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Betting Against Corruption

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Professor Juliet Sorensen (Northwestern University Pritzker School of Law) and Northwestern Law students David Hall and Kobby Lartey recently attended the Seventh Conference of States Parties to the United Nations Convention Against Corruption in Vienna, Austria.  See here for more information on the Conference. This post is from David Hall.

If I were to tell you that a high ranking Italian government official and a Criminal Justice Officer from the UNODC were participating in a panel on international corruption, you might expect that the panel would focus on organized crime.

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World Cup Puts Focus on Complex Compliance Issues In Brazil

Today’s post is from Gregory Paw (Pepper Hamilton LLP).

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Tomorrow afternoon, Brazil begins what many hope will be a month-long showcase of “joga bonito” – the Brazilian passion for football summarized by Pelé as “play beautifully” – with the opening game of the 2014 World Cup pitting the host team against Croatia in São Paulo.  Yet the days leading to the opening have been filled with anxious scenes of subway strikes by groups of laborers, social advocates and students, and the accompanying snarls of traffic clogging the streets of the nation’s biggest city.  The protests are not as large as those of last spring, but nonetheless put into context the issues of the past year as Brazil adjusts to a post-boom economy and debates the public spending priorities that favored sports venues over other public works projects.  All of these events are of importance to compliance professionals watching the Brazilian business landscape for important anti-corruption trends and a better understanding of the current risk environment.

The past year has seen passage of landmark anti-corruption legislation, and the growing pains that can come with implementing a law that ushers important change.  Brazil currently lacks a centralized enforcement infrastructure for its powerful new anti-corruption law.  Brazil’s 27 states and its municipalities, as well as each branch of national government, all can launch investigations and render interpretations on open issues under the new law, such as the critical issue of whether any liability cap exists.  The inevitable inconsistencies will make compliance an ongoing challenge.

Equally important is the persistent culture of corruption that continues to dominate the Brazilian business news.  Many of the recent stories have focused on infrastructure projects in preparation for the World Cup and the 2016 Olympics.  Cost overruns for Brazil’s 12 World Cup host stadiums are soaring.  For example, an audit from the Court of Accounts of the Brazilian Federal District demonstrated a near-doubling from the $312 million 2012 estimated cost, with overpriced construction work alone accounting for $196 million of this overrun.  Political donations from connected companies “are making corruption in this country even worse and making it increasingly difficult to fight,” said an Audit Court arbiter in recent local press reports.  “These politicians are working for those who financed campaigns.”  At least a dozen other federal investigations are underway.

The problems are not limited to sports stadiums.  A scandal involving as many as 15 public transportation systems is said to have revealed corruption by several multi-national companies and inflated project costs in an area of vital public need.  The multi-nationals mentioned as part of the probe, Siemens, Alstom and Bombardier, have denied wrongdoing and pledged cooperation.  But in January 2014, a federal court banned Siemens from bidding on new government work, and a public prosecutor in São Paulo is said to have sought to cancel Alstom’s corporate registration.

Touching deeper to the core of the Brazilian economy are corruption investigations at Petrobras, the state-run oil and gas company.  Swimming under a mountain of debt and declining stock value, Petrobras has launched an internal review of alleged bribery by a Dutch company that serviced off-shore oil rigs.  The Brazilian Congress also has launched a probe into two deals that have turned very expensive – one involving the purchase of a refinery in Texas and the other involving a refinery in the northeastern Brazilian coastal town of Recife.  Both deals cost many times more than their expected prices.  Petrobras’ president recently met federal police personally to turn over company files pursuant to a court order.  Petrobras says the cost overruns come from insufficient infrastructure in Brazil’s poor-but-growing northeast, but critics focus on mismanagement and an alleged culture of graft as these issues play out in advance of a presidential election in October.  The arrest in March of the former head of the company’s refining and supply unit in a money laundering probe has added to the swirl of rumors.  For her part, President Dilma Rousseff – also the former chair of Petrobras – has defended the company, explaining in April 2014 local press reports that “Petrobras will never be stained with any wrongdoing.  Whatever needs to be investigated will be investigated with maximum rigor.”

