Compliance Tips Amid Rising Fraud Risk In Latin America

By Andrew Levine, Bruce Yannett and Fabricio Archanjo
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Law360 (August 31, 2020, 5:49 PM EDT) --
Andrew Levine
Andrew Levine
Bruce Yannett
Bruce Yannett
Fabricio Archanjo
Fabricio Archanjo
Latin America's fight against corruption faces an unusual adversary: the COVID-19 pandemic.

As the coronavirus continues to ravage many Latin American countries, the influx of emergency funding and aid for health-related projects presents serious corruption and other compliance risks, which are compounded by daunting circumstances that often involve less transparency and weaker procurement controls.

More broadly, the significant compliance obstacles posed by the pandemic are heightened by the underlying abilities of governments to combat corruption. The Capacity to Combat Corruption, or CCC, Index — developed by the Americas Society, Council of the Americas, and Control Risks — considers precisely that issue. In that regard, the 2020 CCC report concludes that many Latin American countries have entered this year with weaker capacities to fight corruption than in the prior year.

This article first explores valuable insights from the CCC report and then considers pandemic-related difficulties, such as corruption in health-related procurement, that likely will challenge further regional anti-corruption efforts. Finally, this article addresses measures being taken to mitigate the increased risk of corruption in light of the pandemic and discusses some guidance issued to assist countries in such efforts. 

Latin America's Anti-Corruption Capacity

Released in June, the latest CCC report concluded that countries such as Chile, Brazil, Colombia and Mexico became less capable in 2019 than in 2018 to detect, punish and create mechanisms to prevent corruption.[1] Based on relevant data and input from experts, the CCC Index scores several Latin American countries on 14 variables under three overarching categories: (1) legal capacity; (2) democracy and political institutions; and (3) civil society, media and the private sector.[2]

First published in 2019 to reflect countries' positions in 2018, the CCC Index serves as a proxy for what the future may hold, by country (though not all), across Latin America's anti-corruption landscape.[3] In contrast, Transparency International's Corruption Perceptions Index provides a useful proxy for current degrees of corruption by assessing the perception of corruption.[4]

As the CCC report details, the majority of Latin America's largest economies experienced a decline in their overall CCC Index scores, suggesting lower overall capacity to combat corruption compared to the year before.[5]

CCC Index Overall Scores

Rank
Country
2020 Score
2019 Score Score Change Percent Change
1 Uruguay*
7.78
- - -
2 Chile
6.57 6.66
- 0.09
- 1.4%
3 Costa Rica*
6.43 - - -
4 Brazil
5.52 6.14
- 0.62
- 10.1%
5 Peru  5.47 5.17 +0.32 + 5.8%
6 Argentina
5.32 5.33
-0.01 - 0.2%
7 Colombia 5.18 5.36
- 0.18
- 3.4%
8 Mexico 4.55 4.65
- 0.10
- 2.2%
9 Ecuador*
4.19 - - -
10 Panama*
4.17 - - -
11 Guatemala
4.04 4.55
- 0.51
- 11.2%
12 Paraguay*
3.88 - - -
13 Dom. Rep.*
3.26 - - -
14 Bolivia*
2.71 - - -
15 Venezuela
1.52 1.71
- 0.19
- 11.1%

Source: Americas Society, Council of the Americas, and Control Risks
Note: A higher score implies greater capacity to combat corruption.
*Country was added to the CCC Index in 2020.


On an absolute basis, Brazil was the country most negatively impacted by 2019 events, with a drop of 0.62 in its overall score, representing a 10% decrease. In the legal capacity category, Brazil experienced a marked decrease given concerns about the independence of law enforcement agencies, as well as judicial decisions viewed as unfavorable to fostering police investigations into white collar crime.

