ROPES & GRAY WHITE PAPER Anti-Corruption March 19, 2014 Anti-Corruption Developments in Brazil Update OVERVIEW As the largest and most populous country in South America, Brazil has long been the region’s top financial player, vying for a place as a world economic leader. Brazil has the seventh largest economy in the world and, with a total of $2.4 trillion, the seventh largest nominal Gross Domestic Product.1 Defined by large and well- developed agricultural, mining, manufacturing, and service sectors, Brazil’s economic success has “raised the bar for that country, at home and abroad.”2 Behind such success is a base of over 105 million workers, making Brazil the home of the world’s sixth largest labor force.3 As one of the first emerging markets to begin a recovery after the global financial crisis hit in 2008, Brazil became a major recipient of foreign direct investment. The United Nations Conference on Trade and Development’s World Investment Prospects Survey 2010-2012 ranked Brazil as the third most popular country for foreign direct investment by transnational corporations. But despite the Brazilian economy’s tremendous potential, public corruption remains a significant obstacle to doing business in Brazil. Public corruption in Brazil dates back to the colonial period and persists today due, in large part, to cultural acceptance. A number of recent, high-profile public corruption scandals have focused the country’s attention on the issue, and citizen discontent has grown markedly. With President Dilma Rousseff taking a strong stance against corruption in her own ministry and new legislation on the books aimed at tackling the problem, Brazil may be on the cusp of a lasting anti-corruption movement. According to Marcos Fernandes, economist at the Getulio Vargas Foundation, “[m]any Brazilians . sense that their continent-sized country is ready to realize its potential as a world economic power, and that the old way of doing business, based on personal connections and under-the-table agreements, is holding the country back.”4 There are a number of complex and interrelated reasons for the prevalence of corruption in Brazil. A lack of anti-corruption legislation is not among them. In fact, Brazil has a strong legal framework in place aimed at fighting corruption, which has been used as a model for the establishment of similar frameworks in other developing countries and was recently bolstered by the country’s passage of sweeping anti-corruption legislation in August 2013. Lack of implementation and enforcement has rendered the existing framework largely ineffective, resulting in a culture of impunity. There have been frequent instances of high-profile government corruption and bribery, with many senior public officials going unpunished for their crimes. When Jose Roberto Arruda, the former Governor of the Federal District, was arrested in February 2010 for his involvement in a government contracts kickback scheme, The Economist noted that the arrest was an exception to the general rule: “[t]his is unusual in a country where politicians accused of corruption often lose 1 2014 Index of Economic Freedom: Brazil, The Heritage Foundation, available at http://www.heritage.org/index/country/brazil; The World Bank World DataBank, Fross Domestic Product 2012, available at http://databank.worldbank.org/data/download/GDP.pdf. 2 Great Expectations, FINANCE AND DEVELOPMENT, March 2011, available at http://www.imf.org/external/pubs/ft/fandd/2011/03/mesquita.htm. 3 The World Factbook: Brazil, Central Intelligence Agency, available at https://www.cia.gov/library/publications/the-world- factbook/geos/br.html. 4 Juliana Barbassa, Brazil Takes Hard Line on Corruption, The BOSTON GLOBE, Oct. 16, 2011, available at http://www.boston.com/business/articles/2011/10/16/brazil_takes_hard_line_on_corruption/. ATTORNEY ADVERTISING ropesgray.com alert | 2 nothing more precious than their mandates or their dignity— and even then they seem to bounce back quickly.5 In 2011, six of President Rousseff’s ministers resigned amid corruption allegations. Most observers have lauded the President for her firm stance against corruption, crediting her with removing the corrupt ministers from office. One of Brazil’s most prominent journalists, Eurípedes Alcântara, commented, “It seems to me that [President Rousseff] is much more intolerant with corruption than [her predecessor, Luiz Inacio Lula da Silva] . There now exists a strong awareness, and I think much of it is down to the President, that this kind of extortion is unacceptable.”6 Recent high-profile scandals and resignations such as those of President Rousseff’s ministers, along with extensive media coverage, have forced the issue of anti-corruption legislative reform to the forefront of Brazilian political dialogue. In multiple demonstrations taking place at the end of 2011, thousands of Brazilians took to the streets to protest corruption and the culture of impunity surrounding corruption in Brazil. In September, 594 giant brooms, painted in the green and yellow of Brazil’s flag, were positioned in front of the