Originally published in Pepper Hamilton LLP, 29 September 2011
When Brazilian President Dilma Rousseff took office in January 2011, she enjoyed a super majority in the Brazilian Congress and took the helm of one of the world's hottest economies. A decade of growth and progressive social policies has spread prosperity across Brazilian society. Unemployment is at a record low, credit is expanding and income inequality, although still high, has fallen significantly. Economic growth is projected to continue for several years.
Rousseff is addressing concerns about inflation and a tight labor market to maintain the economic momentum. At the same time, she is facing another perennial stress in Brazil's economy – the impact of corruption. For too many years, official corruption has been an unfortunate characteristic of Brazil and a concern of international investors and businesses. Indeed, an article this month in Forbes, a popular and widely-read American financial magazine, cautioned potential investors in Brazil on the "hidden cost" of "widespread and persistent" corruption in this fast-growing market.
A New Direction in Anti-Corruption Enforcement
Rousseff has had to address several instances of corruption, some of which have involved persons close to her and other involving persons important to her governing coalition. This "faxina," or cleaning, is said to stand in contrast to past paths, such as the 2005 Mensalão scandal involving alleged monthly payments by the ruling party to a number of congressional deputies to vote in favor of legislation. While some minor resignations followed, leaders admitted no wrongdoing, insisted on getting back to the business of governing, and chastised the media for its reporting on the scandal.
Recent events have presented Rousseff with several tests. One of the first came in her own house in June, when the president's chief of staff resigned after press reports questioned his rapid accumulation of wealth after his net worth increased 20-fold over four years. In August, police arrested the deputy tourism minister and 33 tourism ministry employees as allegations arose about diversion of almost $2 million in training money intended to prepare taxi drivers, waiters and hotel staff for the 2014 FIFA World Cup and 2016 Olympic Games. In the latest news, this week the tourism minister resigned amid allegations that household staff had been financed through government funds.
The arrests and resignations come in the wake of allegations of corruption at the ministries of agriculture and transport. Prosecutors seized a number of computers at the agriculture ministry in August, and the agriculture minister has resigned and has been asked to appear before an ethics commission. His chief of staff also has resigned, following allegations of payoffs from lobbyists and "bandits" allegedly involved in a public company linked to the agriculture ministry. Last month, the transport minister and more than 20 officials resigned over allegations of kickbacks at the ministry of transport, including alleged skimming of money from federal infrastructure contracts. Rousseff said that "you don't get rid of corruption all at once, but we can make it more and more difficult."
Rousseff has talked of accountability and the need for investigations to be pursued. At the swearing-in ceremony of the new minister for agriculture, she said "that it was her duty to see an end to the impunity which shelters many of those accused of involvement in corruption practices and we will punish all abuses and excesses." Others wonder if the resolve will stand if it further erodes the ruling coalition, or as one commentator noted, even if "she's doing anything more than just reacting to accusations." Recent exoneration of a legislator who was filmed accepting large amounts of money as a supposed payoff for political support raises questions about the depth of reform. Moreover, recent budget tightening at enforcement agencies has made the job of detecting corruption more difficult. But it cannot be denied that the spirited work of Brazil's policing mechanisms, such as the Tribunal de Contas, the comptroller general, the Federal Police, and the Corregedoria de Justiça, has remained strong in recent months.
For Brazil's estimated $18 billion World Cup investment, each of the 12 host cities has a public prosecutor dedicated to reviewing abuses in the process. More than 80 civil investigations already are underway. One public prosecutor recently said, "We are in favor of the Cup — it can bring lots of opportunities for people and help resolve infrastructure bottlenecks, but this can't be done at the expense of misuse of public funds or corruption." A Cup preparation project at São Paulo's international airport was frozen this month by a Brazilian judge who said that bidding rules had been ignored under the excuse of urgency. "The risks of having projects without the correct procedures and transparency are rising exponentially," said a public policy advisor at the Ethos Institute.
These issues have not been lost on U.S. regulators, who significantly have expanded their enforcement of an American anticorruption law that affects international business. This law, the Foreign Corrupt Practices Act (FCPA), prohibits companies and individuals from paying or offering anything of value to a foreign official to obtain or retain business or to gain an unfair business advantage. American regulators have aggressively enforced the FCPA in recent years, making clear their intent to use the law to address situations in which corruption seems to be the standard way of conducting business. Record-setting fines have been imposed against international companies in recent years for conduct that some previously had viewed as a necessary evil in the business world. Officials of companies violating the FCPA have been sentenced to lengthy prison terms. Thus, companies operating in high-risk markets must take steps to protect against the risks of liability. These steps help not only to avoid liability, but also to attract investors who will want to know that they are investing in a company dedicated to maintaining compliance with the FCPA and other anti-corruption laws.
The recent events in Brazil are likely to gain the attention of U.S. regulators. Indeed, this summer, the Federal Bureau of Investigation (the lead law enforcement agency in the United States) acknowledged that its squad that is focused on the FCPA will be looking closely at contracts issued around the World Cup and the Olympics. Concerns about contracts at major ministries, such as those dedicated to transportation, agriculture and tourism, will increase this level of scrutiny. It is not uncommon for anticorruption regulators to look for such trends as they determine where to look for their next case leads. Companies engaged in work that involves contacting with government officials in these ministries can expect that review may follow.
The atmosphere also may be right for increased cooperation between U.S. and Brazilian enforcement officials. In early August, a United Nations (UN) delegation came to Brazil as part of an anti-corruption review group to evaluate how Brazil has been fulfilling its obligations under the UN Convention against Corruption. One area of particular importance in this review is improving international cooperation. It thus is likely that Brazilian authorities are now keenly focused on how they can work with international anti-corruption regulators.
Impact for Multinational Business
Multinational companies operating in Brazil should take note of these developments. Compliance is as important now as ever to ensure that operations in Brazil do not lead to liability. The important steps expected by regulators, including announcing clear policies on expected conduct, conducting due diligence and oversight of business partners, evaluating the risk environment, setting the management compliance commitment, developing appropriate procedures and controls, and fostering a compliance culture, must be embraced by companies operating in Brazil and elsewhere. An effective program is an important factor influencing how regulators view allegations concerning potential misconduct at a company, should such an issue arise. Indeed, dispositions in many recent cases have depended in large measure on the effectiveness of a company's compliance program.
Equally important, the value of assuring investors that corruption risks have been minimized has never been higher for companies with substantial business in Brazil. A well-structured compliance program not only provides security to investors, but also satisfies the expectations of financial regulators, who already have announced their intention to scrutinize business in Brazil more closely.
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