Brazil Enacts Long-Pending Anti-Corruption Legislation

In addition, the Clean Company Law provides for successor liability in the case of amendments to the articles of incorporation, change of corporate form of the company, mergers, acquisitions or spin-offs. Id., Art. 4.

Although the Clean Company Law applies only to corporate entities and partnerships, it includes a savings clause that provides that the law does not preempt the personal liability of individuals who participate in the illegal conduct at issue, to the extent of their culpability, under other relevant Brazilian laws. Id., Art. 3; see also Section 3 of this article, which describes the most relevant Brazilian anti-corruption and anti-bribery legislation applicable to individuals.

Definition of 'Official'

The Clean Company Law does not define domestic public officials, but instead follows the definition used elsewhere in the Brazilian legal system, and which includes anyone who, even if temporarily and without remuneration, works for any government level or branch, for any government agency, or for any government controlled entity. See, e.g., Brazilian Criminal Code, Art. 327; Administrative Improbity Law (Law No. 8.492/1992). For purposes of the Clean Company Law, “government controlled entities” are likely to be interpreted to include entities as to which the government has either ownership control and/or management control. The definition of domestic public official under Brazilian law also includes those who work for a private entity but are contracted to provide a public service. See id.

The Clean Company Law does define foreign (that is, non-Brazilian) public officials. Similar to the definition of a domestic public official found in other Brazilian laws, the definition of foreign public officials includes individuals who, with or without remuneration, work in any capacity for a foreign government (at any government level), including its diplomatic missions; for corporate entities controlled by a foreign government; or for public international organizations, such as the World Bank or the United Nations. See Federal Law No. 12.846/2013, Art. 5.

Strict Liability

The Clean Company Law provides for administrative and civil strict liability. Id., Art. 2. In other words, to be able to levy administrative and judicial sanctions against an offending entity, the government will need to prove only that the illegal act was committed for the benefit or interest of the entity, without the need to prove that the management or board of directors of the entity was at fault or that either had a corrupt intent. Specifically, the Clean Company Law provides that corporate entities will be held liable for any illegal conduct committed on their behalf, by their employees, directors, officers, agents, or third parties. Id., Art. 3.

This is unlike the U.S. Foreign Corrupt Practices Act (FCPA), under which the government must prove the existence of a corrupt intent, and is more akin to the UK Bribery Act 2010 (UKBA), under which with respect to the “corporate offence” authorities are not required to show that the board of directors or management knew or was involved in the illegal conduct. Under the Clean Company Law, the government nevertheless must establish that an undue advantage was gained on behalf of the entity as a result of the illegal conduct, which includes improper payments and offers of the same. Id., Art. 5.

Significantly, one of President Dilma Rousseff's vetoes concerned the application of strict liability to all facets of the law, both administrative and civil. The original text of the legislation presented to the President for signature provided for strict liability only with regard to administrative sanctions and with regard to one specific form of judicial sanctions, namely that of stripping an entity of assets, rights, or valuables representing the advantage gained from illegal conduct. For the remaining judicial sanctions at the government's disposal, absent the President's veto, authorities would have had to prove fault or corrupt intent of senior managers or the board of directors. With her veto, President Rousseff eliminated this distinction, facilitating potential application of the law. Aug. 2 Gazette, note 1, supra, at 3.

Enforcement of the Clean Company Law

As noted above, the Clean Company Law provides for both administrative and civil judicial enforcement. The statute of limitations (both for administrative and judicial proceedings) is the longer of five years from the date on which the illegal conduct was discovered, or, if the illegal conduct is ongoing, five years from the date it ceases. Federal Law No. 12.846/2013, Art. 25.

Administrative Enforcement

The jurisdiction to investigate, enforce, and adjudicate administrative cases will vary among agencies, depending on the level of government at which the illegal conduct occurred (municipal, state, or federal) and what government entity was involved. The Federal Comptroller's Office (the Controladoria Geral da Uni'o, or CGU) will have authority to prosecute all illegal conduct involving misconduct vis-'-vis officials of, or otherwise implicating, the Brazilian federal government or any foreign government. Id., Arts. 8 & 9.

If the alleged misconduct concerns the officials of or otherwise implicates a Brazilian state or municipality, the competent prosecuting authority will be the highest authority of the relevant Brazilian state or municipal agency where the alleged illegality occurred. Id., Art. 8. For example, if the allegedly illegal conduct involved fraud with respect to a public tender by a S'o Paulo state public hospital, the Health Secretariat of the State of S'o Paulo would have authority to conduct the process to levy administrative sanctions because the Secretariat is the highest authority relative to the public hospital.

