COVID-19 Fraud Concerns Across Latin America

Companies and individuals must remain focused on compliance and risk mitigation.

BY BRANDT LEIBE,
KYLE SHEAHEN
AND LUKE FIELDS

Business disruptions and opportunist misconduct throughout Latin America related to the shockwave of COVID-19 continue to attract attention from enforcement authorities across the region and in the United States.  As the spread of the virus continues across the Americas, in the below, we have identified recent developments that suggest heightened vigilance is warranted in these unprecedented times.  In particular, we highlight comments made by senior-ranking officials at the United States Department of Justice (DOJ), fraud concerns identified across the southern cone, ongoing reforms to Mexico’s legal regime focused on fraud and compliance, and criminal enforcement actions brought in the United States in as part of ongoing enforcement related to Petroecuador.

U.S. Authorities Continue Enforcement Efforts

Over the last several months, the DOJ has announced increased efforts to combat fraud related to the COVID-19 pandemic, including specific points of focus on price gouging and other predatory practices. These additional priorities supplement DOJ’s continued enforcement activity across the globe, which suggest that the Department is attempting to keep pace with its efforts prior to the virus while adapting to account for pandemic-related misconduct. 

In May, officials who manage foreign bribery investigations at the DOJ and the Securities and Exchange Commission (SEC) discussed U.S. law enforcement’s response to changing workplace dynamics brought about by the COVID-19 pandemic and emphasized that their fraud deterrent and investigative efforts remain in force.  Daniel Khan, a senior deputy in the DOJ’s Criminal Division Fraud Section, said that the ability to meet face-to-face with witnesses has declined, but noted that the substantial portion of DOJ’s enforcement work has continued “because a lot of our work can be done remotely.”  Similarly, Charles Cain, the SEC’s FCPA Unit Chief, noted that the agency is “still send[ing] out subpoenas” and “still interview[ing] witnesses… just not the same way and maybe not as quickly.”  

Technology may make some interactions, like witness interviews, easier to facilitate, but production and processing of data and documents may remain subject to the capabilities of companies to respond to such requests in a remote working environment.  Outgoing Assistant Attorney General for the Criminal Division Brian Benczkowski said in June that the Criminal Division has “seen a slowdown a little bit in the production of evidence from the US and also production of evidence into the US,” and noted that the cause of the slowing is rooted in challenges with processing requests for data and documents, especially when such requests “need to go to third-party providers” who have been impacted by the pandemic.

In addition to bringing new cases, DOJ’s Criminal Division also has issued revised guidance for how it evaluates corporate compliance programs. The July 2020 revised version supplements the original document issued in 2017, as well as changes published in 2019.  Key revisions in the updated document focus on evaluating whether a compliance program is dynamic and constantly improving, the need to make compliance resources easily available to company personnel and third parties, and consistent application of discipline following an investigation.   

COVID-19 Fraud Concerns Across Latin America

Pandemic-related fraud concerns are not just the focus in the U.S.  In April, the Organisation for Economic Co-operation and Development’s Working Group on Bribery reaffirmed its “collective commitment to fight foreign bribery” during the pandemic and said “corrupt business dealings endanger vital public services, which in the health sector could result in out-of-date, harmful, ineffective, or unequal access to medicines and medical equipment. As countries around the world work to combat the outbreak, the OECD Working Group on Bribery [including member nations Chile, Colombia, Mexico, and the United States]… is firmly committed to uphold its obligations to fight transnational bribery in all its forms and across sectors.” 

The OECD’s warnings ring true when considering these recent headlines:

•           In Argentina, prosecutors are probing a purchase order of 15,000 expired N95 surgical masks that cost the capital city of Buenos Aires 10 times their listed price.

•           In Bolivia, the health minister was arrested amid allegations that 170 ventilators were bought at inflated prices. The breathing machines were purchased for nearly $28,000 each, even though their manufacturer said it sold them to a distributor for only $6,500. 

•           In Brazil, police in Rio de Janeiro recently raided the governor’s residence as part of a probe into allegations of embezzlement of public funds earmarked for building field hospitals.

•           In Colombia, 14 of 32 governors are being investigated for crimes related to embezzlement and unlawfully awarding no-bid contracts, among others. 

•           In Ecuador, prosecutors announced they had identified a criminal ring that had colluded with health officials to win a contract selling body bags to hospitals at 13 times the real price.

