After a few slow years, the Brazilian oil and gas market is showing signs of improvement. New exploration blocks are being included in forthcoming bidding rounds, and studies for new gas pipelines are under way. Brazil’s government is expecting record investment in the sector in 2020, in the range of 1 trillion reais.
The oil and gas market is highly dynamic and capital intensive, and with the recent history of corruption, questions of compliance and the risks associated with ethical misconduct are sure to be a concern for private sector agents in this turnaround period. Prospects for growth and justified optimism have to be aligned with the need to deal more effectively with the risk of corruption. Investments in new technologies to prevent misconduct and the creation of robust corporate compliance mechanisms are valuable allies to companies seeking to invest and do business in the oil and gas sector.
One of the most challenging questions when structuring compliance policies for businesses is how to say ‘no’ to corruption, especially in the oil and gas and infrastructure sectors. Put another way, how can a business know whether its risk prevention mechanisms and policies are sufficient to avoid misconduct? Concerns of this nature are even more pressing in these sectors, given their complexity. To answer the question, accurate knowledge is needed of the sectors, the players and the risks to which they are exposed.
A first factor of complexity in the Brazilian oil and gas sector is the number and variety of public agents involved. Private sector agents deal with a multitude of public entities, such as the federal government, acting through the Ministry of Mines and Energy, which is responsible for formulating sector policy, and the National Petroleum Agency, the sector regulator and representative of the federal government in concession contracts. Beyond the federal government, there are also the states, which regulate the distribution of natural gas.
There are also a number of state-owned enterprises in the sector, with Petrobras and PPSA having especially important roles. Despite a broad disinvestment policy and the sale of various subsidiaries, Petrobras continues to be a significant player because it operates pre-salt blocks granted under the production-sharing regime and because it is the main supplier of natural gas. Following investigations into corruption in the course of Operation Car Wash, Petrobras invested heavily in compliance and formulated a broad corruption prevention programme and codes of conduct that apply not only to the company but its suppliers. PPSA is the state-owned company that represents the federal government in consortiums and operational committees in production-sharing contracts, and is thus active in the management and supervision of oil and gas exploration and production in pre-salt fields.
In this situation, mapping the points of contact with public agents is fundamental to the formulation of internal compliance mechanisms. To be effective, any corporate policy on interactions with public agents must not only address the critical points of these interactions, but also be appropriate for the sector in which the company operates and the kind of relationship with public authorities that its business requires.
Another important task is to identify the occasions when misconduct is more likely to occur. Government bidding processes, and especially negotiation of price proposals, have historically been one of the times most prone to frauds and other misconduct in infrastructure sectors, in the form of cartel practices by the private agents or collusion between private and public agents with a view to obtaining illicit favourable treatment.
Compliance practices have been growing among oil and gas companies, which have strengthened their internal control mechanisms and standards of conduct. The objective is to fight corruption and improve the way the industry deals with matters such as interaction with public agents, donations and sponsorships, whistle-blowing and channels of communication, and conflicts of interest.
Many regulatory bodies are ready to take prompt action in response to corrupt practices that come to their knowledge, including public prosecutors (both at federal and state levels), federal and state courts of accounts, and public administration bodies responsible for internal controls, such as the Office of the Federal Comptroller General, which exists at both federal level (CGU) and in many states.
Petrobras’s contracting procedures have undergone radical changes in recent years. From 1998 onwards, Petrobras used a simplified procedure, created specifically for that company by Decree 2745 of 1998, which allowed extensive use of the invitation contracting process, by which only companies chosen by Petrobras could participate in bidding processes. This was considered one of the many factors that facilitated unlawful practices.
Law 13303 was enacted in 2016, establishing a new contracting framework applicable to all state-controlled companies, including Petrobras. Under the new rules, Petrobras can restrict participation in bidding processes to companies registered in its system, but cannot choose which will take part in bidding for any contract.
