The Guide to Infrastructure and Energy Investment Second Edition

Assessing Corruption Risks in the Brazilian Infrastructure Sector: A Short Guide to Investors

Introduction

It is no secret that Brazil has been navigating through troubled waters since the beginning of 2014. It has been through the longest and hardest recession in its history and, amid the economic crisis, and largely contributing to it, Brazil has been hosting, since March 2014, its biggest corruption investigation ever.

These have certainly been challenging times for companies and businesses in Brazil. However, as of September 2017, economic indicators are already showing the first signs of recovery, and investment opportunities are booming, largely fostered by cash flow pressures suffered by some of the Brazilian largest groups (as a consequence of the financial and reputational damages caused by the current investigations, many of these groups have decided to sell relevant and profitable assets to survive the current crisis, thus generating new opportunities to domestic and foreign investors).

Such investment opportunities are particularly widespread in the infrastructure sector. That notwithstanding, a common concern shared by potential buyers is the anti-corruption and regulatory implications that could arise from the acquisition of an asset potentially involved with bribery, bid rigging, or other violations to the Brazilian laws.

In this context, this article aims to providing a short guidance on the main risks that such investors may face when planning to enjoy Brazilian upcoming opportunities in the infrastructure and energy sector, as well as a very preliminary assessment on how such risks could be managed or mitigated.

A short overview of the anti-corruption investigations in Brazil

Operation Car Wash has been investigating a gigantic corruption scheme involving the state-owned oil titan Petrobras and several of the largest Brazilian infrastructure groups, including some international companies. As of July 2017, Operation Car Wash has generated 1,765 judicial and administrative procedures, 201 arrest warrants and 279 requests for international cooperation. It has also produced 10 corporate leniency agreements, with more being negotiated, along with 158 plea bargaining agreements. In addition, 277 people have been criminally charged for crimes such as corruption, crimes against the financial system, international drug trafficking, formation of criminal organisation and money laundering, among others.

Along with Operation Car Wash, several other investigations have been launched, such as ‘Black Blood’, ‘Acronym’ and ‘Receiver’. Apart from involving large sums of money allegedly diverted to corruption, such operations have in common the fact that all of them involve companies operating in the infrastructure sector. Many other investigations were also started on different fronts, such as Zelotes, Greenfield, Carne Fraca, Catilinárias, Mar de Lama and Leviatã.

Infrastructure companies are certainly at the centre of this turmoil. Their frequent interaction with public authorities makes them particularly exposed to corruption-related risks, and many of their most valuable assets may be particularly affected by the corresponding legal and reputational consequences of such investigations, such as public financing, concessions and licences.

Overview of the Brazilian anti-corruption legislation

Anti-corruption legislation has been in place in Brazil for a very long time, but until recently was mainly focused on applying criminal sanctions against individuals (either those paying or those receiving illicit advantages). The legal tools to fight corruption, through almost all of Brazilian legislative history, were the monopoly of punitive criminal rules, with an extremely reduced focus on the control, prevention and sharing of responsibilities between the State, corporations and the civil society.

The status quo of combating corruption in Brazil has undergone a profound transformation in recent years. The 1988 Federal Constitution, the Brazilian Public Procurement Law,[2] the Fiscal Responsibility Law[3] and the Administrative Misconduct Law[4] have all marked the beginning of a period of strong legislative focus on preventing and repressing acts that victimise the government, creating a consolidated legal framework for criminal, administrative and civil punishment of individuals and companies engaged in such acts.

Such shift in focus also culminated in the enactment of Law No. 12,846 of 2013, the Brazilian Clean Company Act (BCCA), and the Brazilian Foreign Corrupt Practices Act (FCPA), which specifically aims to punish companies doing business in Brazil for acts against the Brazilian or foreign public administration.

If, on the one hand, this has created a strong set of statutes fighting corruption from different and complementary angles, on the other hand it has created quite a complex scenario for companies and individuals in which anti-corruption laws overlap, leading to different sanctions, established by different regulations, involving multiple enforcement agencies. In this sense, there are a number of different statutes that could be simultaneously applied in case of illegal acts involving public corruption.[5]

Companies that engage in corruption might face several civil and administrative[6] penalties, along with their employees and executives or not. The table below is a preliminary attempt to summarise this complex backdrop of legal penalties.