In particular, the CCC Index report expressed concerns about Brazil, including:

  • President Jair Bolsonaro's selection of an attorney general with whom he is considered to be aligned, deviating from the tradition of choosing from among the list suggested by federal prosecutors;

  • Perceived attempts by the president to interfere with federal investigations;

  • Diminished judicial independence, noting the leaked text messages between federal prosecutors and then-Judge Sergio Moro; and

  • The effectiveness of collaboration instruments and overall judicial strength.[6]

Such concerns about Brazil's anti-corruption efforts mirror the recent suggestion by former Minister of Justice Sérgio Moro that Bolsonaro's administration does not "respect the rule of law and ... the autonomy of the law agencies [that] investigate and prosecute crimes."[7] According to Moro — who was appointed by Bolsonaro after the 2018 election and resigned earlier this year in protest of the president's alleged interference with federal investigations — Brazil's "anti-corruption agenda has suffered setbacks since 2018."[8]

Other Latin American countries likewise have experienced challenging developments in their anti-corruption environments in 2019. Contributing factors highlighted by the CCC report include, among others:

  • Lack of enforcement collaboration by Colombia with other countries;

  • Dearth of progress in long-term institutional reforms in Mexico, which the report noted maintains a "poor" ability to detect, punish and prevent corruption;

  • Concerns about the future of Argentina's Anti-Corruption Office and the decline in the country's broader mobilization against corruption; and

  • Social unrest and political crisis in Chile.[9]

Nevertheless, the report considered such negative factors to have had relatively small effects on these countries' overall capacities to fight corruption, given that some were partially offset by positive changes.[10] This appears to have been the case especially for Argentina, with an overall score that dropped only 0.2%, in part due to positive factors such as the implementation of new campaign financing legislation in 2019.[11]

Meanwhile, in contrast to other Latin American economies, the CCC Index reflects that Peru experienced net positive developments in 2019. Of note, the CCC report deemed Peru's newly created National Board of Justice, in charge of appointing judges and prosecutors and removing those who do not fulfill their duties,[12] a substantial improvement to the country's judicial system and law enforcement.[13]

Despite Peru's improvement and Uruguay being seen generally as a positive story due to its high overall score, the worsening — or, at the very least, stagnation, as appears to be Argentina's case — in the anti-corruption landscape of the majority of Latin America's largest economies in 2019 signals a potential for increased problems in 2020. This is especially the case when coupled with the unique challenges presented by COVID-19, which postdated the relevant period covered by the new CCC Index.

Corruption and Fraud in Light of COVID-19

With respect to the pandemic, Latin America has emerged as a significant area of concern, including to the World Health Organization, given the region's record-breaking number of daily COVID-19 infections and death rates, especially in its largest country, Brazil.[14]

Furthermore, the pandemic has left many Latin American governments in states of emergency, seeking significant funds notwithstanding that public debt already was skyrocketing,[15] which can be particularly difficult for countries entering 2020 with decreased capacities to fight corruption.[16] The rapid influx of emergency funding and aid for health-related projects in Latin America often has been accompanied by looser controls, including suspended regulations governing public contracting and suspended rules requiring greater transparency, which creates opportunity for corruption.[17]

In Brazil, the government has invoked the escape clause of the constitutional expenditure ceiling to accommodate exceptional spending needs. Emergency measures will not be subject to the federal fiscal target and include transfers from federal to state governments to support higher health spending.[18] The Brazilian government also has suspended public bidding requirements for the procurement of certain health-related purchases.[19]

Brazil's emergency funding also has included some unusual sources. Notably, at the request of the Public Prosecutor's Office, Brazil has allocated settlement proceeds from the anti-corruption investigation Operation Car Wash to fight the pandemic.[20] The use of such funds for fighting the pandemic, however, has not been without controversy.

