More than a year after Brazil enacted the Clean Companies Act (Law 12,846 of August 1, 2013) ("CCA"), President Dilma Rousseff signed Decree 8,420 (the “Decree”) to regulate the Act. The regulations came on the heels of massive protests against corruption.
The CCA imposes strict liability on companies for bribery and offenses such as bid-rigging and collusion, and imposes severe sanctions on companies that fail to comply with the law. The potential penalties include administrative fines ranging from 0.1% to 20% of a company’s annual gross revenues during the preceding year, or up to R$60 million if such revenues are difficult to determine. In addition, companies may face judicial sanctions, including dissolution, suspension, disgorgement of profits, loss of public contracts and prohibitions against obtaining incentives, subsidies, grants, donations or loans from public authorities.
The newly-enacted Decree clarifies many aspects of the CCA, including the penalties calculation and the standards for an effective compliance program.
According to the Decree, five factors will be taken into account in determining the total penalty, with percentage fines for each factor ranging from 1% to 5% of the gross revenues earned during the fiscal year prior to the filing of the administrative proceeding, as follows:
1. 1% to 2.5% in cases of continuous unlawful conduct
2. 1% to 2.5% in cases where a company's officers and managers were aware of and tolerated the unlawful conduct
3. 1% to 4% in cases where public services or construction is interrupted
4. 1% if the offender is solvent
5. 5% in cases involving repeat offenders
Rates ranging from 1% to 5% will be applied, based on the value of the contracts held by the company with the damaged public agency or entity, in amounts ranging from R$1.5 million to more than R$1 billion.
In addition five mitigating factors will be considered when determining the total penalty, with percentage reductions for each factor ranging from 1% to 5% of the gross revenues earned during the fiscal year prior to the filing of the administrative proceeding, as follows:
1. 1% in cases of attempted offense
2. 1.5% in cases in which the company provides restitution to the aggrieved agency
3. 1% to 1.5% when a company cooperated with investigation
4. 2% if the offender self-reports
5. 1% to 4% if the company has a compliance program and applies it effectively.
If it is not possible to determine the penalty based on the aggravating and mitigating factors, or if the result of the calculation is equal to or less than zero, the penalty will equal: (i) 0.1% of the company’s gross revenues earned during the fiscal year prior to the filing of the administrative proceeding, excluding taxes; or (ii) R$6,000.00.
In any event, the amount of the penalty will not exceed 20% of the company’s gross revenues earned during the fiscal year prior to the filing of the administrative proceeding or three times the amount of the company’s monetary gains nor shall the penalty be lower than the amount of the company’s monetary gain.
The Decree provides minimum standards to be considered by the authorities whenever assessing whether a compliance program is effective and, therefore, entitles a company to a reduced sanction. According to the Decree, an effective programs requires:
1. Top-level management commitment, including the company’s board, which shall be evidenced by visible and clear support
2. Standards of conduct, code of conduct and ethics applicable to all employees and directors and third parties, irrespective of role or function
3. Standards of conduct, code of conduct and ethics applicable to all subcontractors, agents, suppliers and related third parties
4. Regular training
5. Regular risk assessment procedures
6. Fair and accurate accounting
7. Internal controls that assure accurate accounting and records
8. Specific procedures to avoid fraud and unlawful conduct in bidding processes or in any relationship with a public entity (even if through a third party), such as payment of taxes or obtainment of authorizations, permits and certificates
9. Independence, structure and authority of the internal department responsible for the enforcement of the compliance program
10. Effective whistleblower mechanisms disclosed to employees and related third parties;
11. Disciplinary actions in the event of breach of the compliance program
12. Procedures ensuring that improper activity is detected, stopped, and remediated
13. Appropriate due diligence for the hiring and supervision of third parties, such as suppliers, services providers, agents and associates
14. Due diligences in mergers and acquisitions in third parties
15. Continuous monitoring of the compliance program to prevent, detect and remediate CCA violations
16. Transparency with regard to its political donations
The Decree reinforces the necessity of having an effective compliance program in place, as it requires that all leniency agreements that can be entered into under the CCA provide for the adoption of or improvements to a company compliance procedures, where necessary.