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Avoiding Latin America’s Corruption Scandals: 6 Steps to Minimize Your Risk

Provide employees and local partners with options “reflective of their culture and they will be more likely to follow the rules,” Fava said.

How deeply ingrained is corruption within Latin America’s economy? Headlines paint an alarming picture: In recent years, business and government officials from Mexico to Peru to Brazil have been implicated in high-profile bribery scandals. A survey last year by the watchdog group Transparency International found that 53% of people surveyed in the region believed that corruption had increased in the last 12 months.1

The good news, however, is that pressure by the general public appears to be driving government and law enforcement authorities to act more aggressively in weeding out and prosecuting corruption. In many cases, local law enforcement partners with U.S. agencies, including the FBI and SEC, to build their cases. Palmina Fava, a partner in the Government Investigations & White Collar Criminal Defense practice at V&E, traces some of the momentum for the anti-corruption push to outrage over the Brazilian government’s handling of the 2014 World Cup and the 2016 Olympics.

“I believe the Brazilian people were deeply dissatisfied that hundreds of millions of dollars were being spent on single-use stadiums for the World Cup and the Olympics when that money could have been spent on hospitals, infrastructure, reducing crime, and pensions,” Fava said. “It caused the populace to say enough is enough. Once that wave started, it became a tsunami.”

As both Latin American and U.S. authorities crack down on corruption, investors and businesses with interests in the region can do their part to avoid it. Here are a few steps you can take to minimize your risk of being ensnared in the next big Latin American corruption scandal.

Perform due diligence on third parties.

Performing due diligence on a potential business partner is one of the most important measures you can take to avoid corruption. “If you’re entering into joint ventures, if you have a local partner, whatever the case may be, third-party risk still remains the biggest risk factor in Latin America,” said Ephraim “Fry” Wernick, also a V&E partner in the Government Investigations & White Collar Criminal Defense practice.

Wernick warned of business partners whose invoices don’t show legitimate business uses, who charge inexplicably high commissions, and who are affiliated with shell companies based outside the country of your investment. “All of these issues reflect red flags that you need to be concerned with, because they demonstrate less visibility into money flow and less visibility into a legitimate business operation,” he said.

Invest in a robust compliance program.

A compliance program helps companies maintain transparency when it comes to payments to third parties, and it institutes financial controls to help prevent common forms of corruption, such as bribery. This is critical when, for instance, you’re eyeing a real estate investment in Mexico and you encounter government officials who expect payments for providing routine approvals.

“The investor should ask the questions, ‘How are we going to get the approvals that we need in order to do our business without being subject to these requests for payments? What kinds of financial controls are going to be in place so that I, as the investor, know how my money is being spent and how the company is getting the approvals that it needs?’” Fava said.

Wernick noted that if a government does begin an investigation into alleged corruption at your company or joint venture, a robust compliance program may help mitigate any resulting penalties. Governments “want to incentivize companies to invest in compliance and prevent the problems in the first place,” Wernick said.  “If you can demonstrate that your company had a strong compliance function and the crimes resulted from extraordinary efforts by rogue employees to circumvent internal controls,” he added, “then you will be in a very good position to argue for a modest fine or even a declination of charges by the government.”

Educate your local team and be open to being educated by your local team.

Latin American countries have had anti-corruption laws on the books for years, so your new local partner will know to adhere to them, right?

“Not necessarily,” said Fava.

“Some of these laws really haven’t been enforced for a number of years, and a custom of soliciting benefits or of giving gifts to build relationships predominates,” she explained. “If a U.S. company prohibits gift-giving under all circumstances, an employee at a subsidiary in Argentina may say, ‘That’s not going to work here. Everybody gives gifts.'”

Fava added that just mandating that employees stop giving gifts isn’t enough. Instead, it’s important to explain why gift-giving practices must change and what’s allowed under the applicable laws. Depending on the jurisdiction, for example, gifts that are valued up to a certain limit or are limited in frequency may be perfectly legal. You can also solicit employee suggestions that are consistent with both their culture and the law.

Provide employees and local partners with options “reflective of their culture and they will be more likely to follow the rules,” Fava said.

Apply rigorous controls everywhere … not just in the countries with the strongest enforcement.

The intensity of regulatory enforcement and finance crime prosecution varies from country to country. Anti-corruption efforts in Brazil, for instance, are markedly stronger than they are in Mexico, Fava said.

But that doesn’t mean that companies — multinational companies, in particular — can afford to be lax in their financial controls in Mexico. U.S. authorities may still take an interest in alleged corruption associated with your business. Whatever they find in Mexico could then lead to a broader investigation in the region. “They may believe that if you had lax controls in Mexico, then maybe you also had lax controls in Brazil, Colombia or Chile,” Fava said. “Now this investigation is not limited to Mexico — it’s going to expand to other markets.”

Be prepared to report wrongdoing by officials.

If it seems impossible for a project to move forward without paying a bribe to a government official or engaging in some other illicit conduct, you’re within your rights to turn to regulators and law enforcement for help.

“We’ve seen situations where our clients have gone to the relevant agencies and said, ‘The managing director of this agency or the head of this ministry has requested a bribe — here’s the proof,’” Fava said.

The public’s skepticism notwithstanding, such allegations are less likely to be swept under the rug these days.

“Now, in many countries around the world, the regulators are much more engaged than they were five to 10 years ago,” Fava said. “Governments are recognizing that prosecuting corruption can be good for business.”

Consider the benefits of cooperation.

Unfortunately, even companies with the best of intentions and strongest controls can still find themselves ensnared in scandals. If you happen to discover wrongdoing at your company or by your partner, it might make sense to disclose it to authorities, whether it’s those in the local country or U.S. law enforcement. “In those situations, the government typically will be more flexible in how they handle you because you’ve brought the case to their attention,” Wernick said.  He also noted that DOJ’s new enforcement policy is especially lenient on companies who self-disclose after an M&A deal. “Now, for the first time,” Wernick explained, “there may be a real incentive to self-disclose for companies that discovered corruption in connection with a company or asset that was just acquired.”

If, however, the authorities discover wrongdoing at your company through their own investigations, it is almost always in a company’s interest to appear cooperative with them. “And if you are going to cooperate, you’re going to want the government to believe that you are best in class,” Wernick added. That means, as noted earlier, demonstrating your commitment to your compliance program, as well as taking authorities’ requests seriously. “When they ask for documents, they appreciate a company that is proactive in responding,” he said.

“Though Latin American governments are growing more aggressive in targeting corruption overall, they’re increasingly lenient with companies that do cooperate,” Wernick said. Brazil, he noted, is leading the way. “They’ve probably been the most forgiving in the leniency agreements that they will offer companies and individuals if they are cooperative,” he said. “By doing that, they’ve also been able to build some very massive cases and unravel some very serious corruption cases, and with the increased cooperation with DOJ and the SEC, that in turn, has led to some of the largest FCPA cases ever.”

1 What People Think: Corruption in Latin America & The Caribbean, Transparency International, September 23, 2019