Boom Times in Brazil, Part 4 (Developments that might signal corruption reform . . . including Embraer)
This blog is the last of a four-part series. Part 1 outlines corruption issues to look out for when operating in Brazil’s high-opportunity / high-risk environment. Part 2 gives guidance to companies that are expanding operations into Brazil on ways to manage the country’s unique risk. Part 3 gives guidance (in Portuguese) to Brazilian companies expanding internationally on the basic prohibitions and jurisdictional elements of the FCPA. Part 4 (below) discusses developments that may signal a sea change in Brazilian anti-corruption efforts.
When I started this series of blog posts about Brazil two weeks ago, I intended to write Part 4 as a speculative piece about the potential for corruption reform in Brazil. Then Embraer announced its subpoena. Speculation has turned a bit more real.
Embraer, the Brazilian airplane manufacturer (fourth largest in the world), announced last week that it is being investigated by the U.S. Securities and Exchange Commission (SEC) for possible U.S. Foreign Corrupt Practices Act (FCPA) violations. This is the U.S. government’s first FCPA action against a major Latin American-based multi-national.
The implications are significant. In the past, Latin American executives have watched as major companies were hit by FCPA actions in the region. But the companies were always foreign companies, or their Latin American subsidiaries. Take, for example, IBM in Argentina, Siemens in Venezuela and Argentina, Nature’s Sunshine in Brazil, Alcatel in Costa Rica and Honduras, and Lindsey Manufacturing in Mexico. In each case, Latin American observers could dismiss the action as something against foreigners. Not anymore. Now, one of their own has been hit. Embraer is, through-and-through, a Brazilian corporation. Brazilian executives are on notice.
Regardless of the outcome of the Embraer investigation, this development should highlight the need for Brazilian businesses to pay closer attention to their exposure to anti-corruption enforcement actions from non-Brazilian authorities. One hopes that the action will (finally) trigger momentum in leading Brazilian businesses to change their culture around anti-corruption compliance.
Like many Brazilian-based multinationals, Embraer is subject to the FCPA because it is listed on a U.S. stock exchange and also because it has U.S. operations. These two jurisdictional hooks alone would capture a large number of Brazilian companies and individuals (there are other jurisdictional hooks at play that Brazilians should understand – see Part 3).
One hopes that other Brazilian executives are paying attention. Hopefully they are aware that Embraer’s executives are now probably spending long nights wrestling with issues like: how to run an internal anti-corruption investigation, the cost of outside counsel, potential fines, potential debarment from contracts with the U.S. government, potential criminal liability for responsible individuals, and how to prevent future corruption issues. Others companies would do well to take a harder assessment of their own risks.
In the meantime, eyes are on the SEC and U.S. Department of Justice to see whether this action becomes the first in a series of enforcement actions against major Brazilian or Latin American-based businesses. We have seen similar enforcement trends in the past, usually within specific industries and sectors, including oil and gas, telecommunications, pharmaceuticals, and medical devices. If enforcement in the region picks up against major Latin American companies, executives will have a greater incentive to improve their companies’ anti-corruption compliance efforts.
This blog series started two weeks ago with a description of how Brazilians are now taking to the streets, demanding corruption reform. Allegations of abuse had claimed four of President Dilma Rousseff’s cabinet secretaries since June. The Minister of Sports had just come under fire for alleged embezzlement of $23 million from a program meant to support underprivileged youth. Since then, that Minister has resigned. A sixth, the Minister of Labor, has now come under scrutiny for taking kickbacks from non-governmental organizations with government contracts.
These many developments could very well create better conditions for corruption reform.
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