FINANCIER. Corporate fraud & corruption ANNUAL REVIEW ONLINE CONTENT MAY 2017 R E P R I N T F I N A N C I E R W O R L D W I D E.

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1 R E P R I N T F I N A N C I E R W O R L D W I D E. C O M ANNUAL REVIEW Corporate fraud & corruption REPRINTED FROM ONLINE CONTENT MAY Financier Worldwide Limited Permission to use this reprint has been granted by the publisher PREPARED ON BEHALF OF FINANCIER WORLDWIDE corporatefinanceintelligence

2 CHILE CLAUDIO FELLER GRASTY QUINTANA MAJLIS Q TO WHAT EXTENT HAVE YOU SEEN A NOTABLE RISE IN THE LEVEL OF CORPORATE FRAUD, BRIBERY AND CORRUPTION UNCOVERED IN CHILE IN RECENT YEARS? FELLER: Recently, there has been an increase in corruption cases. There has been a marked increased in the number of individuals using corrupt means to achieve political influence, via contributions of money to the financing of political campaigns and candidates. This practice has occurred for some time, but lately there have been various criminal investigations related to the practice, some of which have concluded with criminal charges against politicians and private individuals. With respect to corporate fraud, there have been several cases, many in the financial sector, which have been conducted through investment companies that have offered very attractive interest rates, but were, in fact, just simple pyramid schemes which resulted in losses being incurred by a significant number of people. Likewise, we have experienced corporate securities fraud resulting from managers that have altered the financials of their companies, as well as taxation fraud. Finally, recently, there has been an increase in cases of agreements between companies in breach of free competition regulations. Q HAVE THERE BEEN ANY LEGAL AND REGULATORY CHANGES IMPLEMENTED IN CHILE DESIGNED TO COMBAT FRAUD AND CORRUPTION? WHAT PENALTIES DO COMPANIES FACE FOR FAILURE TO COMPLY? FELLER: The most important legal change in recent years has been the incorporation of law number 20,393 on Criminal Liability of Legal Entities. In practice, this law provides for the adoption of a model of prevention oriented to avoid and detect the commission of certain crimes by employees, including the crime of bribery, money laundering and financing of terrorism activities. The aforementioned prevention model serves as a safe harbour for the company and, therefore, if not in place, or deficient in any relevant aspect, the law will hold the company liable, establishing criminal sanctions directly applicable upon the legal person or company, independent as to whether the crime was committed personally by the employee. Depending upon the seriousness of the crime committed by the employee, and whether there is any repetition, the sanctions may consist of the dissolution of the legal person or cancellation of its legal REPRINT FINANCIER WORLDWIDE MAY 2017

3 CHILE CLAUDIO FELLER GRASTY QUINTANA MAJLIS personality, a prohibition against contracting with the state and other significant economic sanctions. Distinct is the situation of corporate fraud, other than that contemplated within the categories included in law 20,393, for which Chilean legislation does not contemplate severe sanctions for members of the board of directors or executives. With regard to perpetrating fraud through a corporation, civil damages are the only real deterrent applicable to these types of actions. Q IN YOUR OPINION, DO REGULATORS IN CHILE HAVE SUFFICIENT RESOURCES TO ENFORCE THE LAW IN THIS AREA? ARE THEY MAKING INROADS IN THIS AREA? FELLER: The deficiencies are not so much related to having sufficient physical and human resources to enforce the law; instead, there are deficiencies regarding the training of public officials of regulatory entities, and the lack of attributions they have. Corporate fraud is often perpetrated by sophisticated and innovative means, meaning enforcement officials need to be constantly updated. In any case, we believe there has been progress in this area. Q IF A COMPANY FINDS ITSELF SUBJECT TO A GOVERNMENT INVESTIGATION OR DAWN RAID, HOW SHOULD IT RESPOND? FELLER: Naturally, any reaction should begin with the leadership role that the company s lawyer should immediately assume, advised by its internal and external teams. It is difficult to indicate in advance what measures the company should adopt, but the desired reaction demands a thorough knowledge of the rights that the law grants to the company under investigation, the faculties that the investigating organ has and the type of conduct that should never be exhibited facing a governmental or criminal investigation. In this context, companies, through their legal or compliance managers, should have in place certain policies and procedures addressing investigations or dawn raids, to make sure that the company will react lawfully, while at the same time protecting the company and its employees rights by ensuring employees know what government officials can and cannot do. MAY 2017 FINANCIER WORLDWIDE REPRINT 8

