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GIR Analysis: Crisis-Driven Innovation in Brazilian Internal Investigation Practice

In the Global Investigations Review (GIR) article, "Crisis-driven innovation in Brazilian internal investigation practice," Francisco Petros and Thaís Folgosi Françoso at FF Advogados in Brazil and Iris Bennett and Carlos André Galante Grover at Smith Pachter McWhorter in the US examine innovations in internal investigation practices in Brazil spurred by the Covid-19 pandemic, the benefits of change, and provide tips to manage enforcement authorities' expectations.

The Covid-19 crisis is permanently changing internal investigation practice and business environment in Brazil. Of course, investigations in any jurisdiction are leveraging technology more than ever during the current crisis, but the shift occurring in Brazil may be more fundamental. In Brazil, the crisis has required innovation in existing investigation strategies and practices to achieve the greater efficiencies the current crisis demands. As these innovative practices lead to cost savings and efficiencies, a return to pre-crisis practices is unlikely and incompatible with the new business environment. We expect that many of the changes practitioners are already implementing in Brazil to navigate the crisis are here to stay.

Expanding pre-crisis scope of internal investigations in Brazil

Internal investigations strike a balance between being comprehensive while tailored to issues at hand. The complex and high-profile nature of early investigations in Brazil meant that the industry, driven by active enforcement activity, developed in ways that strongly favoured comprehensiveness. Greater weight on comprehensiveness has been reinforced as ever more enforcement agencies (eg, Brazil’s audit court (TCU), the Comptroller General, the Attorney General, the Federal Prosecution Service, the antitrust agency, and Brazil’s Securities and Exchange Commission) with different areas of focus have become increasingly involved in anti-corruption enforcement. This broad perspective has had practical implications on how internal investigations are conducted in Brazil from the planning stages through conclusion. Adding to this

complexity is the fact that this multitude of authorities are also conceiving, structuring and implementing new strategies and approaches, which further requires that companies and internal investigation teams embrace continuous change. The wide range of enforcement authorities, each with their own priorities, means that those conducting internal investigations have to be prepared for often unforeseeable expectations. Many of these agencies are known for their far-reaching and detailed demands for company records. The TCU, for example, will require detailed transactional support from cooperating companies even where the underlying connection to central facts may not be clear.

It is important to remember that contributing to this complexity is the fact that Brazilian authorities’ approach is rooted in their experience and focus on government entities, including state-owned companies, which are governed by strict codes of Brazilian public law and rules.

Furthermore, in our view, cooperation with non-Brazilian enforcement agencies in recent years has been increasingly demanding and detailed in nature. Something we have observed is that non-Brazilian authorities appear to be taking on an even more aggressive approach with respect to accounting and financial controls issues. The US Securities and Exchange Commission (SEC), in particular, has been extremely active in identifying and scrutinising issues of interest. This additional level of scrutiny and extensive demands for company records contributes to the overall growth in scope and cost of investigations in Brazil.

Importing components of statutory schemes from outside Brazil to the Brazilian legal tradition has contributed to increased scale and cost of interactions with authorities, and can present special challenges in the unique context of the Brazilian legal system. A significant example of this is the negotiation of leniency agreements. While normal in common-law jurisdictions such as the United States, leniency agreements are relatively new to the Brazilian legal tradition and when combined with the extensive formality in legal proceedings in Brazil, the result is drawn out and costly negotiations with multiple authorities.

Planning an investigation

More than in other jurisdictions, in our view, in Brazil the burden is on the investigation team to justify why certain lines of inquiry are not relevant. The broad nature of enforcement stakeholder expectations means there is often less of an emphasis on prioritising lines of inquiry based on relative importance to the investigation. Rather than being guided by a strategic focus, investigation findings in this context can be dependent on reviewing a larger set of documents and interviewing a greater number of people at a significantly greater cost.

Investigation management

The scale and complexity of past investigations in Brazil has also led to the development of a group of law firms and consultants engaged in investigation activities that are on par with any in the world in terms of sophistication and capacity. These actors have handled some of the most complex investigations in recent memory and are continuously innovating existing investigative techniques to meet new challenges.

In addition to conducting their work at the highest levels of excellence, they have much to teach others who practise in the field of complex internal investigations.

Increased sophistication and technical capacity among these various actors also led to growing specialisation, however, which can pose practical challenges to managing investigations. Specialisation is important to ensure expert knowledge in highly technical areas, but can lead to fragmentation of investigation team members if goals are not pursued in an integrated fashion. Teams of professionals with different specialisations mean there is a diversity of concepts, priorities and techniques, making it difficult for the team to function as an “orchestra”. The immediate consequence of this can be a significant burden on investigation management and inefficient use of resources trying to establish investigation criteria and priorities. Thus, specialisation can lead to inefficiencies when operating in a team setting.

Innovation during the Covid-19 crisis

The Covid19 crisis has created pressure for new and creative approaches to conducting internal investigations. In particular, the pandemic caused the practices discussed above to be tested and scrutinised more intensely and caused companies to question operational efficiency and investigation costs. Some of the changes resulting from this reevaluation of existing practices will likely be temporary responses to the immediate crisis. Lasting change with respect to how investigations are planned and managed, however, is already taking shape.

