Brazil – an emerging economic superpower
Brazil also presents significant challenges from a business-ethics standpoint, however. The country has a less-than-favorable reputation given its turbulent past of corrupt government officials and the existing significant income gap between the rich and the poor. Despite this, taking the appropriate precautions can still ensure that any business venture into Brazil can be fruitful and risk-free.
In 2012, Brazil’s GDP was US$2,253 trillion – the seventh-largest economy in the world, ahead of countries such as Russia, Canada, and Italy. With its exports rising at a high rate, the country has been awarded with the responsibility of organizing the 2014 FIFA World Cup and the 2016 Olympic Games. It has the sixth- and ninth-largest oil and uranium reserves in the world.
Substantial steps taken in the 1990s towards fiscal sustainability, as well as measures taken to open and liberalise Brazil’s economy, contributed to better competitiveness and an improved environment for the development of the private sector. The country currently possesses a sophisticated technological sector and internationally-renowned companies such as Embraer, Petrobras and AmBev. Attracted by this environment, foreign companies are investing more and more and striving for success.
Corruption in Brazil
Corruption in Brazil does not have a specific origin, although it can be attributable to two known factors: a heritage from the Iberians as a result of patrimonial relations between the state and society, and the country’s large number of politicians. Brazil has 27 governors, 27 vice governors, 81 senators, 513 federal parliamentarians, 5,561 mayors, 5,561 vice-mayors, 1,059 state parliamentarians and 60,320 aldermen – a total of over 73,000 politicians.
The first major case of corruption in Brazil was in 1992, and resulted in the removal of President Fernando Collor de Mello. Since that time, the extension of denouncements made the Brazilian community question their institutions as well as their own future. In Brazil, corruption is estimated to cannibalise up to 2.4 percent of the GDP, which is around BRL 100 billion.
Prevention and combating corruption are priorities
Last July, the Minister for the External Relations ratified the accession of Brazil to the International Anti-Corruption Academy. The document was delivered to the entity’s headquarters in Vienna, Austria. The Minister stated that Brazil is applying to be the regional headquarters of the Academy in order to provide an incentive for other Latin American countries to take part. The Brazilian Government stressed that “prevention and corruption combat are priorities” of the Brazilian public agenda and that they “want to reiterate the interest and the disposal of the government of Brazil to host the regional academy, which can benefit Latin American countries”.
Corruption in Brazil considered a heinous crime
In June 2013, what initially started as a demonstration against increases in public transportation fees quickly degenerated into a large demonstration against excessive spending on the preparation of the 2014 FIFA World Cup. Corruption allegations and demands for transparency were raised. As a response the Brazilian senators approved a bill that will consider corruption a heinous crime. This was an important step towards putting Brazil on par with other jurisdictions with modern and effective anti-corruption laws, such as the United Kingdom with the Bribery Act and the United States with the Foreign Corrupt Practices Act. On 1 August 2013, Brazilian President Dilma Rousseff enacted Law No. 12.846.
“Heinous crimes” are the crimes understood by the legislative powers as the ones deserving the greatest reproval from the State. In Brazil they are expressly mentioned by Law No. 8.072 of 1990. They are crimes committed against goods that are protected by the Federal Constitution, such as life itself.
With the approval of the 2011 bill, those convicted of corruption will lose their rights to amnesty and absolution, and will not be granted bail. Parole will also be more difficult to obtain. The bill also proposed to raise the minimum prison sentence provided in the Penal Code from two to four years. The minimum sentence for individuals who use their position to obtain undue advantage for themselves or others will also be raised from two years to four, with a maximum sentence of eight years.
As already reported in the Mar–May 2013 and Sep–Oct 2013 editions of Compliance Insider®, the new bill is an attempt for Brazil to enhance its image after the 2007 Organization for Economic Co-operation and Development report criticized the country’s lack of efforts in establishing liability for bribing foreign public officials. At present, only individuals are liable for corruption. This lack of effective anti-corruption legislation created compliance difficulties for international companies which operate in Brazil due to the corruption potential in private and public sector transactions and the strict enforcement of anti-bribery rules by United States and United Kingdom authorities. These factors also posed challenges for Brazilian companies adapting to operations in the international market.
The new law will cover foreign entities with businesses or representation in Brazil, not just local companies, and will also cover bribes to both domestic and foreign officials. Companies found guilty of bribery will face fines of up to 20 percent of their gross annual revenue for the previous year at a maximum of BRL 60 million (US$27.3 million). They could also have their operations suspended, have assets confiscated or even face possible dissolution. Anti-bribery legislation, self-disclosure and the existence of an effective compliance programme will be considered when determining the appropriate sanction.
As of last August, the bill has received senate and presidential approval and is expected to come into force in early 2014.