Law 13303 is supported by the Petrobras Contracting Regulation, approved in June 2018. This Regulation provides that all parties interested in registering with Petrobras as suppliers of goods or services must demonstrate compliance with the Petrobras Corruption Prevention Programme (PCPP), which was created in 2014, and the Governance and Compliance Board of Petrobras, a corporate body composed of an Executive Governance Department and an Executive Compliance Department.
The PCPP is managed by the Compliance Executive Management, through the Compliance and Corruption Prevention Programme Management, in alignment with other areas of Petrobras’s governance structure, such as the Governance, Risk and Compliance Board. Since 2015, the Board has taken action to strengthen enforcement of the PCPP and to ensure compliance in processes and mitigation of risk, including fraud and corruption risk, and adherence to laws, standards, and internal and external regulations.
Under the PCPP, businesses interested in registering with Petrobras as suppliers of goods or services must undergo a prior compliance due diligence, known as integrity due diligence (DDI).
A DDI assessment involves a review of various documents presented by suppliers interested in contracting with Petrobras, such as information concerning their organisational and business structure, their relationships with public sector officials, their compliance record and the effectiveness of their compliance programme. The risk factors considered during the assessment are consistent with Federal Decree 8420 of 2015, which contains regulations under Brazil’s Clean Companies Act (Law 12846 of 2013), and criteria under Directive 909 of 2015 (evaluation of corporate compliance programmes), published by the CGU, and Directive 2279 of 2015 (evaluation of compliance programmes in micro and small businesses) published jointly by the CGU and the Secretariat of Micro and Small Enterprises.
At the end of the DDI assessment, Petrobras will determine the ‘degree of integrity risk’ (GRI) to which Petrobras may be exposed in its relationship with the supplier, and classify the supplier as green (low GRI), yellow (medium GRI) or red (high GRI). This classification is reviewed annually, when the registration is renewed.
The DDI results are recorded and used by Petrobras managers when selecting companies that will be invited to participate in its competitive bidding processes, and to determine the level of monitoring for potential fraud and corruption risks. For practical purposes, a high-risk classification will exclude suppliers from Petrobras’s bidding procedures. Given Petrobras’s importance in the oil and gas sector, this reality has compelled suppliers to maintain high standards of business conduct by adopting fairly strict compliance programme themselves. Suppliers’ GRI ratings are available on Petrobras’s e-procurement website, Petronect.
There are three main documents under the PCPP that govern Petrobras’s relationship with its suppliers: a Code of Ethics, thea Conduct Guide and a Code of Good Practices. These documents address such issues as conflicts of interest, nepotism, money laundering, terrorist financing, and the receipt and offering of gifts and hospitality.
Petrobras has strict rules for its suppliers, and conduct harmful to the company exposes offending suppliers to an administrative accountability procedure (PAR). As provided for under Brazil’s Clean Companies Act, the objective of PARs is to determine the administrative liability of legal entities for illegal conduct that is harmful to Petrobras.
If suppliers are proven to have been involved in fraud, corruption or money laundering, or to have acted contrary to the Petrobras Code of Ethics, the Petrobras Conduct Guide or the PCPP itself, they will be subject to penalties, including administrative fines and the termination of business relations with the Petrobras system.
Penalties imposed in PARs are recorded in the National Register of Sanctioned Entities (CNEP) and published in the Official Gazette. The CNEP was created specifically for entities sanctioned for corruption under Brazil’s Clean Companies Act. The CNEP and the National Register of Barred and Suspended Entities (CEIS) are part of an integrated system maintained by the CGU. Public authorities, agencies and state-owned enterprises keep the registers up to date by directly submitting the names of companies they have sanctioned for violating contracting or procurement rules or the Clean Companies Act.
Although Petrobras has specific requirements, precautions should be taken when participating in any government contracting process. The relationship between the contracting entity and interested bidders should always be institutional, and any questions bidders may have should be dealt with through appropriate channels that allow all potential participants to have access to the questions and the answers given, ensuring that the principles of administrative fairness, such as equal treatment and publicity, are upheld.
