Brazil: Compliance

Introduction

Since 29 May 2012, the Brazilian antitrust system has been running under new rules. Brazilian Antitrust Law No. 12.529/2011 (the New Law) brought several changes to Brazilian Antitrust, such as unification of agencies, a pre-merger analysis system, modification of the criteria for compulsory notification, a term for analysis of mergers, changes in penalties for anti-competitive conduct, modification in the list of anti-competitive conducts, and many others.

These changes in the New Law are taken as an improvement in the antitrust authorities’ capacity to enforce their rules. However, the New Law brought no specific mention of compliance, an important tool in discouraging anti-competitive conducts. Under Brazilian laws, Ordinance No. 14, issued by the Secretariat of Economic Law on 19 March 2004, is still a valid rule regarding compliance antitrust.

It is true that compliance programs could be developed independently, without following Ordinance No. 14, but as a matter of antitrust policy, it is important that CADE adjust and improve the compliance guide in order to allow companies and their executives to understand what antitrust authorities are expecting from compliance programmes.

New Brazilian Antitrust Law

As mentioned before, on 29 May 2012, the Brazilian Antitrust Law came into effect, which restructures the Brazilian Competition Policy System. The main changes include the following:

  • Consolidation of functions into one agency: the New Law unifies the three previous competition authorities - the Secretariat for Economic Monitoring of the Ministry of Finance (SEAE), the Secretariat of Economic Law of the Ministry of Justice (SDE) and the Administrative Council for Economic Defense (CADE) - into a single enforcement agency, CADE, which holds all responsibilities relating to the analysis of mergers and anti-competitive conducts. This new CADE is composed of three bodies:
    • the General Superintendency, responsible for the investigation of anti-competitive conducts and instruction of mergers;
    • the Administrative Tribunal, a decision-making body responsible for judging the cases; and
    • the Department of Economic Studies, responsible for (but not being obliged to) providing economic opinions and studies.
  • Introduction of a pre-merger analysis system: merger transactions shall be previously notified to CADE. Hence, all documents related to a transaction that is subject to pre-merger notification rules must have a clause suspending the effectiveness of the transaction until it is approved by the CADE.
  • Modification of the criteria for compulsory notification of transactions to CADE: the previous law (Law No. 8.884/1994) used to require a participation of at least 20 per cent of a relevant market; such requirement was excluded in the New Law. However, the requirement of annual gross revenues of at least 400 million reais in the previous fiscal year was maintained and is now conjugated with the need of any other party involved in the transaction (considering its whole group) having annual gross revenues in Brazil, in the previous fiscal year, of 30 million reais or more. On 30 May 2012, based on CADE’s suggestion, the justice and finance ministers jointly raised the minimum requirements respectively to 750 million reais and 75 million reais in annual gross revenues, raised in the previous fiscal year.
  • Inclusion of CADE’s right to analyse non-notified mergers: according to the New Law, the CADE has the right to analyse mergers between companies and groups that do not meet the minimum amounts of annual gross revenues required for notification of the act, for up to one year counted from its closing.
  • Term for analysis of merger cases: CADE has a total of 330 days to analyse pre-merger notifications. The ordinary deadline is 240 days, which can be extended by 60 days upon request of the parties or by 90 days if CADE understands that the transaction requires a deeper analysis. The total term of 330 days will only start counting from when CADE accepts the notification as complete (ie, contains all necessary information), but there is no deadline for this pre-analysis of the notification requirements.
  • Penalty for ‘gun jumping’: in case companies start to integrate their business before CADE’s final approval of the merger, they will be subject to a penalty of between 60,000 reais and 60 million reais.
  • Modification of penalties for anti-competitive conducts:
    • Fines: under the previous law, Law No. 8.884/94, in case of anti-competitive conduct, the company was subject to a fine ranging from 1 per cent to 30 per cent of the company’s annual gross revenues in the fiscal year prior to that of the anti-competitive conduct. Additionally, the officers of the company directly or indirectly responsible for the violation of the law were subject to a fine ranging from 10 per cent to 50 per cent of the fine applied to the company. According to the New Law, fines are now based on the annual gross revenues from the relevant market in the financial year prior to the investigation and range from 0.1 per cent to 20 per cent of the company, group or conglomerate’s income from that line of business. The discussions in each case will certainly fall on the definition of the relevant market for that purpose. The New Law also states that the penalty should never be lower than the benefits earned by the company, group or conglomerate due to the anti-competitive behaviour, whenever it is possible to estimate such benefits. As for the officers of the company directly or indirectly engaged in the anti-competitive conduct, if proved to be negligent or having engage in wilful misconduct, they will be subject to a fine ranging from 1 per cent to 10 per cent of the fines imposed to the company, group or conglomerate. In the event of it being impossible to measure the turnover registered by the company, group or conglomerate, the penalty will vary from 50,000 reais to 2 million reais.
    • Other penalties: the list of penalties applied to antitrust misconducts was extended by article 38 of the New Law, which includes the prohibition of trading in its own name or as a representative of a company for up to 5 years, and the possibility of determining any other act or providence necessary to eliminate the harmful effects to economic order.
  • Definition of dominant position: in addition to the control of 20 per cent or more of the relevant market, the New Law states that dominant position will also be presumed if a company or a group of companies is capable of modifying the market conditions unilaterally or coordinately.
  • Modification of the list of anti-competitive conducts: the New Law excluded some conducts (such as exclusivity) and included others as the abusive exercise or exploit of industrial or intellectual property rights, technology or trademark. Nevertheless, the current list of conduct is not exhaustive but exemplificative, and, consequently, even though a conduct is not listed in the New Law, it will be punishable if it fits the objects or effects described in article 36 (restricting, distorting or in any other way harming free competition or freedom of enterprise; dominating a relevant market of products or services; arbitrarily raising profits; and abusively exercising dominant position).
  • Cartel: according to the New Law, a cartel is characterised as when companies:
    agree, combine, manipulate or adjust with competitors, under any form: (a) the prices of products or services offered individually; (b) the production or sale of a restricted or limited quantity of products or the rendering of a restricted or limited number, volume or frequency of services; (c) the division of parts or segments of a current or potential market of products or services through, among others, the distribution of clients, suppliers, regions or periods; (d) prices, conditions, advantages or abstention in biddings.

