Brazil may have had a tough year, but it still draws attention. It leads Latin America in foreign direct investment and the size of its banks and corporations. It has a lively startup scene, and business opportunities around its growing middle class continue to attract investment.
Yet the problems are evident. Protests in 2013 underscored popular dissatisfaction on a range of issues. And in 2014, an investigation into corruption allegations at Petrobras pushed the state-controlled firm to delay publishing audited financial statements and drew in some of the countryâ€™s biggest building contractors.
That complicated backdrop is reflected in the TozziniFreire 2015 Outlook for Legal Issues in Brazil. Compliance â€” closely followed by tax and labor matters â€” emerged as the highest priority for the 56 Brazil-focused executives who completed the survey, most of whom are in legal and related functions in private companies.
Carried out by Management & Excellence (M&E) and LatinFinance, and sponsored by Brazilian law firm TozziniFreire, the study shines a light on what legal professionals understand to be the biggest issues for Brazilian companies in the coming year.
Just over half said they would increase attention to matters of intellectual property and technology transfer, while 47% said they anticipate investing more in environmental projects.
Compliance, however, gained the highest percentage of respondents (41%) who said it would be a top priority for 2015 â€” compared with 39% for tax, 30% for labor, 11% for competition matters, 9% each for M&A and intellectual property and technology transfers, and 7% for environmental concerns. Almost all â€” 91% of respondents â€” said they expected business related to compliance to grow.
Petrobras delayed releasing audited third quarter results in November as a result of the investigation dubbed â€œLava Jatoâ€, or â€œcar washâ€. The move thrust the corruption allegations into the international spotlight. But even before then, Brazilâ€™s 2014 Clean Companies Act had already made compliance a more important area of focus for executives in Brazil, says Shin Jae Kim, partner at TozziniFreire specializing in compliance and investigations.
Brazil is not the only country where companies are seeing the need for more robust legal compliance departments. It is also a trend in the US and Europe, as Salim Saud, partner at Tauil & Chequer, MayerBrownâ€™s Brazilian associate, points out. He explains that compliance extends to capital markets operations and anti-trust regulations, as well as anti-bribery and anti-money laundering rules.
But in Brazil â€œmost people think of anti-corruption when addressing complianceâ€, says Saud.
The Clean Companies Act came into effect in January last year with two major provisions. First, it defines â€œadministrative and civil liabilities on legal entities for acts committed against the national or foreign public administration, involving corruption and fraud in government contracts,â€ says TozziniFreireâ€™s Kim. She also says it â€œgives additional incentive for companies to invest in compliance programs by providing that the existence of effective programs will be considered a mitigating factor by the government when applying administrative sanctionsâ€.
FabÃola Rodrigues, senior associate at Demarest, another Brazilian law firm, says the law has heralded a shift of focus toward compliance risks in her firmâ€™s meetings with clients. â€œBefore, they only spoke about numbers,â€ she says.
Rodrigues says that the change in perception derives mainly from enforcement of the law, which she says is challenging the so-called jeitinho â€” the Brazilian expression for using creative, and perhaps legally dubious, ways of getting things done. â€œWe are seeing the faces of powerful corporate executives in the newspapers; if these people are in jail, the context starts to change,â€ she adds.
Besides stronger penalties, the law provides for further collaboration between state authorities. Now police can access more information and do so faster. Investigators into corporate abuses can retrieve data from the federal revenue service, pensions, banks, the central bank, the capital markets regulator and the federal justice ministry.
For companiesâ€™ legal departments, it means more work in fostering a corporate culture that prevents involvement in wrongdoings and, in the worst case, preparing for a defense against allegations. Petrobras itself will appoint a governance, risk and compliance executive director, the company said in late November, just after receiving a subpoena from the US Securities and Exchange Commission requesting documents from the company.
Ana Carolina de Salles Freire, director of legal and compliance at AES Brasil, a Brazilian electricity company, refers to the crucial role of training in a compliance program. â€œYou need first a compliance culture and values, a code of conduct,â€ she says. â€œCompanies must train employees on the policies in place.â€
As Kim says, however, it is not just about avoiding jail. Being able to boast a strong compliance framework will also help the company raise funding: â€œBrazilian companies willing to have access to foreign capital markets or financing have realized that having a compliance program and conducting business with the highest ethical standards have become essential,â€ says Kim. â€œMoreover, multinational companies have been requiring Brazilian companies to implement compliance programs or controls in order to establish business relationships.â€
Tax comes almost as high as compliance in priorities of the executives surveyed in the Outlook for Legal Issues in Brazil. Asked whether they would classify the level of difficulty of meeting Brazilian tax laws as high, medium or low, 89% of respondents said it was high.
The announcement of a new, market-friendly finance minister late last year in the form of Joaquim Levy has raised hopes for at least short-term adjustments to the fiscal framework in Brazil. But many of the surveyâ€™s respondents complained about the complexity of the existing tax system. They said it involves too many different, and changing, codes and regulations, including variances between individual states and federal and municipal government. The complexity of the tax system means companies have to invest money in costly advice and training on tax, respondents said.
Indeed, a 2014 report on global tax frameworks by PricewaterhouseCoopers and the World Bank showed that in Brazil a hypothetical company would need to spend 2,600 hours a year, on average, complying with tax codes, compared with 334 hours a year in Mexico and 175 in the US.
Ana ClÃ¡udia Akie Utumi, a tax partner at TozziniFreire, describes how Brazilian companies have to spend hours every month submitting files in an online system called SPED, which holds their accounting registrations and tax calculations at federal, state and municipal levels. In addition, this year they will need to navigate another electronic filing system â€” eSocial â€” where they must submit detailed staff information such as salaries, hourly rates, length of employment and service providers. She says that will be another heavy burden on companiesâ€™ time. â€œTax authorities have powerful cross-checking tools to assess any inconsistencies,â€ says Akie Utumi.
Labor laws remain another painful thorn in the side of Brazilian companies, according to the surveyâ€™s respondents. Close to half of respondents (44%) classified the level of difficulty of labor relations and labor disputes as â€œhighâ€.
Almost all respondents were critical of labor laws and related processes, and indicated that that the legal framework in Brazil is too favorable for employees. They said the framework is inflexible, that it reduces companiesâ€™ competitiveness, and that it involves high costs and bureaucratic processes, encouraging long-running disputes.
Mihoko Sirley Kimura, a partner in the labor and immigration practice at TozziniFreire, says much of the Brazilian legal framework dates back to populist governments, and a different economic environment, in the mid-20th century. â€œCombining this antique regulation with more proactive and aggressive performance by public prosecutors in the investigation of compliance with labor regulations is resulting in an increase in the number of public civil actions against employers,â€ says Kimura.
Oscar SimÃµes, adjunct professor of finance and economics at ISE, a Brazilian business school, points to the findings of a study conducted by the Center of Applied Microeconomics at FGV, a Brazilian think tank and higher education institution, and the Brazilian National Industries Confederation (CNI). The study shows that the ancillary benefits that employers are obliged to pay workers means the cost of an employee can be 2.83 times his or her salary.
All in all, the efforts needed in compliance, tax, and labor legislation make Brazil â€œa tricky country for doing businessâ€, according to Saud. LF