Spreading the gospel of “corporate compliance” in Latin America. 1The case of anti-corruption and anti-money laundering
* Guillermo Jorge
1. The origins of corporate compliance
Corporate compliance is an American-rooted concept. It refers to the formal policies and procedures that organizations implement to prevent and detect violations of law, regulation and company policy, and to promote ethical business conduct.
In the US, corporate compliance law has been evolving since the 70s, usually to the pace of corporate scandals. It began with the Watergate in the 70s, which lead to the passing of the FCPA and the establishment of programs to control bribery of foreign public officials. In the 80s, the scandals in the defense industry lead to the privately implemented recommendations of the “Packard Commission”. The insider trading
scandals of the 80s lead to the passing of the Insider Trading and Securities Fraud Enforcement Act, whose requirements were toughed up in 2000 by the Sarbanes Oxley Act after the Enron wave of scandals. The US Patriot Act, while focusing on antiterrorism, updated anti money laundering compliance programs, following recommendations of the Senate Permanent Subcommittee of Investigations on private banking and correspondent banking, two sensitive segments of the banking industry.
While the requirements of the 70s and 80s were normative obligations, the 2passing of the Sentencing Guidelines for Organizations (SGO) at the beginning of the
90s set up the incentives to shift from a reactive to a proactive approach to corporate compliance. It basically provided an increase in the applicable fines to corporations and the possibility of substantial reductions if an effective compliance program was in place. This trend, which proved to be extremely effective, was suit followed by the 34Environmental Protection Agency, the Department of Justice -instructing Federal
Prosecutors to include compliance as a factor to consider when exercising discretion and 5bargaining pleas-, the SEC –as a determining factor as to whether to bring an
enforcement action and what charges to bring- and many other regulatory agencies.
Corporate programs are now an increasing and sophisticated part of the American corporate culture which has evolved from simple prevention to the “promotion of an 6ethical corporate culture”, a concept that has already expanded to some EU Directives.
1 Presented at the Conference "Legal Challenges for Foreign Investment in Latin America” , Sponsored by
the Latin American Caribbean Committee of the American Bar Association, Sao Paulo, Brazil, May 9, 2008. * Partner. Jorge-Dassen Consulting. www.jorge-dassen.com 2 The SGO were ammended in 2001 and 2003. Cfr. US Sentencing Commission at
http://www.ussc.gov/corp/advgrp.htm 3 Cfr. EPA Incentives for Self-Policing: Discovery, Disclosure, Prevention and Correction of Violations, at http://www.epa.gov/compliance/resources/policies/incentives/auditing/auditpolicy.pdf 4 Cfr. the so called “Mc. Nulty Memo” at http://www.justice.gov/dag/speeches/2006/mcnulty_memo.pdf 5 Cfr. Securities and Exchange Commission, Statement of the SEC Concerning Financial Penalties, Release 2006-4, at http://www.sec.gov/news/press/2006-4.htm 6 Corporate compliance has been growing in Europe at the pace of the globalization and the growing trend of self-regulation. Cfr. Cafaggi, F. (ed.) “Reframing Self-Regulation in European Private Law”, Kluwer
Law International, Private Law in European Context Series, The Netherlands, 2006.
2. Compliance culture in Latin America
Corporate compliance was, until very recently, an alien concept to the Latin American legal landscape. From the angle of substantive criminal law, German-rooted criminal law systems are based on purely subjective models of criminal liability, in which the notion of corporate criminal responsibility is difficult to accommodate. From the angle of the criminal procedure, inquisitorial Latin American systems are not familiar with the concept of bargaining. On the contrary, prosecution was compulsory until very 7recently in the whole region and agreements that may “compromise” the finding of the
truth –the end of the criminal procedure- had been largely deemed incompatible with the system.
One should also add less democratic experiences, which in turn account for less governmental accountability and more immature public-private relationships. Altogether, these factors partially make understandable the expression: “Latin American
entrepreneurs prefer to apologize rather than to ask for permission”. This popular adage
clearly summarizes the view that preventive visions and compliance with the law were never regarded as adding value. Lawyers, as well as accountants, have traditionally been hired to advice on how to circumvent, rather on how to comply, with the law.
