The Shortcomings of the Leniency Agreement Provisions of Brazil’s Clean Company Act

If the CEO of a corporation operating in Brazil learns that her company has committed an unlawful act of corruption, should she order the corporation to self-report and negotiate a leniency agreement with the Brazilian authorities under Brazil’s 2013 Clean Company Act, which authorizes such settlements? In most of the cases, the corporate legal department would probably advise against it. Indeed, the number of leniency agreements based specifically on Brazil’s Clean Company Act has been much smaller than expected.

Several factors drive companies away from cooperating with Brazilian public authorities under the Clean Company Act:

  • First, corporations are unsure which public authority they should negotiate with. The Clean Company Act provides that the Office of the Federal Comptroller General (CGU) is the body responsible for negotiating leniency agreements with legal entities that committed violations that harmed the Federal Executive Branch. As settling with corporations involves many legal questions, the Office of the Attorney General of the Union (AGU) cooperates with the CGU in the negotiations. However, over the course of Operation Car Wash, the Federal Public Prosecutor’s Office (MPF) has signed similar deals, which proved to be essential for those investigations. In this context, which of these public agencies should a company contact to start negotiations?
  • Second, under the framework established by the Brazilian Constitution, several different public bodies, all independent from each other, are in charge of enforcing anticorruption statutes. For example, all of the public agencies mentioned above may take legal or administrative measures to punish companies involved in acts of corruption. If a company signs a leniency agreement with one of these agencies, there is no guarantee that the others will abide by it as well. In addition, a General Accounting Office oversees the terms of the leniency agreement signed by the Executive Branch, and firms that negotiate a leniency agreement with one or more of the enforcement agencies run the risk that their leniency agreement will not be approved by the General Accounting Office. Moreover, Brazil has a federal system, and a company that negotiates a leniency agreement with federal authorities may still face prosecution by state or local authorities (and vice versa), as there is no system to coordinate prosecutions at different levels.
  • Third, even if the company manages to sign a leniency agreement under Brazil’s Clean Company Act, the company must fully repair the damage it has caused. While this requirement is sensible in principle, in practice corporations find it very difficult to predict the financial burden they will bear. Additionally, even firms that receive leniency may still have to pay significant fines, and may also face tax consequences. Thus, companies may consider that the possible legal benefits of negotiating a leniency agreement are insufficient to outweigh the costs of reporting violations that otherwise might remain unnoticed by the authorities.
  • Fourth, a leniency agreement signed under the Clean Company Act does not protect the individuals involved in the offenses from potential criminal prosecution. Indeed, the Act requires, as a condition of a leniency agreement for the company, that the firm identify all the natural persons who also took part in the misconduct, and provide the public authorities with the information and documents necessary to hold those offenders accountable. Considering that many large Brazilian companies are family-owned and that those who may be held personally liable oftentimes are still influential in the company, a conflict of interest may arise. Individuals are unlikely to produce evidence against themselves just to benefit the corporation.
  • Finally, corporations are aware that, without their cooperation, law enforcement authorities may not be able to detect the offense or to obtain sufficient evidence to bring a successful prosecution. Thus, the likelihood of being punished by the government on its own does not appear to be high enough to overcome all the legal uncertainty noted above.

 

It’s true that Federal Prosecutors involved in the so-called Car Wash Operation have made extensive use of cooperative mechanisms, and have succeeded in concluding some leniency agreements with corporations. But these leniency agreements rest on somewhat shaky legal grounds, and to justify them, Federal Prosecutors have advanced an innovative interpretation that involves combining many different statutory provisions. While the prosecutors’ argument is plausible, there is no guarantee that Superior Courts will ultimately accept this reasoning. It would be far better to reform the leniency agreement provisions under the Clean Company Act to address the deficiencies noted above. While comprehensive reform will be challenging, there are a few steps Brazil could take now to encourage companies to self-report more frequently.

  • First, Brazil must encourage effective coordination among the different public agencies potentially involved in negotiating leniency. Considering that the most important bodies responsible for anticorruption measures have their own constitutional duties and responsibilities, the law should encourage collaboration and joint negotiation, which would also end the risk of multiple prosecutions for the same offenses.
  • Second, the law should allow leniency agreements also to provide leniency to individuals who want to self-report jointly with the company. This would avoid conflicts of interest within the firms. Similar regulation already exists in Brazilian law concerning the leniency agreements signed under Brazil’s competition law and this same principle should be extended to the anticorruption context.
  • Finally, and more generally, Brazilian companies will not have a sufficient incentive to voluntarily disclose corrupt practices unless they face a serious risk of detection and punishment. This implies the need for more general reforms to improve the effectiveness of Brazilian anticorruption enforcement. Leniency agreements can be a powerful tool, but they only work if companies have a sufficient fear of getting caught.

8 thoughts on “The Shortcomings of the Leniency Agreement Provisions of Brazil’s Clean Company Act

  1. Thanks for this fascinating post. I think you point out a really significant problem, and your solutions intuitively make a lot of sense to me. I wonder, though, if there is not some virtue to fragmentation overall (if not, perhaps in the negotiation of leniency agreements). Theoretically, it would seem that fragmented prosecutorial institutions might provide some check on the others suffering from corruption themselves. Perhaps this is not a real issue in practice, but I wonder if you would worry at all about institutional centralization harming anticorruption efforts.