Brazil's Attorney General's Office has petitioned the Supreme Federal Court, Brazil's highest court, to block any portions of settlement funds from being specifically allocated to fighting the pandemic, as opposed to the usual practice of allocating them to the entities injured by the conduct encompassed by the settlements.[21] The continued availability of such funds for fighting the pandemic is consequently in question and has been suspended by judicial order until the Supreme Federal Court issues a decision.[22]

Not surprisingly, the increased availability of funds for health-related projects, coupled with fewer strict controls, has fueled numerous reports of corruption related to COVID-19 procurement. Government officials, including governors, in several Brazilian states are being investigated on suspicion of misuse of public funds totaling more than $200 million,[23] including alleged embezzlement and bribery in connection with schemes to inflate artificially the price of medical equipment.[24]

Reports of corruption related to COVID-19 procurement also have arisen in other Latin American countries, including Colombia, which has created a National Emergency Mitigation Fund and is allowing for faster direct public contracting under some circumstances.[25]

Claims of related corruption in Colombia extend to lucrative contracts allegedly granted to political campaign donors,[26] as well as cost overruns in the procurement of medical equipment.[27] Colombia's Attorney General's Office reportedly is investigating 10 mayors, and its inspector general reportedly has launched 512 disciplinary proceedings involving 26 provincial governments and 271 mayor's offices.[28]

In Mexico, the government has adopted measures to increase funds for the Ministry of Health, removed red tape in the procurement of medical equipment and materials, and accelerated the public tender processes.[29] As in Colombia, Mexico has seen purchases of medical equipment at seemingly inflated prices: up to 85% higher than the cheapest option.[30]

In Argentina, the government has exempted the procurement of certain supplies from the competitive bidding requirement, allowing for no-bid contracts under some circumstances during the COVID-19 emergency.[31] Additionally, the government is facing allegations that it purchased products from politically connected providers at inflated prices, which has led to several criminal investigations and requests for indictments.[32]

Although Peru fared better than many other Latin American countries in the updated CCC Index, it too has not escaped the headlines regarding alleged wrongdoing involving COVID-19 procurement. Among other alleged misconduct, Peruvian authorities are investigating potential collusion between police officials and equipment suppliers in connection with the government's purchase of low-quality or faulty health products.[33] Peruvian prosecutors also reportedly have identified over 653 potentially illicit acts committed by public officials since a state of emergency was declared due to the pandemic.[34]

Efforts to Combat Pandemic-Related Misconduct

Given the heightened corruption and fraud risks stemming from pandemic-related procurement, mitigating measures such as boosting transparency have assumed the utmost importance. To that end, for governments combating misconduct such as fraud and corruption during the crisis, including impropriety related to COVID-19, Transparency International has recommended best practices including:[35]

  • Publishing information on government contracting in an open data format accessible to all audiences, such as an official website;

  • Avoiding emergency procurement procedures that encourage price gouging, hoarding, or other collusive or monopolistic behavior;

  • Monitoring resources to ensure procurement processes comply with applicable laws and adjustments for the emergency; and

  • Reporting on the origin of resources, effects on budgets, and justifications for allocations, as well as on results of the allocations of funds at the end of the emergency.

Several Latin American countries already have started adopting measures in line with these recommendations. For instance, several watchdog organizations in Mexico have established portals to improve transparency.

Specifically, Transparencia Mexicana and Tojil have created a tracker for plans, programs and actions related to COVID-19, while Derechos Humanos y Litigio Estratégico Mexicano has created a whistleblower platform to receive reports of corruption related to COVID-19 and to track operational failures by providers.[36]

Although criticized for loosening requirements in the electronic management of federal records,[37] Argentina has implemented price controls for certain health care products in order to prevent price-gouging. It also has placed export restrictions on, and centralized the sale of, certain medical supplies.[38]

In Chile, the directorate in charge of public procurement, ChileCompra, has issued several recommendations for the public sector regarding purchases during the pandemic. ChileCompra recommends using framework agreements as opposed to direct contracting, and provides that any decision to contract directly must be duly justified by the authorizing resolution.

