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Antitrust Compliance Programmes in Brazil
Harsh penalties for antitrust infringements
Within the current scenario of globalisation and economic crisis, companies have sought to maximise their economic efficiencies aiming either their survival or the conquest of new markets and opportunities. Such companies shall be conscious, however, of the line separating competition on merits from competition infringements.
In this regard, some companies tend to abuse their market power, by either excluding their competitors or by extending their leverage into neighboring markets. Others tend to employ their efforts in colluding with their competitors in order to avoid fierce competition in the market.
Such behaviour harmed consumers around the globe, but the response has been vigorous from Brazilian antitrust authorities (Antitrust Authorities), and with huge administrative fines and criminal jail sentences being imposed not only to domestic, but also foreign companies and individuals, and burdensome damage claims being filed.
Prevention becomes of greater importance to avoid deep penalties being imposed as a result of competition wrongdoing. But how to prevent such wrongdoings? The answer is as simple as it could be: education, training, supervision and remedy. Antitrust compliance programmes are certainly able to cover such concerns.
Although antitrust compliance programmes are very popular in other countries, in Brazil such preventive tools have only recently been adopted by some companies. Most of the initiatives come from multinational companies with global antitrust policies and compliance culture. Nevertheless, Brazilian companies have started to realise the importance of adopting preventive measures to avoid unlawful practices.
The initiative is not only encouraged by international tendencies, but also by the development of competition enforcement in the country. In line with global trends, prosecution of anti-competitive conducts in Brazil has become more rigorous in the past years. In 2008 and 2009, the Brazilian Antitrust Authorities, especially the Secretariat of Economic Law (SDE), the body in charge of antitrust investigations of the Brazilian System of Competition Defence (SBDC),1 have implemented several campaigns to enforce cartel prosecution. Among these actions were the implementation of the National Day for Cartel Prosecution, dated 8 October, and the publishing of practical guidelines on: cartel prosecution and leniency programmes; bid-rigging; and fighting cartels in trade associations.
SDE has also turned its efforts to increase investigations involving cartels. In 2008, the administrative proceedings involving cartel accusations reached 13.5 per cent of the total administrative proceedings analysed by SDE.2
Since 2000, SDE has been able to count with efficient legal tools to detect and prosecute anti-competitive practices. For example, with the assistance of the federal police, SDE is now constantly conducting secret investigations and organising, upon judicial authorisations, dawn raids (know in Brazil as seek-and-seizure procedures) to collect direct evidence of infringements such as objects, papers of any nature, commercial books, computers and files from the company or individual.3
Not only have SDE initiatives raised the attention to cartel prosecution, but also the increasing penalties imposed by the Administrative Council of Economic Law (CADE). While SDE has the responsibility to start investigations and prosecute antirust wrongdoings, the final decision shall be taken by CADE.
Law No. 8,884 of 11 June 2004 (Competition Act) provides for pecuniary fines of 1 to 30 per cent of the gross revenue of the condemned company in the year prior to the opening of the investigation.4 The company’s executives directly or indirectly involved in the conduct may be fined from 10 to 50 per cent of the fine applicable to the company.5 CADE used to keep the fines more close to the minimum (1 per cent), however, this reality changed in the past years.
The crushed stone cartel case was judged by CADE on 7 July 2005.6 In this case, the fines reached 20 per cent of the gross revenues of some of the involved companies. The trade associations were condemned in more severe fines that reached, approximately, 300,000 reais.
Another important cartel decision dated 19 September 2007 that is worth mentioning is the private security companies cartel,7 by which CADE condemned the involved companies to a total amount of fines equivalent to, approximately, 38 million reais. The trade associations and unions involved in the case were each fined 160,000 reais. The individuals involved in the conduct were fined amounts that totalled approximately 4.5 million reais.
