Brazil: Bill Modifying the Administrative Improbity Law is Sanctioned

On October 25, 2021, the president of Brazil, Jair Bolsonaro, sanctioned Bill No. 10,887/2018 (converted into Law No. 14,230/2021). The new law implements several changes and loosens some of the provisions included in Law No. 8,429/1992 (“Administrative Improbity Law”), which regulates and sanctions the conduct of public officials who: (i) violate the public administration principles; (ii) cause damages to the public treasury; and (iii) unlawfully increase their wealth by taking advantage of benefits from the position they hold, based on the practice of acts of administrative improbity, according to paragraph four of article 37 of the Brazilian Federal Constitution.

Law No. 14,230/2021 substantially changes the Administrative Improbity Law, with 23 of the 25 articles of the law being altered. Among the changes implemented, we highlight the main ones:

i. Only intentional conducts will be classified and sanctioned as acts of administrative improbity. Therefore, the culpable modality was suppressed. This change is aligned with recent decisions of the Brazilian courts, who already required at least serious fault for the sanction to be applied (for example, Special Appeal (Recurso Especial) No. 1,713,044-SP, in the Superior Court of Justice, as well as the Injunction in the Direct Unconstitutionality Action (Medida Cautelar na Ação Direta de Inconstitucionalidade) No. 6,678-DF, in the Federal Supreme Court);

ii. The requirement of specific intention in the improbity acts arising from failure to comply with the law for access to information has been excluded;

iii. The sanctions of the Administrative Improbity Law will not be applicable to the legal entity if the act of administrative improbity is also sanctioned as an act against the public administration under Law No. 12,846/2013 ("Anti-Corruption Law");

iv. Nepotism (including cross-nepotism¹) up to the third degree for positions of trust and the personal promotion of public officials in acts, programs, works, services or campaigns of public agencies were inserted as new types of improbity misconduct;

v. The awarding of defeat fees in the event that the lawsuit is dismissed has been reserved only for cases of proven bad faith;

vi. The new text no longer exemplifies conducts considered to be a violation of the administration principles (article 11) but defines in a restricted list what can actually be considered an improbity act;

vii. The period of suspension of the public official's political rights has been increased from eight to 10 years to up to 14 years;

viii. The statute of limitations to file the lawsuit to enforce the sanctions is now eight years, counting from the occurrence of the fact or, in the case of permanent violations, from the day on which the permanence ceased. In addition, the text included the interim statute of limitations;

ix. The phase of prior defense was abolished;

x. The law admits acts of administrative improbity of less offensive potential, which are only sanctioned with a fine (without prejudice to the restitution of the damages and the disgorgement);

xi. In the cases of unlawful enrichment and damages to the public treasury, the sanction of losing the public position will only affect the position of the same quality and nature of the one the public official or the politician held at the time when he/she committed the infraction. For example, in the case of a mayor convicted for improbity and sanctioned with a fine—who, currently, holds the governor's office—there will be no loss of position. The same applies to a senator who was the target of the lawsuit during his mandate as a representative. However, in exceptional situations, there is a possibility that the judge extends the sanctions to other positions, considering the circumstances and gravity of the improbity act;

xii. The term for the inquiry has been increased to one year, extendable for another year only one more time;

xiii. The Public Prosecutor's Office now has the exclusive right to file the improbity lawsuit, excluding the injured party as plaintiff;

xiv. The liability of partners and company directors and officers was limited to their participation in the misconduct. It is now necessary to demonstrate their effective participation in the practice of the unlawful act and in the benefits gained therefrom in order for them to be subject to sanction;

xv. The successor liability for acts of improbity is limited to the restitution of the damages up to the total amount of the assets transferred. The other sanctions are not extended;

xvi. The prohibition to contract with the public administration must be included in the National Register of Disreputable and Suspended Companies (Cadastro Nacional de Empresas Inidôneas e Suspensas), considering the territorial limitations included in the judicial decision. Only in exceptional cases and for relevant and duly justified reasons, this prohibition may be extended to other public entities, besides the injured party;

xvii. For acts of administrative improbity that violate the principles of the public administration, there must be significant damages for them to be subject to sanction;

xviii. In the case of conviction of legal entities, the economic and social effects of the sanctions must be observed in order to enable the maintenance of their activities;

xix. There may be a request to freeze assets of the defendants, in order to guarantee the full restitution of the damages or of the wealth resulting from the unlawful enrichment. This freeze, however, is limited to the assets that secure exclusively the restitution of the damages and cannot levy on amounts to be paid as a fine or amounts that represent an increase in wealth resulting from lawful activities;

xx. It is possible to pierce the corporate veil for the sanctions, including in order to reach and freeze assets from third parties; and

xxi. The new law recognizes that the sanctions for administrative improbity acts are of an administrative nature and that they must be compensated with other sanctions that may have been applied in other spheres.

As a result of the changes implemented, considering the exclusive legal standing of the Public Prosecutor's Office to file improbity lawsuits, a large number of cases in progress must be reviewed within 12 months. If the Public Prosecutor's Office does not express interest in taking charge and continuing these ongoing lawsuits, they will be dismissed.

It is also important to highlight that the proposed changes kept in the law the possibility for the Public Prosecutor's Office to execute civil non-prosecution agreements ("ANPC") in cases of administrative improbity. In relation to the ANPC, the law detailed some requirements for the agreement to be executed, in particular (i) the hearing of the injured federative entity; (ii) the approval of the ANPC by the Public Prosecution's Office's body competent to assess the filing and dismissal of civil inquiries, if the ANPC is concluded prior to the filing of the lawsuit; and (iii) judicial homologation, regardless of whether the ANPC is concluded before or after the filing of the administrative improbity lawsuit.

¹ This is the case when a public official appoints a relative of another public official to a position, while this second public official appoints a relative of the first one to a position. In other words, it is an exchange of favors between public officials as to appointing relatives.