Compliance and regulatory developments in Brazil: money laundering and corruption
June 2014 | EXPERT BRIEFING | FRAUD & CORRUPTION
Recent regulatory developments in Brazil have not only made compliance one of the most debated topics this year, but also signal new risks related to doing business in the country.
Although the concept of compliance is not new in Brazil, especially concerning the prevention of money laundering, recent developments have raised awareness of the importance and need for implementing compliance programs. This is particularly true due to the promulgation of law n. 12,846/2013, which establishes strict liability for legal entities for acts against the public administration.
Law n. 12,846/2013, as well as regulatory developments in anti-money laundering obligations, among other changes in the Brazilian legal system, illustrate the tendency of Brazilian authorities to follow international regulatory standards, especially concerning issues of money laundering and corruption, under the umbrella of the Financial Action Task Force (FATF) and The Organization for Economic Co-operation and Development (OECD). Brazil is following the trail of several other nations that have increased the use of compliance programs by private entities, based mainly on incentives through regulatory developments and increased enforcement by competent authorities.
Money laundering compliance was introduced in Brazil back in 1998, through the promulgation of law number 9,613/1998, ‘Brazilian anti-money laundering law’, through which not only the crime of money laundering was defined but also the administrative obligations for the prevention of money laundering were imposed.
Such prevention or compliance measures are mandatory to all subject entities, if not adopted the entity can face liability, regardless of whether there has been an actual or indicated violation of the crime of money laundering. Subject entities therefore had to adopt internal measures and change many of their business practices in order to be compliant with the terms of the law and a wave of regulatory developments that followed its issuance.
Money laundering prevention and compliance returned to the attention of companies in 2012, when an amendment of the anti-money laundering law (brought through law n. 12,863/2012) considerably broadened the list of ‘subject entities’ and brought once again a new wave of regulatory developments regarding the prevention of money laundering.
Regulatory changes and innovations in anti-money laundering compliance are ongoing, especially regarding the procedures that must be adopted by companies included in the roll of entities subjected to the terms of the law through the new amendment (‘new subject entities’). Such new subject entities are facing several compliance challenges, especially when related to specificities unique to their business.
Institutions that conduct their services solely through the internet, for instance, and traditionally do not have face-to-face interactions with their customers, have to implement preventive measures procedures which are almost identical to those imposed on businesses with more traditional customer relations, such as banks. Companies that render services through cell phones, among others, are also facing similar challenges.
Questions such as how to conduct proper ‘know your costumer’ procedures in those new environments, for example, have not been entirely answered. Interested entities and public institutions continue to discuss such issues, which often demand an analysis of the intricacies of the business conducted by ‘new entities’. It will be important to follow such developments closely. However, it must be noted that when applicable regulations come into force – some of which already have – the persons and entities subject to their terms must be compliant, even if certain questions remain unanswered.
A similar situation of uncertainty regarding recent regulatory development also occurs in the area of anti-corruption compliance.
On February 2014, the Brazilian Congress enacted law n. 12,846/2013, which imposes strict liability on legal entities for acts against national and foreign public administrations.
Unlike the anti-money laundering law and norms, the new anti-corruption law or the ‘Clean Companies Act’, as certain forums have named it, does not impose mandatory compliance obligations. Instead, it includes specific language intended as an incentive for the implementation of compliance programs. Article 7 of the law establishes that “internal mechanisms and procedures of integrity, auditing and motivation to report irregularities and the effective enforcement of a code of ethics and conduct within the legal entity” (Law 12,846/2013, article 7, VIII), must be considered when imposing penalties.
Such ‘compliance mechanisms’ can in fact be quite relevant in real cases, as the law imposes severe penalties that can range from prohibitions to enter into contracts with government institutions and fines varying from 0.1 to 20 percent of the annual gross income of the legal entity on the year prior to the proceedings. Moreover, in extreme cases, the company may face the penalty of dissolution.
Although the new anticorruption law is already in force and legal entities are currently subject to its terms and penalties, in some aspects it still presents ambiguous language, likely to be clarified through specific regulations and case law.
A relevant aspect that needs further norms pertains to what competent authorities will expect from the mechanisms of compliance discussed above. Particularly, what specific characteristics will make such mechanisms sufficient to be factored in an eventual attenuation of penalties?
Additionally, the law introduces the possibility of leniency agreements, but is unclear on all implications that such agreement may have, especially regarding the consequences for potentially involved natural persons, as the law is only applicable to legal entities.
Answers to such questions are intended to come from a regulation drafted by the Brazilian Comptroller General (Controladoria Geral da União – CGU), which is currently pending issuance. Therefore, at this point, it is not possible to determine the factors necessary to make an anti-corruption compliance program effective in the eyes of the Brazilian authorities.
Considering that Brazil is a signatory of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, and the promulgation of the new anti-corruption law itself occurred in part due to Brazil’s participation in the convention, we find that it would be unlikely that the requisites established by the Brazilian authorities will differ much from what companies have been adopting in other countries with similar laws such as the United States and the United Kingdom.
Regarding leniency agreements under the new law, we suggest that companies use caution prior to seeking such relief. It will be important to follow regulatory developments and specific cases in order to determine the benefits and risks attached to this option.
Overall, considering the new penalties and the questions that remain unanswered, it is undeniable that regulatory developments are increasing the risks of doing business in Brazil. They are also, however, presenting incentives for the implementation of compliance programs and prevention measures, and arguably levelling the playing field for businesses in Brazil. That certainly seems to be the intention of competent Brazilian authorities such as the CGU, the Brazilian Central Bank, and the Brazilian Securities Exchange Commission, among others. For such purposes, authorities are also increasingly improving their enforcement powers.
In such a changing scenario with open variables, companies should be cautious as they adapt their compliance practices in Brazil and closely watch not only regulatory developments and the effects they may have on business practices, but also the enforcement actions of Brazilian authorities.
Ana Maria Belotto and Marcelo Stopanovski Ribeiro are consultants at FeldensMadruga. Ms Belotto can be contacted on +55 61 3966 4850 or by email: email@example.com. Mr Stopanovski Ribeiro can be contacted on +55 61 3966 4850 or by email: firstname.lastname@example.org.
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Ana Maria Belotto and Marcelo Stopanovski Ribeiro