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Chaos Erupts: Brazil's Tipping Point

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May 23, 2017
Ariel Ramirez
BRG

Version en español.

Versão Portuguesa.

This past week saw two significant events rock Brazil’s political landscape: the release of a voice recording of current President Michel Temer allegedly tying him directly to a bribery scheme; and the admission of JBS, the world’s largest meat-processing company, to bribery charges topping the previous and recent alleged meat scandal.

What we are seeing is a tipping point in Brazil. What began as a small money-laundering investigation at a Brasilia gas station, the Lava Jato operation, has spread to corporations around the world and to the uppermost ranks of government.

This is the second in a series of BRG subject-matter expert (SME) articles on the current situation in Brazil. For the first article, see here.

President Temer

On May 18, the Brazilian Supreme Court authorized an investigation into an audio recording allegedly containing President Temer’s endorsement of hush money payments to Eduardo Cunha, former speaker of Brazil’s lower house of Congress. Cunha is one of the highest-ranking politicians to be convicted in Operation Car Wash (Lava Jato), a 2014 investigation into corruption at Brazilian state-owned oil and gas company Petrobras.

Cunha is serving a 15-year sentence for corruption, money laundering, and tax evasion, and is alleged to be the mastermind behind the impeachment of former Brazilian President Dilma Rousseff, whom President Temer replaced less than a year ago.

President Temer has denied any wrongdoing and is resisting calls for his resignation, but these charges are not going to go away. As more politicians, officials, and executives turn state witness, other significant figures are expected to be implicated. As the saying goes, after the first domino falls, it is only a matter of time before others do as well. The chain reaction cannot be stopped. No one is safe from detection. 

JBS S.A.

JBS S.A. produces factory-processed beef, chicken, and pork. Formed in Brazil in 1953 and based in São Paolo, the company reported $53.5 billion USD in revenue for 2016. J&F Investimentos, an investment vehicle controlled by brothers Wesley and Joesley Batista, is the parent company.

The scandal brought immediate consequences to JBS stock and its plans for a $1 billion initial public offering. JBS S.A. is under investigation under both the United States Foreign Corrupt Practices Act (FCPA) and Brazilian Clean Companies Act.

The Batista brothers have been spared jail time as a result of their admission of guilt and are currently negotiating a settlement with prosecutors. Their cooperation with authorities in exchange for a more lenient sentence is part of Brazilian law, commonly known as delação premiada. Delação premiada, which translates roughly to “awarded feedback,” is a colloquial expression for award-winning collaboration that describes a legal benefit granted to a criminal defendant who agrees to collaborate in the investigation of his or her companions.

In this case, Joesley Batista had been cooperating with authorities in his own criminal investigation at the time he allegedly made the incriminating recording of President Temer during a conversation they had in March of this year. 

Petrobras

Fraud and corruption is a powerful and evolutionary event. When we first wrote the Lava Jato article last week, before news of JBS broke, the Petrobras case was considered the highest-profile example of political corruption in Brazil. Operation Car Wash (Lava Jato), as it is known, implicated Petrobras in a far-reaching fraud and corruption scandal.

This case began in 2008 as an investigation into money laundering at Posto da Torre, a Brasilia gas station (hence the term Lava Jato, which means “car wash”), and moved up the chain all the way to Petrobras, including multiple high-ranking executives, and government officials.

Several important figures have been arrested and/or imprisoned. Former President Rousseff was impeached and removed from office in August 2016, just after the Rio Olympics, under a cloud of allegations from her time as chairperson of the Board of Directors of Petrobras from 2003 to 2010. Her predecessor, former President Luiz Inácio Lula da Silva, is facing charges of corruption and money laundering. Now her successor, President Temer, is fighting for his political life due to allegations of receiving bribes.

The effects of Lava Jato continue to spread as more companies are investigated for their ties to known and suspected corrupt officials. 

