Brazil: Compliance

The Importance of Antitrust Compliance in Brazil

Evolution of the Brazilian economic scenario

Over the past 15 years, Brazil has seen a revolution take place in the industrial and services sector, witnessing an exponential increase in the number of economic agents (companies), as well as greater diversification of their activities.

Such development is due to, among other things, the fact that after Brazilian economic liberalisation in the 1990s, business executives had to seek new ways to maximise their earnings, and many did so by following the examples of companies from other countries.

With this exchange of experience, businessmen were able to bring to the country new technologies and services and, in the same manner, while interacting with other economies, also brought a profound change in the business dynamics conducted here.

With this, particularly after achieving economic stability, Brazil saw a growing number of foreign companies investing in the country, mainly through acquisitions of Brazilian companies.

Recently this trend has moved in the opposite direction. That is, more and more, Brazilian companies are operating in other countries, acquiring foreign companies.

All this expansion of consumer activities and markets, characteristic of a globalised world, tends to scatter companies around the world. But on the other hand, it tends to generate greater distance between the parent company and its subsidiaries as to the application of guidelines and internal rules.

Evolution of conduct investigation in Brazilian antitrust

Given the distance between parent companies and subsidiaries, some companies tend to behave in ways that adversely affect competition, either by abusing their economic power in order to harm competitors in the market, or by seeking collusion with their rivals to divide and control the market.

Considering this new economic complexity and considering all possible negative outcomes, the Brazilian government sought to prepare itself against such threats.

From the competition perspective, in recent years the Brazilian antitrust authorities have hardened their posture, especially in monitoring and repressing conducts of companies that could somehow affect the competitive environment.

Indeed, the Brazilian competition authorities, like the business executives, sought examples and tools used by similar foreign authorities, especially in engaging against cartels.

The Brazilian authorities used two different approaches to improve their activity:

• use of more effective strategies for discovering cartels, for example, search and seizure at the investigated companies' ' headquarters; and

• increase of the fines imposed upon conviction of those involved in cartels.

With regard to the use of more effective strategies for discovering cartels, innovative investigative techniques used by the Secretariat of Economic Law (SDE) - responsible for conducting investigations under the Brazilian antitrust law - has enabled the use of the most effective tools such as inspection, search and seizure, wiretapping, among others, often in joint operations with the federal police and prosecutors.

The result of this improvement in the treatment of cartels can be measured, for example, by significantly increasing the number of search and seizures that occurred between 2003, the year that the changes started, and 2008. According to management reports of the SDE, there were seven search and seizures in 2003 and 93 in 2008.

As part of an evolutionary process, the SDE also executed agreements with several antitrust investigation departments of other jurisdictions in order to not only exchange past experiences, but also to work together in identifying and investigating cartels with international operations.

Besides the improvement of investigative procedures, the Administrative Council for Economic Defence (CADE) - the administrative tribunal responsible for the final judgment of all antitrust cases currently under way in Brazil - hardened its position.

The fines imposed by CADE in anti-competitive conduct cases, and especially in cartel cases, seem to have been increasing to discourage such behaviour by offenders.

In accordance with Law No. 8884/94, the fine, in case carrying out anti-competitive conduct, can vary from 1 per cent to 30 per cent of the company's revenues, and in the case of executives, directly or indirectly involved in a cartel, the fine ranges from 10 per cent to 50 per cent of that applied to the company.

So prevention is of paramount importance in avoiding the imposition of heavy fines due to conduct that brings competition concerns.

The compliance programme in Brazilian antitrust

The antitrust compliance programme is a relatively new tool in Brazil. Its use was initiated by multinational companies, which are present in countries where antitrust compliance is more widespread, and for various reasons it had to be implemented in Brazil.

Implementation of compliance is today an important tool for preventing heavy fines, which, depending on the case, may frustrate business activity.

In Brazil, companies can go about this in two ways:

• formal certification before the SDE; and

• internal compliance, adopted independently and tailored to their needs.

