FCPAméricas Blog

Political Donations in Brazil Declared Unconstitutional: compliance considerations for upcoming elections

Author: Guest Author

ballotboxThis guest post is by Trevor Schumacher, a Sao Paulo-based partner of the Financial Advisory area of Deloitte, and Viviane Viera Coutinho Rocha, a Senior Consultant of Deloitte’s Financial Advisory area.

Until recently, legal entities operating in Brazil were permitted to make political donations provided they complied with the requirements of Law 9.504 (9.504/97, arts. 23, § 1º, I e II, § 7º e 81, § 1º) and the rules set forth in Resolution 23.376, Instruction 1542-64.2011.6.00.0000.The law and related resolution permitted legal entities to donate up to 2% of gross income earned in the prior calendar year. Companies and politicians were required to report all donations, and the information was available for query in public databases, allowing for a reasonable level of transparency.

Now the rules have changed. In September 2015, the Brazilian Supreme Court declared political donations by legal entities unconstitutional by a vote of 8 to 3. The decision stems from an action initiated by the Brazilian Bar Association in 2013 challenging sections of laws applying to elections and political parties. The Supreme Court decision does not affect donations made by individuals, who can still contribute up to 10% of their income.

The timing of this decision comes amid numerous, high profile investigations into corruption and money-laundering schemes that purportedly benefited politicians and political parties. In certain cases, regulators have found evidence that companies donated millions to political parties and politicians in exchange for winning public contracts and concessions.

The Supreme Court ruling creates a significant challenge for politicians and political parties, who have historically relied on donations from legal entities for a significant percentage of their overall funding. While there are reasonable arguments for and against the Supreme Court’s ruling, the reality is that, starting with the 2016 municipal elections, politician will no longer be able to rely on funding from legal entities.

Many predict that because of this ruling, there will be a substantial increase in fraud schemes, whereby legal entities will find ways to conceal “political donations”. Some of the schemes legal entities have employed in the past to illicitly funnel money to politicians include:

  • Payments to politicians and political parties using slush funds (known in Brazil as “caixa dois”) and other non-declared/non-registered funds, including monies maintained in countries outside of Brazil.
  • Fraudulently registering donations in the name of individuals (with or without their knowledge) rather than a legal entity. Companies may recruit employees and/or organized groups of individuals (e.g., unions, social organizations) to make donations that the companies subsequently reimburse.
  • Providing non-monetary “donations” to politicians, such as vacations, discounted goods or services, entertainment, etc.
  • Direct payments to third parties for expenses incurred by politicians and political parties (e.g., payments directly to a marketing company for services provided during a political campaign).
  • Payments to individuals and companies related to politicians under the guise of ordinary business expenses (e.g., payments to a consulting firm in which a politician has an ownership interest).

Those charged with preventing and detecting fraud and corruption within their company’s Brazilian operations should consider this change and the risks it may create. The combination of a depressed economy, new donation rules and politicians looking for new sources of funding makes for a challenging compliance environment. As the municipal elections scheduled for October 2016 approach, companies should monitor how these new rules affect the election process and if, as expected, there is an increase in fraud schemes aimed at circumventing the new rules.

The opinions expressed in this post are those of the author in his or her individual capacity, and do not necessarily represent the views of anyone else, including the entities with which the author is affiliated, the author’s employers, other contributors, FCPAméricas, or its advertisers. The information in the FCPAméricas blog is intended for public discussion and educational purposes only. It is not intended to provide legal advice to its readers and does not create an attorney-client relationship. It does not seek to describe or convey the quality of legal services. FCPAméricas encourages readers to seek qualified legal counsel regarding anti-corruption laws or any other legal issue. FCPAméricas gives permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author and to FCPAméricas LLC.

© 2016 FCPAméricas, LLC

Post authored by Guest

Categories: Anti-Corruption Compliance, Brazil, English, FCPA

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