Internal Investigations in the Financial Market: Anti-Corruption and Regulators in Brazil
Priscila Copi
Senior Executive | Legal | Compliance | Risk | Audit | Independent and Self-Regulatory Board Member
Inspired by the episode of Tom Fox's podcast I recently listened to (I recommend it to anyone who hasn't heard it), and the experience I've gained over the years, I decided to write about best practices for conducting internal investigations.
I highlight the importance of improving companies' Compliance programs and recommend a book that is a complete guide for every compliance professional (the latest edition I'm still reading, but I've read previous editions) written by Tom Fox.[1]
The important thing about internal investigations is that the whole process is carried out in such a way as to guarantee the confidentiality of those involved, but that there is a guarantee that the process is transparent and impartial.?
The Components of the Investigative Protocol
The investigative protocol can be structured around five main pillars:
1.????? Opening and categorizing the case: once a possible violation has been identified, the relevant individuals are notified, including the investigative team and senior management. The initial categorization will determine the path of the investigation.
2.????? Planning the investigation: this stage involves essential tasks such as document review and interviews. Measures such as copying hard drives or quarantining documents should be considered and need to follow strict rules so that they can be used as evidence if necessary.
3.????? Execution of the investigative plan: during execution, it should be ensured that interviews are only carried out after a thorough review of the relevant documents and that they follow an order that makes sense for the investigation.
4.????? Monitoring the investigation: After the initial collection of the investigation, the preliminary results should be evaluated and reviewed, checking whether there are any points that still need to be clarified, whether all the documents/evidence have been correctly stored, in order to prepare for the closure of the case.
5.????? Closing the case: The results are communicated to the stakeholders and the final report is completed. The suggested timeframe for closing the case is determined by the complexity of the case and the direction of the investigation defined in the first item here. All the steps taken should be documented in detail, promoting consistency of the investigation and materiality to eventually provide to authorities or regulators.
Importance of a Uniform Protocol
Tom Fox emphasizes the importance of a documented protocol to ensure consistency between investigations carried out by different teams, such as Compliance, internal audit, and others. A well-defined protocol helps mitigate inconsistent results, especially in multinational organizations, where uniformity is crucial.
However, in my professional experience, I would stress the importance of understanding local cultures and adapting to the needs of the head office. It is crucial to recognize that what is permissible and legitimate at the headquarters may not always be applicable to the other subsidiaries, particularly when it comes to the execution of investigations.
In this regard, it is imperative that executives involved are well supported by the local legal team and that there is constant alignment with the headquarters to ensure the consistency and uniformity of protocols, even in the face of differing laws and regulations.
Legal Aspects in Brazil: Anti-Corruption Law
Law No. 12.846/2013, also known as the Anti-Corruption Law, is a critical regulatory framework for preventing and combating corruption in Brazil. This legislation establishes the administrative and civil liability of companies involved in practices harmful to the national or foreign public administration.
A key component of the law is the requirement for organizations to implement comprehensive integrity programs. These programs must include measures such as codes of ethics, employee training, whistleblowing channels, and investigative protocols for investigating possible irregularities. Adopting these measures not only reduces the risk of involvement in illicit practices but can also be considered a mitigating factor in the context of applicable sanctions.
The legislation also provides for severe penalties, including fines of up to 20% of the company's gross annual turnover or, if this figure cannot be ascertained, up to R$60 million. Furthermore, companies may face additional consequences, such as the public disclosure of the condemning decision and a prohibition on doing business with government entities.
A notable instance of the Anti-Corruption Law's application was the case of the company Odebrecht Ambiental, which entered into a leniency agreement concerning irregularities in contracts with municipal administrations. This agreement facilitated the recovery of the embezzled amounts and encouraged the implementation of strict compliance measures within the organization.
This case demonstrates that the consequences of corruption extend beyond financial loss, encompassing reputational risk. The company's name is exposed, and even if the decision is later reversed, the stain of the conviction remains, further damaging its reputation.
In this regard, Law No. 12.846/2013 has played a crucial role by strengthening transparency and promoting an ethical and sustainable business environment in Brazil. However, its success is equally contingent on the efficiency of the legal system.
