Conducting Anti-Corruption Due Diligence in Latin America

October 11, 2016

 

 

Given the headline-grabbing corruption scandals affecting Latin America; the aggressive enforcement of anti-corruption laws by authorities; and, the global jurisdictional reach of many anti-corruption laws, it may seem obvious that anti-bribery/anti-corruption (ABAC) due diligence is a necessity in Latin America. Despite this, many companies seem to treat ABAC due diligence as an afterthought. Conducting a proper anti-corruption due diligence investigation in Latin America is not a straightforward exercise. Properly assessing the risks involved in corruption accusations leveled against the target of a due diligence investigation, for instance, requires plenty of contextualization, which, in turn, requires a deep knowledge of the local players, politics, and industry dynamics at play in a given jurisdiction. It is not necessarily enough to know that a company has been accused of corruption, one must understand who has made the accusations and why. There are specific dynamics at play in conducting anti-corruption due diligence in Latin America of which both companies and their legal counsel should be aware; we explore some of these issues below.

 

Why is Anti-Corruption due diligence important in Latin America?

 

Latin America has complex Corruption Issues

While most parties seeking to do business in Latin America seem to have a general understanding of the notion that corruption is a risk inherent in doing business in the region, many overlook the particular dynamics of corruption, which can vary across and even within jurisdictions. For example, sectors that may have significant state involvement and/or regulatory oversight such as healthcare, energy, or mining can pose a significant risk from an anti-corruption perspective. But the sectors that pose a risk can vary within and across jurisdictions as can the dynamics, players and politics involved in understanding those anti-corruption risks. These are all important factors to consider and contextualize in any anti-corruption due diligence.

 

Anti-Corruption Laws have Broad Reach

Anti-corruption due diligence is important chiefly because this sort of due diligence exercise can help companies identify and mitigate the risk of violations of anti-corruption laws that have a global jurisdictional reach. The US Foreign Corrupt Practices Act (FCPA), the UK Bribery Act (UKBA) and the Brazil Clean Companies Act (BCCA), or Lei Anticorrupção 12.846/2013, all establish a jurisdictional reach that extends beyond the borders of those three countries. In fact, it is not difficult to imagine a scenario where a company might be subject to the provisions of all three laws and thus face administrative, civil, and criminal liability in all three jurisdictions for alleged corrupt acts that took place in a fourth jurisdiction. In addition, all three of the above laws establish vicarious liability, whereby, for instance, a company can be held liable for the actions of its agents, and all three laws also prohibit bribery of “public officials,” a term they tend to define rather broadly.  

 

These provisions can create significant risks of exposure in a region like Latin America where the use of agents (despachantes, in Brazil, or gestores, in most other countries in the region) for activities ranging from everything from customs brokerage to filing routine regulatory paperwork is a frequent and widespread practice. The prohibition on bribing public officials contained in all three laws is also significant in Latin America where bureaucratic procedures involved in establishing or running a business can involve numerous interactions with public officials, often on the part of an agent. Also, the question of who is a “public official” does not always have an obvious answer, for instance, very often, notaries (notarios) in Latin America are deemed to be public officials and can be involved in a wide variety of transactions ranging from providing legal advice on certain matters to assisting in conveyances and performing civil marriages.

 

In other words, third party anti-corruption due diligence is critical in identifying ABAC risks when doing business in Latin America.

 

What are some factors to consider when conducting anti-corruption due diligence in Latin America?

 

  • Third Party due diligence is of critical importance. As made clear above, you must know your third parties, agents, and consultants. If possible, any anti-corruption due diligence should include questionnaires and, potentially, interviews. However, be aware that there are cultural sensitivities that must be taken into account when using either of these tools.

 

  • Relationships are important. Latin America is a region where the business culture is often built on relationships. Does the target company in your anti-corruption due diligence have significant relationships with government officials (keeping in mind the broader definitions of this term)? What about the relationships of target company’s key executives or any personnel charged with government relations functions? Is there a “revolving door” dynamic where high-level executives in the industry tend to be former government officials? Here, one must go beyond the potentially limited and inconsistent definitions of a “politically exposed person” (PEP) and the more “traditional” methods of searching for such information. For example, in some jurisdictions, there are databases of public employees and it can be extremely useful to mine public data found in, say, an executive’s social media accounts in order to establish any connections with current or former government officials.

 

  • Local records are important. Any due diligence in Latin America should involve a thorough investigation of the subject in locally available open sources. For example, has the subject been party to civil, administrative, labor, tax or other legal proceedings? If the subject is a company in a regulated or licensed industry what is the status of its license and/or has it had any issues with the relevant regulator? It is equally important to contextualize both the nature  and outcome of any such proceedings. While online resources can be very useful, it’s important not to assume that online databases in a given jurisdiction in Latin America are complete or provide all available information.

 

Another important area--particularly in Latin America--besides legal proceedings, which is often overlooked, is public contracting. It is an area that is often rife with corruption risks and can also yield insights into the subject’s relationship with public entities, government agencies, or state-owned entities. Has the subject company in your anti-corruption due diligence been awarded a significant amount of government contracts? If so, what were those contracts for? Do the prices seem reasonable compared with the local market? When were the contracts awarded and is there a pattern (for example, if a company begins receiving significant government contracts during a particular government, this may indicate it has a relationship with officials in that government or in the ruling political party)? What sort of contracts is the company awarded (for instance, are they no-bid contracts and, if so, how common is this practice in that jurisdiction)? Are there any data on the subject’s contract compliance rate and how does it compare with other providers for that agency (for instance, the company may deliver the products as requested on 50% of its procurement contracts but this rate may be high compared to other contractors)? Has the company ever had issues involving its status as a government provider (e.g. revocation of status, competitor complaints involving its tender offers, etc.)?

 

This is an important area to review precisely because it is often not thought of as an "obvious" avenue to explore in conducting due diligence investigations. A search of more “traditional” sanctions databases may provide information on whether the target of your due diligence has been sanctioned by a global body or a regulator in say, the United States; it may not necessarily yield a result of the company in question has been fined or even banned from public contracting in Mexico or Brazil, for example.  

 

  • Reputation is important. The target’s reputation in the local market is also important to understand. For example, does it have a reputation for obtaining lucrative government contracts? How is it viewed by its competitors, clients, and providers? What about regulators or industry leaders? Ideally, this sort of reputational assessment combines a thorough review of open sources (including media, blogs, consumer protection bodies etc.) and confidential inquiries with key individuals in the particular jurisdiction(s). The findings should, of course, always be properly contextualized by taking into account their source as well as, for example, any vested interests or political views the sources may have.


In short, a proper anti-corruption due diligence in Latin America can be a complex exercise. It requires both the proper skill and knowledge to conduct a thorough review of available records; it also requires a deep knowledge of the jurisdiction involved. But aggressively-enforced, broadly-worded anti-corruption laws with extraterritorial reach make clear that it’s a very necessary exercise indeed. As the old adage says, “an ounce of prevention is worth a pound of cure.”

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