Third Parties in Brazil? Steps To Consider.

If you’re doing business in Brazil, you need to be taking these actions. 

The second largest retailer in the world stole headlines this past June. “For more than a decade,” The Washington Post describes, “Walmart executives were aware of problems with its anti-corruption programs at its foreign subsidiaries, including in Mexico, Brazil and China, but failed to act.” As federal officials stated, these failures to comply with regulations allowed for Walmart to open up stores overseas at a rapid pace — unlawfully accelerating their profits and growth.  

As you may know, the penalty was severe. Walmart agreed to pay more than $144 million for the Security and Exchange Comissions’ (SEC’s) charges, and approximately $138 million to resolve parallel criminal charges by the U.S. Department of Justice — a combined total of more than $282 million in fines, along with $900 million in additional legal costs

When it comes to improper payments made to government officials in Brazil, Walmart’s situation is hardly an isolated experience. The most notorious being Operation Car Wash, an ongoing probe that has embroiled hundreds of politicians in recent years, eventually leading to the impeachment of former president Dilma Rousseff — all while unearthing other scandals through the “tentacles of the investigation,” as the BBC News so colorfully described last year.  Indeed, while some evidence suggests that the tide is changing as overtaxed citizens take action, the SEC and the DOJ are still looking closely at Brazil, along with “an increasing number of countries [that are] enacting their own antibribery and anticorruption laws, which are often more stringent than the FCPA,” the American Bar Association explains. 

Despite the immediate public outcry for action, the landscape of Brazilian power isn’t changing anytime soon. “Historical examples show that this type of isolated anti-corruption effort — which tends to be very herculean and aims at promoting a shock to the system — is not very effective against corruption,” Nara Pavão, a political science professor at the Federal University of Pernambuco in Brazil, tells Foreign Policy.

Businesses conducting operations with third parties in Brazil should remain alert to what this means for upcoming years and compliance professionals must examine the granular details when conducting business with Brazilian third parties. On this note, we at ethiXbase have studied precisely what failing to “operate a sufficient anti-corruption compliance program,” means regarding the Walmart case. We learned that from approximately July 2000 to April 2011 that Walmart’s subsidiaries in Brazil — along with China, India, and Mexico — conducted operations without a system of adequate accounting controls. “As a result,” Leas Bachatene, ethiXbase’s CEO, explains, “those Walmart subsidiaries paid certain counter parties without reasonable assurances that transactions were consistent with their stated purpose, or consistent with the prohibition against making improper payments to government officials.” Essentially, Walmart was lax in their oversight, and inadvertently allowed for bribery to take place on their company’s dime, while hurting their reputation. 

Historically, corruption has had an economic hold on Brazil for decades, permeating all levels of society. From the top echelons of influence — to the most minute of municipalities: bribery, nepotism, cronyism, kleptocracy, and electoral fraud still influence how some politicians, companies, and militia operate. Consequently, companies operating in Brazil, whether directly, via subsidiaries or with third parties, must take proactive steps to comply and evidence compliance. In light of a spate of recent cases, now is a crucial time to re-examine third-parties in Brazil, and ensure that:

  • Third Parties have completed a Due Diligence Questionnaire (ideally in Portugese) to identify key supplier information and importantly if these Counter Parties connect with Government Agencies to carry out their duties 
  • Third parties and their counter parties, along with known associates, directors and shareholders (uncovered via the Due Diligence Questionnaire and/or registry searches) have been screened against both adverse media and litigation records to ensure no connection to recent corruption cases
  • Third Parties are aware of, and have signed both your companies Anti-Corruption Policy and Code of Conduct (in Portuguese or English)
  • Third Parties have taken (and passed) online Anti-Corruption Training (in Portugese or English)

Checking these boxes not only demonstrates oversight but also helps to defend your company’s actions if anything goes wrong, saving your company hundreds of millions of dollars along with incriminating headlines. Importantly, it also assists in helping Brazil’s citizens as they continue to take action against institutionalized corruption.

“Unsurprisingly we have seen an uptick of enquiries into third parties in Brazil over recent months” says Bachatene. “By leveraging our technical capability via the ethiXbase 2.0 third party compliance platform, along with our detailed domain expertise, clients are readily able to gain detailed risk profiles of third parties in Brazil, and other locations, to evidence steps taken to assess and mitigate risk.” 

Managing a global supply chain is by no means simple, particularly when working with third parties in jurisdictions, cultures and languages foriegn to your own. This is not an excuse not to have adequate oversight of third parties though — in fact, according to the most recent guidelines, it is the opposite. You must not only scrutinize all third-party interactions, but maintain records of your scrutiny, especially when one is operating in higher-risk locations. In the case of Brazil, the weeds of corruption have been growing for decades — deeply entangled in the fundamental structures of the country’s business and political operations. So your tools must be sharp and ready, and proof of your company’s integrity must be readily available.

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