•           In Peru, prosecutors have opened an investigation into the purchase of protective gear for police officers after subordinates of the Chief of Police and an interior minister bought diluted sanitizer and flimsy face masks for police officers.  Peru’s government reports that more than 11,000 police officers in Peru have been infected and 200 have died of the virus.

Allegations like these are likely to continue across the region as economic upheaval and the pandemic invite financial support from global aid organizations, like the World Bank and the Inter-American Development Bank, as well as national governments to provide Argentina with $300 million in emergency funds, a $29 billion stimulus package in Brazil, and Peru’s $26 billion emergency package, among others.  

Despite COVID-19, Mexico Continues Efforts to Combat Corruption

As Q2 2020 drew to a close, the United States-Mexico-Canada Agreement (USMCA) went into effect and became binding on all three states. For the first time, the tri-nation free trade agreement imposes a uniform commitment to fighting corruption – something that was not included in the prior North American Free Trade Agreement. 

Chapter 27 of the USMCA specifically addresses anti-corruption measures and requires each party to adopt or maintain standards that:

•           prohibit public officials from inviting or taking bribes;

•           prohibit the act of bribing a public official, including a foreign public official;

•           prohibit aiding or abetting corrupt payment-related offenses;

•           require measures on maintenance of books and records, financial statement disclosures, and accounting and auditing standards to prohibit bribe payments; and

•           protect whistleblowers who report corruption to relevant authorities

Chapter 27 also requires parties to encourage enterprises to prohibit or discourage “facilitation payments” to expedite routine governmental action for things like issuing papers or processing papers.  We will continue to monitor potential changes to  the United States Foreign Corrupt Practices Act (FCPA), which currently permits payment of facilitating payments, as the USMCA is implemented.  The Prosecution Bureau Specialized in the Combat of Corruption in Mexico’s Federal Prosecution Office (FGR) recently outlined its plans with respect to corruption-related enforcement as well it its annual submission to the Mexican Senate.   In particular, the FGR intends to propose modifications to several anti-corruption laws, in an effort to strengthen prosecutors and their effectiveness, including to the Federal Criminal Code, the National Code of Criminal Procedures, the Anti-Money Laundering Law and the National Asset Forfeiture Law. 

Corporations should take heed: the FGR has expressly vowed to focus on crimes of corruption committed by companies – which the FGR describes as “the other side” of corruption in Mexico (as compared with individual actors) – and to curtail limitations on liability for companies and their agents and representatives.  To that end, the FGR committed to the creation of a specialized area solely dedicated to corporate corruption.

Mexico, like the United States and Canada, must now implement the obligations of the USMCA.  At a minimum, concrete steps outlining efforts to investigate and prosecute corruption by the FGR, as well as the requirements of Chapter 27 of the USMCA, underscore the extent to which increased scrutiny and heightened enforcement activities will continue in Mexico and the rest of North America. 

Petroecuador Investigation Sweeps In State-Owned Insurer Seguros Sucre

We have previously summarized DOJ’s efforts to prosecute individuals involved in a bribery scheme at Petroecuador, Ecuador’s national oil company, which has resulted in multiple indictments and guilty pleas against individuals in South Florida.  That prosecution has now swept in Ecuador’s state-owned insurance company, Seguros Sucre, and additional charges have been filed against three defendants (including an advisor to an Ecuadorian president and former Seguros Sucre chairman) for their role in a scheme to secure contracts with Seguros Sucre in exchange for bribes. 

The DOJ has charged that, from 2014 to 2016, approximately $1 million of the multi-million-dollar scheme was laundered through US bank accounts.  More than $10 million in commissions allegedly passed through different companies and bank accounts across the globe as part of the scheme.  The insurer has indicated that it will cooperate with investigators if asked to do so.  

Takeaways

Companies and individuals doing business in Latin America must remain focused on compliance and risk mitigation in light of the enforcement efforts described above.  The pandemic has forced companies to move quickly and decisively to confront the exigencies threatening their employees and their businesses.  Such intense pressures can sometimes lead to less scrupulous compliance with and enforcement of established policies and procedures.  However, as enforcement authorities around the world take aim at pandemic-related misconduct in addition to pre-pandemic areas of enforcement, a robust commitment to policies and procedures to avoid regulatory and enforcement scrutiny is more important now than ever. Companies must ensure that procedures are evaluated and updated to reflect the new risk environment and that employees are appropriately educated and trained. 

King & Spalding partners Brandt Leibe and Kyle Sheahen and associate Luke Fields are members of the firm's Special Matters and Investigations practice, Brandt represents clients in investigations and litigation.

They wrote this article for Latinvex.

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