Lessons from “The Mensalão”: Brazil’s Largest-Ever Corruption Trial

Right now, Brazil is in the middle of its largest corruption trial in its history. The proceeding is being called the “Mensalão,” meaning “the big monthly payment.” Thirty-eight individuals, including current and former government officials, have been accused of paying or accepting monthly bribes, money laundering, conspiracy, fraudulent management of finance institutions, and other related crimes to secure support in Congress for the legislative priorities of Brazil’s former President, Luiz Inácio Lula da Silva. Al Jazeera recently reported: “The case is of such great importance that Brazil’s powerful Public Defender (the Ministério Público) has established a website to explain the trial to children.” Learn more background here.

In legal terms, the mensalão deals with purely domestic bribery issues. There is no indication that foreign bribery played a role in the scheme. But the case is still relevant to FCPA compliance practitioners. Here are some reasons why:

Another Sign that Brazil is Confronting Corruption. The mensalão marks the first time that such a large number of high-level individuals, both from politics and business, are going to trial for corruption. Nearly all Brazilians are talking about the case. The news is covering it every night. There are heightened expectations. The atmosphere is so charged, there is even concern among legal circles that the hysteria will lead to a miscarriage of justice – the Supreme Court is under pressure to act.

These developments build on other signs of growing intolerance for corruption in Brazil, such as current President 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. At the same time, there is still significant skepticism among the public. According to one recent poll, 73% of Brazilians think that the accused in the mensalão should go to jail but only 11% think that they will. It will be interesting to see how the trial turns out.

Political Contributions Riskier for Multinationals. Brazilian electoral rules permit some political contributions, so legal contributions by a company in Brazil would not be per se violations of the FCPA given the statute’s local law defense. But such contributions are always risky because they could form, or be perceived to form, part of aquid pro quo. Further, the mensalao case heightens the risk that such contributions will be misperceived by the public. Thus, even a legal donation to a politician might be ill advised in the current environment. As a result, many multinationals that are concerned about compliance issues are choosing to reduce or eliminate their political contributions. Whether such donations pick up in the upcoming election season will be an important measure of the impact of this case.

No Corporate Liability for Corruption. The mensalão reminds us that Brazilian law does not yet make corporate entities liable for corrupt acts, although the country has committed to establish such liability for purposes of compliance with the OECD Anti-Bribery Convention. Several companies, like the well-known Banco Rural, are allegedly involved in the scheme. But none will be charged. All defendants are individuals.

Anti-Corruption Legislation Under Consideration. As discussed in previous FCPAméricas posts, the Brazilian Congress is currently considering legislation to strengthen the country’s anti-corruption regime. But the provisions of the proposed law – including the establishment of corporate criminal liability – could be watered down in negotiations. The mensalão may influence these negotiations, as it highlights risks and methods for improperly influencing the legislative process. It gives observers real reason to question how the bill writing process might be playing out, how drafts might be changing, and what might be the influences at play.

Anti-Corruption and Anti-Money Laundering. The mensalão shows the clear connection between corruption and money laundering, and the need to tackle both in tandem. For example, it is alleged that President Lula’s Chief of Staff laundered funds first before disbursing them to legislators to secure votes. Through the United Nations Convention Against Corruption (Article 23), the international community took a significant step in elevating money laundering to a prohibited practice on par with that of bribery itself. The mensalão shows why.

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.

@2012 Matteson Ellis Law, PLLC

Author: Matt Ellis

Another BRIC in the Anti-Corruption Wall (Brazil considers foreign bribery law overhaul)

The Brazilian Congress is now considering Draft Bill 6.826/2010 that would dramatically strengthen its foreign bribery law. This is a significant development – the result of years of effort by Brazilian authorities working closely with their OECD, United States, and other counterparts. It is also timely. Sophisticated Brazilian-based multinationals are quickly expanding internationally, and encountering corruption risk. At the same time, Brazil is grappling with corruption on the domestic front: the President’s administration has lost six Ministers to corruption allegations since June 2011, and the country consistently ranks high on corruption risk indices.
Brazil’s effort is part of a broader movement. Countries that have adopted the OECD Anti-Bribery Convention, the United Nations Convention Against Corruption and other treaties are working to strengthen their anti-corruption laws. The FCPA Professor summarized Turkey’s recent progress in an earlier post. The Brazilian bill should improve its treaty implementation status with the OECD. (Brazil’s gaps were highlighted in the OECD’s Country Monitoring Reports for Brazil.) Moreover, as a significant effort by a major economy and regional leader, this bill may have impact outside of Brazil.
These provisions constitute dramatic changes in the Brazilian legal system. According to Carlos Henrique da Silva Ayres, one of the attorneys heading the Anti-Corruption and Compliance Committee of the Brazilian Institute for Business Law (Ibrademp):

The new law still requires some adjustments; however, it should be more easily applied than current laws. It introduces features that are relatively new or non-existent in the Brazilian anti-corruption arena, such as the credits corporations will get for compliance programs, self-disclosure and cooperation with authorities.