All government contracts are subject to scrutiny by authorities such as the CGU and the Federal Public Accounts Tribunal. The Public Prosecutor’s Office is also very active in the supervision and control of government contracts, through both civil and criminal proceedings.
As far as contracts for construction work and supply of services are concerned, the main ‘choke’ points in terms of compliance risks are suppliers’ and contractors’ relationships with inspection agents, subcontracts for part of the contracted service or works, and changes in the scope of the contract while it is being performed. A fundamental step in designing internal policies to deal with these risks is a study of Brazilian public procurement and contracting laws and its anti-corruption legislation, to draw up an accurate risk matrix.
On this point, it is key to remember that Brazil’s Clean Companies Act imposes objective administrative and civil liability on a company for acts of corruption performed by third parties in the company’s interests or for its benefit, so it is essential for companies to know their subcontractors and other suppliers and the potential risks associated with those parties. To reduce the chances of involvement in cases of corruption or fraud in government bidding processes and contracts, companies should carry out appropriate checks and make use of checklists when contracting and supervising suppliers of goods and services, brokers and other intermediaries, associates and other parties that may interact with public authorities.
At times, however, while a subcontract or other contract with a third party may not contemplate interaction with government authorities on the company’s behalf, the interaction can occur while the contract is being performed and generate risks for the company. For example, in the course of carrying out projects in the energy and natural resources sector, equipment and other goods are required, and the movement of those goods may involve border crossings, ports, airports, and negotiations with export and customs agents. Logistics suppliers might commit customs violations that benefit the company by accelerating processes, avoiding inspection or influencing the result of inspections, and thus expose the company to liability under the Clean Companies Act.
Thus, in conducting due diligence on third-party suppliers, companies should check whether the supplier, be it an individual or a company, has a history of involvement in administrative misconduct and ensure that the supplier has a compliance programme that not only mitigates these risks but is consistent with the company’s own standards of business ethics.
Companies should also include clauses in their contracts with suppliers that require commitment to integrity in public-private interactions. Clauses of this type will provide that the supplier must comply with the company’s policies and instructions, that the contract will be terminated if the supplier commits any misconduct in dealings with national or foreign public authorities, and that the supplier will indemnify the company if the company is held liable for the supplier’s acts. Although the parties are free to draw up clauses that contemplate the performance of a specific service, these clauses can be generic in nature, applicable to any economic sector, not just the oil and gas industry.
Companies should also be attentive while the contract is being performed, and make periodic checks to ensure a third-party supplier is acting in accordance with the contract and the law. There is a series of red flags that can indicate involvement in fraud or the payment of undue advantages to public agents, such as requests that payments be made in an unusual manner (in cash, in foreign currency, to more than one bank account, to accounts in countries other than the country where the supplier is based or is providing the service), and contracts in which the service to be provided is poorly defined. Another potential source of problems is the use of success-based clauses, providing that the supplier will only be paid (or will receive a higher amount) if it is successful in performing the contract, which could make the supplier feel under pressure to use less than legal means to increase earnings. Payment of a success fee can also serve to disguise, for accounting purposes, an undue advantage paid to a public agent.
In fact, accounting records are important in good compliance practices. They should be detailed and enable income and expenses to be monitored, facilitating the identification of illicit conduct. For example, the records should identify the reason for a contract, the contract price and the market price, information on delivery of the product or service, and comments on the quality of the service in relation to its price. Non-typical characteristics in transactions, or changes in the level of revenues (a marked increase in revenue from government contracts in a certain region, for example) or expenses (contracts for services at above-market rates, or a sudden decrease in the expense of a certain tax, for example) can indicate that something is amiss. Last, because of the quantity and complexity of their processes, large companies, especially those in the oil and gas sector, should arrange for independent, external audits of their accounts.