Bacen regulation
The Central Bank of Brazil (Bacen) has established Circular 3.978/2020, which governs measures to prevent money laundering and terrorist financing. Regulated companies must implement robust structures to identify, analyze, and report suspicious financial movements. These structures require a clear and transparent investigative protocol. Additionally, Bacen emphasizes the importance of comprehensive documentation to effectively monitor financial risks.
The Bacen utilizes various methods to ensure that financial and related institutions adhere to the established regulations, thereby safeguarding the integrity of Brazil's financial system. One such approach is the intrusive inspection, which is grounded in a comprehensive regulatory framework.[2]
Intrusive inspection is characterized by a more in-depth and rigorous approach, aimed at identifying and mitigating risks associated with financial irregularities. This type of inspection goes beyond document analysis and includes face-to-face visits, detailed audits and direct interactions with the senior management of financial institutions.
In recent years, the Central Bank has intensified its inspections in order to identify atypical transactions and suspicious behavior in various financial institutions:
1.????? Investigation into the financing of irregular operations in the credit market: institutions reported fraudulent operations involving the granting of credit to front companies.
2.????? Analysis of cross-border transactions: identification of misuse of purpose in foreign exchange transactions, with signs of currency evasion.
3.????? Use of digital platforms for financial fraud: supervision of fintechs involved in suspected misuse of customer data and facilitation of illegal transactions.
This integrated approach strengthens the security and confidence of the national financial system, promoting economic stability and customer protection.
CVM regulation
The Brazilian Securities and Exchange Commission (CVM) has established regulations, including Instruction 607/2019, which governs the procedures for investigating infractions by publicly traded companies and other regulated entities. A key aspect of these regulations emphasizes the requirement to report identified irregularities to supervisory bodies and the obligation to ensure the rights of whistleblowers and those investigated during the process are protected.
The Commission has detailed procedures for investigating infractions in the capital markets, as established by CVM Instruction 607/2019. This instruction delineates the phases of the administrative sanctioning process, including the pre-sanctioning phase, where evidence of irregularities is investigated.
While the CVM maintains the confidentiality of ongoing proceedings to safeguard the integrity of the investigations and the rights of those involved, some decisions have already been made public. Please find below two examples of administrative sanction proceedings conducted by the CVM:
Summary: This case involved XP Investimentos and its director, in an accusation of "front running", a practice where professionals carry out operations for their own benefit before executing client orders, using inside information.
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Conclusion: The CVM decided to impose a fine on XP Investimentos and its director, due to the seriousness of the infraction and the damage caused to the capital market. The infraction was considered serious, since it compromised transparency and trust in financial market operations .[3]
2.????? CVM Administrative Sanctioning Proceeding No. 19957.011029/2019-64 - ModalMais brokerage case
Summary: The case investigated irregularities related to the inadequate provision of information to the CVM by the broker ModalMais. The accusation constituted a hindrance to CVM supervision and a violation of transparency obligations in the financial market.
Conclusion: The board's final decision resulted in penalties for ModalMais, reinforcing the importance of collaboration with regulators and maintaining transparency in the market. The broker had to adopt corrective measures and adapt its compliance practices to prevent future irregularities.[4]
These examples demonstrate the application of punitive and corrective measures by the CVM, showing how the commission acts to preserve the integrity and transparency of the financial market. In both cases, it seems that the companies did not investigate the matter internally.
These cases illustrate the CVM's role in maintaining the integrity of the Brazilian capital market, showing that penalties are applied in proportion to the infractions committed
SUSEP regulation
The Superintendence of Private Insurance (SUSEP) has regulations aimed at inspecting irregularities in the Brazilian insurance market, such as CNSP Resolution 382/2020. Investigative protocols must guarantee good governance, fraud prevention and transparent communication with stakeholders and regulatory bodies. Irregularity reports need to be detailed and properly stored for future audits or investigations.
The Superintendence of Private Insurance (SUSEP) has intensified its inspection and investigation activities in the Brazilian insurance market, as evidenced by recent measures and studies.
