Brazil may be the next hotbed of FCPA activity for the SEC and, based on early reports, there wasn’t an uptick in the number of international whistleblowers tips coming from the country concerning suspected violations. If the goal of the SEC whistleblower program is to alert regulators to areas of concern before they become public knowledge, then this disconnect should be concerning.
The Foreign Corrupt Practices Act bars U.S. companies and U.S. issuers from making payments to foreign officials to obtain or retain business. It also prohibits the lack of internal accounting controls that allows employees, subsidiaries and intermediaries to make prohibited payments. Five years ago, the Dodd-Frank Act authorized rewards to whistleblowers who provide information about FCPA and other securities law violations to the U.S. Securities and Exchange Commission.
The FCPA Blog keeps track of the countries where companies have disclosed internal investigations into potential FCPA violations. On the January 2015 list, Brazil was #2 overall. It received mentions in the disclosures by ten companies. Only China had it beat (and substantially so) with 40 mentions by businesses.
The news coming out of Brazil suggests that this number has the potential to explode upward. The Brazil government is now looking into allegations concerning two multi-billion dollar corruption scandals. State owned oil giant Petrobras has been in the news for a couple months now. But only last week, authorities there announced a tax fraud scheme involving the tax appeals board at the Finance Ministry. The government is investigating seventy companies across a number of different injuries for bribing tax officials.
Brazil is also spending substantially to get ready for the Olympics, and corruption has been suspected in some of these contracts as well. Bilfinger, a German engineering firm covered by a deferred prosecution agreement in 2013 with the Justice Department for FCPA violations in Nigeria, said that the company discovered possible compliance violations related to its provision of monitor walls for security centers.
It seems only a matter of time before US companies come forward based on their activities in Brazil. Although the corruption scandal has predominately involved Brazilian companies, other international companies with operations in Brazil have disclosed problems and investigations. InBev disclosed it was under investigation by Brazilian authorities for hiring a former government official. The SEC also extended the deferred prosecution agreement for orthopedic device manufacturer Biomet last month in light of the company’s disclosure of potential additional violations related to the company’s operations in Brazil and Mexico.
Our SEC whistleblower attorneys throughly analyze the reports released by the SEC Whistleblower Office every year. We now have three full years of data on the countries of origins under the securities whistleblower law. During Fiscal Years 2012 to 2014, there have been only 13 tips from individuals located in Brazil. This data, because of the fiscal calendar of the U.S. Government, runs from October 1, 2011 through the end of September 2014.
With only 13 tips, Brazil is not even the leading country in South America and substantially behind its BRIC peers. Argentina (22) and Mexico (14) both are head of Brazil. India (120), China (111) and Russia (32) outpace the country by a wide margin.
If the goal of the whistleblower program is to provide early warning to regulators about problem areas, then we would have expected this to be an area of high activity over the past few years. Given the reports of widespread corruption in Brazil, that is not being disclosed should have been reported.
At the end of last year, we posted about the OECD Working Group on Bribery report on whistleblowing in Brazil. The report commented on the lack of investigations opened by Brazil as a result of whistleblowers. It offered a cultural aversion to and suspicion of the government as possible explanations.
There are two additional possible explanations for the lack of tips to the SEC whistleblower program besides the obvious possibility that US and multinational companies simply aren’t engaged in bribery in the country. It may be that individuals aren’t aware of it. The publicity about the program here in the United States doesn’t necessarily reach the general Portuguese-speaking public in Brazil. Additionally, some of those fully informed about the option might choose to decline to participate because of the lack of extraterritorial application of the anti-retaliation provisions offered by the Dodd-Frank Act.
There are many other potential explanations for the difference between the number of tips received by the SEC and the number of news stories about corruption coming out of the country, including the possibility that U.S. and multinational corporations operating in Brazil haven’t actually been involved in the bribery of public officials. The SEC whistleblower program is also still in its infancy. The 5 year anniversary of the Dodd-Frank Act is this year and the securities regulator is still getting the word out.
So it is far too early to draw any firm conclusions in this area. It is simply a preliminary hypothesis based on the news reports that we have seen and the data that has been provided by the U.S. Government. If you have other thoughts, our FCPA whistleblower attorneys would love to hear them.