Current corruption environment and anticorruption. enforcement trends. Corruption Risks in South America & How to Respond. Discussion topics 9/20/2013

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1 Corruption Risks in South America & How to Respond October 2013 Discussion topics Current corruption environment and anticorruption enforcement trends in South America Risks specific to the region and individual South American countries Enhancing your compliance program 1 Current corruption environment and anti-corruption enforcement trends 1

2 Increased interest in adopting anti-corruption legislation There is an increased interest of the major economies in South America to improve/renovate their current anti-corruption legislation in addition to signing agreements with international anti-corruption organisms such as the Organization for Economic Co-operation and Development ( OECD ) Anti- Bribery Convention (Colombia signed in 2013). In spite of the interest to improve policy and the establishment of local anticorruption commissions (in January 2013, Peru gave legal status to their Comision de Alto Nivel Anticorrupcion), the prevailing perception for the region is that corruption continues to be a major problem. Enforcement of local anti-corruption legislation remains low. 3 International anti-corruption conventions South American countries who are parties to the OECD Anti-Bribery convention (year of entry into force of the Convention) 2000 Brazil 2001 Argentina Chile 2013 Colombia South American countries adopting the Organization of American States ( OAS ) convention Colombia Argentina Peru Venezuela Chile Uruguay Brazil Showing only relevant economies 4 Recent changes to local anti-corruption legislations Peru Amendment made in 2009: Criminalization of active bribery of foreign officials to influence the performance or omission of any act in violation of his duties in order to retain business No provision on passive transnational bribery or criminal liability of legal entities Chile Two amendments made in 2009: Criminalizes active bribery of foreign public officials by Chilean citizens or individuals residing in Chile Introduces criminal liability for entities for the bribing (domestic or foreign) of public officials No provision regulating commercial bribery 5 2

3 Recent changes to local anti-corruption legislations Colombia Enacted July 2011: Sanctions corruption of Colombian government entities or officials by Colombian or foreign individuals and companies Similar sanctions are contemplated in cases of bribery of foreign officials Includes provisions sanctioning commercial bribery Brazil Enacted August 2013 Prohibits bribery of domestic and foreign public officials Includes provisions similar to the FCPA and sanctions the promise, offer, or delivery of any undue benefit to a public official (directly or indirectly), or a related third party Extends prior legislation to sanction bribery of public officials by corporations. Prior to this legislation, only individuals were responsible for corrupt acts 6 Overall anti-corruption enforcement trends An analysis of enforcement actions issued by the SEC and the DOJ against corporations from January 2008 June 2013 identified 10 cases with a connection to a South American country. These 10 enforcement actions represent 16% of total corporate cases for the period. Even though this trend may suggest a reduced interest by the US government in the prosecution of bribery offenses by corporations with operations in South America, trends seen in 2012 and 2013 (20% and 33% respectively) indicate the US government continues to have an interest in the investigation of allegations against corporations with operations in the region. 7 FCPA enforcement actions including a South American country Source SEC and DOJ reports on annual enforcement action activity 8 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Corporate Cases (only) Jan - Jul South America Other Regions '

4 Recent U.S. FCPA enforcement actions involving South America Argentina (2013) Retail/Manufacturing Payments to obtain customs clearance and avoid inspections Profits of $700,000; Penalty $1.6 million Brazil (2012) Global Pharmaceutical Company High discounts paid to distributors; used to establish slush fund to make payments to government officials Sales of $1.2 million; Alleged bribes of $70,000; Penalty $25 million Brazil / Argentina (2012) Medical Device Manufacturer Fictitious invoices used to funnel kickbacks to doctors Alleged bribes of $1.5 million; Penalty $23 million Required to have a Compliance Monitor for 18 months Source: 9 Recent U.S. FCPA enforcement actions involving South America Venezuela (2010) Large Offshore Drilling Company Payments of $400,000 to extend contracts and collect receivables Personal penalty for country manager of $25,000 Company penalty $56 million (alleged violations in multiple countries) Brazil (2010) Freight and Logistics Services Supplier Payments to customs officials in Brazil, Nigeria, Angola, Russia, Kazakhstan Disgorgement of $11 million; Criminal fine $71 million Source: 10 Global Corruption Barometer Question 1 Over the past 2 years, how has the level of corruption in this country changed? Decreased Country A little A lot Stayed the same A little Increased A lot % % % % % Argentina Brazil Chile Colombia Peru United States Note: Developed by Transparency International, the 2013 Global Corruption Barometer surveyed approximately 1,000 people from 107 countries between September 2012 and March Source 2013 Global Corruption Barometer Survey 11 4