Key Provisions in Brazil’s Draft Legislation
In addition to penalizing domestic bribery, Brazil’s draft bill prohibits bribery of foreign public officials, defining the act in a way that appears consistent with the OECD Anti-Bribery Convention. Some provisions are particularly relevant:
Corporate Liability. The draft bill establishes the direct civil liability of corporations (also known as “legal persons”) for bribery of foreign public officials. It also makes corporations liable for the acts of their directors, officers, employees and agents under the theory of respondeat superior. These are dramatic developments in a country where the notion of corporate liability has received only limited recognition.
These changes bring Brazilian law closer to the U.S. Foreign Corrupt Practices Act (FCPA). Why not extend criminal liability to corporations, like the FCPA does? The answer is reflected in Brazil’s civil law system. Unlike common law jurisdictions, civil law systems generally do not apply criminal liability to legal persons. Civil law typically considers corporations to be abstract, intangible entities that have no capacity for the mens rea (intent) required to establish criminal conduct.
The OECD Antibribery Convention recognizes this variation in legal systems and compensates for it. Article 3(2) provides:

In the event that, under the legal system of a Party, criminal responsibility is not applicable to legal persons, that Party shall ensure that legal persons shall be subject to effective, proportionate and dissuasive non-criminal sanctions, including monetary sanctions, for bribery of foreign public officials.

Tightened Sanctions. The draft bill would establish harsh consequences for bribery of foreign officials. Fines would range between 1% and 30% of the company’s gross revenue. In addition, the bill would make prosecutions public, potentially creating reputational risk. Companies can be debarred from public contracts based on bribery violations.
These steep penalties appear responsive to the requirement of sanctions that are “effective, proportionate and dissuasive.” If the legislation is enacted, it will be important to watch how Brazilian courts apply these sanctions. The OECD Working Group on application of the convention is certain to review that question (see a previous review here).
Voluntary Disclosure, Cooperation, and Compliance Programs. The draft bill provides that the government should take into account voluntary disclosure, cooperation with government investigations, the existence of pre-existing and effective compliance programs, and other factors when determining sanctions. Specifically, Article 9 states:

The following will be taken into consideration at the application of the sanction:
I. the seriousness of the offense;
II. the advantage obtained or sought;
III. the accomplishment or non-accomplishment of the offense;
IV. the extension of the breach or the danger of injury;
V. the negative result caused by the injury;
VI. the economic status of the company;
VII. the cooperation in investigating the facts, through practices such as reporting violations to public authorities before a legal proceeding is initiated and the promptness in providing information in the course of investigations; and
VIII. the existence of internal integrity mechanisms and procedures, audits, and incentives to report violations, as well as the effective application of codes of ethics and conduct within the company.

This also makes the Brazilian approach similar to that of the FCPA. In fact, many of the provisions in the Brazilian bill appear to be directly lifted from the U.S. Department of Justice’s McNulty Memorandum and Chapter 8 (Sentencing of Organizations) of the 2010 United States Federal Sentencing Guidelines. But the bill goes further than the FCPA by incorporating considerations of such factors into the law. Under the FCPA, such factors make up enforcement policy and practice.
The difference, again, flows from Brazil’s civil law system. As a general principle of law, prosecutors and public authorities do not have discretion to seek specific sanctions. Rather, sanctions must be determined in accordance with a written law. Invoking a memorandum on enforcement practice would have little, if any, effect before a Brazilian court. In order to have any relevance, considerations like cooperation and compliance must be written into the law.
Mr. Ayres, along with Bruno Carneiro Maeda (also of Ibrademp), have testified before the Brazilian Congress about the draft legislation. They point out some lingering questions related to Article 9. They seek clarification on whether companies will get credit for their cooperation after proceedings have already begun. They are also concerned that the draft bill does not describe the elements of a credit-worthy compliance program.
Foreign Official. The Brazilian draft bill defines “Foreign Public Administration” and “Foreign Public Official” in a way that is consistent with the OECD and United Nations Conventions. Specifically, Article 6 provides:

The agencies and government entities or diplomatic representations of a foreign country are considered foreign public administration, no matter their level or sphere of government, as well as companies held directly or indirectly by the government of a foreign country.
For purposes of this law, a foreign government official is any individual who, although momentarily or without payment, holds a public position, employment or function in any public agency or entity or diplomatic representations of foreign country, and also in companies held directly or indirectly by the government of a foreign country or in any international public organization.