In addition, ChileCompra has created a section on its website listing goods and services procured during the pandemic,[39] and Peru has created similar databases for public access.[40]

Likewise, the Brazilian government has launched online tools detailing public contracts related to COVID-19,[41] including purchases that were exempted from the public tender process,[42] as well as a hotline dedicated specifically to receiving complaints related to services and conduct by public officials in connection with COVID-19.[43]

Adapting Compliance Programs to COVID-19 Times

Just as governments facing increased risks of corruption and fraud associated with COVID-19 have begun to adopt mitigating measures, companies must ensure that their compliance programs reflect the new risk environment. While recognizing the significant financial challenges posed by the pandemic, with corporate resources being subjected to understandable reprioritization, several key measures may be taken without extraordinary efforts.

Reassess Risks and Recalibrate Internal Controls

As a starting point, companies should reassess their compliance risks in light of the pandemic and adjust their internal controls accordingly. This includes considering the impact of factors such as: (1) commercial dealings with governments, including public contracting, sometimes with suspended tender requirements, and the receipt of emergency funds; (2) diminished supply chains and related challenges; and (3) increased import and export restrictions.

After reassessing the relevant risks and controls, companies should consider carefully what compliance activities require prompt attention and what do not.

Scrutinize Certain Third Parties

Companies navigating the pandemic naturally may look for assistance from third parties with specific expertise and knowledge, including due to new travel restrictions, supply chain disruptions and changed procedures for public contracting. Given that many such third parties are being retained in expedited fashion under emergency conditions, companies should consider steps to mitigate at least partly the increased risks, even if current conditions do not allow for full diligence prior to the retention.

These steps may include: (1) conducting basic due diligence through searches on readily available databases; (2) reserving the right through contractual provisions to terminate the relationship after additional due diligence is conducted or in case significant wrongdoing is reasonably suspected; (3) carefully monitoring the third party's activities, especially in the new high-risk areas identified in light of the pandemic; and (4) documenting actions taken in connection with the relationship and setting goals for more fully examining the third party as soon as conditions allow.

Capitalize on Remote Capabilities

Working virtually does not mean that all compliance activities must be placed on hold. Indeed, companies can capitalize on this shift by securely leveraging technology to perform expeditiously certain compliance-related tasks traditionally handled in person.

This includes potentially: (1) conducting compliance training, and more timely than before in some cases; (2) reviewing and updating policies with simultaneous input from multiple parties, such as via shared screens; and (3) conducting remote interviews across the globe, both for internal investigations and compliance due diligence.

Although there are significant benefits, under normal circumstances, to performing many of these activities in person, companies should consider how best to leverage their remote capabilities amid current prohibitions on physical proximity.

Document, Document, Document

Lastly, companies should document carefully the compliance steps they take in response to the pandemic, as well as those compliance steps deferred in light of the pandemic. This includes being purposeful about how and when to revisit those compliance activities deemed incompatible with current constraints.

Conclusion

Despite entering 2020 with lesser capacities — as reflected in the CCC Index — to fight corruption than a year before, countries in the region increasingly are developing ways to mitigate at least partially the various pandemic-related compliance risks.

Notwithstanding such initiatives, serious corruption and fraud risks persist in Latin America, exacerbated by the continuing toll of the pandemic. Indeed, both the strains of the pandemic itself and the efforts to remedy its impact present ample opportunities for abuse, especially when intermingled with weakened controls, even when well-intentioned in the context of a public health crisis.

Significantly, companies must confront the pandemic's many challenges, including reassessing compliance risks and enhancing relevant controls. While it is too early to predict the precise magnitude of the pandemic's impact on corruption and fraud in the region, the experience of the pandemic stands as a powerful reminder of the importance of bolstering throughout the region (and beyond) the capacity to combat corruption and similar societal ills.



Andrew M. Levine and Bruce E. Yannett are partners, and Fabricio M. Archanjo is an associate, at Debevoise & Plimpton LLP.

