Fraud and corruption litigation in Latin America

December 2017  |  FEATURE  |  FRAUD & CORRUPTION

Financier Worldwide Magazine

December 2017 Issue

Arguably, one of the biggest challenges of doing business in Latin America has been fraud and corruption. In recent years, however, considerable efforts have been made to mitigate their corrosive effects. According to the World Economic Forum’s Global Risk Report 2017, though fraud remains a serious issue, it is no longer the most pressing issue in Latin America. This shift can be attributed to a number of factors, including public outrage over the scale and depth of corruption in the region, which has translated into government action.

Undoubtedly there is still work to be done. The average score for Latin American countries in the 2016 Transparency International Corruption Perceptions Index was 44 out of 100; scores below 50 indicate governments are failing to tackle corruption. Furthermore, Latin American companies also scored poorly on the Bribe Payers index. However, Latin American authorities have begun to turn up the heat on individuals, companies and public officials who have benefited from corruption.

The de-escalation of fraud in Latin America is thanks to the efforts of companies, governments and the wider international community. New laws governing bribery and money laundering, and extending existing criminal fraud laws to cover corporate misconduct, have all helped mitigate the effects in recent years. The aftershocks of Operação Lava Jato or ‘Operation Car Wash’ in Brazil can still be felt, and its influence on fraud and corruption in the region cannot be overstated. The investigation has highlighted considerable fraudulent activity across Brazil and emboldened litigators to pursue cases.

“There has been an increasing interest in the issue of fraud in recent years, in light of several severe corruption cases,” says Eduardo Bonis, a partner at Navarro Castex Abogados. “Fortunately today the authorities are taking the issue seriously, and civil society is currently asking for results in the fight against corruption in the region, with imprisonment for the culprits and the recovery of assets, where possible. The best example of this has been seen in Brazil, with the amazing institutional response to ‘Operation Car Wash’ and the ‘Odebrecht’ cases.”

Enforcement agencies in Brazil are feeling particularly emboldened in the current climate. “Brazil is facing unprecedented enforcement by multiple authorities, at the federal, state and municipal levels, and overlapping laws, especially in terms of corruption,” explains Karla Lini Maeji, a partner at TozziniFreire Advogados. “The recent Brazilian Clean Companies Act has barely been tested and the previous legal framework is being reinterpreted by regulators. On top of that, companies are facing aggressive penalties, including debarment.”

From a legislative perspective, the list of do’s and do not’s is extensive. Litigators in Latin America constantly wrestle with a range of issues, including the interplay between criminal and civil remedies, enforcement issues, building effective relationships with the law, reputational considerations and regulatory changes that correspond with international transparency requirements. Collaboration, for many, is key, and good fraud litigation practitioners are increasingly looking to deepen their knowledge of procedures in other Latin American jurisdictions and establish fluid contact and cooperation.

Influence of the FCPA

Anti-fraud legislation such as the US Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act have helped to increase the focus on fraud in Latin America. Although authorities in the region have enhanced their own enforcement capabilities in recent years, the US Department of Justice (DOJ) and Securities and Exchange Commission (SEC) have continued to hold companies and individuals accountable for bribery in Latin America using the FCPA. Both the SEC and the DOJ are emphasising individual liability for corporate misconduct. The DOJ has been driven by the Yates Memorandum, which requires prosecutors to focus on individual misconduct from the start of any investigation and which limits eligibility for corporate cooperation credit to companies that share all relevant facts about individuals involved in corporate wrongdoing.

As a result of extraterritorial enforcement, other Latin American jurisdictions have rallied. A number of countries have updated their fraud and bribery legislation with broader anti-corruption laws (and, in some cases anti-money-laundering laws), including Chile in 2009, Colombia in 2011, Peru in 2010 and Argentina in 2011. In Argentina, the country’s legislative approach to fraud has attracted criticism in the past due to a lack of enforcement. The regulatory framework is there, however a failure to prosecute foreign bribery has drawn disapproval from the OECD Working Group on Bribery. Yet, efforts are being made to improve and update the country’s approach.

Regional collaboration in a location as large and diffuse as Latin America can be hard to maintain.

In Ecuador, the new president Lenin Moreno has also taken a stance against corruption. Mr Moreno issued Executive Decree No. 21, in which he sets out the “National Strategy for Transparency and the Fight Against Corruption”. In this Decree, Mr Moreno recommended the country seek advice from the United Nations in order fight corruption. He also created the “Front for Transparency and the Fight Against Corruption”, whose members are high-profile individuals, civil society entities, the Minister of Foreign Affairs, and the National Secretary of Planning. The Front will propose corruption prevention strategies and mechanisms to the president. Although the body has no legal powers, it can urge entities to exercise control and conduct investigations, seek the promotion and development of transparent corporate culture and values, and submit political and legislative proposals to fight corruption.

Mexico, too, has instituted a number of measures to reduce the effect of fraud and corruption. In July, the country’s new General Law of Administrative Responsibility (GLAR) came into effect. The GLAR establishes administrative penalties for improper payments to government officials, bid rigging in public procurement processes, the use of undue influence, and other corrupt acts.

