The Importance of Anti-Corruption Models in Chilean Subsidiaries

Foreign companies operating in international markets need to be aware of how to manage the risk of corruption within their subsidiaries. Regardless of the parent companies’ size, many companies enter new markets with limited staff, limited oversight, and limited knowledge of local laws.  This is particularly true in Latin America where operations can be far from the head office meaning local staff are often working with limited oversight.  

For this reason, it is important that foreign companies place importance on establishing anti-corruption programs within their foreign subsidiaries to ensure that their local staff are adhering to local and international laws. Corruption has many faces. In the largest of cases, it involves bribes of substantial amounts. In most situations though, it is actually small amounts and is limited to the actions of a select few within the company.

Why is it important in Chile? 

Chile is known internationally as a relatively safe and anti-corrupt country but there are still many practical situations that come up on a daily basis that have consequences for companies who may not be aware of how new laws introduced since 2009 establish criminal offenses for actions that were previously not considered.

In addition, companies supplying the mining industry are increasingly being asked to show that they have procedures and anti-corruption programs in place in order to be rewarded contracts.

What are considered criminal offenses under Chilean Law?

• Money Laundering – Anyone who in any way hides or disguises the illicit origin of money.
• Reception – Whoever acquires, possesses, has or uses illicit goods, for profit, when at the time of receiving them they knew of their illicit origin.
• Financing of terrorism – Anyone who by any means, directly or indirectly, requests, collects or provides funds that support terrorism
• Unfair Administration – When a person who is responsible for safeguarding or managing the assets of another person or company does harm by exercising powers that are deliberately contrary to the interest of the owner of the affected asset(s).
• Incompatible Negotiation – When a director or manager of a company has direct or indirect interest in any negotiation, action, contract, or operation where that person would personally benefit from the outcome.
• Bribery of a national or foreign public official – When a person offers, promises or gives an economic or other benefit to a third party to carry out an action or incur an omission with a view to obtaining or maintaining any business or undue advantage.

The first three criminal offenses have traditionally been known but the last three which were introduced since 2009 have practical considerations that arise during the day-to-day business of companies.

• As an example of unfair administration, many companies rely on their foreign management teams to manage their local assets but what happens when they are used for the personal benefit of a local manager or employee. For example, an idle machine is rented to a third party and local managers pocket these profits.
• As an example of incompatible negotiation, what happens if a subcontractor is selected for a project, and the managers / employees take a kick back for rewarding them the contract. This could also include when a manager or employee has interest in another company, and said company is rewarded a contract even when they offer conditions worse than those of the other participants.
• As an example of bribing public officials, what happens if a manager or employee provides an extravagant gift such as a vacation to a public official. Bribery in many cases is not millions of dollars but more commonly gifts to officials or their families in exchange for something.

What are the legal consequences? 

• Dissolution of the local company (except for State Companies or those who provide public utility services with serious consequences for their interruption).
• Partial or total prohibition to enter into contracts with public entities (2 to 5 years).
• Partial or total loss of tax benefits (20% to 100%).
• Fines for tax benefits (200 UTM to 300,000 UTM).

In addition to the legal consequences, corruption has a significant reputational impact on the parent company. It can prevent companies from doing business with other international companies or public entities. The Chilean mining industry for instance has taken significant steps to ensure suppliers within its ecosystem are of the highest standard requiring them to demonstrate preventive models.

Why are anti-corruption programs and models important? 

An anti-corruption program is important to a company because it lays out policies and procedures to help prevent corruption, as well as policies and procedures to remediate any issues that arise. Even more importantly, it can also help to mitigate a company’s liability if corruption happens within its ranks.

It is not enough to simply have anti-corruption policies. Companies need to put in place procedures, training, and oversight to ensure these policies are adopted and followed.

Conclusion 

Corruption has practical aspects that go beyond the large bribery cases that we see in the news. There are many day-to-day situations that arise for managers and employees which are considered criminal offenses. These situations are often not understood by employees as they traditionally were not criminal offenses. It is the responsibility of the company to ensure staff are clear on what is acceptable and what is not.

The risk for foreign companies is that they often have less oversight of their foreign subsidiaries and staff than in their home countries. In order to combat this, companies need to place importance on establishing preventive models that ensure their subsidiaries and employees are following local and international laws. It is the first step to protecting the company, especially if something happens, so that the company can show it was not complacent in its efforts.

In future blogs, we will discuss in more detail what these anti-corruption models should look like and how they should be implemented.

Ax Legal helps foreign companies to enter and operate in the Latin America. Our team of legal and commercial advisors have a distinguished track record of helping foreign technology and services companies at each stage of their growth. Over the years, we have worked with starts up, mid-size businesses, and publicly listed companies. The one common factor that connects are clients is that they are leaders in their field, providing innovative technologies and services to the industrial sectors.

To better understand how we can support you in the Region, please contact Cody Mcfarlane at cmm@ax.legal