A formal alternative to compliance programmes are the prevention programmes for violations of the economic order (also known as PPI). Through guidelines set out by Ordinance No. 14, issued by the secretariat of economic law on 19 March 2004, companies can tailor their own PPI and try to obtain a certificate issued by the secretariat of economic law.

To be eligible for such a certificate, the PPI must meet some requirements, also specified by the Ordinance. So the company must provide specific documents and information to the SDE, such as the its history of merger reviews, preliminary investigations and administrative procedures, as well as market information of the economic group. Besides general information of the company's economic group, the company must also provide a description of the PPI, disclosing standards and procedures which employees have to follow, designation of managers to coordinate and supervise the PPI's proposed objectives, and disciplinary mechanisms, among others.

The SDE also imposes the presentation of the support material, contracts of external and independent auditors, internal rules and regimes, and sanctions should any antitrust violation take place.

Once filed, the PPI will be analysed by the SDE within 60 days. The SDE may request further documents and information, recommend the inclusion of measures in the PPI, or, should all requirements and conditions be fulfilled, the SDE may grant a certificate. The certificate is valid for two years, and is renewable if the PPI is duly updated.

The main benefit in obtaining the certificate is the possibility of reducing fines and penalties given by CADE in the event of antitrust violations, regardless of the preventive compliance programme procedures and measures.

In the same manner, a company can develop an antitrust compliance programme in an independent way, adjusting the requirements to their needs. In this case, the Brazilian programme is very similar to other guidelines already adopted by other jurisdictions. Today in Brazil such independent programmes are increasingly used, custom-designed for the company. The certification process with the SDE can be extremely difficult and costly, due to the series of demands and requirements of Ordinance No. 14.

Development of a compliance programme: creation, implementation, review

As seen above, an antitrust compliance programme aims to prevent the company from possible condemnation by the Brazilian antitrust authorities in the event of any anti-competitive conduct. Also, it is useful in identifying possible behaviour that is already in progress, so allowing a reduction in the fine.

For a successful outcome of the programme, it is necessary to note that one of its key features is the education of executives and employees at all levels of the company as a whole. The more educational the training content is, the more effective the programme becomes.

It is worth remembering that compliance does not seek to transform the company into a law firm with deep antitrust expertise. The goal is to provide practical knowledge, very direct and easily understood, and strictly needed to ensure that all practices adopted from then on by the company are 'clean' and will not create future problems with antitrust authorities.

To reach this goal, it is important to pay attention to all phases of the programme, from its creation, passing through the implementation, to regular reviews.

In the creation phase, which preferably should be conducted by an outside counsel in order to be independent and impartial, factors like the company's market position in which it operates and the internal structure of the company should be taken into account.

One point that deserves special attention is the identification of the level of antitrust risk associated with the sector of the company, that is, a detailed analysis of the antitrust authorities'' knowledge regarding the company's industry.

An effective way to determine potential risk areas of the company is interviews with company executives. Associated with this, an audit of routines, papers and staff e-mails, analysing possible documents that could be interpreted incorrectly, can be used to get the exact picture of the entire structure, especially the weak points.

A tool that has achieved great results at this stage of the programme are the simulations of search and seizure in companies, in view of identifying the weaknesses of the organisation, making it possible to correct them and tailor them to the required standards.

Although creation of the programme is an important step, as it should provide the basis for virtually the whole compliance programme, it may collapse if not properly implemented.

The implementation phase is the key to a successful programme. It should be incorporated into the company's culture, where all employees - from the president down - should be aware of the programme, taking into account their respective responsibilities.

Involvement of senior officers is very important, so that at every possible opportunity a degree of importance and seriousness is transmitted, representing the company's values that should be followed by all.

It is essential to clarify the procedures that should be adopted if, perhaps, an employee notices that his or her superior is not complying with the rules and regulations of the company. Anonymity of the complainant must be ensured, as well as punishment of the person who disobeyed what was determined, otherwise the whole structure may not hold.

Still related to procedures, it is important to emphasise that the programme must address where confidential documents should be sent and how they will be dealt with. This measure aims to provide greater certainty and credibility by providing, for example, that after a certain period the documents will be destroyed.

