For this year’s Anti-Bribery and Corruption Benchmarking Report, Kroll interviewed 100 executives in Brazil and Mexico to evaluate regional changes, trends and updates on how compliance professionals detected, prevented and mitigated corruption risks in their organizations.
In Latin America over the last year, the fight against bribery and corruption has continued to be a primary focal point for political discourse and corporate governance. This trend can be expected to continue in 2022 with paradigm-shifting elections in each of the major economies and ongoing discontent with anti-corruption efforts. Combined with economic pressure, potential political changes contribute to uncertainty and may be a cause for a higher proportion of Latin American respondents having concerns about what is on the regulatory horizon (71% versus 58% globally).
Latin American respondents largely shared similar sentiments as other regions, with 69% believing their compliance programs are effective or highly effective. Most of the respondents (63%) attributed the effectiveness to how internal audits confirmed that their programs work, while 38% used third-party reviews and external audits to confirm program effectiveness. An effective compliance program is one that can be tested via auditing and third-party reviews to ensure that it works. In addition, 60% of the Latin American respondents believed that their programs were effective because no bribery or corruption incidents have been identified to date.
This confidence is a byproduct of a global decline in anti-bribery and corruption (ABC) enforcement actions, particularly those related to Foreign Corrupt Practice Act (“FCPA”) investigations. The U.S. Department of Justice and the U.S. Securities Commission filed enforcement actions against six companies in 2021 compared to 11 in 2020. The number of fines also decreased in 2021. The average fine was USD 70.5 million in 2021, whereas it was USD 533 million in 2020, which represents over a 90 percent decrease. 1 Most of the FCPA-driven prosecutions were linked to small or privately held companies or politically exposed persons who received bribes, which differs from prior prosecutions targeted at large multinational corporations. Despite this overall decline in enforcement activity by U.S. regulators, Latin America has maintained its position as the top region for the number of companies implicated in FCPA-related bribery schemes.
Of the Latin American respondents who did not rate their ABC compliance programs as effective or highly effective (31%), they cited program gaps found during internal (47%) and external (26%) audits, exposure to data breaches (44%), and being subject to ABC enforcement action (61%) as the leading causes.
According to 2021 Transparency International’s Corruption Perception Index, there were no changes in Brazil’s CPI score between 2020 and 2021, as it remained at 35/100 with a 96th rank out of 180 countries. The same happened in Mexico, whose CPI stayed at 31/100 and kept the ranking as 124/180 in 2021.2 Although the perception of corruption remained unchanged, compliance professionals in Brazil and Mexico were the ones who demonstrated the highest concern for future regulatory changes (71% versus 58% globally). Most dramatically, geopolitical risks were cited as the reason for this concern among 39% of Latin American respondents, compared to 26% globally. Among other potential concerns for upcoming regulatory enforcement and changes for 2022, Latin Americans ranked increased enforcement activity (55%) and stricter and increased regulatory environment requirements and legislation (48%) as other top concerns.
The region has been developing its ABC programs, policies and procedures, and ways to prevent and detect bribery allegations and corrupt activities, which have been proven to be effective via internal and external audits. However, for respondents now preoccupied with regulatory developments, 37% of respondents in the region identified anti-money laundering and counter-terrorism finance as a top priority for compliance program improvements compared to a global average of 21%. Other main concerns included anti-bribery and corruption (28%) and sanctions (18%).
In Brazil, this may be due to new anti-money laundering regulations established in Brazil in recent years by the Brazilian Securities Commissions (ICVM 617) 3 and updates to regulations by the Central Bank of Brazil on financial institutions or authorized institutions (Circular 3,978/2020). 4 The latter includes additional guidelines for onboarding documents required for know-your-customer (KYC) data, including each customer’s identification, qualification and classification to build a risk profile with an understanding of the business activities to identify the source of funds. Both regulations also require the implementation of effective AML programs, KYC procedures and ongoing monitoring. These recent Brazilian AML developments could cause AML to be the primary (73%) program that Brazil respondents said they were implementing because of regulatory changes. Of those implementing AML programs, 73% of respondents commented that they were enacting internal or external systems that apply risk assessments during the onboarding process, which respond to the higher requirements for KYC onboarding in Brazil, and 37% advised that they were going to implement additional AML training for their staff.
In Mexico, executives primarily focused their regulatory-related program improvements on ABC. This focus may be reflected in how they are responding to the U.S. Strategy on Countering Corruption and the EU 6th Anti-Money Laundering Directive. They are prioritizing top-to-bottom compliance program reviews (50%) and preventative compliance cultures (47%), and they are measuring whether their ABC framework is effective (41%). The relatively high focus on preventative compliance cultures in Mexico could be influencing how confident respondents are in their program, as they rated factors contributing to strong compliance cultures higher than in other regions. In particular, respondents said their compliance processes are adapted to local market cultural nuances (86% versus 73% globally), there is a clear message from the top of the organization that compliance and accountability are important (90% versus 80% globally), and their companies respond to risk management incidents in a consistent manner (88% versus 77% globally). Unlike Brazil in recent years, Mexico has continued to see slow progress or regression in combatting corruption through legislative and judicial reform. Effective compliance programs in Mexico–particularly those with international investors, customers and suppliers–are designed to meet requirements from both foreign and local regulators.
In particular, respondents in both Mexico and Brazil showed alignment with other regions in their use of certain compliance activities, including conducting due diligence on third parties (70% versus 73% globally). Due diligence has maintained its prominence in compliance programs because most FCPA investigations detected improper third-party relationships over the last decade. Cross-border investigations identified that companies may have hired third parties without knowing the beneficial ownership, local reputational risks, political exposure and the use of illicit business activities to secure government contracts.
One of the main methods used by Latin American compliance professionals to evaluate third-party risks includes face-to-face interviews with third parties, which is much higher than the global average of 38%. This may be attributed to the Latin American cultural aspect of relationship building before engaging in business activities, which was highly impacted with travel limitations during the pandemic. However, although this is the preferred method, compliance professionals adapted and used other methods for assessing their business partners. These methods included the use of electronic onboarding risk questionnaires (44%) and risk-based due diligence (40%) in the region. However, the use of screening tools was ranked lowest in this region across global respondents–only 33% of Brazilians and Mexicans advised that they used screening solutions compared to the global percentage of 47%.
Confidence in compliance programs will continue to be key over the next 12 months in Latin America. The region is emerging from the pandemic hopeful for continued economic recovery, with 85% of Latin American survey respondents expecting their businesses to perform better in 2022 than in 2021. Robust compliance programs, particularly those that incorporate environmental, social and governance factors, and the fight against corruption will be crucial for the region to capitalize on foreign investment that is seeking new markets following geopolitical conflict in Eastern Europe. While potential political upheaval in certain countries such as Brazil makes the future of regulatory enforcement uncertain, Latin American compliance professionals have a reason to believe they will be able to stay resilient if they continue their commitment to measuring third-party risks, providing compliance training and focusing on their cultures of integrity.
3 https://conteudo.cvm.gov.br/legislacao/instrucoes/inst617.html; https://www.anbima.com.br/data/files/10/77/E6/2E/9C7B8710F6C40787882BA2A8/ANBIMA_Guide_PMLFT_english.pdf