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Countdown to the Olympics: What’s being done to combat the Brazilian corruption crisis?

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Seven weeks and counting…

FLAG

Amid the samba music, caipirinhas and beach volleyball of this summer’s Olympic Games in Rio de Janeiro, it will be easy to forget how dire the political and economic crisis facing the host country is.

The recent impeachment of President Dilma Rousseff follows the arrest of her predecessor and mentor, ‘Lula’, on suspicion of receiving $8m in kickbacks during the Petrobras corruption scandal. The scandal, the worst in Brazil’s history, involved an estimated $3.7 billion of unrecorded payments from construction company bosses to Petrobras’ executives, in return for hugely inflated contracts.

Financial crime is a major problem in Brazil, as in many emerging economies. The country ranks 77th out of 177 in Transparency International’s corruption-perception index. Historians identify the root of the problem in the country’s former caste system — a structural inequality between the wealthy elite and impoverished labourers that encouraged illicit payments. Yet where Brazilians once tolerated graft as a fact of everyday life, they now consider it the main obstacle to the country’s progress.

In response to mounting public pressure, President Rousseff signed the Clean Companies Act in late 2013. The act, strengthened by subsequent decrees, constitutes one of the most aggressive pieces of anti-corruption legislation among the world’s major economies.

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One of the takeaway provisions of the act is the imposition of strict liability on corporations for corrupt acts committed by their employees or agents. Unlike the US Foreign Corrupt Practices Act (FCPA), there is no requirement to prove corrupt intent. Nor is it a defence to have a robust system of compliance in place, as under the UK Bribery Act.

The potential sanctions for infringements are severe. They include a fine of up to 20% of the company’s worldwide revenues, debarment from tendering for government contracts, and the publication of the offence in the global media. These mirror the ambition of the FCPA and the Bribery Act, although the Clean Companies Act stands out by holding parent and affiliated companies jointly liable.

If these punishments are the proverbial stick, Decree No. 8,420 is the carrot. Previous legislation offered no incentive to companies to tackle corruption internally, but the decree provides that the implementation of a compliance programme will be a mitigating factor when calculating fines.

The parameters for assessing a compliance programme therefore include the commitment of the company’s upper management, the code of ethics applicable to employees, anti-corruption training, specific procedures to prevent fraud and an independent internal body in charge of overseeing the programme.

Enacting the legislation is one thing, but will it be enforced?

Here lawyers have noted the failure of the act to designate a specific government agency responsible for pursuing administrative proceedings, in contrast to the US model which vests the enforcement of the FCPA in the Securities and Exchange Commission and Department of Justice. Instead, any entity within the executive, legislative and judicial branches may bring an action, the likely corollary being an inconsistency of standards.

Furthermore, the Brazilian Constitution gives the country’s 27 states and 5,570 municipalities the right to interpret the act as they see fit. This could create irregularities in the definition of an adequate compliance system, as well as an upsurge in local corruption as unscrupulous mayors blackmail companies bidding for municipal tenders with the threat of investigation.

Nevertheless, for a country in Latin America, the independence of Brazil’s judiciary and its police force, in addition to its respect for the rule of law, is remarkable. Even before the Clean Companies Act came into force, Brazil’s federal prosecutors had the bit between their teeth. In the period from 2008 to 2013 the number of arrests made for crimes relating to corruption increased by 133%.

Moreover, 86 people have already been convicted of crimes relating to the Petrobras scandal, the majority from the country’s political and economic elite, and in arresting Lula prosecutors have sent out a clear message of intent: none will be spared in the pursuit of justice.

The fate of Lula, however, will more likely divide the country than unite it. His extraordinary popularity (he secured 80% approval ratings on leaving office) guarantees an imperfect outcome to the investigation — his acquittal would be condemned as an establishment cover-up; his conviction put down to the machinations of other political parties.

The uncertainty of his future is adding more fuel to a deepening recession, one which saw the economy contract by 3.8% last year. Brazil, already split by race and wealth, risks further fracture.

Yet despite the inseparable convergence of corruption and high politics, which may take many years to untangle, there remains, remarkably, light at the end of the tunnel. The headlines over Petrobras, the enactment of the Clean Companies Act and the fearlessness of federal prosecutors have prompted many businesses to re-evaluate their practices.

Lawyers are already noting that compliance — one of the key planks of the FCPA and the Bribery Act — is slowly embedding itself into the culture of Brazilian companies.

At the same time, the police are increasing their ambition. The on-going investigation into aircraft manufacturer Embraer, whose executives are accused of paying bribes to officials in the Dominican Republic, marks one of Brazil’s first efforts to prosecute corrupt acts committed outside its borders. The collaboration with the SEC and US Department of Justice reflects a willingness on the part of Brazil (one shared by other emerging economies) to adopt a global approach to anticorruption, sharing information and best practice.

It is still too early to judge whether Brazil will succeed in its efforts, and there will be no shortage of allegations in the coming years around the World Cup and Olympic Games.

Indeed, the irony that at this stage in its history Brazil should play host to FIFA and the IAAF — two organisations plagued by their own corruption scandals — has not been lost on ordinary Brazilians.

Yet if all three are now in a race to reform, don’t discount Brazil to make the most progress. Its anti-corruption campaign is showing no signs of mercy. Not even to ex-presidents.

George Croft is a GDL student at the University of Law. He graduated with a languages degree from the University of Oxford in 2013. This post was one of the standout entries we received for the BARBRI Global Financial Crime Blogging Prize.

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4 Comments

Anonymous

TL:DR

Ellie

Onlytime will tell if Brazil can sort out this mess by Rio 2016, but I’m not too optimistic

Ellie

Also am pretty shocked by the transparency list! Thought North Korea was sure to be in last spot but nope I was wrong

Gus the Snedger

Why do people here want to combat Brazilians?

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