1.???? Fine on PricewaterhouseCoopers (PWC) and its auditors: In October 2024, the Brazilian insurance regulatory authority, SUSEP, imposed substantial fines on PWC and its auditors for conducting inadequate audits of the financial statements of IRB Brasil Resseguros S/A (IRB). The infractions involved the approval of 2019 financial statements that presented inconsistencies and relevant distortions, such as the overvaluation of assets and the artificial increase in the company's liquidity sufficiency. The total amount of the fines imposed exceeded two million reais. In addition, the cases were referred to the Federal Public Prosecutor's Office (MPF) for the potential investigation of criminal activities and to the Securities and Exchange Commission (CVM) for information regarding the decision.[5]
2.???? Public consultation on authorization procedures: In December 2022, the SUSEP initiated a public consulting process to discuss procedures related to the authorization, approval, and communication of corporate acts, in accordance with CNSP Resolution 422/2021. The proposed draft circular aims to systematize and streamline the processes, deadlines, and documentation applicable to operations involving supervised companies, reinsurance brokers, and international reinsurers. [6]
3.???? Public Consultation on Administrative Inquiry Rules: In January 2024, SUSEP published Public Consultation Notice No. 11/2024 regarding the procedural rules of the administrative inquiry. This initiative aims to improve the authority's investigative procedures, ensuring greater transparency and efficiency in investigations. [7]
These actions reflect SUSEP's commitment to ensuring the integrity and transparency of the Brazilian insurance market, promoting effective governance and fraud prevention.
Real Case: Investigation into a Listed Company
In 2024, a case that gained prominence was the investigation involving the company Azul S.A., listed on the Brazilian Stock Exchange (B3), for accounting irregularities. The investigations, conducted under the supervision of the CVM and the Internal Revenue Service, examined inconsistencies in its financial reports. The company cooperated fully, adjusting its reports and applying corrective measures, demonstrating the importance of an effective investigative protocol in ensuring market confidence.
Handling of Investigations by Self-Regulators
Entities such as BSM Supervis?o de Mercados and ANBIMA establish rules of conduct for the financial sector, demanding detailed reports and ethical practices from participating institutions. In addition to supervising participants, these organizations reinforce the adoption of investigative protocols that guarantee integrity and traceability throughout the process, strengthening the Brazilian market against fraud and deviations.
Communication to Authorities and Regulators
In compliance with Brazilian laws and regulations, such as the Anti-Corruption Law (12.846/2013), Bacen Circular 3.978/2020 and CVM Instruction 607/2019, it is essential that significant irregularities are reported to the competent authorities within regulatory deadlines. Normally, these communications should take place within 30 days of the irregularity being identified, ensuring transparency and collaboration.
Failure to communicate can lead to more severe sanctions, while meeting deadlines and sending detailed information helps to reduce penalties, in accordance with the principle of good faith recognized by Brazilian law.
Conclusion
This episode highlighted the significance of investigative protocols as a crucial component of effective compliance programs. In addition to the five fundamental components presented, crucial aspects of Brazilian legislation were addressed, such as the Anti-Corruption Law, the regulations of Bacen, CVM and SUSEP, and the role of self-regulators in the financial market. We also examined a real-life case involving a company listed on B3, emphasizing the impact of robust investigation practices on maintaining organizational trust and integrity.
It is evident that companies that proactively cooperate with investigations demonstrate a strong ethical commitment, thereby fostering the trust of regulators and the market. However, it should be noted that this culture remains underdeveloped in Brazil. There is a considerable gap to be filled in demonstrating to the board the necessity of reporting to the authorities.
Consistency, transparency and adequate documentation remain central to the success of corporate investigations in Brazil and around the world.
[1] The Compliance Handbook: A Guide to Operationalizing Your Compliance Program, 5TH edition, LexisNexis.
[2] CMN Resolution No. 4,557/2017: Provides for the risk management structure and the implementation of a compliance policy.
Bacen Circular No. 3,978/2020: Establishes procedures related to the prevention of money laundering and terrorist financing (PLD/FT).
CMN Resolution No. 4,693/2018: Defines criteria for risk-based supervision.
Bacen Circular No. 3,461/2009: Regulates oversight within the Brazilian Payment System.
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Inspetor na Comiss?o de Valores Mobiliários
1 个月Priscila, really apreciated tha article. Thank you for publishing it!
The Voice of Compliance*Founder of The Compliance Podcast Network*Evangelizing for and Serving the Compliance Community
1 个月I may have inspired Priscila Copi but she took that inspiration and ran with it. Great piece and thanks for the shout out.