Statutory basis

Kind of action

Potential enforcers

Potential sanctions for legal entities

10,406/2002

(Civil Code)

Civil action for damages against legal entities and individuals.

Both the damaged entity and the Public Prosecutor’s Office can start a lawsuit before the appropriate civil court.

Payment of the damages suffered by the public party.

8,429/1992

(Improbity Law)

Civil improbity action against legal entities and individuals.

Both the damaged entity and the Public Prosecutor’s Office can start a lawsuit before the appropriate civil court.

Loss of assets or amounts unlawfully acquired; payment of a civil fine of up to three times of the benefits gained or damages caused; prohibition from entering into new contracts with the public administration or from receiving tax or credit benefits or incentives, even if through a legal entity of which it is a majority partner, for up to 10 years.

12,846/2013

(BCCA)

BCCA’s civil proceeding against legal entities only.

Both the damaged entity and the Public Prosecutor’s Office can start a lawsuit before the appropriate civil court.

Loss of assets, rights or values that represent a direct or indirect advantage or benefit obtained from the infraction, except for the right of the injured party or third party in good faith; suspension or partial prohibition of its activities; Compulsory dissolution of the legal entity; prohibition on receiving incentives, subsidies, subsidies, donations or loans from public entities and public financial institutions or controlled by the public power, for a minimum term of one and a maximum of five years.

12,846/2013

(BCCA)

BCCA’s administrative proceeding against legal entities only.

The damaged entity and other agencies, such as the appropriate Internal Control Offices (e.g., Ministry for Transparency, Supervision and Internal Control (CGU) in case of actions involving the federal administration) can start an investigation ‘ex officio’.

Fine; public exposure of the condemnation.

8,666/1993 (Public procurement law) and other public procurement laws and contracts

Administrative liability action under the Public Procurement and under the Concessions Law mostly against legal entities.

The damaged entity and other agencies can start an investigation ex officio.

Warning; fine; temporary suspension from participation on bidding procedures and prohibition of contracting with the Public Administration, for a period of time of up to two years; declaration of inability to bid or contract with the Public Administration.

8,443/1992

(Federal Court of Accounts’ Organic Law)

Administrative liability under the Federal Court of Accounts’ Organic Law mostly against legal entities.

The Federal Court of Accounts can start an investigation ex officio.

Disbarment to participate, for up to five years, on biddings of the Federal Public Administration.

8,137/90 and 12,529/11 (Competition Law)

Administrative liability against the legal entities (the law includes provisions regarding criminal liability to individuals as well).

The Administrative Council for Economic Defense (CADE).

Fine; publication of the conviction; ineligibility for official financing and for participation in biddings; registration on the National Registry for Consumer Protection; recommendation to the respective public agencies regarding intellectual property and tax matters; company divestiture, transfer of corporate control, sale of assets or partial interruption of activity; prohibition to carry on trade on its own behalf or as representative; any other act or measure required to eliminate harmful effects to the economic order.

CADE – bid rigging

Understanding the legal risks and navigating through them

As explained above, a single act of corruption can trigger parallel enforcement actions by various different enforcement agencies, potentially resulting in overlapping penalties, which could range from fines to the loss of assets and licences. Among these actions, a growing concern is related to the recently enacted BCCA.

The BCCA has created a system of responsibility based on strict liability, under which a conviction can be imposed irrespectively to any proof of fault, wilful misconduct or even knowledge of the wrongdoing. Indeed, according to the system established by the BCCA, a benefit to the investigated company is in principle a sufficient trigger for establishing the company’s liability, making it responsible even for acts committed by third parties on its behalf. Additionally, it has provided for the joint responsibility of affiliates, subsidiaries, controlling or parent companies, and even members of consortia. The penalties to be applied under the BCCA are also substantial, including fines of up to 20 per cent of the company’s annual gross revenues, along with other relevant penalties[7] such as debarment or even, in extreme cases, the closing down of the legal entity.

