Working with the Public Sector: How to Say ‘No’ to Bribery
This is an Insight article, written by a selected partner as part of Latin Lawyer's co-published content. Read more on Insight
The negative impacts of the covid-19 pandemic will continue to be felt in 2022, although vaccination coverage allows for greater optimism. In Brazil, the scenario of uncertainty is heightened by the presidential elections in October, in which issues of importance to the oil and gas industry will certainly be on the agenda, including the role of Petrobras and public policy on fuel prices.
Following Operation Car Wash, Petrobras implemented a radical change in its operations, with a broad divestment policy that is likely to continue in 2022. One of the main consequences is a repositioning of Petrobras’s role in the sector and greater room for private players, and companies should be taking steps to ensure that their internal policies and risk mapping reflect these market changes. While contracts with Petrobras continue to be both significant and strategic, despite the company’s divestments, the importance of clear regulatory frameworks to govern relations with new private players is growing, particularly with respect to measures for antitrust compliance and monitoring, and control of funds.
The year 2022 will see two important regulatory milestones. The first is the opening up of the natural gas market, following the approval of the New Natural Gas Law in 2021 (Law 14.134/2021). This Law promises to modernise and inject new life into the sector by promoting competitiveness and transparency and attracting more investment. The second milestone is the start of private operation of a significant part of Brazil’s refining facilities, which until now have been concentrated in Petrobras. This too indicates increased competitiveness.
Another piece in the strategy of attracting more investment to Brazil’s infrastructure sector is the advent of the New Framework Legislation for the Foreign Exchange Market (Law 14.286/2021), which provides that contracts between exporters and suppliers of infrastructure or products can be made in foreign currency, which will generate greater stability and foreseeability for projects.
The Foreign Exchange Framework Law will come into effect in December 2022. Its main objective is to modernise the Brazilian market by bringing the rules on foreign exchange transactions into line with the regulations in effect in countries that belong to the Organisation for Economic Co-operation and Development (OECD), and so reducing the level of bureaucracy in the market. The expectation is that the new legislation will increase legal certainty in infrastructure and oil and gas projects, an aspect that is vital to attracting private investors and protecting invested capital from high volatility in the value of currencies.
For foreign investors especially, the modernisation of the foreign exchange rules allows individuals and legal entities that meet Central Bank requirements to open bank accounts in Brazil denominated in foreign currency.
These and other measures are intended to prepare Brazil for the process of joining the OECD, which will demand improvements to mechanisms and institutions for fighting corruption, along with legislation and regulations directed to environmental protection and the reduction of inequalities.
The oil and gas and infrastructure markets are highly dynamic and capital intensive and, with the recent history of corruption in Brazil, 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, and with the recent industry’s legal and structural transformations.
Another element in this context is the large number of competitive contracting procedures governed by the New Public Procurement Law (Law No. 14.133/2021), sanctioned by the president in April 2021, which instituted a novel contracting regime for the government and introduced important innovations in matters of compliance. The New Public Procurement Law created new incentives for the adoption and improvement of integrity and compliance programmes by companies that contract with the government, in addition to those already present in previous bidding processes. Now, for bidding processes and contracts formed under the New Public Procurement Law, the adoption of an integrity programme has become mandatory for the company hired to provide works, services and supplies considered to be of great importance (whose object exceeds the amount of 200 million reais). The existence of an effective integrity programme can also be taken into account by the government as a tiebreaker criterion in bidding processes and also for sanctions mitigation purposes, especially in cases where this is not a legal requirement.
Finally, the New Public Procurement Law also added the implementation or improvement of an integrity programme as a requirement for rehabilitation of economic agents, bidders or contractors who have been sanctioned by the government. Such provision is in line with previous measures taken by the Office of the Federal Controller General, which from 2020, through Ordinance No. 1214, also started to envisage the rehabilitation, that is, the possibility of entering into public contracts with sanctioned agents will rely on the proof of ‘adoption of measures that indicate that the reasons for a certain punishment have been overcome, which includes the implementation and application of an integrity program’.
As can be seen, recent legislative innovations have expanded incentives for the creation of private anti-corruption mechanisms and instruments for companies operating in the public procurement market, especially in infrastructure sectors. Such provisions, together with the expectation of a bull market, cause investments in new technologies to prevent misconduct and the creation of robust corporate compliance mechanisms as valuable alliances to companies seeking to invest and do business in the oil and gas and infrastructure sectors.
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 and infrastructure sectors is the number and variety of public agents – such as the federal government, through the Ministries of Infrastructure and Mines and Energy; regulatory agencies; and state-owned companies – involved. Petrobras, for example, has been playing an especially important role. Despite its 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 over 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 to its suppliers.
In this situation, mapping the points of contact between public and private agents – including the new stakeholders that will start to play an important role as the sector opens up – 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 and private 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 the federal level (CGU) and in many states.
Doing business with Petrobras
Petrobras’s contracting procedures have undergone radical changes in recent years. From 1998 onwards, Petrobras used a simplified procedure, created specifically for that company, 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.
A new contracting framework was put in place in 2016, which is 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. In addition, Petrobras issued a new Contracting Regulation,which 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), created in 2014.
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 legislation dealing with compliance issues and evaluation of corporate compliance programmes.
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 and infrastructure sectors, this reality has compelled suppliers to maintain high standards of business conduct by adopting fairly strict compliance programmes themselves.
There are three main documents under the PCPP that govern Petrobras’s relationship with its suppliers: a Code of Ethics, a 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.
Efforts to build a culture of compliance in Brazil’s oil and gas industry
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 Accounting Court. 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 and infrastructure industries.
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, provided 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.
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. The publication of the New Public Procurement Law, as seen above, promises to speed up these efforts.
Financial record-keeping and money laundering
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 No. 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, along with the new challenges that changes to the sector will bring.
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 by implementing changes in the current legislation and strengthening compliance rules. 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.
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.
 Anna Carolina Malta Spilborghs and José Guilherme Berman are partners at Barbosa Müssnich Aragão.