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