This definition encompasses a broad range of entities, including agents of the state, state-owned enterprises, international public organizations, and other instrumentalities of the state. This definition would make employees at these entities “foreign public officials.” The broad definition appears to stand in contrast with ongoing efforts in the United States to clarify or narrow the
meaning of that term.
Accounting Provisions. The Brazilian draft bill does not include any accounting provisions, as required under Article 8 of the OECD Anti-Bribery Convention. However, Brazil’s laws provide similar provisions elsewhere, which work to meet the OECD requirement as noted in the OECD Working Group Phase II Report. The report also notes that, while an advanced framework for accounting requirements exists under other laws, requirements under the law for internal controls have room for development.

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.
@2012 Matteson Ellis Law, PLLC

Author: Matt Ellis

The End is Nigh for Facilitation Payments – Get Ahead of the Breeze

Last summer, an article was published in the University of Pennsylvania, Journal of Business Law, entitled “The OECD’s Call for an End to the ‘Corrosive’ Facilitation Payments and the International Focus on the Facilitation Payments Exception under the Foreign Corrupt Practices Act”. It was authored by Jon Jordan, Senior Investigations Counsel, in the Foreign Corrupt Practices Act (FCPA) Unit of the Securities and Exchange Commission (SEC). In this article, Jordan reviews, at length, the creation of the facilitation payment exception to the FCPA and the international criticism of the US position by the Organization of Economic Co-operation and Development (OECD), Transparency International, the World Economic Forum and TRACE International. The article also contains a discussion of the hidden costs to US companies which still allow facilitation payments under their company compliance regimes. I found this article to be an excellent review of the issue of facilitation payments and a useful guide to the compliance practitioner on how to navigate this knotty problem.

Costs of Facilitation Payments
1. The Bull’s Eye
Jordan notes that the cost of making facilitation payments is often higher than simply the (purportedly) small dollar amount. He believes that once a company starts down the road of making such payments, it may well lead “to higher costs imposed on those companies that choose to engage in that type of activity.” He quotes Alexandra Wrage, President of TRACE International, that having a corporate policy of allowing facilitation payments is like “putting a bull’s eye on your company’s forehead” as the payment of facilitation payments sets “a permissive tone, which leads to more and greater demands.”
2. Books and Records Issues
A second reason detailed by Jordan is the hidden intra-corporate transaction costs in making facilitation payments. There are a “complex matrix of domestic and foreign anti-bribery laws that companies must navigate when making facilitation payments, and steering through that matrix can be a compliance nightmare and a costly legal undertaking.” The clearest example of this situation is the UK Bribery Act, which has no exception for facilitation payments. If your company has a UK subsidiary, or any employees who are UK citizens, you must carve out an exclusion for them from your facilitation payment exception under your FCPA compliance policy. Got that? So not only must you have an entire carve out in your compliance protocols, your internal accounting system, which is required under the FCPA to record internal controls, you must also make sure that no UK citizen or person otherwise under the jurisdiction of the UK Bribery Act, makes such a claim for reimbursement under your company policy.
 3. Customers
The same is true for large UK based multi-national companies with which your company might transact business. The most obvious example in the energy arena is BP, which not only bans facilitation payments, but requires that any company which provides services for them ban facilitation payments made while doing work for or performing services on BP’s behalf. So think through how you would train your employees on how to properly make and record facilitation payments under your FCPA compliance policy with the HUGE EXCEPTION of when they might be performing some work under the 5 year Master Services Agreement with BP. It’s an administrative nightmare.
Is it Legal to Bribe?
Jordan also brings up the issue that there is not any country in which facilitation payments to public officials of that country are permitted under the written law of the recipient’s country. Accordingly, even if a particular facilitation payment qualifies for an exception of the FCPA, it, nevertheless, is likely to constitute a violation of local law – as well as under anti-bribery laws of other countries that also might apply simultaneously – and thus exposes the payer, his employer and/or related parties to prosecution in one or more jurisdictions. While enforcement to date in this area has been limited increased global attention to corruption makes future action more likely. Countries that are eager to be seen as combating corruption are prosecuting the payment of small bribes with greater frequency. Remember the hellish example of UK citizen Bill Smith, who was sentenced to two years imprisonment in an Afghanistan prison for making a ‘facilitation payment’ to get his company’s vehicles out of a Kabul impoundment lot. Apparently, even Afghanistan will fight the corruption of its own government officials, particularly if the fight involves a foreigner.
You Don’t Need a Weatherman
Jordan concludes by stating, “The facilitation payments exception has become a dinosaur remnant of a bygone era…” He advises US companies to get ahead of this issue and ban such payments in their company compliance programs now. This is sound advice. I would, however, add one additional reason for such advice, which is foretold in the intro paragraph to this article.
Who does the author work for and where does he work? Let’s recap: The SEC in the FCPA Unit. The article clearly states, “The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement of its employees…and do not necessarily reflect the views of the Commission…” Did I mention who the author works for and where he works? You don’t need a weatherman to know which way the wind blows and the direction of that breeze you feel at your back about now is clearly running against allowing the facilitation payments to continue.


© Thomas R. Fox, 2012