In what may be called a quiet revolution, however, globalization has been changing the landscape. Compliance programs are more and more commonplace in Latin America. Unlike the American model, this is not a process driven by Latin American Governments pressured by angry voters after scandals. This is rather a process driven by the opportunity to export to OECD jurisdictions, the goal to engage in the value chain of a global market and, in some specific markets were reputation plays a major role, the believe that prevention of violations and ethical behavior add value in the long term.
3. Challenges for investors in Latin America
From the perspective of an investor in Latin America, one can evaluate the impact of the global anticorruption campaign from two different angles.
On the one hand, the OAS Convention against Corruption, following the model of Human Rights treaties, set up standards on the behavior of Governments with regard to transparency and corruption within its territory. The Program includes conflict of interest rules, assets disclosure policies, access to information acts and criminalization of typical corrupt behavior. Most available indicators show that, despite widespread public concern, the passing of most implementing legislation and the creation of specialized
7 “Plea-bargaining style” reforms have been a growing trend in Criminal Procedure Reform in Latin America, though it is usually normative to specific cases rather than discretional. Cfr. Langer, Maximo, „From Legal Transplants to Legal Translations: The Globalization of Plea Bargaining and the Americanization Thesis in Criminal Procedure‟, 45 Harvard International Law Journal 1-64 (2004);
Langer, Maximo, „Revolution in Latin American Criminal Procedure: Diffusion of Legal Ideas from the
Periphery‟, UCLA School of Law Public Law & Legal Theory Research Paper Series, Research Paper No.
anticorruption bodies, after ten years of its entry into force, the OAS convention has not caused a major impact. Official corruption remains persistent and very modest progress has been made since the reestablishment of democratic rule to improve transparency and 8government ethics in the region.
On the other hand, however, the OECD Convention on Bribery of Foreign Public Officials in International Business Transactions seems to have caused a much notable impact. The treaty criminalizes foreign bribery mirroring the FCPA, aiming at leveling the playing field among OECD competitors for southern markets by prohibiting bribery in international business transactions. Jurisdiction to enforce the crime requires a nexus with the territory of the mother company. However, this may be satisfied, as it is in the US, by an automatic entry into and electronic database or an electronic pulse through the payment system.
The last amendments to the FCPA, e.g., expand jurisdiction to foreign persons who make illegal payments outside the US if they have a “detrimental effect in the US”, a criteria that covers the passing of illicit money through the US Financial system. Moreover, foreign subsidiaries are subject to recordkeeping provisions and face liability for misrecording transactions.
European implementing laws are not as far reaching as US laws. Nonetheless, there are ongoing investigations in the UK, France, Germany, Italy and Spain and in most 9of those cases assets have been seized.
The treaty is enforced by a tough “peer review” monitoring program which
includes a biannual confidential tour de table where governments can blame each other
for the business their companies have lost anywhere. After years of US blaming European governments for not taking serious action, and once the implementing laws 10entered in to force, the situation the situation started to chance
This incipient understanding in the US-European debate on increasing
enforcement over foreign bribery is having a notable impact in developing countries. 11Although the OECD Convention criminalizes prohibited conduct by intermediaries only
when a connection to the mother company is found, global companies have started to homogenize compliance policies to prevent bribery in all its operations. The reason should be found more on risks to the reputation than on concrete legal risks. The damage caused by corrupt behavior in a subsidiary is today able to impact other operations just because of the media reporting the case or the civil society watchdogs campaigning against the company. Paradoxically, these actors are, in this sense, more effective than governments lacking political will to enforce these laws.
