How Brazil’s Clean Companies Act will Affect Emerging Markets

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As my colleague Anna Nadgrodkiewicz recently discussed on this blog, corruption is a preeminent threat to developing countries.  In Brazil, corruption has been estimated to cost somewhere around $53 billion (approximately 2.3 percent of GDP) in 2013 alone.  Because this loss has a corrosive effect on democratic governance and the country’s ability to deliver continued improvement, Brazilians took to the streets in massive protests.  As a result the government of Brazil passed the “Clean Companies Act” which began being enforced on January 29.

The new law, like similar legislation in other countries, establishes corporate liability for corrupt practices committed by Brazilian companies as well as foreign companies that have branches or affiliates within the country.  Under the act, companies that bribe public officials (foreign or domestic) can be subjected to civil and administrative sanctions including heavy fines, prohibition on receiving state funds, and even dissolution of the firm.  The fact that Brazilian president Dilma Rouseff exercised her line-item veto power to make the law more strict than originally drafted seems to signal to the world that Brazil is serious about reining in corruption.

In the wake of the passage of the Clean Companies Act, much talk erupted over the implications for international trade.  Since the law closely resembles existing anti-corruption laws such as the U.S. Foreign Corrupt Practices Act and the UK Bribery Act, experts have warned that companies operating in the region can expect Brazilian authorities to cooperate more closely with their counterparts in the US during investigations.

More general discussion has involved the importance of solid compliance programs in multi-national companies (MNCs) if they are to avoid any run-ins with the law.  However, such commentary ignores a large audience that should take note of this development: developing countries.

To grow their economies, developing countries around the world increasingly rely on the ability of local business to tap into global value chains and attract foreign investment.  Although this alone is not enough to sustain any economy in the long term, joining these supply chains is key to achieving success in today’s globalized marketplace.

As the world’s 6th largest economy, the investment potential for development represented by Brazilian business is no small matter. With the Clean Companies Act now in force, developing countries that currently conduct business with firms registered in Brazil must clean up their own backyards to keep the investments flowing.  By the same token, countries seeking to attract new business can make themselves more appealing to Brazilian MNCs by eschewing bribery and other corrupt practices.

Private enterprises in emerging markets can directly benefit from operating in a clean above-the-board manner.  Because the Clean Companies Act is so similar to FCPA and the UK Bribery Act, it is likely that there will be an emphasis placed on third-party compliance. Therefore, MNCs looking to expand into emerging markets will wish to partner with local companies that have clean operating procedures. While this can be difficult in environments where corruption is a hard reality of doing business, local enterprises that avoid corruption can become more competitive among their peers when it comes to joining supply chains.

In order for legislation such as FCPA, the UK Bribery Act and now the Clean Companies act to have a meaningful impact on corruption, local businesses in the developing world must be addressed directly and an effort must be made to help them build their own compliance programs.

Too often, international companies take a “check the box” approach to show due diligence and supply their partners with foreign tools that they do not know how to apply effectively.  That is why CIPE is currently pioneering a project that seeks to educate local small and medium sized businesses that are currently in or wish to become a part of global value chains.  Only when these companies understand the direct benefit of compliance and possess the tools needed to build their own programs will the growing international effort to root out corruption succeed.

Frank Stroker is an Assistant Program Officer for Global Programs at CIPE.

 

 

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