4 CHILE CLAUDIO FELLER GRASTY QUINTANA MAJLIS Q WHAT ROLE ARE WHISTLEBLOWERS PLAYING IN THE FIGHT AGAINST CORPORATE FRAUD AND CORRUPTION? HOW IMPORTANT IS IT TO TRAIN STAFF TO IDENTIFY AND REPORT POTENTIALLY FRAUDULENT ACTIVITY? FELLER: Most corporate frauds or acts of corruption are detected by complaints; therefore, undoubtedly whistleblowers have an important role to play, as does training staff to detect potentially fraudulent activity. The existence of channels and clear and known procedures within the company are also very important. Law 20,393 establishes the need to appoint a compliance officer that shall be autonomous from the management of the company and who will have to establish a procedure in order to receive complaints from whistleblowers. In addition to the latter, leniency is becoming an important legal tool in helping to uncover certain corporate fraud, particularly relating to antitrust matters, where sanctions are being strengthened and, therefore, this provides an incentive for whistleblowers and confessors. Q WHAT ADVICE CAN YOU OFFER TO COMPANIES ON CONDUCTING AN INTERNAL INVESTIGATION TO FOLLOW UP ON SUSPICIONS OF FRAUD OR CORRUPTION? FELLER: Our first suggestion will always be to have a crime prevention model in place, duly certified by an external entity, such as a rating agency or an auditing company, as prescribed by law 20,393 in order to qualify for safe harbour. In addition, when pursuing an internal investigation, companies should take into account labour laws, so that any internal investigation is performed in compliance with labour rules and respecting the rights of employees, including those who are suspected of the fraudulent or corrupt action. Otherwise, any proof obtained during the course of the investigation may be declared invalid and become worthless in a judicial procedure. Likewise, the company may be exposed to labour and civil indemnifications payable to the employee and other sanctions for breaching the fundamental rights of employees. In Chile, our law and courts are very strict on these matters. For these reasons, our recommendation will always be that the company lawyer should be included in the team that carries out the investigation. REPRINT FINANCIER WORLDWIDE MAY 2017

5 CHILE CLAUDIO FELLER GRASTY QUINTANA MAJLIS Most corporate frauds or acts of corruption are detected by complaints; therefore, undoubtedly whistleblowers have an important role to play. Q WHAT GENERAL STEPS CAN COMPANIES TAKE TO PROACTIVELY PREVENT CORRUPTION AND FRAUD WITHIN THEIR ORGANISATION? FELLER: We believe that the most basic and effective step is to instil within the company a culture of good corporate practice, so that it forms one of the fundamental pillars of the organisation. If the culture of adhering to the law and ethical practices exists, there will be significant progress. Then, it is important that the company has a system to prevent corruption and fraud, led by a compliance or enforcement officer who is highly qualified and independent from the administrative organs of the company, including the owners and directors. This compliance officer should have absolute autonomy and the facilities to establish, execute and perfect the prevention system in a continual manner. Finally, there should be easily accessible channels within the company to make complaints regarding poor practices, which, together with assuring the seriousness of the complaints, offer a guarantee to the complainants that they will not suffer retaliation. gqmc.cl Claudio Feller Partner Grasty Quintana Majlis cfeller@grasty.cl Claudio Feller s professional activity is concentrated on litigation, principally related to criminal matters and white-collar defence, as well as litigation related to regulatory sanctions. He served as Director of the Criminal Law Department of the Pontifical Catholic University of Chile between 2006 and 2011 and is currently professor of Criminal Law and diverse postgraduate courses imparted by that same university. Furthermore, he is invited professor to the training sessions held by the Judicial Academy and the Public Ministry. MAY 2017 FINANCIER WORLDWIDE REPRINT

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