Subsidiaries facing the dilemma of “doing business as usual” without being
backed by headquarters or engage in the compliance trend, have generally chosen the second option, even at the cost of loosing some contracts. In many instances, headquarter authorizes a regional compliance policy developed taking into account some of the local
8 Cfr. Peter DeShazo, “Anticorruption Efforts in Latin America Lessons Learned”, Policy Papers on the
Americas, Volume XVIII, Study 2, September 2007, available at
http://www.csis.org/media/csis/pubs/070913_anticorruptionefforts_finalreport.pdf 9 Cfr. OECD Evaluations Reports, Phase 2, at
http://www.oecd.org/document/24/0,3343,en_2649_37447_1933144_1_1_1_37447,00.html#phase_2 10 According to the US Department of Commerce, loses of US business against corrupt competitors amounted to USD 165 billion in the period 1994-2000 and to 113 in the period 2001-2005 11 Including foreign affiliates, branches, subsidiaries, agents.
conditions with regard to gifts, conflict of interests, liability of agents and partnerships, disclosure policies, and also enforcement trends in the region.
Interestingly enough, this transformation is also having an impact in local companies willing to engage in the value chain of multinational corporations. Today, showing “fluent contacts” with the government may not be, as it was in the past, the best credential to engage in a joint venture agreement, a partnership, a local agent, a representation or even a supplier. Multinationals are more and more demanding ethical credentials on the part of their intermediaries, as they face serious legal and reputational 12risks for not conducting proper due diligence over them.
As a consequence, even local companies are interested in showing to prospect clients and partners ethical credentials. And they do it by implementing compliance programs.
Finally, it is remarkable that the 4 biggest economies in Latin America –
Argentina, Brazil, Chile and Mexico- are Parties of the OECD Convention on foreign bribery. It means that local exporters and investors are now forbid to engage or consent bribery abroad. Brazil and Mexico have already been fully evaluated by the OECD Working group. Brazil was urged to amend its legislation to make companies directly liable for the payment of bribes to foreign public officials, to ensure that effective sanctions are applicable, to be more proactive in detecting, investigating and prosecuting cases of foreign bribery, and to boost the existing law enforcement resources dedicated to 13fighting complex economic crimes. Mexico, on its part, was urged to develop integrity
programs directed to encourage the private sector to introduce codes of conduct, compliance committees and the protection of whistleblowers -which have been launched though not yet fully implemented-, to change the method to calculate the fines applicable to companies engaging in foreign bribery –which is now based on the income of the 14company-, to amend the statute of the liability of legal persons.
There is, in short, an increasing interest in the Latin American private sector to implement internal compliance and ethics programs. The driving forces of this process have not been the Latin American Governments but rather the multinational corporations as well as the OECD Working Group on Bribery and its tough monitoring system.
In the field of money laundering, while similarities may be drawn from the whole picture, a closer look shows some important differences. 15Most Latin American countries were pressured in the last decade to pass anti-
money laundering laws and regulations, to set up a Financial Intelligence Unit to which the financial sector is obliged to report suspicious transactions of being laundering the proceeds of crime. Most countries have evolved from a drug-based approach to a wider
12 See, e.g., the work of TRACE International, an association of multinational companies that conduct due diligence over intermediaries< at www.traceinternational.org 13 OECD Working Group on Bribery, Brazil: Phase 2, December 2007, available at
http://www.oecd.org/dataoecd/61/30/39801089.pdf 14 OECD Working Group on Bribery, Mexico: Phase 2, April 2007
http://www.oecd.org/dataoecd/39/39/38376307.pdf 15 The IMF and the World Bank joined FATF Affiliated bodies in evaluations and included AML compliance part of their loan-conditioning policies.
16“serious crime” and sometimes even “all crimes”, based approach to predicate offences. 17Most Latin American FIUs belong to the Egmont Group, a membership which allows
them the exchange of financial information in extremely efficient basis. Unlike in the anticorruption field, these laws and regulations did not remain in the books.
