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backLATINtalk April, 2012

Potential Corruption Risks in South America

Companies moving into South America may find themselves unprepared to deal with unique corruption risks.

Over the past several years, Brazil has led its South American neighbors in foreign direct investment as companies from the United States and other developed nations rushed to expand their presence in the largest and fastest growing economy in the region.

It is therefore no surprise companies have focused their attention on identifying and mitigating potential corruption risks specific to Brazil in response to global and local anti-corruption laws, most notably the U.S. Foreign Corrupt Practices Act (“FCPA”) and the U.K. Bribery Act.

However, with an abundance of raw materials and increasingly stable political and legal systems throughout the region, companies are looking beyond Brazil for opportunities in other South American countries. Companies moving into these markets may find themselves unprepared to deal with unique corruption risks resulting from complex regulatory structures and government interactions, such as sales to government customers, tax regulations, acquisition of land-use rights, construction permits and approvals, various types of government inspections, or securing and maintaining utility service.

GLOBAL COMPANIES ARE GOING BEYOND BRAZIL

One way to attempt to measure the global business community’s collective thinking on this topic is to analyze recent trends in foreign direct investment (“FDI”). To think of it in its simplest form, FDI includes physical investment (e.g. factories, machinery and equipment, and buildings) made by companies in other countries.

The United Nations Economic Commission for Latin America and the Caribbean (ECLAC) reports global FDI grew only 1 percent in 2010, but FDI in South America was up 56 percent to over $85 billion. As has been the case in the past, the United States was the leading source of FDI in the region followed by the Netherlands, China, Canada, Spain, and the U.K. These figures suggest the global business community sees attractive opportunities in many countries across the region.

ANTI-CORRUPTION ENFORCEMENT IN SOUTH AMERICA

As investment activity throughout South America heats up, U.S. companies are faced with the daunting task of balancing regulatory compliance with the need to compete in the unique business environments within South America. With respect to anti-corruption efforts, this balancing act has traditionally proved challenging as South American countries often lacked the resources and, in some cases, the motivation, to tackle corruption and bribery issues in a meaningful way. However, the landscape has begun to change.

All South American countries have now adopted at least one of the prevailing anti-corruption conventions such as the Inter-American Convention Against Corruption (“IACAC”), the United Nations Convention against Corruption (“UNCAC”), and the Organisation for Economic Co-operation and Development Convention against Transnational Bribery (“OECD-CATB”).

Some countries have taken meaningful actions to comply with these conventions by passing legislation and devoting resources to specifically address corruption risk. Among recent enactments are the following:

Chile: In December 2009, Chile passed law 20,393, Criminal Responsibility of Legal Persons for the Crimes of Money Laundering, Financing of Terrorism and Offences of Bribery, which in part criminalizes bribery of Chilean and foreign public officials.

Colombia: In 2011, Colombia passed the Estatuto Anticorrupcion, which creates new agencies tasked with developing anti-corruption policies and monitoring their effectiveness.

SOUTH AMERICAN POTENTIAL RISK AREAS

A number of factors may influence risk, including the level of government oversight or involvement in the industry, the ratio of government sales to overall sales, reliance on business partners, consultants, agents and other third-party intermediaries for sales or regulatory matters, and the perceived tolerance for bribery or unethical business practices. A focused, yet thorough, risk assessment may enable a company to identify particular red flags and corruption exposures in each jurisdiction in which it operates, and, accordingly, evaluate whether its existing compliance program and controls adequately mitigate those risks.

Companies can generally expect to encounter certain risks in South America, although to varying degrees depending on the country:

- Local government officials tend to be paid lower wages and there may be an expectation wages are to be supplemented with “payments” from individuals and companies needing their services

- The general attitude toward bribery is more relaxed than in the U.S., and some may even view it as an accepted part of doing business

- Local laws are complex and often make it difficult to prove and prosecute bribery

- Customer relationships built on trust may result in a general reluctance to memorialize business agreements or understandings into formal written contracts

As companies consider potential risks within specific countries, they may find the challenges in each are in many ways unique. For example, consider the following factors:

- Chile was rated as having “little or no enforcement” of anti-corruption laws in Transparency International’s 2011 Progress Report

- In Argentina, the government has a history of establishing short- and long-term trade barriers such as quotas, additional import/export fees, or licensing and registration requirements to protect local industries

- In a Transparency International study, Argentina was cited as having certain inadequacies in its legal framework to combat bribery and corruption, including no criminal liability for corporations, inadequate sanctions, and inadequacies in statutes of limitations

- In Peru, the government is encouraging state-owned energy companies to play a greater role in the economy, similar to Chile and Brazil, so companies in this industry may be dealing with more government entities and officials going forward

- In Venezuela, nationalization of key industries has resulted in a sharp drop in FDI with increased government interactions for companies continuing to conduct business there

- Venezuela has the highest level of perceived corruption among South American countries based on Transparency International’s 2011 Corruption Perception Index with a score of 1.9

- Ecuador ranks 130 out of 180 in the World Bank’s “Ease of Doing Business” 2012 ranking by scoring poorly on certain sub-indices including (i) Starting a Business, (ii) Protecting Investors, and (iii) Getting Electricity

Accordingly, the unique business and regulatory environments in many South American countries may require companies to assess corruption risk on a country-by-country basis and not rely exclusively, for example, on compliance measures employed in their Brazilian operations.

MITIGATING CORRUPTION RISKS IN SOUTH AMERICA

The risk assessment process will be a key component in companies’ efforts to understand how they can best mitigate bribery and corruption risks in South America. Even best-in-class type programs, while admirable and reflective of a company’s compliance commitment, may not address country-specific risks that can lead to serious financial and reputational damage. Therefore, knowing where to look for potential exposures and what controls to implement to effectively reduce the likelihood of a violation will help companies in their efforts to successfully navigate anti-corruption compliance challenges in South America.

Trevor Schumacher is a senior manager and Vito Giovingo is a manager in the Forensic & Dispute Services group of Deloitte Financial Advisory Services LLP.

Source: Latin Business Chronicle - GAI

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