Canadian Lawyer InHouse

MARCH 2016 16 INHOUSE unemployment and economic recession un- derway across Brazil. That's bad. What's worse: Petrobras isn't the country's only large-scale scandal. An- other involves kickbacks at Eletrobras, Bra- zil's largest power utility. Yet another has to do with allegations that companies involved in a passenger rail project in São Paulo col- luded to fi x prices. It's easy to see how some might think Brazil is rife with corruption, a country in which business and bribery walk hand in hand. Others go even further in their criti- cism. The New York Times said in a story last year that corruption in Brazil was fuelling a serious national "identity crisis . . . Much of Brazil's recently acquired cachet looks as if it was the product of fraud." The political system is unstable, the economy is in reces- sion, and unemployment is rising, all thanks in part to corruption, the paper said. But not everyone agrees that Brazil is in an especially precarious collective state of mind. And people who know the situa- tion in the country say the idea that Brazil's business culture is inherently corrupt is ri- diculous. "It's more nuanced than that," says Milos Barutciski, Toronto-based interna- tional trade and investment lawyer at Ben- nett Jones LLP. Corruption is a problem, he says, but it isn't endemic. GROWING PAINS Bear in mind that Brazil has evolved sub- stantially since 1985, when it began to tran- sition away from rule under the authoritar- ian military junta and started down the path toward democracy, support for civil rights, and economic freedom. Since then, the country has developed more sophisticated and effective business and legal frameworks. But progress can be messy. "As in many emerging economies, large fortunes were made very quickly, relationships were es- tablished that spilled over into areas they maybe shouldn't have, and certain things went off the rails," says Barutciski. Corruption in the oil and gas sector was peculiar. "What happened at Petrobras was a perfect storm. You had a combination of three red fl ags." The fi rst concern is the resource sector itself. It's inherently risky, Barutciski says. Organizations make sizable upfront capital investments long before they see a penny of cash fl ow. "Large pools of money — we're talking billions here in most instances — attract bad people like honey attracts fl ies." The second potential problem: the public- private interface. "You have a state enterprise that is controlling the oil and gas sector," Ba- rutciski says. "It's a meeting of worlds that don't necessarily mix well." Success in the public sector is measured according to con- tributions to the public good. Success in the private sector has more to do with profi ts. Meeting both goals can be complicated. "This problem isn't unique to Brazil; look at Canada," Barutciski says. "Remem- ber eHealth Ontario?" The provincial agency came under fi re after an investiga- tion revealed that it had improperly ap- proved nearly $5 billion in contracts. "How about construction in Quebec?" The Char- bonneau Commission's investigation into Quebec's construction industry and its relationship with the province uncovered widespread corruption. And the third red fl ag: As in many emerg- ing economies, Brazil's rule of law is a work in progress. Successive governments have yet to fi ll gaps in the legal and political framework. Like Barutciski, Glenn Faass acknowl- edges the fact that Brazil's corruption prob- lem is big international business news. "But you never know whether something's more prevalent or whether it's being policed bet- ter," says the Rio de Janeiro-based senior partner and co-head of corporate merger and acquisition and securities, Latin Amer- ica at Norton Rose Fulbright LLP. "Some- times, more news coverage is evidence of better policing and improving transparency because cases are brought to light." Faass doesn't buy the idea that Brazil is experiencing an identity crisis linked to cor- ruption. From his perspective, the country knows what it has going for it in the long term: abundant natural resources, political stability, an educated population, a growing middle class, and an expanding domestic market. Brazil also recognizes its current challenges: historically low commodity prices, which undermine the country's re- source-focused exports; and a currency that has depreciated compared to the U.S. dollar, making it diffi cult for Brazil and Brazilian businesses to service their debts. "Those external diffi culties have had a more profound effect on the economy than any single scandal, no matter how large," Faass says. "As commodity prices improve and currencies strengthen, I think you will see the economies in Latin America getting better, whether or not corruption scandals are resolved satisfactorily." Brazil's strong attempt to curtail corrup- tion indicates that some parts of the nation's political class see the need for improvement. "I think people in Brazil, including legisla- tors and the society in general, aren't given credit for that," Faass says. THE CLEAN COMPANY ACT In January 2014, the Brazilian government brought into effect the Clean Company Act. It covers all companies that operate in Bra- zil, including foreign organizations. The law provides for proceedings to hold businesses and legal entities accountable for acts against the Brazilian or foreign gov- ernments. Harmful acts include: offering an undue advantage to a public offi cial; de- frauding through collusion the competitive- ness of public bid processes; and manipulat- ing the fi nancial aspects of public contracts. Penalties include potential fi nes of be- tween 0.1 and 20 per cent of the accountable organization's annual revenues, or, if the entity's revenue is unknown, a fi ne between R$6,000 and R$60 million, depending on — among other things — the seriousness of the infraction and whether the organization has internal integrity mechanisms designed to prevent corrupt practices. An organization could face judicial as well as administrative penalties. The coun- try, states, and municipalities may seize property and money, prohibit the company from receiving loans or subsidies from pub- lic fi nancial institutions for up to fi ve years, or even dissolve the business. That's the law. Next, the regulations: In

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