As stated above, one of the key features that ensures the success of compliance programmes is education. In this case, education is done through training, such as courses, seminars and classes to all those who work in the company.

The training should bring appropriate content to the audience, always trying to be straightforward and easy to assimilate. Passing on knowledge in antitrust is a very difficult task, especially for those who are not lawyers.

Generally, the format of dos and don'ts to show the main weaknesses that should be avoided by everyone is used in training. However, alternative methods are becoming more frequent, such as videos, online manuals, quizzes, question-and-answer games and pamphlets, among others.

It is recommended that at the end of training, a simple test to check participants' knowledge should be conducted. This procedure aims to give greater assurance to the company that the content has been duly assimilated. Finally, each participant must sign a statement that they received the necessary information to avoid a reckless attitude to themselves and to the company.

Once the programme is implemented, it is important that it is always remembered, be it through periodic training, or through internal institutional campaigns.

Thus, an appropriate programme forsees and runs periodic reviews of its foundations. The goal is, solely, to keep one updated with the company and its sector of activity. At this stage it is possible to check if any misunderstandings or conducts that previously took place were duly ceased.

However, all changes that were determined during the review,must be communicated to all employees during training, aiming at the standardisation and dissemination of knowledge.

The importance of compliance

Although the programme is associated with high compliance costs for business, it is necessary to observe certain aspects that make this an important, if not crucial, tool for the prevention and reduction of liabilities (fines) of the company.

As mentioned above, the current context of globalisation has made businesses go abroad in search of new consumers and markets. Sometimes these new markets are governed by totally different rules from those governed at the company's headquarters.

In these cases, the barrier of the applicable law becomes a critical factor that often creates a liability without intent.

The adoption of compliance in this case substantially reduces such problem, since they are all weaknesses of the company, and are identified under the supervision and from the perspective of local attorneys (preferably external), which certainly will observe and suit them to the local standards.

Another aspect also connected to the unknown concerns possible everyday business practices made by the company and, that the antitrust point of view, may reveal a dangerous risk. Likewise, the programme, given its preventive role, would help to eliminate these behaviours, and thereby greatly reduce the possibility of a fine.

The use of search-and-seizure simulations, constant training and other tools creates an environment where employees know how to behave, which gives more protection to the company.

However, even though it may bring immediate costs to the company, considering the current context of the Brazilian antitrust and risks that may give inconsistencies in conduct, which would result in a conviction and imposition of a high fine, the value related to the programme in antitrust compliance should be considered, without doubt, as an investment and not as an expense.

Most vulnerable sectors to anti-competitive conducts

Historically, the sectors that are vulnerable to anti-competitive conduct, in view of the characteristics of the activity itself, are the chemical industry, producers of commodities, base industry and construction sector.

However, the SDE has steadily extended this range of sectors and activities, and today there is no way to categorically state that only large sectors of the economy will be subject to search and seizure and even condemnation by CADE.

In fact, it became common for the SDE investigations to raid into sectors that, at a first sight, did not seem to be a major concern of antitrust authorities; for example, the cartel of tachographs, investigated in 2008, and judged and convicted by CADE in August 2010. Another lawsuit filed in 2005 had as its object the sector of training schools for vehicle drivers of São Paulo, ¹ also convicted by CADE.

The SDE, with the effort of trying to bring the concept of a cartel to the Brazilian population and business-executive culture, recently published a booklet on how to identify a cartel in unions, biddings etc. The current line of action of the authorities is aimed at sporting events that will be held in Brazil in the coming years - the 2014 World Cup and the 2016 Olympics.

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This brief text aimed at bringing into context the current level of performance of the Brazilian antitrust authorities, SDE/CADE, and particularly their line of action focused on combating cartels. It is possible to note that, although the combat of anti-competitive conduct is recent, the fact is that improvements have been constant, causing considerable damage to companies that ignore this aspect.

Thus, similar to what exists in other countries, an antitrust compliance tool is effective to reduce or even eliminate the risks inherent to the activities of companies.

Notes

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. Sindicato das Auto Moto Escolas e Centro de Formação de Condutores no Estado de São Paulo. (№08012.001692/2005-07)