The most recent and remarkable case, decided in 2009, condemned several companies involved in a cartel for bid-rigging in the sand extraction industry to fines of 22.5 per cent of their gross revenue.8
Not only are the penalties applied to companies and trade associations getting more severe, but also the penalties applied to the involved executives. Besides being administratively fined by CADE, a cartel is also a criminal felony in Brazil punished with two to five years of imprisonment, or pecuniary fine.9?SDE is working together with public prosecutors to get the involved individuals also prosecuted in the criminal field. According to estimates from SDE, more than 100 individuals are facing criminal prosecution in the country and more than 20 have already been sentenced.10
In this context, a very important and recent change of the Brazilian policy with respect to cartel fighting is the fact that the Antitrust Authorities are prosecuting not only foreign companies, but also foreign individuals involved in international arrangements. For such purposes, the authorities are likely to make use of the Interpol Red Notice system for notification of the defendants. Until recently, the Brazilian authorities limited criminal enforcement to local individuals, in order to facilitate formal aspects of the criminal proceedings. But this change of policy aims at increasing deterrence and incentives for a leniency programme in Brazil, whenever a given conduct may produce anti-competitive effects in the country.
Therefore, local executives who might get involved in antitrust investigations shall not only be concerned with local commercial practices, but also with their headquarters’ practices that might affect the Brazilian market. For instance, a local subsidiary of an international company that does not produce all of the group’s portfolio locally, but does import certain products from its headquarters abroad to sell locally, may be punished by the authorities in case such sales include an overprice agreed abroad. In this context, it shall be recalled that local companies are jointly liable for their headquarters’ practices, according to the Brazilian Competition Act.
Besides those penalties, there is also civil responsibility of the companies involved in antirust infringements, which could be subject to damage actions for their illicit conduct. According to the Brazilian legislation, any injured parties may defend their interests in court aiming the awarding of losses and damages suffered in connection with antitrust infringements.11 Although judicial damage claims resulting from anti-competitive infringements in Brazil are still rare, there are considerable discussions going on which could stimulate follow-on litigation in the near future.
Reasons and steps in adopting an Antitrust Compliance Programme
In view of the international trends in cartel enforcement and increasing capabilities of the Brazilian Antitrust Authorities to prosecute cartels, companies have also increased their efforts to avoid unlawful practices and antitrust penalties. In this regard, companies are increasing their interest in adopting an Antitrust Compliance Programme, which aims at educating and training employees from the lowest to the highest levels on competition rules, as well as identifying any possible antitrust infringements. Remedies shall result from this initial diagnosis, effectively and proportionally to the problems detected.
Antitrust Compliance Programmes in Brazil may be implemented independently by the company or through a certification process before SDE.12 In this regard, SDE has enacted a ruling with specific guidance on how to develop an Antitrust Compliance Programme. Once all the requirements provided by the law are met, the company or trade association may receive an official certification for its programme. The severe requirements, however, have not encouraged many companies to follow this last route. Currently, only one entity has had its Compliance Programme approved by SDE, the Brazilian Association of Importers of Popular Products (ABIPP).13
Several reasons advocate in favour of an Antitrust Compliance Programme. First, these programmes not only spot, but also prevent antitrust infringements that can have serious consequences. Secondly, businesses’ public image benefit from a compliance reputation – it could be hard to keep your customers when you have just been fined for illegal conduct that resulted in higher prices for them. Moreover, besides helping the company to avoid anti-competitive conducts, the education provided as part of a compliance programme facilitates identification, by the company’s executives and employees, of unlawful conducts carried on by its competitors, clients or suppliers, which may harm the company’s businesses.
In this regard, companies may adopt simpler or more complete types of Compliance Programmes. Simpler programmes may involve only short training, that will teach basic notions of competition law and explore ‘do’s and don’ts’ in a very pragmatic way.