    • Hi, Maura! Your point is very important. Some argue that institutional multiplicity in Brazil has contributed to the recent success in fighting corruption. (For example, in English, Carson and Prado, 2016 – https://www.sciencedirect.com/science/article/pii/S1062976916300564). Indeed, theoretically, institutional multiplicity not only provides some checks on the others, but also creates a race, a dispute, to obtain results. However, in practice, these institutions are constantly competing for more power and relevance, which creates constant coordination problems and a confusing liability system. It is hard to know which of these effects prevails. Specifically regarding leniency agreements, I believe that this kind of institutional multiplicity creates more problems than benefits, at least in the Brazilian reality.

  2. Thanks Victor for looking into this complex issue of compliance when it comes to crafting new anti-corruption legislation. This convoluted system of reporting to various agencies seems to be a large barrier to effective implementation but I think Maura raises a valid point about potential harms of centralization. However, if the goal is to streamline the reporting process, is this a logistical hurdle where streamlining is hard to achieve or is it more of a turf wars scenario where individual agencies would like to have maximized authority over this type of work? Another question I had was why did this law pass in the first place as it seems there are serious issues with every aspect of it? Was it for inherently political purposes to show Brazil was “doing something about corruption” or was it more of “this is the best we can do right now” type of mentality? Lastly, is there similar legislation that applies to foreign companies operating in Brazil? Do they have less, more or relatively the same incentives to self-report and cooperate with authorities?

    • Hi, Megan. I will try to answer all your important questions, apologizing for the brevity, since an adequate response would require more than a short reply to a comment. 1) I guess both alternatives are correct. Settlement for corruption offenses is a complex issue and each of the most important public agencies has constitutional duties and responsibilities, so coordination is not easy. However, I also believe that there is a dispute going on over competence and power.
      2) The Clean Company Act was enacted to implement part of the commitments adopted by the country when it joined the OECD Antibribery Convention and Brazil was already late in fulfilling this obligation. In addition, the approval came as legislative reaction to a wave of protests around the country that occurred in 2013, which included several different social demands. It was not the best scenario for the careful design of the incentives related to leniency agreements.
      3) The same Act applies to foreign companies operating in Brazil, if the foreign legal entity has a branch or a representation in the Brazilian territory, which is likely the case for any corporation that operates regularly in the country. A situation like this could become an example of jurisdictional multiplicity. If an American company, operating in Brazil, bribes a Brazilian public official, this corporation could be held liable under the FCPA and also under Brazil’s Clean Company Act.

  3. The main problem related to the Brazilian leniency agreements with corporations is the last one indicated in the post: the lack of efficiency of anti-corruption proceedings in Brazil. The country has struck leniency agreements with corporations involved in corruption only in Car Was Operation. That investigation is an exception in the Brazilian general rule of impunity that favors white collar criminals and corruption agents. Thus, I can easily ensure that there won’t be leniency agreements outside of Car Wash Operation. At most, that kind of cooperation agreement will be very rare in non-Car-Wash cases. Brazilian anti-corruption agencies should coordinate their work to jointly improve the efficacy of the respective proceedings, rather than fighting to an exclusive power to negotiate and sign leniency agreements. It would be a first step towards the enhancement of the country’s anti-corruption system. Without this coordinated posture it is hard to think even in correcting the failures of the corresponding legislation.

    • Yes, I totally agree with you, Rodrigo. “Lava Jato” created a credible threat that companies and individuals could be held liable for corruption, which has led some companies to settle under the Clean Company Act, despite all these dysfunctional incentives. When Car Wash Operation is over (sooner or later, for one reason or another, it will be over), it is hard to believe that leniency agreements under the Clean Company Act will continue to be relevant. Thus far no any leniency agreement under the Act has been signed by state or local authorities, for any act of corruption whatsoever, and the agreements signed at the federal level are all connected with Car Wash Operation or with its developments.

  4. Thank you for your interesting and thoughtful post, Victor! I think much of the world can learn a lot from what is happening in Brazil right now.

    A lot has been said already about the multiplicity of the Brazilian system, so I want to focus my comment on your second recommendation regarding greater leniency toward individuals self-reporting. It seems like the drafters of the Clean Company Act had large corporations in mind when they wrote the law, perhaps imagining that the corrupt activities would be limited to one department of a company, run by a small group of people who could be punished. In this scenario, the leaders of the company might have an incentive to self-report this behavior and these corrupt individuals for the sake of the company overall. However, as you clearly point out, this works less well when the corruption is more widespread and involves members of corporate leadership. In that scenario, I think getting rank and file members of the corporation to self-report might be a more effective way to combat corruption. How, if at all, does this law interact with Brazil’s whistleblower laws? Can an individual who self-reports under the Clean Company Act qualify as a whistleblower and get any protections that way?

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