The oil and gas industry has dedicated a good deal of attention and effort to developing more robust compliance practices that will bring greater transparency to the sector. These efforts translate into more security and certainty for investors. At the same time, they encourage industry players to improve their internal practices by making them aware of the importance of ethical and sustainable conduct to the stability of their businesses.
One of these efforts is the Integrity Pact of the Petroleum, Gas and Biofuels Industry (the Pact), signed by leading companies in the sector. The Pact sets out, in a straightforward way, 14 guidelines and actions for ethical, integral, transparent, sustainable, environmental and socially responsible conduct. The Pact contemplates adoption of a zero-tolerance policy on violations of anti-corruption laws and competition practices.
The Pact also sets out some recommended compliance practices, such as due diligence to identify potential risks associated with suppliers and other third parties, the adoption of efficient internal controls and records, implementation of whistle-blowing channels that guarantee confidentiality and protection against the risk of retaliation, and training sessions to ensure that collaborators understand the principles and conduct expected of them under companies’ internal policies.
As a result of the Pact, the Guide to Good Practices on Corporate Compliance in the Oil and Gas Industry (the Guide) was launched by the Compliance Committee of the Brazilian Institute of Oil, Gas and Biofuels in November 2018, with the support of the CGU. The Guide was written collectively by the signatories of the Pact, based on comparative studies of their compliance programmes and generally accepted international guidelines.
Focusing on the entire supply chain and other members of the industry, the Guide aims to set out basic guidelines for adopting a compliance programme that reflects the industry’s risks. The Guide is yet more evidence of the movement towards self-regulation in the oil and gas industry, which sees compliance as an essential element in the development of the sector.
The oil and gas sector has also seen increased use of data analysis and machine learning tools to identify red flags for potential irregularities in contracts, indicating a trend towards automated checks in compliance practice.
The industry has been making sterling efforts to meet significant challenges, but there is still more work ahead. There is a pressing need for clearer rules on lobbying and advocacy practices, which have historically drawn little attention in Brazil, and for that reason lack transparency. And, despite the efforts made to date, transparency in government contracting continues to be one of the main demands made by investors and private sector players.
The importance of saying no to bribery is not limited to the oil and gas industry. In fact, all infrastructure sectors are highly sensitive to matters involving bribery and corruption, given that there is always some kind of state interaction in these kinds of activities.
Many sectors, including telecommunications, transport, rail, highways, water and sanitation, are public services open to the private sector under delegation, which must be preceded by a public bid. The same applies to public construction projects, which also must be preceded by public tender. The number of privatisations in Brazil is growing rapidly in the wake of recent political changes in federal and state governments.
Illegal acts such as bribery and cartels involving public bids are not unusual in a number of sectors. To avoid liability, those involved must comply with the public rules, communicating with the public authorities through the official channels and reporting any misconduct immediately to the relevant regulatory bodies.
Some state governments, such as those in Rio de Janeiro and the Federal District, have recently enacted laws stating that any private party that enters into a public contract must prove that it has an effective compliance programme. This is just one example of how efforts to avoid misconduct are being implemented in Brazil.
Another concern relates to the need for better mechanisms to identify companies’ final beneficiaries, to prevent and combat money laundering more effectively. Since money laundering comes into play after a crime has been committed, to disguise or conceal the direct or indirect product of that crime, it has also received attention in the oil and gas sector in recent years. In fact, at certain phases of Operation Car Wash, industry executives were accused of money laundering for having entered into sham contracts with companies owned by hawala brokers, with amounts paid under the contracts being passed on to public agents as bribes. According to the accusations, amounts transferred in this way were the product of criminal practices committed against Petrobras, such as cartels, rigged bids and embezzlement.
Under Brazilian law, companies are required to keep accurate financial books and records. However, the regulations are essentially focused on tax and bankruptcy law and accountability to shareholders, and not on anti-corruption provisions.
