Brazil Should Rethink the Corporate Death Penalty for Corrupt Acts

Brazil’s Clean Company Act (CCA), enacted during a time of mass protests against corruption and impunity, was a major step forward in the fight against corporate crime. While the CCA is best known for its imposition of strict civil and administrative liability on legal entities that commit corrupt acts against public administration, the CCA is also notable for its authorization, in extreme cases, of a “corporate death penalty.” More specifically, the CCA requires the dissolution of a corporation or other legal entity when (1) the legal entity is in fact a “shell company” used to conceal illegal acts (such as money laundering, tax evasion, or procurement fraud), or (2) the legal entity was used on a regular basis to facilitate or promote the performance of wrongful acts. Applying the corporate death penalty to shell companies created for the purpose of facilitating or concealing criminal acts is straightforward and not terribly controversial, especially since these shell companies do not engage in any genuine productive activity. The controversy arises with respect to the second category, which can include productive companies.

Applying the extreme sanction of corporate dissolution might seem like appropriately strong medicine for companies, even productive companies, that have been involved in serious and ongoing illegality. In practice, however, this sanction is not working as intended. A much more effective and realistic sanction, at least in the Brazilian context, would be to compel a persistently corrupt (but productive) company’s shareholders to sell their controlling stake in the company—thus preserving the company as a going concern, but placing it under new ownership and management.

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The Trade-Off Between Inducing Corporate Self-Disclosure and Full Cooperation

In discussions of appropriate sanctions for corporations that engage in bribery, much of the conversation focuses on the appropriate penalty reduction for firms that self-disclose violations, cooperate with authorities, or both. Self-disclosure and cooperation are often lumped together, but they’re not the same: Plenty of targets of bribery investigations, for example, did not voluntarily disclose the potential violation, but cooperated with the authorities once the investigation was underway.

This gives rise to a problem that is both serious and seemingly obvious, but that somewhat surprisingly is hardly ever discussed.

The problem goes like this: Enforcement authorities want to encourage self-disclosure, and they want to encourage full cooperation with the investigation; they would like to do so (1) by reducing the sanction for firms that voluntarily disclose relative to those that don’t, and (2) by reducing the sanction for firms that fully cooperate relative to those that don’t. But if the minimum and maximum penalties are fixed (say, by statute or department policy or other considerations), and the penalty reductions necessary to induce self-disclosure and full cooperation, respectively, are large enough (cumulatively greater than the difference between the maximum and minimum feasible sanction), then adjusting sanctions to encourage self-disclosure may discourage full cooperation, and vice versa.

It’s easiest to see this with a very simple numerical example: Continue reading