Famous corruption cases
The Mensalão Scandal
The Mensalão scandal is of one of the most important corruption cases in Brazil. Meaning “big monthly payment” in English, Mensalão involved a scheme regarding the buying of parliamentary votes during the presidency of Luiz Inácio Lula da Silva from the Worker’s Party, or Partido dos Trabalhadores (PT).
Robert Jefferson blew the whistle on the corruption after he was accused of involvement in fraudulent licitations regarding Empresa Brasileira de Correios e Telegrafos (Brazilian Post and Telegraph Corporation). Prior to the investigations of Comissão Parlamentar de Inquérito (Brazil’s Parliamentary Enquiry Commission), Jefferson claimed that the deputies from the PT were paid a monthly amount of BRL 30,000 to vote according to government instructions. The votes were being bought with money obtained from bribes through public companies. With this money the PT extinguished debts and assured financing for its electoral campaigns. Several politicians were accused of involvement in the scheme and were dismissed from their positions.
In August 2007, two years after the case was brought to the surface, the Supremo Tribunal Federal (Supreme Federal Court) accepted the Procuradoria Geral da República’s denunciation and opened a case against forty individuals involved in the scandal. These individuals will respond to allegations including active and passive corruption, gang association and money laundering.
Caixa De Pandora
Operação Caixa de Pandora (Pandora’s Case Operation) was a Federal Police operation that was initiated in November 2009. In this case the whistleblower was the Brazilian politician Durval Barbosa, who reported the details of a corruption scheme that had taken place in the Federal District to the Justice Officials of the Núcleo de Combate as Organizações Criminosas of the Ministério Público do Distrito Federal. After assessing the information, officials informed the Procuradoria-Geral da Republica, which brought the case to the Superior Tribunal de Justiça (Superior Court of Justice).
The accusations of Durval Barbosa involved not only politicians but also company owners and administrators, and led to the arrest of then governor José Roberto Arruda. Barbosa’s accusations were supported by video evidence of negotiations between politicians and entrepreneurs which included clear mentions of the bribery scheme and the advantages that would be offered to the bribe payers. The scheme was simple and typical: a donation would be made to a political party and that political party would then direct public tenders to the company owned by the donator. The political party would create complex requirements for the products or services which could only be matched by the bribing company.
Another typical scheme for bribery was creating an emergency situation. Brazilian law does not recognize the need for a public tender in these situations, so direct purchases can be made instead. Because of this, entities were intentionally running their stock (e.g. medicine) down until they were so low that they could declare an emergency and therefore purchase stock from who they wanted, at prices that they set.
These types of cases are commonly encountered by foreign companies using distributors in market-entry situations. Having robust due diligence practices could mitigate the risks associated with this issue.
Between 2002 and 2007, Panalpina Brazil paid over US$1 million in bribes to the Brazilian government officials responsible for assessing and collecting duties and tariffs on imported goods on behalf of its customers. The purpose of many of these bribes was to expedite the customs-clearance process, avoid the imposition of fines and penalties, circumvent Brazilian law requirements for customs declaration of courier shipments, permit shipments to be imported into Brazil without an import license, and allow exports of goods without accurate and complete documentation. Many of the bribes made by Panalpina Brazil on behalf of its customers were in relation to shipments to Brazil from Panalpina in the United States.
In 2011 Bridgestone agreed to pay a US$28 million fine for its role in conspiracies to rig bids, fix prices and allocate market shares of marine hoses in the United States and other countries. It also conspired to make corrupt payments to various Latin American government officials in order to obtain and retain business in several countries, including Brazil. The scheme was said to have run from January 1999 to May 2007.
Corruption Perception Index (2012)
- Treaty member of UN Convention against Corruption (UNCAC), highlighting prevention, criminalization, international cooperation and asset recovery.
- Treaty member of OECD Anti-Bribery Convention, combating foreign bribery.
- Penal Code (Introduced an offence of foreign bribery in 2002).
- Official Misconduct Law.
- Public Procurement law.
Corruption Investigation Agencies
- Office of the Comptroller General.
- Public Ethics Committee.
The Most Common Red Flags in Brazil
- Official action to fight corruption is often seen as ineffective.
- High-level politicians and officials are noted to be corrupt.
- Petty bribery is widespread in the course of activities with the government.
- Judicial system is regularly criticized for its lack of independence and efficacy.
- Litigation records are not open or easy for the public to review and check.
- State-owned enterprises have maintained an important role in the economy.
- Government has a significant stake in the business through stake or stock ownership.
- Principals are often politically-exposed persons and/or relatives or close associates of politically-exposed persons.
- The bidding process for government tenders is not recognized as highly transparent and accountable.
- Good relationships with government are often necessary to establish business.
- It is common to use third-party agents for doing business due to geographical and language differences.
- Obtaining corporate information could be time consuming as it is a slow process.
- One company is often involved across various industries.
- Principals are often connected to several companies.
- Reverse directorships are not usually found in official records.
- Companies frequently get reregistered after being deregistered or liquidated by using a new name and address.