Summer associates Christopher Bello and Jose J. Martinez assisted in the preparation of this article.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] "The Capacity to Combat Corruption (CCC) Index: Assessing Latin America's Ability to Detect, Punish, and Prevent Corruption Amid COVID-19," Americas Society, Council of the Americas, and Control Risks (June 2020), https://www.as-coa.org/sites/default/files/archive/2020_CCC_Report.pdf.

[2] The 14 variables are: under (1) Legal Capacity, (i) judicial independence and efficiency; (ii) anti-corruption agencies' independence and efficiency; (iii) access to public information and overall government transparency; (iv) independence and resources for the Chief Prosecutor's Office and investigators; (v) level of expertise and resources available to combat white collar crime; (vi) quality of leniency and plea bargain instruments; and (vii) level of international cooperation on law enforcement; under (2) Democracy and Political Institutions, (i) quality and enforceability of campaign finance legislation; (ii) lawmaking and ruling processes; and (iii) overall quality of democracy; and under (3) Civil Society, Media, and the Private Sector, (i) civil society mobilization against corruption; (ii) education improvements; (iii) quality of the press and investigative journalism; and (iv) digital communications and social media.

[3] "The Capacity to Combat Corruption (CCC) Index," supra note 1.

[4] See "The Corruption Perceptions Index," Transparency International, https://www.transparency.org/en/cpi; see also Andrew M. Levine, Karolos Seeger, Robin Lööf, et al., "White Collar Crime and COVID-19: Enforcement in a Rapidly Changing Landscape," FCPA Update Vol. 11, No. 10 (May 2020), https://www.debevoise.com/insights/publications/2020/05/fcpa-update-may-2020.

[5] "The Capacity to Combat Corruption (CCC) Index," supra note 1.

[6] Id.

[7] Bryan Harris, "Anti-Corruption Drive Floundering Under Bolsonaro, Says Ex-Minister," Financial Times (July 26, 2020), https://www.ft.com/content/710f9fe2-9f06-411b-a5e6-ec3b5b23cbb6.

[8] Id.

[9] "The Capacity to Combat Corruption (CCC) Index," supra note 1.

[10] Id.

[11] Id.

[12] Id.; Republic of Peru, National Board of Justice, https://www.jnj.gob.pe.

[13] "The Capacity to Combat Corruption (CCC) Index," supra note 1.

[14] Anthony Boadle, "WHO Says the Americas are New COVID-19 Epicenter as Deaths Surge in Latin America," Reuters (May 26, 2020), https://www.reuters.com/article/us-health-coronavirus-latam/who-says-the-americas-are-new-covid-19-epicenter-as-deaths-surge-in-latin-america-idUSKBN2322G6.

[15] Michael Stott and Andres Schipani, "Fears Mount of a Fresh Latin American Debt Crisis," Financial Times (July 20, 2020), https://www.ft.com/content/a86e0382-8f63-4f4f-839c-51c5a9ccc9e5.

[16] Geert Aalbers, "Headwinds Fighting Corruption in Latin America," Ethisphere Magazine (2020), https://magazine.ethisphere.com/latin-america-corruption-index.

[17] Natalie Kitroeff and Mitra Taj, "Latin Americaʼs Virus Villains: Corrupt Officials Collude with Price Gougers for Body Bags and Flimsy Masks," New York Times (June 20, 2020), https://www.nytimes.com/2020/06/20/world/americas/coronavirus-latin-america-corruption.html.

[18] International Monetary Fund, "Policy Responses to Covid-19" (July 17, 2020), https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19.

[19] "Corruption in Times of Covid-19: A Regional Perspective on Public Procurement," Lawyers Council for Civil & Economic Rights, Cyrus R. Vance Center for International Justice (May 20, 2020), https://www.vancecenter.org/wp-content/uploads/2020/05/Corruption-in-times-of-COVID-19-a-regional-perspective-on-public-procurement.-Lawyers-Council.pdf.

[20] See Will Barbieri, "Brazil's Use of Settlement Funds to Fight Covid-19 Pandemic in Limbo," Global Investigations Review (July 15, 2020), https://globalinvestigationsreview.com/article/1229026/brazils-use-of-settlement-funds-to-fight-covid-19-pandemic-in-limbo.