Moving Forward

Regarding the US FCPA, authorities are investigating more than 30 Brazilian companies for suspected violations Brazilians are outraged, and the world is watching, some with trepidation, because they know they have ties to Brazil that may come back to haunt them. The nature of the system in Brazil lends itself to the potential for engaging in graft and corruption, frequently by entities’ local executives, staff, vendors, and/or consultants

As we indicated in the first article of this series, the best way for a company to understand its legal posture relative to its activities in Brazil is to undertake a comprehensive, independent investigation of operations in the region, to determine whether potentially suspect activity has taken place between it and the government. Of primary importance are obtaining a thorough understanding of the facts, qualifying and quantifying suspect transactions, identifying culpable individuals, and ensuring that any bad behavior has ceased. Retaining an independent third party to undertake the investigative efforts with qualified investigators and forensic accountants is the best way to maximize the chances that the investigation will be accepted by its intended audiences: regulators, shareholders, the board of directors, employees, and—importantly—the general public.

The investigation must be driven by the desire for a full and accurate picture of relevant events and transactions. The work plan should be thorough and detailed and should account for all possible alternative theories as to why a transaction took place. An investigative report must detail the steps taken, documents reviewed, and whether or not employees cooperated, and should recommend steps for ensuring that similar activities do not take place in the future. Last, to ensure the greatest chances that the report will be well received by regulators, the company should be prepared to waive any privilege that may have existed between the investigations firm, the client, and the client’s legal advisors. Open your books, compile a detailed report memorializing the results of that self-imposed investigation, and show that you are willing to mend your ways. The benefits outweigh the costs, as there is no way, in most cases, to avoid the reach of a government investigation.

Satisfying regulators that an investigation was comprehensive and unbiased, a report should detail:

  1. The fact that the bad activity has ceased and how the company knows it has
  2. The detailed facts surrounding how any bribes were paid or any corruption took place
  3. The amounts involved, including the value of any profits made via the illegal transactions (presumably as there would be disgorgement)
  4. More important, what steps have the company taken or will it take to address the bad behavior and provide a strategy for implementing such remediation (as there may be a government-mandated monitor)

Any internal forensic audit or subsequent investigative report must address all of the above. Considering the memorandums published by former Assistant US Attorneys Thompson and Yates, complete and detailed independent reports by experienced investigators could yield significant goodwill from any authority evaluating a company’s handling of a corruption situation.

But it’s not just apologizing and then offering general sensitive information, says Wifredo Ferrer, leader of Holland & Knight's Global Compliance and Investigations team and a former US Attorney for the Southern District of Florida.

According to current Department of Justice policy, to be eligible for any cooperation credit, companies must provide the Department with all relevant facts about individuals involved in corporate misconduct. Voluntary disclosure of corporate misconduct does not, in and of itself, constitute true cooperation, if the company avoids identifying the individuals who are criminally responsible.

If a company wants credit for cooperation, it must engage in comprehensive and timely cooperation. Lip service will not do. In addition, the Department will many times conduct its own parallel investigation to pressure test a company’s internal investigation: to determine whether the company actually sought to root out the wrongdoing, or instead merely checked a box on a cooperation punch list.

Coming clean allows for a reset of business practices and is often the fastest way to resume normal operations. In the authorities’ view, having a company come forth with a thorough investigation saves them countless hours and costs.

For the most part, authorities are not out on witch hunts. They understand that companies employ many hard-working, decent, and honest people, that these people have families, and that their collective work affects a nation’s economy and future. However, their view is that for the sake of justice, the law must be carried out.

Corruption hurts everyone and is a drag on the economy. Ill-gotten gains are made at the expense of society. Those who have committed illegal acts should not benefit because those who uphold the law are either powerless to stop them or because authorities turn a blind eye.

There may be a near endless number of companies to investigate, but that does not mean an alleged corrupt company, or person, can hide. If an internal investigation can find fraud and corruption within the walls and confines of your company, then the authorities can as well. It may be only a matter of time before the trail leads to you. 

Forward-Looking Compliance Is Crucial

Many companies have global, self-regulating departments, sometimes significantly large in-house departments, already in place. These include internal audit, compliance, internal controls, and others, but these departments are not always fully empowered. Even if they were, it is not possible to know everything that goes on inside an organization, due to globalization, ever-changing technology, and cost and time limitations.

When fraud is occurring or about to occur, there is no silver bullet. A basic principle of fraud and corruption theory is that collusion is likely required to engage in the activities. Collusion is the coming together of one or more people to circumvent a system of internal controls. Not even the most qualified and robust self-regulatory internal compliance departments can completely prevent collusion. And collusion leads to inevitable breakdowns that allow for corrupt practices and behavior to occur.