Under Article 1179 of Brazil’s Civil Code, ‘companies must follow an accounting system, based on uniform entries in their books corresponding to the underlying documentation, and must draw up, annually, a balance sheet and a profit and loss statement’. Brazil’s Tax Code establishes that companies must keep the books required for commercial and tax accounting and documentary evidence to support the information entered in the books. Further, it is a crime under Law 8137 of 1990 (the Tax Crimes Law) for a company to omit facts or insert inaccurate items in its financial records to evade taxes.
Neither companies nor individuals are required to report any criminal activity of which they may become aware. The same is true for the disclosure of violations of the Clean Companies Act. On the other hand, if an individual holding a management position, who has responsibility for taking action within the company, learns that bribery or any other criminal act is being committed, that person may be prosecuted for failure to take action to avoid the criminal conduct.
Until Federal Law 12283 of 2012 (the Anti-Money Laundering Law, which amended Federal Law 9613 of 1998), the crime of money laundering depended on the existence of one of the predicate offences set out in an exhaustive list in the legislation. Now, however, the crime of money laundering is committed whenever someone ‘conceals or disguises the true nature, origin, location, availability, transaction or ownership of assets, rights or valuables that constitute the direct or indirect proceeds of a criminal offence’. The crime is also committed if, to conceal or disguise the proceeds, someone converts the assets into licit goods, or acquires, receives, exchanges, negotiates, gives or receives in guarantee, keeps, keeps in deposit, transacts or transfers them, or imports or exports them for an amount different from their real value. Finally, money laundering encompasses the use, in economic or financial activity, of assets, rights or valuables that are proceeds of crime, and participation in a group, association or firm with the knowledge that its main or secondary activity is directed to the commission of money laundering crimes.
In addition to defining the crime of money laundering, the Anti-Money Laundering Law establishes client due diligence, record-keeping and reporting obligations, and non-criminal sanctions for failure to comply with those obligations.
These are just some of the challenges that must be overcome on the road to greater integrity and transparency in public-private relationships in the infrastructure sector, and especially in the oil and gas industry.
Both industry and government have been working to construct compliance mechanisms that will reduce the risk of fraud and corruption in strategic sectors of the Brazilian economy, such as the oil and gas sector, where the perspectives for growth are good. On the government’s side, the creation and enhancement of broad anti-corruption laws, and specialist supervision and control authorities, seek to prevent abuses by public agents and encourage the market to do its part.
In response to this movement, the oil and gas industry has invested in horizontal practices to establish parameters for ethical, effective and sustainable business practices that will contribute to the sector’s development. Internally, companies have felt the need to improve their control mechanisms and have strengthened their compliance policies with an eye towards new perspectives for expansion.
All these efforts, obviously, start from the premise that an ounce of prevention is worth a pound (or even more) of cure. The recent history of corrupt practices in Brazil shows not only the costs involved, but also the losses that can result from doing business on the basis of illegal, fraudulent and abusive practices. In saying ‘no’ to corruption, private sector agents also say ‘no’ to those costs, and recognise that transparent conduct and compliance with the law does pay off in the end.
Effective compliance also requires a thorough understanding of the market, in all its complexity, so as to design compliance policies and risk prevention mechanisms that are truly appropriate for each company’s business. Generic compliance structures that do not take into account the reality of a company’s business may initially generate some value, but in the end will not achieve their main objective.
In a complex and competitive market, it is important to establish a critical mass of agents who also want to say ‘no’ to corruption. Initiatives on self-regulation in the area of compliance are a trend and Brazil’s oil and gas industry has made real efforts in that direction. Due diligence when contracting suppliers and other third parties is important, too, not only to avoid the risk of liability under the Clean Companies Act, but also to spread good practices.
 Anna Carolina Malta Spilborghs and José Guilherme Berman are partners at Barbosa Müssnich Aragão.
 Regulamento de Licitaçãoes e Contratos da Petrobras.
 See Evaluation Reporting (Relatório de Notas) and Monitoring (Portal de Monitoramento) at Petronect.com.br.