Similarly, if the illegal conduct involved a bribe paid to an employee of the Rio de Janeiro Municipal Transportation Office, the City Hall of Rio de Janeiro, the highest authority over the Municipal Transportation Office, would have authority to conduct the administrative action.

The administrative procedure will be conducted by a commission designated by the relevant authority and composed of two or more civil servants. Id., Art. 10. With appropriate judicial authorization, the relevant administrative authority will be permitted to make use of any judicial measures needed to conduct its investigation, such as search and seizure and access to information otherwise protected by the Brazilian bank secrecy law. See id.; Brazilian Code of Criminal Procedure, Arts. 240-250; Supplemental Law No. 105 (Jan. 10, 2001), Art. 4. The commission must complete the administrative proceeding within 180 days, at which point it must present the facts of the case and its decision, including any sanctions it determines should be imposed against the offending entity. Federal Law No. 12.846/2013, Art. 10. Any entity charged under this process will be provided 30 days from notice of the proceeding to make its defense. Id., Art. 11. The commission's decision, once finalized, will then be sent to the relevant authority for adjudication. Id., Art. 12. An entity found liable on the administrative level will be entitled to appeal the administrative decision to the Brazilian courts.

The Clean Company Law provides for three different types of administrative sanctions: monetary fines (the most significant), restitution of damages caused by illegal conduct, and widespread announcement of condemnatory decisions in various industrial or national publications. Id., Art. 6. Fines are designated to range from 0.1% to 20% of an entity's gross revenues in the year prior to the initiation of administrative proceedings. Id. In situations in which it is not possible to calculate the company's gross revenues, and therefore the 0.1% to 20% rule cannot be applied, entities will be subject to fines ranging from a minimum of 6,000 to a maximum of 60 million Brazilian reais (or approximately U.S. $2,640 to U.S. $26.4 million). Id.

The law also provides that fines cannot be less than the value of the advantage or benefit conferred, if that figure is possible to calculate. Id. Significantly, in approving the law, President Rousseff vetoed a provision that would have capped fines at the total value of goods or services contracted for, effectively barring some companies from being fined 20% of gross revenues from the year prior to the administrative proceeding. Aug. 2 Gazette, note 1, supra, at 2. In doing so, the President eliminated a provision that would have weakened the government's ability to penalize some entities for illegal conduct.

The new law specifies a number of factors that must be considered in levying administrative sanctions against an offending entity. These include the gravity of the infraction; the advantage or benefit sought by the entity and whether the entity had the opportunity to utilize or receive such advantage or benefit; the negative effect of the infraction; and the economic circumstances of the offending entity. Federal Law No. 12.846/2013, Art. 7. In line with U.S. and UK law and practice, the government also will give weight to the existence of a generally effective compliance program; that is, the existence of mechanisms and internal procedures to assure the integrity of transactions and employee conduct as a general matter, auditing and incentives to denounce irregularities, and the effective application of the entity's code of ethics and code of conduct. Id. Other factors include the extent to which the entity cooperates with the government and the value of the contracts that the entity has with the government. Id.

The original text of the law had also included as a factor to be used in levying sanctions the extent to which a public official contributed to the illegal conduct. In another veto, President Rousseff eliminated this provision from the law, thus ensuring that entities are fully responsible for their conduct vis-'-vis the government, even when confronted with demands from public officials (at least in cases where these do not rise to a level that would afford a defense of extortion under Brazilian law).

There undoubtedly will be certain administrative challenges to overcome along the way, such as the highly decentralized nature of the administrative process, a subject of public criticism. At least some authorities with limited relevant training and expertise likely will have responsibility for certain administrative enforcement efforts.

Next month, we will look at civil judicial enforcement of the Clean Company Law and at the circumstances under which lenience agreements may be considered.

Andrew M. Levine and Bruce E. Yannett are partners, Steven S. Michaels is a counsel, and Ana Frischtak is an associate in the New York office of Debevoise & Plimpton LLP. They are members of the Litigation Department and the White Collar Practice Group, and may be reached at [email protected], [email protected], [email protected], and [email protected]. Renata Muzzi Gomes de Almeida is a partner in the Corporate Law and Foreign Investment, Mergers and Acquisitions and Compliance practice groups at TozziniFreire Advogados, based in its S'o Paulo, Brazil, office. She may be reached at [email protected].

At the end of last month's installment, we began looking at Brazil's Clean Company Law, which imposes corporate civil and administrative liability for bribery of domestic and foreign public officials. We continue our discussion herein.