Developing a hierarchy of investigation needs and priorities

With respect to investigation planning, one adjustment we have already begun to see is a greater emphasis on establishing an investigation “hierarchy of needs” at the outset. The current climate has provided some limited leeway with enforcement authorities for investigation teams to focus on core issues rather than the more wide- ranging approach demanded in the pre-crisis environment. Rather than engaging in extensive mapping of a company’s organisation and structure, for example, investigation teams are focusing resources on development of the core facts. As the investigation develops, additional mapping may prove necessary, but this additional work will only be undertaken if it proves necessary based on the document review or interviews.

Streamlining this process also requires investigation teams to collaborate more effectively with a company’s internal resources, such as internal audit or compliance, where appropriate. These corporate functions often have built up knowledge that is crucial to making the investigation planning process efficient.

This is a significant change in how investigations have been approached in Brazil in the past. Rather than starting with an all-encompassing approach needed in the past to meet enforcement authorities’ expectations, investigation teams take a more focused view at the outset and build toward a wider perspective, if necessary, as the investigation develops. This provides greater control over costs and helps avoid investigation sprawl. An additional benefit is that early progress in the core fact development can help provide urgent interim recommendations to management on the most crucial topics. As investigation teams face pressures during the current crisis to reduce projected costs and ensure that actual costs match these revised projections, greater control over the investigation’s development has proven essential.

Integrated management of the investigation team

Pre-crisis overspecialisation of investigation team members has given way during the crisis to a greater emphasis on collaboration. Rather than individual consultants pursuing specialised issues, the broader team is taking on greater responsibility for all issues. This can be challenging when everyone is working from home; however, greater use of virtual conferencing, and adjustments to the nature and frequency of team communication make this change possible. This integrated approach also fosters the development of a “common language” amongst the various specialists, fostering an understanding of how the work is being performed as a whole and what objectives are being pursued. This common understanding allows for the most efficient use of resources, both for achieving results and lowering costs.

Communication with cross-border enforcement authorities

The trend towards more intensive scrutiny from non-Brazilian authorities will likely continue to be difficult to manage during the current crisis and in the context of post- crisis constrained budgets. While challenges will likely persist, internal investigation teams in Brazil have begun deploying strategies during the current crisis to manage these demands with some, albeit limited, success. Establishing clearly defined and direct communication channels with non-Brazilian authorities and requesting clarity regarding the scope of non-Brazilian authorities’ inquiries have, in our experience, helped investigation teams manage these relationships in a way that can contribute to keeping investigations focused and on budget. Investigation teams will likely need to use these strategies to an even greater extent during and following the crisis.

Without a direct communication channel, non-Brazilian authorities form their understanding of the facts based on their communications with Brazilian authorities. This is like a bad game of “telephone,” where investigation teams talk to Brazilian authorities who relay their understandings to non-Brazilian authorities. Such an approach creates far too many unknowns. No matter how effective the initial communications with Brazilian authorities, it is impossible to know what they understood from the investigation team’s explanations or how those explanations were relayed to non-Brazilian authorities. We have found that critical elements of the facts, particularly those related to complex financial control and accounting issues, get lost when such an approach is taken. This can lead to additional lines of inquiry and more extensive demands for information from non-Brazilian authorities than is necessary. During the current crisis these inefficiencies are even more unwelcome.

In our experience there have been four factors, in particular, that are key to managing communications during parallel investigation involving Brazilian and non-Brazilian authorities. First, it is important to ensure that information shared is consistent between the various authorities. This not only demonstrates a company’s transparency and willingness to collaborate, it also prevents issues arising from miscommunications with multiple authorities who talk to each other.

Second, it is important to regularly check-in with authorities to ensure expectations and objectives are clear throughout the investigation. New facts, for example, could change the concerns of each authority.

Third, it is important to monitor potential pitfalls and risks associated with discussions with multiple authorities including that there is extensive collaboration between Brazilian and non-Brazilian authorities. This allows the investigation team to stay ahead of any concerns that may develop.

Finally, it is crucial that the company and key internal stakeholders be kept informed about the context, objectives, and process associated with discussions with authorities. In our view, well-informed internal stakeholders who understand the objectives are more comfortable with and encouraging of transparency with authorities.

Potential for a permanent shift in internal investigation practices in Brazil

The current crisis has created a window during which investigation strategies are being revisited. If new strategies are successful at generating efficiencies, it will be difficult to justify a return to the status quo. From what we have seen, there have already been some early positive effects on investigation efficiencies from the strategies being deployed. As a point of comparison, in the US, enforcement authorities have acknowledged in public policy statements that they do not expect companies to “boil the ocean” when conducting internal investigations. While any experienced practitioner will tell you that the “devil is in the details,” and that despite this professed policy there is always a risk of being criticised by enforcement authorities for not doing enough, the measures being deployed in Brazil can be utilised to conduct effective, rigorous, and appropriately focused investigations.

As investigation practices continue to be in flux during the pandemic, it is a good opportunity to level-set investigation expectations with corporate clients and with government authorities. The developments that have been and will continue to take place over the next few months will be important shifts in how investigations are conducted, and in how relations with authorities in multiple jurisdictions are managed. Practitioners should take care to ensure that these developments have positive impacts on investigation efficiencies.

The full article is available here

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