Brazil Corruption Report

Companies should note the risk of corruption and external influence in Brazil’s police sector. The police force is entrenched in corruption, violence, and acts with impunity (BTI 2016; FitW 2016). Powerful landlords in remote or rural areas of the country have significant influence over the police (BTI 2016). Companies do not find the police reliable and attribute significant costs to mitigate crime and violence (GCR 2016-2017).

Prominent federal police officer Newton Ishii, a key investigator in the probe into corruption at the state-owned company Petrobras, was arrested on corruption charges himself in June 2016 relating to earlier convictions for participating in a smuggling ring (Reuters, Jun. 2016).

There is a high risk of corruption in Brazil’s complex tax administration. Companies report that bribes in the tax administration happen frequently (GCR 2015-2016). Companies identify tax rates to be the biggest obstacle to doing business in Brazil (GCR 2016-2017). In what is considered one of the most onerous and complex tax systems in the world, opportunities for corruption and bribery are plentiful (WSJ, Apr. 2015). Companies have been tempted to engage in tax evading activities because of the enormous complexity and burden the tax system imposes on them (Financial Times, June 2016). Tax regulations do not differentiate between foreign and domestic firms, but companies should be aware that the tax system is set up to provide advantages to domestically-produced products, sheltering them from imported products (BTI 2016).

Prosecutors are continuing to investigate ‘Operation Zelotes’, a scheme that allegedly ran for decades in which over seventy Brazilian companies, banks, and multinationals participated in a scheme where they bribed officials to reduce or waive tax payment fees (Financial Times, June 2016). The total sum of missing payments is said to amount to at least USD 5.5 billion (Financial Times, June 2016). Brazil’s tax court system was overhauled leading to the court ruling in favor of the tax authorities in many cases (International Tax Review, Dec. 2016). Former Finance Minister Guido Mantega is currently standing trial over charges that he solicited an illegal political campaign donation of USD 16 million from engineering firm Odebrecht in return for favorable tax legislation (Reuters, Apr. 2017).

Even though there is a comparatively low frequency of tax payments, companies have to spend over 2000 hours per year on preparing, filing and paying taxes compared to 163 hours in OECD states, and 343 hours in Latin America (DB 2017).

There is a significant risk of corruption at the Brazilian borders when importing and exporting (GETR 2016). Companies assess the border administration to be inefficient, features poor time-predictability, and prone to irregular payments and requests for bribes (GETR 2016). Burdensome import procedures and corruption are frequently cited by companies among the most problematic factors for importing (GETR 2016). Particularly documentary compliance with import procedures takes businesses a lot longer than the regional average (DB 2017).

The Brazilian port of Santos has been named as the main departure point of cocaine smuggling bound for Asian, European, and African markets, yet only seven percent of South America’s cocaine seizures take place there (Insight Crime, July 2016). It has been reported that corruption is commonplace among officials at the facility (Insight Crime, July 2016).

Companies are highly likely to encounter favoritism and corruption in Brazil’s public procurement. Companies indicate that irregular payments and bribes are highly common in procurement procedures in Brazil (GCR 2015-2016). Companies assess that public funds are frequently diverted and that government officials frequently show favoritism to well-connected firms and individuals when deciding upon policies and contracts (GCR 2016-2017). Foreign companies may find it difficult to participate in public procurement without significant in-country presence, as a local representative is commonly required (ICS 2016). Foreign companies often have success in sub-contracting from local firms that have won government contracts (ICS 2016).

Amidst the widening Petrobras corruption case, also known as ‘Operation Car Wash’, several firms and politicians are implicated in a corrupt cartel-forming kickback system of bidding and awarding contracts (COHA, Apr. 2016). The investigation led to the impeachment of President Rousseff as well as other high-ranking officials (The Guardian, Feb 2017). The federal police are continuing to investigate numerous foreign firms who paid bribes to obtain contracts with Petrobras, including South Korea’s Samsung Heavy Industries Co Ltd, Swedish builder Skanska AB, Danish oil and shipping group Maersk, and British engineering firm Rolls-Royce Holdings (Reuters, June 2015). The damages to Petrobras alone are reportedly as much as USD 5.3 billion (Vox, Mar. 2016).

A separate but related corruption case involves Latin America’s largest construction firms, Odebrecht (The Guardian, Feb. 2017). Testimony by former and current Odebrecht executives shows that the company operated a “bribery department” which meticulously funneled over USD 800 million in bribes to various parties in Latin America (The Guardian, Feb. 2017). Six out of twelve stadiums built for the 2014 World Cup are currently probed for corruption and bribery, in addition to the subway line opened for the 2016 Olympics (The Guardian, Apr. 2017). Several high profile officials involved in the organization of the 2016 Olympics are also under investigation in connection to the scheme, including former Rio mayor Eduardo Paes and the president of the accountability tribunal for the state of Rio (The Guardian, Apr. 2017). Furthermore, several executives have received sentences of up to twenty years in jail, but some have been suspended contingent on further cooperation with the investigation (Law360, Mar. 2016). Odebrecht and associated petrochemical company Braskem agreed to pay at least USD 3.5 billion to authorities in the U.S., Brazil, and Switzerland, in the largest fine recorded in a foreign bribery case thus far (Reuters, Dec. 2016).

A scheme of bribery of public health officials by officials in Brazil’s USD 12 billion meat-exporting industry has recently been uncovered (Reuters, Mar. 2017). The probe found evidence of bribes paid to health officials and politicians to overlook practices including shipping products with traces of salmonella and processing rotten meat (Reuters, Mar. 2017). It has since been revealed that JBS, a major meat processing firm, had made financial contributions to over a hundred deputies and 28 senators in addition to paying large bribes to others; over 30 percent of Brazil’s elected deputies and senators are involved, with the crisis threatening to bring down President Temer’s government (Financial Times, May 2017). It is alleged that one USD 153,000 bribe was destined for Brazil’s president, Michael Temer (Financial Times, May 2017). JBS has agreed to pay a fine of USD 3,2 billion in a leniency agreement over the bribery charges (FCPA Blog, May 2017).

Companies are recommended to implement special due diligence procedures to counter the likelihood of encountering corruption in the procurement process.