That considered, the BCCA should be a relevant (although not exclusive) focus of attention for corporations investing in Brazil, especially for those companies investing in industries in which there is a higher interaction with public authorities, such as the infrastructure and energy sector.

The BCCA became effective on 29 January 2014 and sets out five main potential offences:

  • to promise, offer or give, directly or indirectly, any improper advantage to a public official, or third person related to him or her;
  • to finance, fund, sponsor or in any way subsidise illicit acts against the public administration;
  • to make use of an intermediary (individual or legal entity) to conceal or disguise the real interests or the identity of the beneficiaries of the acts performed;
  • regarding public tenders and contracts, to thwart, defraud, impede or disturb any act of public bidding procedure and its competitive nature, to manipulate or defraud the balance of economic and financial contracts with the public administration; and
  • to hinder the investigation or assessment activity of public agencies, entities or officials, or to interfere with their work, including activities falling within the scope of regulatory agencies and supervisory bodies of the national financial system.

The lack of substantial case law regarding the enforcement of the BCCA adds uncertainty to any analysis on how the authorities will interpret its provisions. However, there are already some specific elements within the Law that are creating deep concerns in investors: (1) its strict liability system (2) provisions regarding M&A transactions; (3) provisions on joint liability; and (4) responsibility of executives for corrupted acts.

On the other hand, if corruption related risks cannot be totally avoided by investors, there are instruments to mitigate the risks imposed by the Brazilian legislation and corruption context, which – if correctly implemented – can provide much more safety and comfort for investments in highly exposed markets.

Strict liability

The strict liability element would be the most significant and relevant innovation of the BCCA, considering that legal entities may be punished regardless of their culpability or even though they had taken all preventive measures possible.

On the basis of the BCCA, a company can be sanctioned because of an isolated employee’s or third party’s act (such as a vendor or service provider) that benefits or aims at benefitting the company, even if its higher management or representatives were unaware, did not consent and did not encourage such behaviour.

Considering said strict liability system, the implementation of a compliance management system (CMS) rises as the most adequate corporate response.

Despite the fact that a CMS cannot be used as a discharge argument under Brazilian legislation, its existence guarantees several sanctioning benefits (potential reduction of the administrative fine) and – naturally - is able to prevent wrongdoings from happening.

On the other hand, an ineffective CMS or a CMS designed to be effective only on paper not only will show itself as useless, but will also not guarantee the sanctioning aforementioned benefits. Sanctioning benefits will only be available for companies capable of demonstrating that, by the time of the offence, they had effective compliance tools in place, focused on actually preventing corrupt practices and mitigating the company’s own specific risks (no ‘one kind fits all’ compliance programme).

Brazilian legislation provides details on the expected features of an adequate CMS,[8] similarly to what the US Sentencing Guidelines do.

Joint liability

Article 4, section 2 of the BCCA provides that parent, controlled or affiliated companies, or consortium members (within the scope of the respective contract) shall all be held jointly liable for corrupted acts.[9]

As one can imagine, this is a very controversial provision, especially because it affects companies with absolutely no power to interfere in the decision-making process that led to the misconduct. This scenario of actual unfairness not only enhances uncertainty to companies and enforcers, but also can lead to discussions in court, since jointly liable companies would have strong legal grounds to defend that such liability would be unreasonable. This is also a point of concern in M&A transactions, particularly when one is planning to acquire a company previously owned by a parent company that is currently under investigation.

Minority shareholdings would probably provide the basis for a better defence against such broad provisions, particularly when the minority investor can a compliance-oriented conduct in the exercise of its power towards the invested company.

For investors more generally speaking, an adequate ABC due diligence is a proper way to map the corresponding risks and provide a subsequent defense should any sort of litigation emerges in the future. More on this issue will be developed in the subsequent topic of this article.

M&A transactions

The BCCA included special provisions that somehow relate to M&A transactions. Its Article 4 establishes that ‘the responsibility of the legal entity remains with it in the event of any of amendments to their articles of incorporation, corporate changes, mergers, acquisitions or spin-offs’, limiting such liability – in mergers and acquisitions – to the payment of applicable fines and to the full compensation for occasional damages, up to the value of the transferred assets.