The OECD’s Integrity Review of Mexico also noted the passing of the general law of the national anticorruption system (NAS). The NAS will lead the coordination, collaboration and systematisation of the operations of anti-corruption institutions in the country. Following the introduction of the NAS in July 2017, Mexico now has a system composed of independent and effective authorities that are focused on preventing and combating corruption. They also benefit from a new comprehensive and integrated system of administrative responsibilities, a new criminal regime to fight corruption and a new control and oversight system to coordinate state and local authorities.

Work to be done

The past decade has seen a marked improvement in both anti-corruption legislation and enforcement mechanisms. More must be done in terms of litigation, however. Though improvements are underway, as Mr Bonis explains, change may rely on legislative progress. “From the Argentine perspective, I strongly believe that fraud litigation in the region will improve once the draft bill of Criminal Liability of Legal Persons for fraud and corruption cases becomes law. The draft bill is currently under discussion in congress. This law will be effective, among others things, because it aims to bring into force so-called, ‘effective collaboration agreements’. These agreements will enable companies that decide to cooperate with prosecutors to obtain a deferred prosecution by sharing information or accurate and verifiable data which clarifies the facts of the cases, identifies instigators or participants, or leads to the recovery of assets or profits proceeding from the crimes,” says Mr Bonis.

The Brazilian Clean Companies Act has provided authorities with the ability to enter into leniency agreements with companies. Companies that enter into such agreements and satisfy their conditions may see their fines reduced by up to two thirds, and be exempted from certain judicial and administrative sanctions. Under the Act, Brazilian authorities can enter into a leniency agreement with a company as long as it admits its participation in the illicit act, ceases any further participation, provides full restitution for damage caused and cooperates fully and permanently with the ongoing investigation. Brazilian authorities have already signed five leniency agreements with some of Brazil’s largest engineering firms, and a number of other organisations are in negotiations over potential agreements. But they are controversial. The agreements take many of their cues from the Non-Prosecution Agreements (NPAs) and Deferred Prosecution Agreements (DPAs) used by US authorities in white-collar criminal law enforcement, and there are question marks over whether they act as a sufficient deterrent.

Since 2013, Chile has also passed measures to facilitate the investigation and prosecution of corruption cases, and authorities have initiated high-profile anti-bribery cases against senior government officials and congressmen. In 2017, Chilean asset manager Aurus Capital liquidated two funds previously run by one of its former partners and fund managers, Mauricio Peña Merino. He was found guilty of hiding $35m in losses, sentenced to five years probation and barred from working for firms regulated by the SVS in Chile.

Though jurisdictions are upping legislative measures, these efforts must be matched by companies. Companies must educate their employees about the dangers of fraud and corruption, implement programmes to prevent and detect wrongdoing, such as whistleblower channels, undertake regular risk assessments, tailor their compliance programmes and test their ongoing effectiveness.

Furthermore, when fraud is detected, companies must be willing to act. Pursuing criminal and civil remedies to fraud is an important step. “Since mid-2015 with Argentina’s new Civil and Commercial Code, new exceptions to the forced ‘stay’ of civil proceedings until a final ruling is reached in criminal proceeding – which may take several years – are in force, enabling parties to obtain a final ruling in the civil proceeding in the event of a delay in the criminal proceeding or if the civil action is based on the objective attribution factor of liability; hence, this will foster the development of civil proceedings as well,” says Mr Bonis. “Furthermore, and from the criminal side, a new Criminal Procedural Code has been passed by Congress – and despite the fact that its implementation has been suspended – which implies a radical change in the way criminal proceedings are conducted in the country. The Code will need time to be duly implemented. Though there is some doubt over whether the Code will ever be implemented, however, its aims will, in the mid-term, be pursued – either through the final implementation of the Code or via other bill initiatives.”

Collaboration is key

Regional collaboration in a location as large and diffuse as Latin America can be hard to maintain. Efforts to align anti-corruption can often be hindered by the complexity required to tackle an issue which affects all countries and cuts across social, political and economic lines.

However, progress is being made. Collaboration between US and Latin American authorities, for example, is now common. Authorities in the US and across Latin America are increasingly interested in coordinated prosecutions involving cases of fraud, corruption, money laundering and RICO. “Because of the extraterritoriality reach of several laws and extreme international cooperation, illegal acts practiced in one country may trigger liability in foreign jurisdictions, which requires litigators to have a global strategy,” notes Ms Maeji.

Working alongside regional counsel and searching for foreign nexus is key in building a case. Brazilian regulators have increased international cooperation by exchanging information with authorities from across the globe to trace and recover assets arising from fraud. According to Ms Maeji, courts have also been influenced by the current scenario and are more prone to confirming foreign awards and enforcing interim relief granted by foreign courts, including freezing of assets.

Fraud and corruption in Latin America are waning, thanks to the introduction of strong legislative measures and the efforts of companies and employees to stamp it out. Though more must be done, litigators are now receiving the tools they need to tackle crime across the region.

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Richard Summerfield

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