Law enforcement authorities have been effectively trained in a wide range of investigative techniques to uncover complex economic crime in several countries –Brazil,
Mexico, Chile, Colombia-. Efforts to improve the reporting systems and the relationship between FIUs and the private sector are ongoing in most Latin American countries. The trend shows increasing compliance from the financial sector and an average of 7% of criminal cases initiated upon further analysis of FIUs and criminal prosecutors. Brazil has been implementing annual strategies to combat money laundering, in the US style, and more recently, the Argentine authorities emulated the initiative. Mexico has recently broadened the powers of its financial intelligence unit as well as the categories of persons bound by the regulations, the new FIU has streamlining and accelerating the process for making suspicious transaction reports, and improving cooperation and information sharing between with other law enforcement and prosecutorial authorities While most countries have not yet reached convictions, there is an average of 100 ongoing 18investigations in each jurisdiction.
Unlike in the anti-corruption field, anti-money laundering regulations require financial institutions –including players in the banking, insurance and securities markets- to establish specific anti-money laundering compliance programs composed of the establishment of a compliance department, procedures for internal reporting system, training of personnel. To avoid “cosmetic” programs, most regulations require senior management involvement in the program.
Unfortunately, these requirements are still purely normative and have not yet been linked to a formal set of incentives, as in the US.
In addition to increasing local enforcement, anti money laundering compliance is ensured by foreign constrains. Let‟s take the example of the US.
Since the enactment of the US Patriot Act in 2001, the US has geometrically expanded its jurisdiction over foreign transactions suspicious of carrying proceeds of crime or directed to finance a terrorist organization. According to US Patriot Act, 319, deposits into foreign banks are considered deposits into any bank account the bank may have in the US. As a consequence, restraining and seizure orders can be made against funds held in the US institution even if the depositor has not funds in the US, the funds are not in US dollars and there is not crime committed in the country of deposit.
More recently, the US has expanded its jurisdiction over virtually any transaction denominated in US dollars. This is because most US dollars transactions pass through the US international payment system and this inoffensive “electronic bit” suffices as a
jurisdictional nexus. As a consequence, the assets of financial institutions carrying on US denominated transactions or maintaining correspondent accounts with US institutions are potentially subjected to US jurisdiction. This is why the US Patriot Act requires foreign banks that maintain US correspondent accounts to designate an agent to receive US
16 Cfr. the country reports of GAFISUD members at www.gafisud.org 17 Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru and Venezuela. Bolivia was suspended in 2006. Cfr. Egmont Gorup of Financial Inteligente Units, at www.egmontgorup.org 18 Cfr. www.gafisud.org
subpoenas through which information concerning any transaction, account or customer may be requested.
In addition, international administrative cooperation at the level of Financial Intelligence Units –which are regulated through bilateral memoranda of understanding and powered by the Egmont Group- have amazingly eased the gathering of financial intelligence and, in many cases, the freezing of assets in foreign jurisdictions. Nowadays, a simple email suffices to immobilize funds in many countries. Moreover, some jurisdictions, e.g. Switzerland, have implemented an “automatic freezing” system according to which any suspicious transaction report implies the obligation of freezing the assets for 5 working days, a laps within which the prosecutorial authority will decide whether there are grounds to open a money laundering case.
In short, if normative compliance programs required by domestic Latin American laws may still be deemed as not to have enough teeth, the impact of foreign anti money regulations over the Latin American financial institutions is undoubtedly real. In other words, there is not way to any financial institution to operate without a sound anti-money laundering compliance program.
The main argument of this presentation is that, even if political will for enforcing anticorruption and anti money laundering laws is far from being robust in most Latin American countries, there is an ongoing process indirectly geared by the US and OECD policies but directly driven by market forces.
One of the consequences of this trend is that compliance programs in Latin America are usually designed to satisfied American or European standards, which varies from strict US regulations to more general European statutes. Attention is usually paid on how to avoid the disruptions associated with investigations and prosecution of the mother company in its country of incorporation.
Despite those constrains, compliance is a growing legal field in the areas of anticorruption and anti-money laundering. It is expected that, in a not so longer future, Latin American corporations would be recognized for “asking permission before having
to apologize”, and not the other way around.