The Brazilian Clean Companies Act

The Brazilian Clean Companies Act

 For those of you looking ahead to 2014, one date you will want to note on your calendar is January 29, 2014. That is the effective date of the Brazilian Clean Companies Act, a new anti-bribery statute that signals Brazil’s intention to crack down on corruption. The Act represents an operational and compliance challenge for Brazilian companies and for foreign companies doing business in Brazil. It also represents a potentially significant development in the risk environment for D&O insurers doing business in Brazil.

Following highly publicized public protests last year, the Brazilian Senate approve the Clean Companies Act on July 4, 2013. Brazilian President Dilma Rouseff signed the Act into law on August 1, 2013. The Act subjects Brazilian companies and foreign entities with a Brazilian registered office, branch or affiliate i to civil and administrative sanctions for bribery of domestic or foreign public officials. Violations of the Act can be sanctioned by civil fines of as much as 20 percent of a company’s gross billings, or if the prior year’s revenue cannot be calculated, of up to R$ 60 million (about US$26 million).

A December 6, 2013 memo from the Morrison & Foerster firm describing the Act can be found here. An August 9, 2013 memo from the Covington & Burling law firm with a detailed description of the Act can be found here.

The Brazilian Act has certain features in common with the U.S.’s Foreign Corrupt Practices Act and the U.K.’s Bribery Act. Like those two statutes, the Act has an international reach, applying to acts committed both in Brazil and abroad. Because of this international applicability, companies “can expect Brazil to cooperate more with US and UK regulatory authorities than it does today,” according to a memo about the Act by São Paulo attorney Gabriela Roitburd.

At the same time, there are important differences between the Act and the FCPA and the Bribery Act. Unlike the Bribery Act, the Clean Companies Act is a “strict liability” statute. In order for sanctions to be imposed on a company, prosecutors are not required to show that company representatives acted with criminal or corrupt intent. In addition, according to the Morrison & Foerster memo, “a company cannot avoid liability under [the Clean Companies Act] by proving that it had ‘adequate procedures’ in place.” However, companies can mitigate potential fines based on cooperation with Brazilian authorities and by having effective internal compliance procedures. Companies will also receive a cooperation credit for voluntary disclosure.

Unlike under the FCPA and the Bribery Act, the Clean Companies Act does not impose criminal liability on legal entities for acts of bribery. Violations of the Act can result only in the imposition of civil and administrative sanctions (which, though not involving criminal sanctions, nonetheless potentially can be quite harsh). The Act does not alter existing laws under the Brazilian Criminal Code imposing criminal liability on individuals for acts of bribery. In addition, unlike under the FCPA, the Clean Companies Act does not contain an exception for so-called “facilitation payments.”


The extent of the changes that may follow the Act’s effective date is uncertain. In the words of the São Paulo attorney Gabriela Roitburd, “how aggressively Brazilian authorities will enforce the Act and in which areas they will focus their efforts remain to be seen.” Skeptics might well question the extent to which the Act alone will change anything.

Just the same, there are reasons to suspect that the Act could represent a very significant development. The Act’s enactment not only took place in the midst of a highly charged political environment, but it also follows a period in which Brazilian authorities have already started cracking down on corrupt activities; based on examples cited in its memo, the Morrison & Foerster law firm notes, with respect to existing enforcement activities, that “authorities are not shying away from pursuing big, powerful targets.” The memo goes on to observe that “the risks involved in sectors that require significant interaction with public officials have multiplied.”

There is a larger context within which the Act’s enactment takes on a more global significance. As the Morrison & Foerster memo notes, the Act “represents a firm statement of intent from the Brazilian government to align itself with global trends and tackle corruption head on.” It is this sense in which the Brazilian’s adoption of the Act represents a part of a “global trend” that the Act takes on a greater significance.

During numerous conversations with industry colleagues outside the U.S. this fall, I have heard over and over again that regulators outside the U.S. are becoming increasingly active and that there has been an upsurge in claims notifications involving regulatory and enforcement actions outside the U.S. The Brazilian adoption of the Act seems to set the stage for an augmentation of this current trend.

Ranked by GDP, Brazil has the world’s sixth largest economy. It is the largest economy in South America. Its enactment of this statute potentially will have an impact on other counties and economies, perhaps even outside of Latin America. To the extent, Brazilian’s adoption of the Act encourages other countries to try to crack down on bribery and corruption, it could accelerate the already pronounced trend toward greater regulatory activity around the world.

At a minimum, the Act’s adoption raises the possibility of greater regulatory and enforcement activity in Brazil, involving both Brazilian companies and foreign companies doing business in Brazil. The possibility of this increased regulatory and enforcement activity in turn raises the possibility of increased D&O claims activity, as companies targeted by prosecutors seek to have their defense costs and other expenses reimbursed by their insurers. The possibility (noted above) for collaboration between Brazil and both the U.S. and the U.K. on anticorruption enforcement further reinforces the possibilities for greater D&O claims activity.

Brazil’s adoption of the Act is significant in and of itself, for what it means for the country’s efforts to try to crack down corruption. It potentially is also emblematic of a more global move toward greater regulatory enforcement. These developments in turn have important significance for companies doing business in Brazil and for the larger global economy. All of these developments have important implications for the global D&O insurance industry.

The extent to which coverage would be available for any particular company under its D&O insurance for matters of the kind described above will of course depend on the nature of the specific allegations raised and the particular wording of the company’s policy. The extent of coverage available for investigative costs is a recurring issue, and the extent of coverage for investigations and enforcement actions involving the entity is particularly dependent on policy wording. In connection with enforcement actions, fines and penalties typically would not be covered, so enforcement action-related coverage questions would most likely involved defense cost protection. To the extent enforcement actions under the Brazilian Clean Companies Act lead to follow on civil litigation (as has happened in the U.S.  following FCPA enforcement actions), the related civil actions would involved further costs for which the insured persons would seek D&O insurance coverage.

 Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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