In turn, a more complete programme will allow the company not only to deeply educate its employees, but also to identify past and ongoing potential unlawful practices. A complete programme has basically four stages. First, the areas of potential concern must be identified. Secondly, a legal audit should be conducted in these areas. Thirdly, in view of the information gathered, interviews should be held. Finally, a training programme and a tailor-made guidance manual should be provided to the relevant executives and employees.
The first step in the programme is to identify the main areas of concern. For cost-efficiency reasons, compliance programmes do not need to cover the whole company. Risky areas can be quickly identified either by interviewing executives or based on the recent history and practices of the company. To better identify such areas, the lawyer should get a comprehensive picture of the decision-making process.
Areas of concern may differ for each company, but departments involved in pricing, sales or contacts with competitors, or all of the above, are always relevant due to their exposure to customers and competitors. Another example of areas of potential concern is those involved in trade associations, in particular if they are attended by personnel from the sales department. Competitors meet and exchange information in these reunions that may have antitrust implications.
The next step is to conduct internal audits of the executives’ and employees’ records: routine files, as well as unofficial files, memos, diaries, but most importantly their e-mails. Using special software, certain documents or e-mails will be selected for review. The audit will review those documents and identify those that suggest any potential anti-competitive practice such as price fixing or abuse of dominance. The audit will not only identify any possible violation, but also indicate documents that could be misinterpreted.
Audits should be carried out by antitrust lawyers with deep understanding of the potential antitrust issues and the areas of concern. These lawyers, for reasons of independence and confidentiality, should preferably be external lawyers.
Once the audit has been completed, interviews should be carried out with key executives and employees, whenever possible taking into account the files examined during the internal audit. These interviews usually provide a good idea of the level of antitrust compliance within the company. The interviews are not inquisitorial since the employee should feel comfortable in volunteering information.
After the phases above are concluded, it will be possible to identify the potential antitrust issues that the company’s businesses must pose and, consequently, the remedies that could be adopted to avoid or mitigate possible anti-competitive violations. It is then time for a report to the management of the company or the board of directors, or both, identifying such factors.
With a diagnosis of the company’s problems, an educating and training programme shall be prepared, tailor-made to the specific concerns of each area. This educating and training will introduce employees to the basic antitrust rules, raise their awareness of the conducts that can be considered illegal, and provide guidelines on how to act on a daily basis and how to react in certain situations. A General Guideline or Code of Conduct shall also be prepared and delivered to all executives and employees of the company.
Elements of a successful Antitrust Compliance Programme
There are several elements reputed essential for a successful Antitrust Compliance Programme. Firstly, top management must show an unequivocal commitment to comply with the programme and, therefore, with antitrust rules. Acquiescence in abusive conduct for the sake of maintaining market leadership or turning a blind eye to certain information exchanges pave the way for an antitrust infringement. Therefore, a zero tolerance culture should be established. In some companies compliance is one of the elements of the employees’ evaluation. Appointing a compliance officer is usually a good mechanism to ensure commitment to the programme. A senior corporate officer with relative independence and authority within the company, regular access to top management and a deep knowledge of the company’s internal division should be appointed for such position.
Secondly, a successful Antitrust Compliance Programme should be simple and comprehensible. All relevant employees must understand the basic ‘do’s and don’ts’. At the same time, however, not all employees will be required to have the same level of knowledge. Those with greater responsibilities and exposure will need to get deeper education on free competition rules.
Thirdly, a programme should not undermine or limit the capacity of a company to compete in the market. The risk with compliance programmes in general is that it may set rules based on a conservative approach that will ultimately undermine the competitiveness of the business. For example, certain types of discounts applied by dominant companies may constitute an abuse of dominance if they have a loyalty enhancing effect. However, a compliance programme should not always prohibit applying discounts, since the prohibition only applies to certain types of discounts. The training programme should prohibit only what is strictly necessary and identify those situations in which employees should ask for guidance.
Fourthly, internal reporting mechanisms should be created to allow employees to seek guidance and report ‘suspect’ activities to the compliance officer. In these circumstances, confidentiality is of the utmost importance. The compliance officer mentioned above should be perceived as an independent person who will ensure confidential treatment.