A compliance review looks at the mechanisms of compliance within the company, from whistleblower policies and procedures, to training, and the human side of internal control. This includes not just the Committee of Sponsoring Organizations of the Treadway Commission (COSO) model of monitoring, but a sense of the compliance culture itself. Do employees feel and act upon the idea that they must “do the right thing”?

Compliance is crucial, but it cannot solve or even prevent every problem.

In my 20-plus years of criminal, civil, and corporate investigative field experience, even the strongest, most sophisticated company clients with well-funded internal audit and compliance global departments have turned up a skeleton or two in their closets after an in-depth forensic audit review. These were not regular internal or external audits, but a deep review of risk-based practices.

Compliance is not just a process, a department, or a manual. It has to be a company culture.

Take for example the Siemens case, the largest worldwide corruption scandal to date. When facing corruption charges, the company acknowledged its misdeeds, undertook significant and swift global changes, cooperated with the government, opened its books, and became a compliance model for teaching future generations.

Peter Loscher, former Siemens AG CEO and a leader in the fight against corruption, said, “… only clean business is Siemens business.” These were not just words. Mr. Loscher’s push for difficult but much-needed changes led to a company culture that valued honor and pride in running the company with integrity. The same situation is occurring now in Brazil. 

Forensic Audits

Aside from whistleblowing reporting mechanisms in place, and chance, most cases of fraud and corruption are detected through a review of company accounting and accounting practices. The nature of a basic system of accounting is not only professional judgment but also a double-sided action for every transaction. One simple debit or credit or payment affects another transaction somewhere else. Things can only go so far before someone detects that something is amiss. Accounting fraud affects a company’s books and records and is typically present in any corruption scheme.

The primary tools available to companies that want to gain insight into their level of potential exposure is forensic auditing and a compliance review.

Forensic auditing is the systematic and targeted search for fraud and corruption. A forensic audit is not an investigation but the complexity of deterrence, prevention, and detection, which then, more likely than not, lead to a forensic accounting or special investigation. An external forensic audit, by nature, will dig into areas that internal departments may not be able or even want to. There are no vested interests for external forensic auditors, so they will ask the tough questions or turn over the rocks that no one in the company internally will want to overturn.

Forensic audits can discover, for example, a corruption scheme involving payments made off the books and records or as pass-through through to political campaigns.

In practical reality, no one can guarantee that all corruption will be detected or prevented in a timely manner. But many companies could have prevented an ultimately catastrophic corruption scandal simply by engaging in a forensic audit and compliance review. Some companies have been presented with the choice of engaging in a forensic audit, but did not want to “rock the boat” or face the truth. This is where the company culture comes in.

The consequences of getting caught, however, are much more severe and costly than the price of a forensic audit or internal investigation. If Petrobras, JBS, and former President Rousseff can be taken down, then it is possible for any company engaging in unlawful acts to be caught. It is only a matter of time.

To quote Luis G. Fortuño, partner at Steptoe & Johnson LLP and former governor of Puerto Rico, “Recent developments in Brazil should serve as a warning to US companies and companies working with American businesses that FCPA rules should be taken seriously. Not doing so may represent serious liabilities in the near future.”

Business and politics in Brazil will never be the same, but it is all for the better.

Companies big and small, politicians, and public officials should have a level playing field. There should not be the pressure to “grease the wheels” of business or politics. There shouldn’t be the pressure to commit unlawful acts. “Business as usual” should not be the usual. Clean companies and clean politics will only benefit society and the economy in the long run.

Brazil has reached a tipping point. The time to make changes is now. 

What We Offer

BRG’s Global Investigations + Strategic Intelligence practice includes a large team of fraud, risk, and forensic accounting investigators and crisis managers headed by Allen Applbaum globally and Frank Holder for the Latin America group. Our team in the Western Hemisphere has nearly 80 professionals on the ground in Central and South America and the Caribbean, with experience ranging from former Big Four accounting firm auditors and partners to former federal prosecutors, lawyers, and federal law enforcement agents. They have been on both sides of numerous investigations and cases worldwide, directly supporting both government investigations and prosecutions and defense counsel for companies dealing with charges. This depth of experience makes BRG well positioned to help any company in need.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.

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