[21] Id.

[22] See "Repasse de Valores Recuperados na Lava Jato para COVID-19 é Suspenso" [Pass-Through of Amounts Recovered in Lava Jato for COVID-19 is Suspended], Veja (July 28, 2020), https://veja.abril.com.br/politica/repasse-de-valores-recuperados-na-lava-jato-para-covid-19-e-suspenso.

[23] See Natalie Kitroeff and Mitra Taj, supra note 17.

[24] See Bryan Harris, Andres Schipani, and Gideon Long, "Coronavirus Corruption Cases Spread Across Latin America," Financial Times (July 7, 2020), https://www.ft.com/content/94c87005-7eb1-47c4-9698-5afb2b12ab54.

[25] See International Monetary Fund, supra note 18.

[26] See Natalie Kitroeff and Mitra Taj, supra note 17.

[27] See Luis Jaime Acosta, "Colombia Issues Arrest Warrants for 10 Mayors for Alleged Graft," Reuters (May 21, 2020), https://www.reuters.com/article/us-health-coronavirus-colombia-corruptio/colombia-issues-arrest-warrants-for-10-mayors-for-alleged-graft-idUSKBN22Y00L.

[28] Id.

[29] See International Monetary Fund, supra note 18.

[30] See Natalie Kitroeff and Mitra Taj, supra note 17.

[31] "Corruption in Times of Covid-19: A Regional Perspective on Public Procurement," supra note 19.

[32] Id.

[33] See Natalie Kitroeff and Mitra Taj, supra note 17.

[34] "Fiscalía: Hubo 653 de Casos de Corrupción Durante Emergencia por Covid-19" [Office of the Prosecutor: There Have Been 653 Corruption Cases During Covid-19 Emergency], Gestión (June 1, 2020), https://gestion.pe/peru/politica/coronavirus-peru-hubo-653-de-casos-de-corrupcion-durante-emergencia-por-covid-19-nndc-noticia.

[35] "Corruption Could Cost Lives in Latin America's Response to the Coronavirus," Transparency International (March 31, 2020), https://www.transparency.org/en/news/corruption-could-cost-lives-in-latin-americas-response-to-the-coronavirus; "Public Procurement During States of Emergency: Minimum Requirements to Ensure the Integrity of Contracts Awarded During Crises," Transparency International (2020), https://images.transparencycdn.org/images/EN_Latin-America_emergency_procurement_COVID_19.pdf.

[36] "Corruption in Times of Covid-19: A Regional Perspective on Public Procurement," supra note 19.

[37] Id.

[38] See International Monetary Fund, supra note 18.

[39] "Corruption in Times of Covid-19: A Regional Perspective on Public Procurement," supra note 19.

[40] Id.

[41] Federal Government of Brazil, "CGU Lança Painel Para Dar Transparência a Contratações Relacionadas à COVID-19" [CGU Launches Dashboard to Provide Transparency to Contracts Related to COVID-19], (July 3, 2020), https://www.gov.br/cgu/pt-br/assuntos/noticias/2020/07/cgu-lanca-painel-para-dar-transparencia-a-contratacoes-relacionadas-a-covid-19.

[42] Federal Government of Brazil, "Governo Lança Site com Detalhes das Compras Feitas com Dispensa a Licitação no Combate ao Covid-19" [Government Launches Website with Details on Purchases Made with Exemption from Public Tender in Fight Against Covid-19], (April 9, 2020), https://www.gov.br/cgu/pt-br/governo-aberto/noticias/2020/4/ministerio-da-economia-lanca-site-para-divulgacao-e-monitoramento-das-compras-relacionadas-ao-novo-coronavirus.

[43] Federal Government of Brazil, "FAQ Coronavirus," (May 12, 2020), https://www.gov.br/cgu/pt-br/coronavirus/faq-coronavirus.

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