Fifthly, a document-retention policy should be implemented establishing a time frame for the destruction of documents. In particular, in the event of an imminent or already initiated investigation, no documents should be destroyed. Not only may this undermine the company’s capacity to defend itself but also it may give rise to criminal liability in certain jurisdictions.
Finally, a review of the programme should be carried out periodically. Refreshing and updating the programme ensures that the employees are aware of new antitrust developments and takes into account changing market conditions.
Remedying possible antitrust infringements
If and when a company identifies an antitrust violation being committed by any of its executives or employees, it could make use of certain instruments in order to avoid or mitigate penalties that could be imposed. This may be reached through the celebration of leniency agreements14 or through the negotiation of an Agreement to Cease Practice (TCC).15
In short, a leniency agreement may be proposed by any company in case the Brazilian Antitrust Authorities have neither knowledge nor sufficient evidence to punish that certain illegal conduct. It shall be added that the submitting company may not be the ring leader of the violation. By this agreement the company shall provide detailed information and evidences on the infringement, its participation and the participation of other agents. Moreover, the applicant needs to confess the wrongdoing committed and agree to fully cooperate with the authorities during the investigation.
In exchange for its cooperation, the company may receive full or partial immunity. It will receive full immunity in case the authorities had no knowledge of the infringements before the application and it will receive partial in case the authorities have certain knowledge but no sufficient evidences for punishment.
Such immunity shall cover the administrative and criminal penalties. However, in order for an individual to be covered by the programme and receive immunity, he should step forward, confess its role in the infringement, agree to cooperate and execute the leniency agreement.
In case the leniency agreement is not available anymore, a Commitment to Cease Practice is also an alternative. Through this instrument, the company and its employees may negotiate a settlement with CADE, receiving a penalty reduction for their admission and cooperation with the investigation. It is the Brazilian equivalent to the US Plea Bargain Institute.
In summary, creating, implementing and updating an effective Antitrust Compliance Programme can promote several benefits to the company, such as the avoidance of harsh administrative fines for companies and individuals, as well as to preserve the company’s public image. In addition, a Compliance Programme may well avoid criminal penalties being imposed to the company’s executives and employees.
Such Programmes are designated to educate and train the company’s personnel on basic competition rules. Moreover, besides preventing antitrust infringements, the implementation of an effective programme will inevitably spot possible antitrust infringements being consciously or unconsciously committed by the company at an early stage, when several remedies are still available for the company.
Undoubtedly, in view of the global scenario mentioned above and local enforcement policy carried on recently by the Brazilian Competition Authorities, the benefits for implementing an Antitrust Compliance Programme by far supersede the costs incurred in its implementation.
1 See article 32 and following of Law No. 8,884/94.
2 See SDE’s 2008 Annual Report.
3 See article 35-A, of Law No. 8,884/94.
4 See article 23, item I, of Law No. 8,884/94.
5 See article 23, item II, of Law No. 8,884/94.
6 See Administrative Proceeding No. 08012.002127/2002-14 (Defendants: Sindicato da Indústria de Mineração de Pedra Britada do Estado de São Paulo and others).
7 See Administrative Proceeding No. 08012.001826/2003-10 (Defendants: Associação das Empresas de Vigilância do Rio Grande do Sul (ASSEVIRGS) and others).
8 See Administrative Proceeding No. 08012.000283/2006-66 (Defendants: Sociedade dos Mineradores do Rio Jacuí (SMARJA) and others).
9 See Law No. 8,137, of 27 December 1990.
10 See SDE’s 2008 Annual Report.
11 Article 29 of Law 8,884/94.
12 See SDE’s Ordinance No. 14, of
13 See SDE’s Ruling No. 134, of 5 March 2009.
14 See article 35-B, of Law No. 8,884/94.
15 See article 53, of Law No. 8,884/94.