Operation "Weak-Flesh" is launched in Brazilian Market

Published 25 May 2017

The recent Federal Police investigation into Brazil's meat market reinforces the importance of D&O insurance.

On 17 March 2017, the Brazilian Federal Police initiated a search-and-raid operation to investigate several food processing companies accused of bribing officials from the Ministry of Agriculture to obtain health certificates for their plants and products. It is alleged that the companies sold, in both national and foreign markets, out of date meat and meat tainted with chemicals to mask its poor quality.

The so-called Operation “Weak-Flesh” (Carne Fraca, in Portuguese) started in 2015, after a complaint by an agriculture inspector to the Federal Police. He was suspicious having found irregularities in a meat plant located in Paraná and he reported his findings to the Ministry of Agriculture. However, instead of further investigating the matter, he alleges that the local Superintendent removed him from office.

Investigators believe that government officials from the Ministry of Agriculture and politicians led the corrupt scheme, having subordinates among the agricultural Superintendence of other states, such as Paraná, Minas Gerais and Goiás. Around 33 officials have been suspended.

More than 20 meat processing companies are being investigated for unhygienic practices, including the giants BRF (the world's top poultry producer) and JBS (the world's largest beef exporter). About 46 executives from the Brazilian largest food processing companies have had their phone conversations intercepted, their bank and tax accounts investigated, and their assets frozen up to a total amount of BRL1bn.

In addition to the civil actions, the Federal Prosecutors’ Office has also commenced criminal proceedings, prosecuting 60 individuals for corruption, fraud, prevarication and criminal association.

One of the main issues being debated is that, as the operation was progressing, some of the preliminary conclusions from the Federal Police were widely and hastily spread by the press. Allegations about the quality of the meat, including the addition of potentially cancerous chemicals and cardboard during the production process, have had a direct impact on sales in the local market and exports. Also, the investigation appears to lack documents to support the culpability of all the directors and officers in charge of the involved companies, and of the 38 arrests, only 24 remain under preventive detention. Notwithstanding these issues, the Federal District Court of Paraná accepted, on a preliminary basis, the charges presented by the Public Prosecutors on 25 April 2017 against 59 defendants.

All these developments highlight the importance of D&O insurance in Brazil. After Operation “Car-Wash” (Lava Jato, in Portuguese), the claim rate increased by around 50% in one year. This has led to an expansion of the demand for financial lines products and to a hardened D&O insurance market with higher premiums.

Once again, as a result of Operation “Weak-Flesh”, managers, directors and officers of all Brazilian companies are aware of the high risks of management misconduct and having their personal assets frozen. All executives accused of criminal conduct have needed legal advice from specialist attorneys to guarantee their release from jail or protect their personal assets.

For these reasons, the D&O insurance market continues to grow in Brazil. Coverage of defence costs enables directors and officers to run a proper defence; vital in cases where they have no responsibility for the acts under criminal investigation. Cover will however always be subject to the relevant authorities concluding at the end of any investigation that there was no misconduct.