FCPAméricas Blog

Boom Times in Brazil, Part 1 (Five corruption issues to look out for in a high-opportunity / high-risk environment)

Author: Matteson Ellis

This blog post is the first of a four-part series. Part 1 (below) outlines corruption issues to look out for when operating in Brazil’s high-opportunity / high-risk environment. Part 2 gives guidance to companies that are expanding operations into Brazil on ways to manage the country’s unique risk. Part 3 gives guidance (in Portuguese) to Brazilian companies expanding internationally on the basic prohibitions and jurisdictional elements of the FCPA. Part 4 discusses developments in Brazil that may signal a sea change in corruption reform.

Brazilians are taking to the streets. Fed-up citizens are marching in the city squares of Rio de Janeiro with 594 brooms held-high, demanding a corruption clean-up, with one broom for each member of Congress. Corruption allegations have claimed four of President Dilma Rousseff’s cabinet secretaries since June. Her Chief of Staff resigned after a newspaper reported an unexplained 20-fold increase in his personal wealth over four years. Now the Minister of Sports is under fire – the allegations are that he embezzled $23 million from a program meant to support underprivileged youth.

This upheaval is happening at a time when the country’s economy is taking off. Brazil had the third highest foreign direct investment in the world last year. In 2010 its economy grew at more than 7.5%, the highest in a quarter century. Foreign companies are moving into Brazil at record pace, and Brazilian companies are expanding internationally.

A keen understanding of the corruption risks presented in Brazil is vital to companies and individuals doing business there – especially those subject to the U.S. Foreign Corrupt Practices Act (“FCPA”), the UK Bribery Act and similar laws. As Latham & Watkins partner Aaron Murphy, the author of the helpful guide, Foreign Corrupt Practices Act: A Practical Resource for Managers and Executives, correctly states: “Corrupt transactions are notoriously difficult to unravel, and compliance counsel with on-the-ground experience is invaluable. Knowing how to open up a local agent’s books with an understanding of how corrupt transactions commonly occur in specific jurisdictions is the only way to spot the most common corruption issues in an efficient yet thorough
manner.”

I offer my own list of five issues to watch out for when managing corruption risk in Brazil. This list is based on years of compliance work that my colleagues and I have conducted in this wonderful country.

1. A Sophisticated Economy = Sophisticated Corruption: Brazil is not a “Banana Republic,” to borrow the pejorative term sometimes used to describe underdeveloped Latin American economies that have traditionally been dependent on the U.S. economy. Nor is it the highly mature and developed economy of a country like, say, Canada. Brazil is a unique mix. It has a large, sophisticated, and modern private sector and relatively weak government institutions. Returns on investment are impressive. So are poverty rates and infrastructure gaps. When U.S. and other companies enter the Brazilian market, they should expect to encounter a sophisticated and savvy business sector. Corruption schemes are also sophisticated. Companies will likely encounter petty corruption (some surveys report that more than half of businesses in Brazil report tax collector requests for bribes). But they should also be alert for, and have a strategy to avoid, large and complex bribery schemes. Schemes like price fixing and collusion with competitors, and elaborate manipulation of public bids using multiple parties, can be commonplace.

2.  Complex and Unique Regulatory Regimes: Brazil is an elaborately regulated country. On multiple investigations there, I have confronted complex regulatory regimes that provide various opportunities for corruption. Intricate rules in areas like tax and environmental regulations and public procurement create room to disguise improper payments. They also create opportunity for books and records violations. It is sometimes necessary to use local counsel to better understand these rules so that companies can determine whether or not regulatory-related payments are indeed proper.

3. Personal Relationships: In Brazil, the personal and professional are oftentimes intricately intertwined. For example, when I worked at a major multinational corporation in Argentina and we began to develop sales in Brazil, a friend in Brazil gave me some advice. He told me that, before I started talking business, I needed to make friends first. He suggested I talk sports, family, and music – that this was the best way to get business done. He was right. I would regularly discuss whose “futebol” club was superior (I am a fanatico of Argentina’s Boca Juniors). They would pledge allegiance to Brazil’s Flamengo and Santos. And we would get the job done. These lessons have been helpful at times in my due diligence and investigative work in the country. Sometimes transactions under review are better understood when one considers the personal relationships behind them.

4. “Jeitinho Brasileiro”: The phrase jeitinho brasileiro (the “Brazilian Way”) is as much an attitude as an act. It refers to the grace by which Brazilians handle situations, accomplish tasks, or find paths around problems. It is what makes us love the country – what gives innovative rhythm to bossa nova, what inspires Brazilian soccer with improvisation, and what makes Brazilians such fun-loving people. In the context of international business, however, the jeitinho brasileiro can also mean the “Brazilian Work Around.” Companies working in Brazil should be aware of this dynamic. I have investigated cases where local agents repeatedly told the company one thing, and then just as easily and gracefully did another. Such dynamics heighten the need to implement robust reporting requirements and internal controls, and to consistently monitor operations.

5. Enhanced Investment Means Enhanced Risk: Record levels of investment in Brazil reflect a country with great opportunity. But more opportunity also means more money and competition. In these climates, companies sometimes start asking fewer questions about the practices of their employees and demand quicker results to stay ahead. Local officials might see more opportunity for personal gain. When companies look for creative ways to generate business and officials look for creative ways to profit, risk goes up. Think of the huge investment-laden global events like the Olympics and World Cup. Not only do they evoke notions of exciting national competition, they also evoke common stories of corruption. And the World Cup is coming to Brazil in 2014, the Olympics in 2016.

The FCPAméricas blog is not intended to provide legal advice to its readers. The blog entries and posts include only the thoughts, ideas, and impressions of its authors and contributors, and should be considered general information only about the Americas, anti-corruption laws including the U.S. Foreign Corrupt Practices Act, issues related to anti-corruption compliance, and any other matters addressed. Nothing in this publication should be interpreted to constitute legal advice or services of any kind. Furthermore, information found on this blog should not be used as the basis for decisions or actions that may affect your business; instead, companies and businesspeople should seek legal counsel from qualified lawyers regarding anti-corruption laws or any other legal issue. The Editor and the contributors to this blog shall not be responsible for any losses incurred by a reader or a company as a result of information provided in this publication. For more information, please contact Info@MattesonEllisLaw.com.

The author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. 

© 2011 Matteson Ellis Law, PLLC

Matt Ellis

Post authored by Matt Ellis, FCPAméricas Founder & Editor

Categories: Brazil, Due Diligence, FCPA, Internal Investigations, Procurement, Uncategorized

CommentsComments | Print This Post Print This Post |

2 Comments

Comments

2 Responses to “Boom Times in Brazil, Part 1 (Five corruption issues to look out for in a high-opportunity / high-risk environment)”

  1. Lessons from “The Mensalão”: Brazil’s Largest-Ever Corruption Trial LEC - Legal, Ethics and Compliance Says:

    […] Dilma Rousseff’s decision to rid her administration of numerous corrupt Ministers, discussed here. In these ways, Brazil is starting to grapple with a problem that has been there for a long time. […]

  2. Denise Says:

    Excellent article!
    As a Brazilian you think I would be either offended or defensive, but the truth is after living more than half of my life in the US, I’ve come to the sad conclusion that business in Brazil is often done under the table. It is certainly a wonderful country but there is a lot to be fixed including our government.

Leave a Reply


FCPAmericas

Subscribe to our mailing list

* indicates required

View previous campaigns.

Close