BRAZIL: An Introduction to General Business Law: Campinas & Surrounds

The Importance of Risk Management for Executive Criminal Liability Purposes

In recent years, newspaper headlines have been taken by cases of business crimes involving important players from the most varied sectors of the Brazilian economy. As examples, one can mention the Lava Jato operation, the cases of collapse of the Mariana and Brumadinho dams, and others.

The economic impact for the companies investigated in these police operations was so significant, as was the impact on their reputations, that many of them went into a serious financial crisis, even leading to the judicial reorganisation of some of the companies involved.

In addition to these effects, numerous partners, members of the board of directors, officers and managers were targeted for search and seizure and even for imprisonment, bringing to light the risk of criminal liability for these executives.

This is because, in Brazil, with the exception of environmental crimes, criminal liability is always of the individual. Thus, shareholders, partners, members of the board of directors, executives and employees are exposed and may be held criminally liable for their actions or omissions, or even for those of third parties who may have collaborated in the commission of a crime, in the exercise of business activity.

The risk materialises when these executives are directly involved in an illegal action or when they fail to take measures to prevent the commission of crimes within the company.

Liability of Executives 

At first, the Public Prosecutor’s Office used to consider the position held by the executives for holding them liable for the criminal conduct. This was, in fact, criminal strict liability, which is prohibited by Brazilian criminal law.

Subsequently, after the famous Mensalão corruption case, the theory of the domain of fact was adopted as a criterion for criminal liability of executives.

According to this theory, the perpetrator of the corporate crime is the executive who determines or authorises the criminal practice or has control over the situation that occurred, even if such executive did not act directly – that is, the executive who had control over the situation and could have prevented the criminal action at any time, but did not.

To this end, it was only possible to hold an executive criminally liable if such person were fully aware of what was happening and had the power to stop the criminal practice. If the leader did not have full awareness of everything and the power to interrupt the practice, they could not/should not be held responsible.

However, in practice, awareness of the criminal conduct was presumed, as was the ability to stop it. As a result, executives continued to be held liable, due to the positions they held.

Liability as Guarantors 

Currently, the trend is for the criminal liability of managers to be attributed by omission. In this context, the risk lies in the understanding of the Public Prosecutor’s Office – ie, in a broad sense, because they are managers, they have the duty to prevent any crime committed within the company. Thus, all executives are considered guarantors and, in the case of omission, are automatically held liable as if they had directly committed the crime.

However, for executives to be held liable, even if by omission, they must first have the legal duty to prevent the result of and the ability to interrupt the criminal practice. The mere fact of their being shareholders, members of the board of directors or officers is by itself not sufficient to hold them liable.

The powers and duties that place an executive in the position of guarantor are those related to specific decision-making, such as:

• approving budgets for certain actions;

• the power to appoint or remove officers; and

• the establishment of duties of officers or managers.

This is because these powers highlight the company’s risk management relationship.

For an executive to be held liable by omission, it is essential that one of the following cases be identified:

• when the executive has a legal duty to prevent crime as provided by law;

• when the manager has expressly assumed the duty to prevent the crime – where, for example, in the description of a position there is the duty to supervise certain work and prevent certain risks; or

• when the executive took an action that created the risk of a criminal outcome.

The control relationship that the executive has over the company resulting from legal provision must be consistent with the factual context. Therefore, the mere formal designation in corporate documents is not enough, and the actual assumption of the position is required.

In other words, in addition to one of the three cases mentioned above, it is necessary for the executive to be aware of the criminal practice and have effective conditions to interrupt it.

In large companies where there are several hierarchical layers with multiple delegation structures, there is an expansion of the guarantors; thus, great care is required. In these cases, the duties of each one must be very well described and formalised and, in addition, surveillance and control mechanisms must be established to keep risk within permitted levels.

In the case of a limited liability company, the members with management power, managers or designated managers have a duty to act. Meanwhile, in a corporation, this power is vested in the officers. As for the board of directors, the issue is not yet settled; though the majority understanding is that its members do not have the duties of guarantors, since the board of directors has a macro view of the business.

In Summary 

In order to minimise the risks of unlimited criminal liability in business activities, it is important to effectively and efficiently manage business risks, classifying them into permitted risks and not-permitted risks so as to be accurate in what is expected of an executive who holds the position of guarantor.

The creation of normative acts that outline the duties of each position and its obligations are also extremely relevant, as is the hiring of a compliance officer with the duty to supervise the company and to ensure that all activities are regular and legal, and, in the event of an irregularity, to immediately report such occurrence.