Brazilian government sales: how to address risks in integrity programmes
Karla Lini Maeji
TozziniFreire Advogados, São Paulo
Franco Mikuletic Neto
TozziniFreire Advogados, São Paulo
The government, or public sector, is one of the most important clients, if not the major client for a significant number of companies doing business in Brazil. This means that companies are constantly exposed to the intricacies of government sales and to their risks.
What many companies are yet to realise – and, unfortunately, what others have realised the hard way – is that government sales are complicated and require a well-trained in-house and channels team with in-depth experience of the applicable laws and regulations. They also require comprehensive internal controls to mitigate associated risks, while providing clear and practical guidelines which serve as an incentive to a transparent business environment and contribute to business growth.
Government sales are conducted under a highly regulated process in Brazil, which is going through a transitional phase, requiring additional attention and efforts. The legal and enforcement framework has changed, with increased oversight by authorities and the enactment of new legislation dealing with public procurement, especially Law 14,133 issued in April 2021. This context has been completed with a departure from pre-existing rules to remove safeguards for emergency purchases during the Covid-19 pandemic.
While Law 14,133/2021 aims at simplifying the public procurement process, it relies on specific regulations, which are slowly being enacted, and is concurrently applied with the previous law, which will only be fully revoked in April 2023. This makes the current situation more challenging rather than simpler. But it is clear from this new law that there is a growing trend to focus on integrity programmes and the company’s ability to anticipate and remediate possible violations.
According to Law 14,133/2021, all requests for proposals (RFPs) for ‘hiring of works, services and supply of large amounts’ (ie, with estimated amounts exceeding BRL 200m (approximately US$385,000)), will require the implementation of an integrity programme from the winner within six months of the signing of the contract. Additionally, the implementation and improvement of an integrity programme will be considered as a tie breaker between proposals and in the application of penalties. The same trend has already been displayed by state laws when requiring integrity programmes for companies planning or holding an ongoing contract with the government.
In the aftermath of Operation Car Wash, a massive investigation into corruption in different business sectors, much light was shed on fraud in public procurement processes and contract performance. This unprecedented enforcement was followed by the Covid-19 pandemic, which again turned the focus to purchases made by the government in an emergency context and where enormous amounts of money were injected to relaxed public procurement processes to address the health crisis – the perfect storm for violations.
Authorities were active very early on during the pandemic and the level of scrutiny increased significantly. Over 200 investigations targeting the healthcare sector were launched in 2020 and 2021 alone. Authorities were also acting speedily and meticulously – the message being that although procurement rules were more flexible, that was not the case for liability.
It stands to reason that authorities would attempt to adopt a preventive approach and incentivise companies to tailor their integrity programmes to more than just anti-corruption policies. The Office of the Comptroller General of the Union (CGU), for example, made available a control panel to monitor government spending, contracts and suppliers and a comparison of prices. In another preventive effort, the CGU launched ‘Best Practices in Integrity in the Relationship between Public and Private Sectors During the Pandemic’ citing more relaxed rules for public tenders and calling companies to operate with integrity, with a special focus on contracts and partnerships with government.
In parallel, Law 14,133/2021 and several state laws require companies to have integrity programmes in order to participate in public procurement processes and hold government contracts. But incentives to integrity programmes are also given if the company is involved in violations. Mitigating factors set out in Brazil’s Clean Company Act, Law 12,846/2013 (BCCA) include cooperation of the company with the investigations and existence of a functional integrity programme.
Going beyond the requirement for an integrity programme on paper, authorities are looking for an effective integrity programme, which will be under their scrutiny and assessment. Authorities in Brazil have been very transparent about their expectations and criteria for assessing the programme. The CGU has launched guidelines in different languages on how to build an effective integrity programme and made available a detailed checklist on how integrity programmes will be assessed. All the material is easily available on their official website. In one of these guidelines, public procurement and contract performance are flagged as being of increased risk for fraud and corruption.
Therefore, additional responsibilities should be placed on the sales team and other employees with direct interaction with government officials before and after a government sale – including sales made under a public procurement process, through unenforceability of a public procurement process or others. Under the guidance and with support from management, these employees should be trained on a very practical level of the risks and best practices when performing their work, especially considering the scenario of strict liability provided by the BCCA and the fact that violations are not only a result of wilful misconduct, but more often than not a result of the lack of knowledge from both the private and public sectors on the complexities of government sales.
Given this context, companies should pay particular attention to aspects of government sales in their integrity programmes, especially to: (1) provide employees and channels (distributors, sales agents and resellers) with information about laws and best practices pre- and post-sales; (2) set regular trainings addressing practical matters and situations that these employees and channels face; (3) provide training on best practices in interactions with public officials, including in relation to instant message apps; (4) periodically monitor government sales to find gaps and/or opportunities to strengthen internal controls, policies and trainings; (5) conduct adequate vetting, training and monitoring of channels; and (vi) set clear rules to guide interactions with distributors and their activities.
A well-designed and efficient integrity programme with a solid tone from the outset, could make each and every employee and third party acting before government entities and officials the company’s first level of defence and contribute to a fair and successful business environment.