5 Anti-corruption enforcement Perceived effectiveness 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Chile United States Peru Colombia Brazil Argentina Likelihood Corruption will be Prosecuted Anti-Corruption Laws are Effective Source of data: 20Survey%20(with%20cover)%20-%20FINAL.pdf) 12 Global Corruption Barometer Question 8 What was the most common reason for paying the bribe/bribes? Country As a gift, or to express gratitude To get a cheaper service To speed things up It was the only way to obtain a service Argentina Brazil Information not available Chile Colombia Peru United States Source: Transparency International Global Corruption Barometer 13 Risks specific to the region and individual South American countries 5

6 More Corrupt Less Corrupt 9/20/2013 Global Corruption Barometer Question 2 To what extent do you think that corruption is a problem in the public sector in this country? Country 1 - Not a problem at all A very serious problem Argentina Brazil Chile Colombia Peru United States Source: Transparency International Global Corruption Barometer 15 Perceived corruption Customs, Police and Municipal/Local Government 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Argentina Brazil Colombia Peru United States Chile Customs Police Muni/Local Source of data: %20(with%20cover)%20-%20FINAL.pdf) 16 Global perception of corruption 2011 vs vs CPI Scores Argentina Brazil Chile Peru Colombia Source: Transparency International. CPI : Corruption Perception Index 17 6

7 Distributor risk Distributor risk Customs payments to minimize duties and taxes Customs payments to minimize duties and taxes Tender and contracting Tender and contracting Payments for service execution Payments for service execution Fictitious invoices/paperwork Fictitious invoices/paperwork 9/20/2013 Common corruption risks throughout South America Third party risks Common use of third party intermediaries to facilitate business transactions (e.g., customs agents, business consultants, sales agents and brokers) Government interactions Radical political and government shifts and their collateral consequences (e.g., expropriations, breach of contracts, requests of cooperation with new regimes) Increased corruption environment in government areas commonly used in business transactions (e.g., customs, licensing and permits, general contracting) Complex local laws making the business environment less transparent Certain industries fully controlled or closely watched by government s (e.g., oil and gas, healthcare) Cultural risks Business culture of the region is built around trust and friendships The general belief or, in some instances, fact, that interactions with government entities require the payment of bribes 18 Prevalent corruption risks affecting specific countries Common Schemes Unique corruption risks Brazil Argentina Public procurement has significantly increased based on the boom in construction caused by the World Cup and Olympic games Abundant regulatory agencies increase the risk of bribe requests Complex tax system Customs risks are especially prevalent Use of phantom or third party companies that offer no legitimate services established to facilitate bribery 19 Colombia High risk for money laundering of drug profits Corruption particularly problematic in the public procurement system Higher risk for companies, especially those in the energy industry, from use of military for security in countryside Prevalent corruption risks affecting specific countries Common Schemes Unique corruption risks Venezuela Tumultuous government landscape Facilitation payments and gifts to government officials in the processing of licenses and permits are common Importing and exporting of products is a complicated process Strict currency controls Peru Granting of licenses and permits is often plagued with confusing processes Bribery in government procurement processes is common High levels of corruption in connection with resource extraction concessions 20 7

