Spotlight on corruption in Brazil

Corruption scandals are regrettably common place in Brazil. Even so, the deluge of recent allegations against Petrobras, the state-controlled oil company, has received blanket coverage in the local media and sparked a series of investigations and debates in parliament.

The timing of this attention is highly political. Many of the allegations relate to business dealings from several years ago, when incumbent Brazilian President, Dilma Rousseff, was chairman of Petrobras’ supervisory board. With President Rousseff seeking re-election later this year, her political opponents are keen to highlight her involvement. However, in this case, the political climate echoes the mood on the street, where widespread protests in major Brazilian cities have voiced public outrage against corruption amongst the political and business elite.

These protests may have accelerated the enactment year of Brazil’s first comprehensive anti-bribery and corruption legislation, Law 12.846 (the “Bribery Law”), as described in our previous Law-Now and the latest version of the CMS Guide to Anti-Bribery and Corruption Laws, which came into force in January this year. This new legislation should prompt all companies active in Brazil to review their compliance procedures and ensure anti-bribery measures are being strictly implemented.

I. Allegations

The recent focus on corruption was triggered in February when allegations relating to Petrobras contracts with floating production platform provider, SBM, were first widely reported (although the allegations were first published on Wikipedia in October 2013). A former SBM employee alleged that Petrobras employees and lobbyists were paid a total of US$139m to secure lucrative contracts for SBM’s FPSOs. Internal investigations by Petrobras and SBM have not found any evidence of wrongdoing, but the accusations are still being investigated by Dutch, U.S. and Brazilian authorities.

Another allegation receiving much attention relates to Petrobras’ purchase of a refinery in Pasadena, Texas. Petrobras paid a total ofover US$1.2bn for the refinery, that was bought by the seller a year earlier for just US$42m and is currently thought to be worth no more than US$180m. Petrobras insist that there is no evidence of foul play, but it is proving difficult to explain away losses of such magnitude. Suspicions are heightened by the arrest of one of Petrobras’ former directors in charge of the acquisition for an unrelated allegation of money laundering.

These headlines have drawn attention to cost overruns on other projects, including another refinery in the North East of Brazil, and high value contracts with major international suppliers. The President’s Workers’ Party (PT) has hit back with allegations of its own relating to the Metro in São Paulo and illegal campaign funding, which tarnish opposition election candidates.

II. Legislation

It is yet to be seen whether any of these allegations will result in successful prosecution, and many of the dramatic headlines are not supported by proof of wrongdoing. However, the new Bribery Law is an important new weapon in the prosecutor’s armoury. For the first time, corporate entities in their own right, will be subject to rigorous judicial and administrative sanctions for a range of corruption offences.

Multinationals may also need to consider the extra-territorial application of the UK Bribery Act 2010 and the US Foreign Corrupt Practices Act 1977 and similar legislation. The added danger for these companies is that any bribery offence is likely to infringe anti-corruption legislation in several countries, so they may face investigation by several enforcement agencies and sanctions in multiple jurisdictions at the same time.

III. Compliance

However, even unfounded accusations can damage reputations. So this latest media frenzy should be a timely reminder of the importance of a robust compliance programme, which identifies regulatory and reputational risks and proactively promotes behaviours that are beyond reproach.

Under section 7 of the UK Bribery Act, it is an offence for a corporate to fail to prevent bribery on its behalf. However, there is a defence if the corporate can prove that it had in place ‘adequate procedures’ to prevent persons associated with it (i.e. an employee, agent or subsidiary) from committing bribery. Although the Brazilian Bribery Law does not contain an equivalent defence provision, it does allow for a reduction in applicable sanctions where anti-corruption systems have been implemented at an organisational level.

The current scandal concerning SBM should give pause for thought to many companies in the oil and gas industry. The allegation is that bribes were paid to Petrobras out of commissions paid to commercial agents for representation in Brazil. Use of agents and payment of commissions is common in international oil and gas, and there is nothing illicit in that, in itself. However, where commissions for obtaining contracts are disproportionate to the services being provided,the temptation to buy the contracts and influence with the client is obvious. So where companies have these arrangements, it is crucial to ensure that compliance procedures cover agents as well, and that agency arrangements allow sufficient oversight by the principal to minimise any risk of bribery.

Conclusion

It is to be hoped that recent scrutiny of corruption allegations in Brazil is not solely a function of seasonal politics. Brazil has lived with endemic corruption for too long and the bulk of society is sick of it. If the new Bribery Law has the desired effect, perhaps this latest flurry of corruption stories will mark the turning of the tide.

It will require sustained efforts by companies to implement compliance procedures and change behaviours, and a willingness of law enforcement agencies vigorously to pursue offenders, but reducing corruption can only bring economic benefits for companies and social improvements for the country as a whole.