country’s congressional building. The brooms, one for each federal politician, were meant to symbolize the need to clean up politics.7 The Guardian reported that 2011 may “be remembered as the year in which public frustration over rampant political corruption finally boiled over.”8 In addition to the President’s apparent intolerance for government corruption and strong grassroots activism, a group of lawmakers called the anti- corruption caucus has dedicated itself to the cause. According to a CBS News story, the caucus has “dusted off 21 bills that target corruption, some having been stuck in the process for more than 15 years.”9 In August 2013, following even larger public protests than occurred in 2011 (indeed, the largest public protests in Brazil in two decades), anti-corruption efforts were rewarded with the Brazilian Senate’s passing, and the President’s signing, of a landmark bill that imposes civil and administrative liability on corporations for bribery of national and foreign public officials. As discussed below, it is yet to be seen whether the legislation will in fact be enforced as intended. THE SIZE OF THE PROBLEM Transparency International, the international non-governmental organization dedicated to eliminating corruption, ranks countries and their governments’ efforts to fight corruption on its Corruption Perceptions Index. For 2013, Brazil tied Bosnia and Herzegovina, Sao Tome and Principe, Serbia, and South Africa for 72nd in perceived corruption of the 177 countries and territories on the list.10 In addition to the six ministerial resignations in 2011, Brazil has suffered a number of other high-profile public corruption scandals in recent years. Officials at all levels of government have been accused of 5 Corruption in Brazil: The Money Trail, THE ECONOMIST, Feb. 25, 2010, available at http://www.economist.com/node/15580390. 6 Tom Phillips, Brazil is the latest country to get angry about corruption, THE GUARDIAN, Oct. 27, 2011, available at http://www.guardian.co.uk/world/2011/oct/27/brazil-latest-country-angry-corruption/print. 7 How Brazil is opening up access to official information, BBC NEWS LATIN AMERICA & CARIBBEAN, Dec. 30, 2011, available at http://www.bbc.co.uk/news/world-latin-america-16292843?print=true. 8 Phillips, supra note 6. 9 Barabassa, supra note 4. 10 See Corruption Perceptions Index 2013 Results, Transparency International, available at http://www.transparency.org/cpi2013/results. ropesgray.com ATTORNEY ADVERTISING alert | 3 accepting bribes, awarding public contracts in exchange for kickbacks, and personally profiting from taxpayer money. A 2011 study by the Industrial Federation of São Paulo State estimated the annual cost of corruption in Brazil to be between $28.7 billion and $47.7 billion—equaling 1.4 to 2.3 percent of GDP—in 2010.11 11 According to Transparency International’s 2013 Global Corruption Barometer, a total of fifty-six percent of Brazilians surveyed assessed the Brazilian government’s actions to curb corruption as “ineffective” or “very ineffective; only twenty-one percent of respondents perceived the government to be “effective” at fighting corruption.12 A total of forty-seven percent of Brazilians surveyed believed that the level of corruption in Brazil has increased either “a little” or “a lot” over the past two years.13 Brazilians have long accepted corruption as the cost of doing business, in both private commerce and public service. According to regional poll Latinobarómetro, twenty-three percent of Brazilian households surveyed in 2011 claimed that bribes are needed when interacting with public officials.14 The perception of companies doing business in Brazil is similarly negative on the status of anti-corruption efforts. The Enterprise Surveys 2009 data, collected by the World Bank and International Finance Corporation, demonstrate that seventy percent of surveyed companies identified corruption as a “major constraint” for doing business in Brazil.15Almost twelve percent of companies polled expected to give gifts or make payments to public officials “to get things done.”16 CURRENT ENFORCEMENT REGIME I. PREEXISTING LEGISLATIVE FRAMEWORK Prior to its enactment of robust anti-corruption legislation in August 2013, Brazil had in place a strong legislative framework aimed at fighting corruption and had ratified important international anti-corruption conventions, but lacked domestic laws similar to the U.K. Bribery Act and the U.S. Foreign Corrupt Practices Act (“FCPA”) that prohibit corporate entities from bribing of foreign public officials in international business transactions. Domestically, corruption is addressed in Brazil’s Penal Code as well as in multiple specific federal laws. Article 333 of the Penal Code prohibits offering or promising an undue advantage to a public official to induce him or her to perform, omit, or delay an official act. Persons in violation of this provision face two to twelve years of imprisonment and a fine. Article 337-B criminalizes the same conduct when it involves foreign public officials in international business transactions.