8 Enhancing your compliance program in South America Challenges with compliance programs Cultural implications Corporate's tone at the top does not filter down to the subsidiaries Language barriers Cultural customs preventing the reporting of known or suspected compliance issues (i.e., "do as you are told" or "the end justifies the means") Lack of formal or "regionalized" compliance program One size fits all compliance programs Without a formal local compliance program structure and adequate resources in place, the organization is challenged to effectively identify and mitigate compliance risks The absence of a formal or "regionalized' compliance program does not demonstrate commitment level consistent with the corporation's intentions of compliance Lack of clarity around rules Unclear ownership of roles and processes contributes to internal control deficiencies and a lack of accountability when issues arise Ownership and accountability not globally integrated 22 Challenges with compliance programs Absence of dedicated leadership Compliance leadership is an improvised collaboration among other functions such as Legal and Internal Audit; not only at the local level, but globally Unclear local ownership of decision making and risk mitigation activities Inadequate controls and processes Control structures not considering local risks or not based on country or local industry practices Audit functions that rarely visit foreign locations or too focused on procedural testing (low skepticism) Lack of formal risk-based approach to compliance Governance, Risk and Control technology tools not optimized to aid in prevention and detection Lack of due diligence procedures in the retention of third party intermediaries and business consultants 23 8

9 Global Corruption Barometer Question 11 Reporting corruption 11a. Would you report an incident of corruption? Country YES NO Argentina Brazil Chile 93 7 Colombia Peru United States Source: Transparency International Global Corruption Barometer 24 Global Corruption Barometer Question 11 Reporting corruption 11b. Of those people that said yes they would report Country Directly to the institution General government hotline Independent non-profit News media Other Argentina Brazil Chile Colombia Peru United States Source: Transparency International Global Corruption Barometer 25 Global Corruption Barometer Question 11 Reporting corruption 11b. Of those people that said no they would not report Country I do not know where to report I am afraid of the consequences It wouldn't make any difference Other Argentina Brazil Chile Colombia Peru United States Source: Transparency International Global Corruption Barometer 26 9

10 Global Corruption Barometer Question 12 Requested to pay a bribe 12a. Have you ever been asked to pay a bribe? Country YES NO Argentina Brazil 8 92 Chile Colombia Peru United States Source: 2013 Global Corruption Barometer Survey 27 Global Corruption Barometer Question 12 Refusing to pay a bribe 12a. Of those who have been asked, have you refused to pay a bribe? Yes No Argentina Brazil Chile Colombia Peru USA Source: Transparency International Global Corruption Barometer 28 Questions 10

11 Contact Information Vito Giovingo Senior Manager Deloitte Financial Advisory Services LLP Luis Ortega Senior Manager Deloitte Financial Advisory Services LLP About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Member of Deloitte Touche Tohmatsu Limited 31 Aspects of the Brazilian Anti- Corruption Law Shin Jae Kim Partner of the Compliance Practice Group CCEP skim@tozzinifreire.com.br October 2013 Informações Confidenciais de Propriedade de TozziniFreire Advogados 11

12 Some differences: FCPA vs UK Bribery Act vs Anti-Corruption Law FCPA UKBA Brazilian Anti- Corruption Law Bribery of foreign YES YES YES officials Bribery of local officials NO YES YES Books and records YES NO NO provisions Other acts prohibited NO Commercial Fraud in public bids and bribery government contracts Type of Liability Criminal and Civil Criminal Administrative and Civil Strict liability NO YES, for failure to YES prevent bribery Facilitation Payments Permitted Prohibited Prohibited Penalties/Fines/Other Sanctions Credit for existence of compliance programs Credit 33 for self-disclosure and cooperation Anti-bribery violation: up Unlimited fines Up to 20% of the to US$ 5 million per company's gross revenue violation. Accounting Debarment of the previous year or up violation: up to US$ 25 to BRL$ 60 million, million per violation. prohibition to receive Twice the benefit obtained incentives, publication of or sought the condemnatory Debarment, lawsuits, sentence, suspension of compliance monitors, etc. activities, etc. YES YES (failure to YES (under USSG) prevent bribery is an offense) YES YES (limited) Copyright 2013 Deloitte Development LLC. YES All rights reserved. (leniency agreement) Informações Confidenciais de Propriedade de TozziniFreire Advogados 12