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Inside Medical Devices Updates on Developments for Medical Devices from Covington & Burling LLP

Spotlight on Latin America: Brazil’s New Clean Companies Act

Posted in Foreign Corrupt Practices Act

Following months of widespread public protests against official corruption in Brazil, Brazilian President Dilma Rousseff signed into law the Brazilian Clean Companies Act (“Act”) on August 1, 2013.  The Act, scheduled to take effect January 29, 2014, is groundbreaking.  Twelve years after becoming a member of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, Brazil has finally enacted a law to bring it into line with convention standards.  For the first time, Brazilian entities, as well as foreign entities having a registered office, branch or other representation in the Brazil, may be subject to sanctions for bribing either Brazilian or foreign public officials.

Medical device companies operating in Brazil should consider how the new law may apply to their particular business.

  • Who must comply?  The Act applies to legal entities, including corporations and non-profit organizations, that are either domiciled in Brazil (even if temporarily) or maintain a registered office, branch, or other representation in Brazil.  Any medical device company with a subsidiary, branch office, joint venture, distributor, or agent in Brazil likely would be subject to the Act.
  • What is prohibited?  Among other fraudulent conduct, the Act prohibits the bribery of domestic and foreign public officials.  Bribery is defined as promoting, offering, or giving, “directly or indirectly, an improper benefit to a public agent, or to a third person related to him [or her].”  Because many hospitals and health institutions in Brazil are state-owned, doctors and other healthcare professionals employed by those institutions may be considered “public agents” under the Act.  The Act also prohibits the use of a “natural or legal third party” to conceal the beneficiaries of the corrupt conduct.  Unlike the U.S. Foreign Corrupt Practices Act, the Act does not include an exception for so-called facilitation payments.
  • What are the penalties?  An entity that violates the Act may be fined as much as 20% of the entity’s gross billings from the fiscal year prior to the initiation of administrative proceedings or, if the entity’s revenue cannot be calculated, R$ 60million (approximately USD 26 million).  Besides these financial penalties, an entity that violates the Act also may face dissolution or suspension, may be subject to forfeiture or debarment, and may lose public incentives, subsidies, or similar benefits from public entities or institutions for up to five years.
  • Are there any disclosure or compliance incentives?  Under the Act, an entity may qualify for reduced sanctions if it has implemented “internal mechanisms and procedures for integrity, audit, and incentives to report irregularities and the effective application of codes of ethics and conduct.”  Additionally, an entity that reports misconduct before it comes to the attention of enforcement authorities, cooperates in the investigation, and ceases the misconduct before being asked to do so may have its fines reduced by two-thirds.  Of course, in this era of multi-jurisdictional investigations, medical device companies would be well-advised to consider how a voluntary disclosure in Brazil could lead to exposure in other jurisdictions.

To the extent they have not done so already, medical device companies with operations in Brazil should consider developing and implementing policies and procedures to combat the bribery of both domestic and foreign officials.

In anticipation of the law’s January 2014 effective date, medical device companies also should consider using the coming months to educate employees, distributors, and other third party representatives working or overseeing operations in Brazil about the Act and its prohibitions.  Although the Act does not change existing laws in the Brazilian Criminal Code imposing liability upon individuals for acts of corruption, the Act provides an opportunity for companies to remind employees and third party representatives of the importance of conducting business with integrity and honesty.

Looking ahead, medical device companies also should consider incorporating references to the Act in compliance policies and training materials and third party contracts.  Even though existing compliance programs and contractual provisions focusing on the U.S. Foreign Corrupt Practices Act or U.K. Bribery Act may already cover similar conduct prohibited under Brazil’s Clean Company Act, tailoring compliance programs and contractual provisions to local law can be an effective way to make compliance more relevant to foreign national employees and third party representatives.