From the enforcer’s perspective this provision aims to guarantee that the sanctions will not be set aside and will be executed (even if just a fraction of it); from the investor’s perspective it raises the risk of M&A transactions in Brazil, which, as mentioned above, requires carefully conducted anti-corruption due diligence (ACDD).

The ACDD must comprise non-materialised risks, which means that the analysis on the target company shall comprise the conduction of thorough background checks, but also include an assessment of the target’s exposure to corruption-related risks and the mitigating mechanisms in place.

In the ideal scenario, the legal and anti-corruption diligences must be coordinated, making it possible to jointly (and more efficiently) assess materialised and non-materialised issues. In this sense, the results of said assessment shall aid companies in their decision-making processes, also supporting the design of contractual protections and other measures that could limit post-closing liabilities.

In this regard, the proper and advised drafting of representations and warranties and other provisions on the transaction documents are also key elements in limiting investors liability in M&A transactions.

Executives liability for corporate corruption

Differently from the strict liability applicable for legal entities in the BCCA, individuals ought to be punished in accordance with their own culpability; therefore, when acting with intent or fault when committing the wrongful act.

However, in a sort of Brazilian adaptation of the wilful blindness theory, there have been rulings[10] in which managers were held accountable without having specifically committed any illicit act. In such cases, managers were found guilty based solely on the assumption that they have had control over all the circumstances of such illicit act and deliberately decided not to act, making such omission criminally relevant.

From a civil perspective, the aforementioned anti-corruption regulations have definitely raised the stakes for corporate corruption in Brazil and corrupt acts could deeply affect a company’s value and profit. In this sense, some scholars have been maintaining that failing in addressing such risks, could be construed as a violation to the executive’s duty of care, making him or her accountable for reparations before damaged parties (e.g., minority shareholders).

In this context, although the implementation of a compliance programme is not a corporate obligation under Brazilian law and, therefore, companies cannot be held accountable for its absence, some scholars have sustained that, depending on the specific case, a manager’s complete omission in implementing any preventive initiative might be construed as a violation of his or her corresponding duty of care.[11]

Adequate corporate governance rules and a proper CMS would also serve, in this context, to limit executive’s liability, segregating accountability within the legal entity and demonstrating the exercise of a proper duty of care. In the end, it would assist on preventing – on an occasional wrongdoing – allegations that management should be held criminally accountable for omission, or personally responsible for reparations of damages suffered by third parties.

Conclusion

It is undeniable that Brazilian anti-corruption context and legislation present an undesired amount of uncertainty and that any investment in a highly exposed industry will contain some level of risk; nevertheless, there are instruments in hand to properly evaluate the risks of a given operation and to mitigate them to acceptable levels, empowering investors to benefit from several upcoming opportunities in Brazil.

Both the factual and legal context impose on companies operating in Brazil the urgent need to create and implement compliance mechanisms in order to prevent, detect and remedy breaches of integrity related to corruption. When adequately implemented, such mechanisms are able to diminish the risk of wrongdoing, limit occasional sanctions, and reduce management exposure to civil and criminal liability.

In the same sense, a proactive and well-documented ‘pro-compliance and control’ position in boards and other governance bodies can assist minority shareholders in drawing a line between the risks faced by an invested company and their own risks.

For new investments, properly conducted anti-corruption due diligences – with adequate technique and expertise, as well as due consideration of the local legal and cultural framework – have been proving mostly valuable to evaluate non-materialised corruption risks, also allowing the investor to address and mitigate such risks in the transaction documents and structure.

As the waters start to calm down in Brazil and business opportunities start to multiply in the infrastructure sector, understanding risks and being able to cope with them becomes key to enjoying the upcoming opportunities of this recovering market.

Notes

[1] Marcos Paulo Verissimo is a partner and Raphael Rodrigues Soré is a senior associate at Machado, Meyer, Sendacz e Opice Advogados.

[2] Public Procurement Law No. 8,666 of 1993.

[3] Fiscal Responsibility Law – Complementary Law No. 101 of 2000.

