The Act sets forth that any entity that performs, or for the benefit of which are performed, offenses against the Brazilian and foreign public administration will be held strictly liable for any damages related to such offenses. They may also be subject to fines and other penalties. The Act applies to both Brazilian and foreign entities with office, branch or commercial representation in Brazil. According to the Act, the following actions are considered offenses: to promise, offer or give an undue advantage to public officials or parties related to them, to finance in any way illegal acts, to conceal or disguise the real interests or identity of the beneficiaries of the offense, to defraud public tenders or contracts, or to hinder an official investigation.
The applicable fines range from 0.1% to 20% of the offending entity’s gross income in the preceding fiscal year. The enforcing authority may also impose a public disclosure of the wrongdoing and of the penalties. Entities may also be prosecuted in court and be subject to the forfeiture of properties, rights or amounts obtained as a result of the infraction, partial suspension or interdiction of their activities, compulsory dissolution or prohibition against receiving incentives, subsidies, grants, donations or loans from any public body.
Strict liability will also apply to the entity’s successors in case of corporate reorganization, merger, amalgamation and spin-off. In addition, the entity’s affiliates and associates will also be held jointly and severally liable. In both of these cases the applicable penalties will be limited to the payment of fines and full compensation of the damages caused by the offense.
The Act – specially the joint and several liability – brings an extra concern to M&A transactions. And as a result, anti-corruption due diligence gains in importance.
This due diligence should be conducted by a team composed of experts in forensic accounting, specialized advisers and lawyers, who should assess potential risks and, depending on the circumstances, raise red flags. The investigation may include an analysis of the target entity’s history, interviews with its directors, officers, and managers, scrutiny of financial data and agreements signed with government bodies and third parties, and review of any other documents and information necessary for the full comprehension of the target company’s environment and activities.
Due diligence investigations should also take into account the target company’s compliance programs and codes of ethics. The existence and enforcement of compliance programs and codes of ethics are considered mitigating circumstances in the grading of penalties under the Brazilian anti-corruption law. It is not clear how these mitigating circumstances will be valued, since the Act provides that the parameters shall be established by specific regulation to be issued by the Federal Government.
If an offense is uncovered during due diligence, the potential purchaser may negotiate with the seller and the target company its disclosure to the authorities. When the company collaborates with the authorities, the Act allows the execution of an acordo de leniência, a type of plea agreement to reduce the applicable penalties (for instance, fines may be reduced by up to two thirds of their value).
As a preventive measure, it is advisable that the M&A agreement contain representations and warranties on compliance with the anti-corruption law by the target company and its directors, officers and employees. A proper indemnification provision for damages caused in case of misrepresentation should follow.
The enforcement of anti-corruption laws has been a significant matter of concern in many jurisdictions. The influence of the US Foreign Corrupt Practices Act, the UK Bribery Act and the Canadian Corruption of Foreign Public Officials Act are good examples. Since their enactment, many companies have been held accountable for corruption and bribery. In many cases, purchasers were held accountable based on their failure to conduct adequate due diligence in M&A transactions.
Potential purchasers and sellers of Brazilian companies should draw some lessons from this. Experience shows that preventive action is the best remedy. Owners (and potential sellers) of Brazilian companies should consider adopting proper compliance procedures and codes of ethics. And purchasers should protect themselves with thorough due diligence and a sound M&A agreement.
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