
Although Brazil does not have a whistle-blower statute, the Brazilian Congress passed a criminal law in 2013 authorizing prosecutors to enter plea bargain agreements with criminal defendants who provide information that can lead to the discovery of other wrongdoers and the recovery of ill-gotten gains. Since that time, plea bargain agreements have become the most effective tool of criminal investigators in Brazil. They played a key role in the evolution of the Car Wash probe, with individuals entering these agreements both after being held in pre-trial detention and, as the pressure has increased, a growing number entering agreements even before detention. Thus, the risk that undisclosed misconduct will be discovered and punished is substantial in both the U.S. and Brazil, elevating the risks of non-disclosure.
Although cooperation can lead to substantial penalty reductions in the U.S. and Brazil, some companies may believe that obstructing an investigation and using delay tactics may be to their advantage. This has historically been the case in Brazil, where penalties could only be imposed after all appeals were exhausted but could not be imposed after the statute of limitations expired, even if charges were filed or a conviction was obtained within the limitations period. Because defendants could generally file several different appeals, it was common for a case to last for up to a decade in Brazil, which made it possible for wrongdoers to avoid punishment by using delay tactics until the statute of limitations expired.
Two recent changes in Brazilian law have greatly reduced the likelihood that a company can use delay to avoid punishment for corrupt acts or to shield key employees from liability. The Clean Company Act now provides that the statute of limitations in a corporate corruption case is satisfied by the filing of a lawsuit within the limitations period, so that delay tactics after litigation has begun do not impact whether a company can ultimately be held liable for its misconduct. Additionally, Brazilian jurisprudence now allows punishment in any case to be imposed after the first appeal rather than after all appeals are exhausted, sharply decreasing the likelihood that delay tactics can enable key employees to invoke the statute of limitations and escape the consequences of their misconduct.
In the U.S., penalties can be imposed after the limitations period as long as charges were filed within the statute of limitations, so that delay after a lawsuit is filed cannot affect the liability of companies or their employees. Additionally, it is common practice for prosecutors to require companies to enter tolling agreements during an investigation in order to obtain cooperation credit, so that they can effectively extend the limitations period. Thus, delay tactics, with the hopes that a case cannot be brought, have virtually no value in the U.S. and much less value in Brazil than they had in the past. In both countries, the cost of losing cooperation credit is likely to exceed the perceived benefit of delay.
For a company that does business in the U.S. and Brazil, the growing alignment in incentives simplifies the decision to disclose, cooperate and settle. In the past, a company would likely have desired to make a disclosure to U.S. authorities in order to obtain a reduction in penalties, to increase its ability to influence the case’s outcome, and to avoid the collateral consequences and negative publicity associated with a trial. However, the company would have also had a reasonable expectation that U.S. authorities would not have bothered to disclose the misconduct to Brazilian prosecutors who were perceived to have a weak enforcement regime. Without that disclosure, Brazil would otherwise not have learned of the misconduct and, by the time the case was settled, would not have been able to complete their investigation and prosecution before the statute of limitations expired.
Although disclosure to Brazilian authorities historically would not have led to penalties for the corporation, there were no negative consequences for nondisclosure and a company could protect its image and shield key employees by keeping potential misconduct confidential. However, the Clean Company Act and the emerging enforcement practices of Brazilian authorities change this analysis, as discussed above. In addition, the September 2015 Yates Memo announced that the U.S. Department of Justice will not give corporations credit for cooperating with government investigators unless they provide all information relevant to individual prosecutions, making clear that companies cannot mitigate their own FCPA liability while shielding key employees.
As incentives in the U.S. and Brazilian systems become more closely aligned, a company is less likely to make a U.S. disclosure without making a simultaneous disclosure in Brazil that would eliminate any concerns related to inter-governmental information sharing. Nonetheless, there are at least five crucial differences in the incentives provided by the U.S. and Brazilian legal systems:
Thus, the incentives to disclose, cooperate and settle are still weaker in Brazil than in the U.S. While generally there is a change in attitude towards disclosure in Brazil in light of its cooperation with the U.S., there may be some cases in which a company will still want to weigh the advantages of a disclosure to Brazilian authorities.
The benefits of disclosure, cooperation and settlement in Brazil are, however, taking shape. Calls for a whistleblower statute in Brazil may lead to legislation that increases the risk of nondisclosure. Even without new legislation, Brazilian prosecutors can encourage self-disclosure by treating it as a quantifiable mitigating factor in penalty calculations and can encourage settlements by establishing a clear pattern of respect for confidentiality. These changes would be significant steps in forming an incentive structure in Brazil that parallels the incentive structure in the U.S. In any event, growing alignment of incentives across jurisdictions is a welcome development for prosecutors and companies alike. Prosecutors can ensure uniformity in outcomes, which increases the perception of fairness in the system. Alignment also simplifies decision-making for multinational corporations by encouraging disclosure to and cooperation with all relevant authorities.
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
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