[4] Administrative Misconduct Law No. 8,429 of 1992.

[5] Brazilian legislation regarding private corruption is quite scarce and shall not be analysed in this article.

[6] Corporate corrupted acts could have criminal implications to the individuals involved; however, not to corporations, since legal entities can only face criminal liability in Brazil in connection with environmental issues.

[7] BCCA sanctions will not prevent independent claims for damages by the damaged entity or entities. In this sense, if a company benefits from a corrupt act the damage caused can be compensated alongside the punishments listed below:

a fine of 0.1 to 20 per cent of the company’s gross revenues of the last year prior to the beginning of the proceeding and, if it is not possible to determine the amount of the revenue, the fine shall be established between 6,000 reais to 60 million reais;

b publishing of the administrative decision not only in the Official Gazette, but also on the main page of the website of the legal entity condemned;

c prohibition to receive public incentives, subsidies, donations and financing from one to five years;

d seizure and confiscation of assets and gains related to the misconduct act;

e partial suspension or interdiction of activities; and

f compulsory dissolution of the legal entity when the entity is (1) used on a regular basis to ease or promote the performance of wrongful acts, or (2) organised to conceal or dissimulate illicit interests or the identity of the beneficiaries of the acts performed.

[8] Decree 8,420/2015. Article 42. For the purposes of the provisions in Section 4 of Article 5, the integrity programme shall be assesses for existence and implementation, based on the following parameters: (1) commitment of the senior management of the legal entity, including the boards, evidenced by visible, unequivocal support to the programme; (2) standards of conduct, code of ethics, and integrity policies and procedures applicable to all employees and managers, irrespective of the position or role; (3) standards of conduct, code of ethics and integrity policies that are extensive, when necessary, to third parties, such as suppliers, service providers, brokers and associates; (4) periodic training on the integrity programme; (5) periodic risk analysis oriented to any adjustments required in the integrity programme; (6) accounting records that comprehensively and accurately reflect the corporate transactions; (7) internal controls to ensure the prompt preparation and reliability of the corporate reports and financial statements; (8) specific procedures to prevent fraud and illegal actions within the scope of bidding procedures, the implementation of administrative agreements, or any interactions with the public sector – albeit facilitated by third parties – such as the payment of taxes, submission to audits, or obtaining permits, licences, authorisations and certificates; (9) independence, structure and authority of the internal body in charge of implementing and enforcing the integrity programme; (10) channels to report non-compliance, which should be open and widely disseminated to employees and third parties, as well as methods oriented to safeguard good faith whistleblowers; (11)disciplinary action in case of breach of the integrity programme; (12) procedures to ensure the prompt interruption of any non-compliance events or violations detected, and timely remediation of the damage caused; (13) appropriate hiring measures and, as appropriate, supervision of third parties such as suppliers, service providers, brokers and associates; (14) during mergers, acquisitions and corporate restructuring procedures, verify any faults or illegal actions committed or the existence of vulnerabilities at the legal entities involved; (15) ongoing monitoring of the integrity programme for improvement, in order to prevent, detect and fight the detrimental actions provided for in Article 5 of Act No. 12,846 of 2013; and (16) transparency of the legal entity regarding donations to candidates and political parties.

[9] Such liability would be restricted to the payment of applicable fines and to the full compensation for occasional damages.

[10] See http://lavajato.mpf.mp.br/atuacao-na-1a-instancia/decisoes-da-justica/documentos/Sentenca%20-5047229-77.2014.404.7000.pdf; https://tre-rn.jusbrasil.com.br/jurisprudencia/23199699/recurso-criminal-rcrim-1457668-rn-trern; https://stj.jusbrasil.com.br/jurisprudencia/468930842/recurso-especial-resp-1646332-sp-2017-0001767-3 (all accessed on 15 August 2017).

[11] The duty of care, according to Brazilian legislation, is related to the executives’s bias, what must be the one of an honest and active person, acting continuously in the best interest of the company, behaving as carefully and diligently as a reasonable person would do in similar circumstances. In this sense, if the absence of a CMS is considered as a failure of the manager’s duty of care, this may lead to civil liability for the manager as an individual.

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