Covered Legal Entities

The Clean Company Law covers corporations, partnerships, and proprietorships, both for-profit and non-profit. It also subjects to its terms non-Brazilian legal entities that operate through an office, branch, or representation office in Brazil, even if only temporarily. Federal Law No. 12.846/2013, Art. 1. The extraterritorial reach of the law appears to be limited to the actions of Brazilian corporate entities abroad, thus leaving the actions of non-Brazilian entities acting outside of Brazil beyond the scope of the law, even if they have a representative office, branch, or subsidiary in Brazil. See id., Art. 28.

In addition, the Clean Company Law provides for successor liability in the case of amendments to the articles of incorporation, change of corporate form of the company, mergers, acquisitions or spin-offs. Id., Art. 4.

Although the Clean Company Law applies only to corporate entities and partnerships, it includes a savings clause that provides that the law does not preempt the personal liability of individuals who participate in the illegal conduct at issue, to the extent of their culpability, under other relevant Brazilian laws. Id., Art. 3; see also Section 3 of this article, which describes the most relevant Brazilian anti-corruption and anti-bribery legislation applicable to individuals.

Definition of 'Official'

The Clean Company Law does not define domestic public officials, but instead follows the definition used elsewhere in the Brazilian legal system, and which includes anyone who, even if temporarily and without remuneration, works for any government level or branch, for any government agency, or for any government controlled entity. See, e.g., Brazilian Criminal Code, Art. 327; Administrative Improbity Law (Law No. 8.492/1992). For purposes of the Clean Company Law, “government controlled entities” are likely to be interpreted to include entities as to which the government has either ownership control and/or management control. The definition of domestic public official under Brazilian law also includes those who work for a private entity but are contracted to provide a public service. See id.

The Clean Company Law does define foreign (that is, non-Brazilian) public officials. Similar to the definition of a domestic public official found in other Brazilian laws, the definition of foreign public officials includes individuals who, with or without remuneration, work in any capacity for a foreign government (at any government level), including its diplomatic missions; for corporate entities controlled by a foreign government; or for public international organizations, such as the World Bank or the United Nations. See Federal Law No. 12.846/2013, Art. 5.

Strict Liability

The Clean Company Law provides for administrative and civil strict liability. Id., Art. 2. In other words, to be able to levy administrative and judicial sanctions against an offending entity, the government will need to prove only that the illegal act was committed for the benefit or interest of the entity, without the need to prove that the management or board of directors of the entity was at fault or that either had a corrupt intent. Specifically, the Clean Company Law provides that corporate entities will be held liable for any illegal conduct committed on their behalf, by their employees, directors, officers, agents, or third parties. Id., Art. 3.

This is unlike the U.S. Foreign Corrupt Practices Act (FCPA), under which the government must prove the existence of a corrupt intent, and is more akin to the UK Bribery Act 2010 (UKBA), under which with respect to the “corporate offence” authorities are not required to show that the board of directors or management knew or was involved in the illegal conduct. Under the Clean Company Law, the government nevertheless must establish that an undue advantage was gained on behalf of the entity as a result of the illegal conduct, which includes improper payments and offers of the same. Id., Art. 5.

Significantly, one of President Dilma Rousseff's vetoes concerned the application of strict liability to all facets of the law, both administrative and civil. The original text of the legislation presented to the President for signature provided for strict liability only with regard to administrative sanctions and with regard to one specific form of judicial sanctions, namely that of stripping an entity of assets, rights, or valuables representing the advantage gained from illegal conduct. For the remaining judicial sanctions at the government's disposal, absent the President's veto, authorities would have had to prove fault or corrupt intent of senior managers or the board of directors. With her veto, President Rousseff eliminated this distinction, facilitating potential application of the law. Aug. 2 Gazette, note 1, supra, at 3.

Enforcement of the Clean Company Law

As noted above, the Clean Company Law provides for both administrative and civil judicial enforcement. The statute of limitations (both for administrative and judicial proceedings) is the longer of five years from the date on which the illegal conduct was discovered, or, if the illegal conduct is ongoing, five years from the date it ceases. Federal Law No. 12.846/2013, Art. 25.

Administrative Enforcement

The jurisdiction to investigate, enforce, and adjudicate administrative cases will vary among agencies, depending on the level of government at which the illegal conduct occurred (municipal, state, or federal) and what government entity was involved. The Federal Comptroller's Office (the Controladoria Geral da Uni'o, or CGU) will have authority to prosecute all illegal conduct involving misconduct vis-'-vis officials of, or otherwise implicating, the Brazilian federal government or any foreign government. Id., Arts. 8 & 9.

