Odebrecht and Embraer fines bring D&O insurance market into focus once more in Brazil

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Odebrecht and Embraer fines bring D&O insurance market into focus once more in Brazil

Published 8 febrero 2017

In what seems to be a never ending spiral of scandals and shocking revelations, there have been a number of significant recent developments in the corruption investigations gripping Brazil and its political class.

In late December 2016, the long running Operação Lava Jato (Operation Car Wash) saw Odebrecht, the construction firm, and Brazilian petrochemical firm, Braskem (which is jointly owned by Odebrecht and Petrobras), agree to pay a total across the group of at least US$3.5bn to the authorities in the US, Brazil and Switzerland for bribery across the globe, including to Petrobras officials. The DOJ has stated that this is the largest foreign bribery case yet.

In October 2016, Embraer, the Brazilian aircraft manufacturer, agreed to pay US$205m in fines to the Department of Justice ("DOJ") and the Securities and Exchange Commission ("SEC") in the US in order to settle a bribery FCPA investigation involving aircraft sales to Saudi Arabia, Mozambique, India and the Dominican Republic. Embraer was also fined US$20m by the Brazilian authorities.

FCPA extraterritoriality and international cooperation

The global trend in regulatory enforcement has been driven by the US authorities embracing the notion of extraterritoriality to mount enforcement actions against foreign entities. International companies might not be fully aware of how easy it is to fall foul of US regulation and legislation. Trading shares in the US, issuing American Depository Receipts and even an email thread sent via a US server or payments routed through a US bank expose companies to US laws and enforcement.

The US regulatory action against Odebrecht and Embraer represents the latest example of internationally coordinated bribery investigations. Embraer will be able to offset the Brazilian fine against its SEC payment. Whilst the US does not recognise international double jeopardy in this respect, such co-operation will lead to better relations and passage of information between the two countries1.

Leniency agreements

In addition to promoting multijurisdictional cooperation, the US and Brazil encourage companies to self-report violations in exchange for lesser penalties and deferred prosecution agreements ("DPAs"). In Brazil, the Office of the Comptroller General and the Federal Public Prosecutors' Office can enter into leniency agreements with legal entities that have bribed foreign public officials.

By contrast, in the US, the FCPA does not require self-reporting. However, under US securities laws, including the Sarbanes-Oxley Act ("SOX"), corporations are sometimes required to disclose improper payments or internal investigations into improper payments, thereby effectively notifying or reporting to the government. Following the enactment of SOX, the number of voluntary disclosures of actual or suspected FCPA violations have increased sharply.

D&O insurance market

The increasing level of enforcement is an important development for D&O insurance, both in the US, and also in countries where business relationships with US entities exist or are in contemplation. Whilst a typical D&O insurance policy would not cover FCPA fines, defence costs or follow-on civil litigation by shareholders would usually be covered under most policies, depending on the wording.

Nevertheless, the D&O market is soft and premiums are constrained. Overcapacity in this sphere and the entrance of new players prevent the market from hardening. In this landscape, D&O underwriters are employing different approaches to maintain their position. As such, both low rates and expanded wordings have become competitive elements for large insurers.

For insureds, reimbursement of legal costs incurred in connection with investigations and enforcement proceedings is increasingly important. There is sustained pressure on underwriters from insureds to broaden terms, and policies are changing to capture the post-crash regulatory and conduct agenda and cover not only defined costs of civil and criminal challenges, but also the cost of FCPA investigations. However, it is important for insureds to be aware that the costs of internal investigations initiated by the insured itself may not be covered under the D&O policy. In order to identify issues and effectively self-report many large listed companies employ teams of external consultants from law firms and forensic accountancy practices at substantial cost, but it is doubtful that these professional fees would fall within the conventional definition of defence costs in many cases.

By contrast, other carriers are now stricter with D&O policy wordings or increasing premiums where possible. With an eye toward FCPA exposure and corruption investigations, prudent underwriters are scrutinising, and even barring companies with financial woes or those with business operations in less compliant foreign countries. Insurers are also resisting coverage for insureds that operate in specific risk classes. In another development which signifies a departure from conventional D&O practice, underwriters are providing for indemnification of defence costs only once a final determination has established the D&O's innocence. In other cases, coverage for corruption-related issues is being excluded entirely from policy coverage.

 

1 Globally, off-setting fines in this manner is increasingly common in cross-border anti-corruption cases in order to adhere to international double jeopardy rules and to avoid parallel and/or successive criminal enforcement actions in multiple jurisdictions.

Authors

Key Contacts

William Allison

William Allison

London - Walbrook

+44 (0) 20 7894 6440

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