The changes in the Brazilian Competition Policy System created a certain apprehension in the local market, especially in relation to merger transactions. Skeptical about the application of the New Law, market players notified 141 mergers to CADE from 29 May to 20 June 2012 to be analysed according to Law No. 8.884/1994, and only two pre-merger notifications were made to be analysed under the rules of the New Law.

In principle, the New Law brought no significant change to the compliance rules under Brazilian laws. Nevertheless, it will be necessary to wait for the developments of the new structure of Brazilian Antitrust Policy System in order to ascertain possible adaptations to the current ruling of compliance. Given that three functions have been consolidated in the hands of one sole body, CADE, it is not unlikely to have new rulings coming from that bureau in relation to subjects previously ruled out by SDE or SEAE, such as compliance programmes.

According to article 13 of the New Law, the General Superintendence is currently competent to develop studies and researches with the purpose of guiding prevention policies for violations of the economic order, as well as to instruct the people about the different forms of violations of the economic order and the ways to prevent and repress it.

Compliance in Brazil

In respect to compliance rule under Brazilian laws, Ordinance No. 14, issued by Secretariat of Economic Law (SDE) on 19 March 2004, which establishes the guidelines of prevention programs on economic order offences (also known as PPI), currently remains in force, except for one article.

On 2009, article 9 of Ordinance No. 14 was revoked by another ordinance from SDE (Ordinance No. 48), and hence there is no longer the possibility of companies requesting the analysis of PPI’s effectiveness for the recommendation of reductions to the penalties imposed by CADE.

Through the use of effective tools such as inspection, search and seizure, wiretapping and so on over the past few years, and the execution of agreements with several foreign antitrust authorities, SDE, responsible for conducting investigations under Law No. 8.884/1994, has improved investigative procedures. Meanwhile, CADE, responsible for final judgment of antitrust cases, has hardened its position, condemning more companies for anti-competitive conducts, such as cartels.