Against this backdrop, Brazilian economic growth has slowed by more than half of its peak 2010 rate, and a March 2014 poll by a Brazilian news organization found that more than two-thirds of the population thought corruption was lower during Brazil’s time of dictatorship.  Perhaps part of that feeling comes from the current greater media transparency on corruption probes.  But companies operating in Brazil can expect that the focus on anti-corruption issues will only continue to remain a complicated compliance challenge.  Most important is a continuing focus on compliance fundamentals:

  • Leadership setting clear expectations on ethics and compliance
  • Risk awareness, coupled with controls designed to address those risks
  • Due diligence and monitoring of business partners
  • Nurturing the compliance commitment through training and communications
  • Promptly follow up if potential issues arise

These fundamental steps will best protect companies operating in Brazil, where hope runs high that the attention from the World Cup will highlight the Brazilian spirit and creativity which has proven so resilient through past eras of change.

Safeguarding Against Corruption In The Context Of Sporting And Other Major Public Events

Note:  Professor Juliet Sorensen (Northwestern University School of Law) and Northwestern Law students Akane Tsuruta and Jessica Dwinell are attending the Fifth Conference of the State Parties (CoSP) to the United Nations Convention against Corruption in Panama City, Panama.  See here for a live feed of the States Parties’ discussions.

This post regarding the proceedings is by Jessica Dwinell.

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News broke yesterday that oilfield services company Weatherford International agreed to pay $253 million to settle federal charges in the United States, including FCPA charges in which an allegation by the SEC was that Weatherford funded a trip to the 2006 World Cup for two officials from a state-owned Algerian company. At the same time, members of the United Nations Office on Drugs and Crime (UNODC), the Global Alliance for Integrity in Sports and the OECD were gathering at the fifth CoSP to the UNCAC to present on the importance of safeguarding against corruption in the context of sporting events.

As Nicola Bonucci (Director for Legal Affairs of the OECD) explained, “sport events are sport, but sport is also a . . . business,” and a highly lucrative one at that. Unfortunately, though hosting public and sporting events can serve as a great honor for a country, many major events also breed corruption.

Alexey Kronov (the Head of the Expert Group on Anti-Corruption for the Department of Public Administration and Russian G20 expert) outlined three factors that create the corruption-prone environment surrounding major sporting events. First, countries or regions who want to host events often feel pressure to “overcome other bidders,” a pressure which can lead to bribe offers or solicitation. Second, after winning a bid, the host country controls significant funds to build infrastructure, creating numerous opportunities for public abuse for personal gain during the procurement process. Third, sporting events are unique in that all projects must be completed by a specified time; where the opening of a transnational tunnel can be delayed, the start of the World Cup games cannot. The Executive Summary to the UNODC report, “A Strategy for Safeguarding against Corruption in Major Public Events,” similarly suggests that the high risk of corruption “is largely because such events involve significant resources and large amounts of funds as well as complex logistical arrangements within very tight timeframes.”

Representatives from Russia (set to host the Winter Olympics in 2014) and Brazil (the host of the World Cup in 2014 and the Summer Olympic games in 2016) provided information on measures their respective governments have taken to prevent corruption surrounding their upcoming major events, including efforts to undertake extensive risk assessments, audit event budgets and project proposals to ensure accurate price projections and quality designs, creation a public website detailing project expenditures to increase transparency, and conduct periodic on-site visits.

Such measures are a step in the right direction; however, Mr. Bonucci suggested several additional steps that could further decrease corruption in sports. For instance, Mr. Bonucci stressed the need for a multi-stakeholder approach, an approach of utmost importance given the constant interaction between government officials and private companies during the procurement process. Further, he recommended that the global community establish clear international standards, which include provisions detailing conflict of interest disclosure requirements, and complete transparency.

Olajobi Makinwa (Head of the Transparency & Anti-Corruption Initiatives for the UN Global Compact) stated that “it is necessary to keep sports clean because people look up to sports heroes.” Sports offer hope, break down barriers and provide role models. Sporting events can also prove crucial for morale building. A mishandling of funds, however, can quickly derail any positive advances. Though further research must be done, transparency, multi-national and multi-stakeholder approaches appear key to combating corruption in the context of sporting events.

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