If the alleged misconduct concerns the officials of or otherwise implicates a Brazilian state or municipality, the competent prosecuting authority will be the highest authority of the relevant Brazilian state or municipal agency where the alleged illegality occurred. Id., Art. 8. For example, if the allegedly illegal conduct involved fraud with respect to a public tender by a S'o Paulo state public hospital, the Health Secretariat of the State of S'o Paulo would have authority to conduct the process to levy administrative sanctions because the Secretariat is the highest authority relative to the public hospital.

Similarly, if the illegal conduct involved a bribe paid to an employee of the Rio de Janeiro Municipal Transportation Office, the City Hall of Rio de Janeiro, the highest authority over the Municipal Transportation Office, would have authority to conduct the administrative action.

The administrative procedure will be conducted by a commission designated by the relevant authority and composed of two or more civil servants. Id., Art. 10. With appropriate judicial authorization, the relevant administrative authority will be permitted to make use of any judicial measures needed to conduct its investigation, such as search and seizure and access to information otherwise protected by the Brazilian bank secrecy law. See id.; Brazilian Code of Criminal Procedure, Arts. 240-250; Supplemental Law No. 105 (Jan. 10, 2001), Art. 4. The commission must complete the administrative proceeding within 180 days, at which point it must present the facts of the case and its decision, including any sanctions it determines should be imposed against the offending entity. Federal Law No. 12.846/2013, Art. 10. Any entity charged under this process will be provided 30 days from notice of the proceeding to make its defense. Id., Art. 11. The commission's decision, once finalized, will then be sent to the relevant authority for adjudication. Id., Art. 12. An entity found liable on the administrative level will be entitled to appeal the administrative decision to the Brazilian courts.

The Clean Company Law provides for three different types of administrative sanctions: monetary fines (the most significant), restitution of damages caused by illegal conduct, and widespread announcement of condemnatory decisions in various industrial or national publications. Id., Art. 6. Fines are designated to range from 0.1% to 20% of an entity's gross revenues in the year prior to the initiation of administrative proceedings. Id. In situations in which it is not possible to calculate the company's gross revenues, and therefore the 0.1% to 20% rule cannot be applied, entities will be subject to fines ranging from a minimum of 6,000 to a maximum of 60 million Brazilian reais (or approximately U.S. $2,640 to U.S. $26.4 million). Id.

The law also provides that fines cannot be less than the value of the advantage or benefit conferred, if that figure is possible to calculate. Id. Significantly, in approving the law, President Rousseff vetoed a provision that would have capped fines at the total value of goods or services contracted for, effectively barring some companies from being fined 20% of gross revenues from the year prior to the administrative proceeding. Aug. 2 Gazette, note 1, supra, at 2. In doing so, the President eliminated a provision that would have weakened the government's ability to penalize some entities for illegal conduct.

The new law specifies a number of factors that must be considered in levying administrative sanctions against an offending entity. These include the gravity of the infraction; the advantage or benefit sought by the entity and whether the entity had the opportunity to utilize or receive such advantage or benefit; the negative effect of the infraction; and the economic circumstances of the offending entity. Federal Law No. 12.846/2013, Art. 7. In line with U.S. and UK law and practice, the government also will give weight to the existence of a generally effective compliance program; that is, the existence of mechanisms and internal procedures to assure the integrity of transactions and employee conduct as a general matter, auditing and incentives to denounce irregularities, and the effective application of the entity's code of ethics and code of conduct. Id. Other factors include the extent to which the entity cooperates with the government and the value of the contracts that the entity has with the government. Id.

The original text of the law had also included as a factor to be used in levying sanctions the extent to which a public official contributed to the illegal conduct. In another veto, President Rousseff eliminated this provision from the law, thus ensuring that entities are fully responsible for their conduct vis-'-vis the government, even when confronted with demands from public officials (at least in cases where these do not rise to a level that would afford a defense of extortion under Brazilian law).

There undoubtedly will be certain administrative challenges to overcome along the way, such as the highly decentralized nature of the administrative process, a subject of public criticism. At least some authorities with limited relevant training and expertise likely will have responsibility for certain administrative enforcement efforts.

Next month, we will look at civil judicial enforcement of the Clean Company Law and at the circumstances under which lenience agreements may be considered.

Andrew M. Levine and Bruce E. Yannett are partners, Steven S. Michaels is a counsel, and Ana Frischtak is an associate in the New York office of Debevoise & Plimpton LLP. They are members of the Litigation Department and the White Collar Practice Group, and may be reached at [email protected], [email protected], [email protected], and [email protected]. Renata Muzzi Gomes de Almeida is a partner in the Corporate Law and Foreign Investment, Mergers and Acquisitions and Compliance practice groups at TozziniFreire Advogados, based in its S'o Paulo, Brazil, office. She may be reached at [email protected].