Post By: Patricia Colombo (LinkedIn), Director of Legal, Compliance, and Regulatory Affairs, Fujifilm Brasil and Emanuel Batista (LinkedIn), Associate Managing Director, Compliance Risk and Diligence, Kroll
Latin America has earned notoriety in the aftermath of Operation Car Wash, which triggered a wave of anti-corruption investigations across the region. In the past few years, Latin American companies have faced scrutiny by local authorities and even by U.S. and European regulators. In recent years, the U.S. Department of Justice investigated a number of Latin American organizations’ improper relationships with politically exposed persons (PEPs). This blog post aims to provide a glimpse into the events that shaped the fading, albeit persistent landscape of corruption in today’s Latin America for U.S. companies interested in developing their business activities in the region.
Corruption Perception
Transparency International’s Global Corruption Barometer — Latin America & the Caribbean 2019[1] found that more than half of the 17,000 citizens surveyed from 18 Latin American countries believed that corruption in the region was worsening and that their governments were not adequately addressing the problem. The survey found that respondents had little faith in the political process, perceiving it as lacking in integrity, particularly, with regard to elections. Bribery was considered a common practice; most Latin Americans view their governments as essentially oligarchies, run by a few private interests.
This leads to another problem: lack of trust in the government. OECD chief, Gurria, stated at the 2020 World Economic Forum that “discontent is linked to corruption (and) corruption is a terrible cancer,” and that “less than half of the people trust the government.” He concluded that corruption is the “most important challenge” facing Latin America. Companies doing business in Latin America should continue to maintain an accurate view of the corruption landscape to manage legal and reputational risk.
Compliance’s Role in Protecting Good Reputations
Some facets of the ongoing corruption scandals in Brazil are more universal in the context of Latin American. Examples include the difficulty in vetting third parties, the autonomy (and therefore lack of oversight) of local government entities and the overall “informal economy.” Corruption risk is increased by several other local factors, including inappropriate gift-giving; audits and internal investigations; and the use of fictitious vendors, invoices, and record-keeping.
Compliance has become a regional watchword in Latin America. Trainings, workshops, and conferences have proliferated in response to increased interest in effective compliance programs and the policies, procedures and conduct most likely to protect organizations’ reputations.
To earn and maintain good reputations, companies are doing their best to update their programs and comply with regulations. Likewise, compliance officers are increasingly being empowered to ensure companies are maximizing their risk assessments and mitigation efforts. By understanding the potential corruption risks associated with operating in Latin America, U.S. companies can implement a risk-based approach.
Changes in the Corruption Environment
Although the general perception persists that Latin American countries have been lax in their anti-corruption initiatives, many of these countries have introduced serious reforms in recent years. As previously mentioned, Mexico introduced its new National Anti-Corruption System in 2017, which aimed to increase oversight, created new enforcement mechanisms and lowered penalties for companies that self-disclose violations. The Brazilian and Mexican anti-corruption laws are examples of these reforms. Moreover, U.S. authorities have increasingly low tolerance for violations of the Foreign Corrupt Practices Act (FCPA) by companies operating in Latin America. This strengthens the impetus for companies operating in questionable countries to remain mindful of the potential for corruption.
The Use of Tailored Risk Assessment to Prevent, Detect and Mitigate Corruption Risks
The topologies of risk in Latin America are not uniform. Risk assessments must be tailored not only to the overall region but also to the specific locality of business. The risk landscapes in Brazil, Mexico, Colombia, Argentina and Peru, for example, are profoundly different and require different approaches to be effectively managed. One universal theme, though, is relationships with third parties, which, as in many other regions, present some of the most relevant risks. Any effective compliance program will glean information from third parties and model potential risks based on their business activities, partners and beneficial owners.
Conducting Risk-Based and Effective Due Diligence
The availability of information useful for due diligence in Latin America varies by country; this makes it unlikely that a simple internet search can reliably determine the organizational structure of a company, much less, who is behind its business activities and how the company operates in the market. Add to this a generalized dearth of central digitized records calls for a “comprehensive” due diligence, which must include boots-on-the-ground records retrieval, coupled with interviews of local stakeholders to evaluate the reputations and business activities of potential business partners. Due to travel restrictions related to the pandemic, companies may want to use local partners to obtain such information in-country.
Looking Ahead: Creating a Culture of Compliance
The overall picture of the burgeoning compliance culture in Latin America looks brighter but falls far short of a fait accompli. The efforts and resources expended thus far to establish an effective compliance program that effectively manages and mitigates reputational risks will be squandered without follow through.
Change requires time and focused energy; the tones from the top and middle are crucial, and a focus on ongoing training for both employees and third parties is critical. The propensity to do the right thing, even when no one is watching, must penetrate to the roots of the organizational culture, leaving no room—and no tolerance—for corruption.
Luckily, much of this responsibility devolves to Latin American compliance professionals: passionate and hardworking individuals who are committed to protecting their organizations and their brands. That said, all employees of their organizations must also commit themselves to transforming their culture, as heavy regulation persists, and the reputational damage induced by violations remains a serious concern. As regulatory regimes evolve, so too will the risks and complexities of illicit activities. Every organization should recommit itself to making concerted efforts to challenge bad actors and the corruption they embody.
The contents of this blog post were prepared by its authors in their personal capacity. The views and opinions expressed in this blog post are those of the authors and do not reflect the official position of their employers.
[1] https://www.transparency.org/files/content/pages/2019_GCB_LatinAmerica_Caribbean_Full_Report.pdf