The importance of compliance programmes within companies increases as investigative procedures improve and the imposition of penalties hardens in order to discourage anti-competitive conducts. Prevention becomes extremely important in avoiding investigations and penalties due to conducts that can bring competitive concerns.

Compliance programmes inside companies can be developed independently or implemented in accordance with Ordinance No. 14. In case of a PPI, the programme must meet the requirements foreseen by the Ordinance to enable SDE to grant a certificate to the company, valid for two years. Among those requirements is:

  • the presentation of the economic group’s history of merger reviews;
  • market information of the economic group;
  • a description of the PPI (disclosing standards and procedures);
  • support material;
  • contracts with external and independent auditors; and
  • general information on the company’s economic group.

The major benefit of obtaining a certificate was the possibility of a reduction in penalties imposed by CADE. Since article 9 of Ordinance No. 14 has been revoked, this benefit no longer exists and the appeal for companies to adhere to the PPI is currently not strong enough to justify the difficulties of obtaining the certificate (SDE imposes several conditions and is strict in their appreciation).

Therefore, companies that decide to have a compliance programme generally opt for the implementation of an independent and customised programme. In order to avoid future condemnation by antitrust authorities, companies voluntarily adopt compliance programmes, seeking to anticipate and adapt their standards in business and practice to competition rules.

Today, the implementation of compliance programmes by economic actors and its use by both those actors and antitrust authorities remains incipient in the country, although many companies already share the conscience of a need for those compliance programmes.

Education is one of the key features of compliance programmes. Ignorance on the part of employees about the best practices is generally one of the main causes of antitrust prosecutions in global companies. From the involvement of a senior officer to the provision of periodic training, all measures taken by the company shall be with the purpose of getting the audience informed, involved and moved to collaborate.

Internal and external legal counsel are of high importance in the education process and in the designing of a compliance programme, given their specific knowledge of the area and, in case of internal lawyer, of the company’s business. The expertise of external and specialised local lawyers is also recommended in the creation, implementation and maintenance of compliance programmes. External lawyers can better analyse the situations impartially, specially evaluating the possible offence that is a consequence to the conduct verified.

Granting confidentiality for those who collaborate and creating a clear punishing system for those who disobey the rules related to antitrust also work as positive factors to the effectiveness of the programmes. It is important to highlight that there are some difficulties in defining the punishments without disrespecting Brazilian labor laws. One possibility is to layoff the employee, and another is to transfer the employee to another and a less risky area, from a competition perspective. In summary, when employees know how to behave, the company is more protected.

Another relevant factor to be considered when creating and implementing a compliance programme is the relevant markets in which the company is active, and those markets’ structures and conditions. Internally, companies shall investigate the sectors and employees that are more likely to practice violations (ie, purchase and sales, market sectors, etc). Compliance programmes are basically to prevent and detect.

However, as already mentioned, the culture of compliance in antitrust is still incipient and there have been few decisions from CADE specifically relating compliance programmes.

Conclusion

The New Law seems to be in accordance with the more strict standards from authorities when analysing anti-competitive conducts. It is said that the Brazilian Antitrust Law now has similar legal standards compared with more developed antitrust systems such as the US and EU. In this context of deeper and thorough investigations by antitrust authorities to identify and punish infringements of the economic order, compliance programmes gain more and more importance to market actors.

Given the importance of compliance, CADE, probably through the General Superintendence, shall issue new rules on the subject or, at least, review regulation on the matter.

It is now for antitrust authorities to take the opportunity presented by changing the antitrust law to improve and adjust the whole set of rules related to compliance programmes. This step will certainly help all actors involved (authorities and companies) clarify what exactly should be taken into account in a compliance programme. On the other hand, it is now for market actors and lawyers to be open to discuss and able to help constructing this compliance programme guide.

It is important to wait until the whole antitrust system is in full practice again, after the physical and practical adjustments caused by the changes are duly made for the consolidation of functions. However, it is important to keep this necessary adjustment, and improvement, in mind as well.

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