Month: September 2020

Regardless of the fact that Ecuador’s economy is the eighth largest in Latin America and the Caribbean (among 33 countries), Ecuador has amazing potential of business activities in the mining, energy, tourism and agriculture industries. With large natural mineral reserves (in gold, cooper and iron), amazing conditions for the development of energy projects, especially photovoltaic and hydroelectric energy, incredible tourism locations such as the Galapagos Islands, beautiful highlands, and considered to be one of the most bio-diverse countries in the world, Ecuador is also one of the top exporters worldwide of bananas, shrimp, flowers and cacao.

Due to all these interesting factors and many others like a dollarized economy, the government’s current policy has been focused in promoting attractive conditions for foreign investors and working on improving the benefits that were already granted in the Organic Code of Production, Commerce and Investment (COPCI) published in December 2010, but had little or none effect during the previous government (aligned to Hugo Chavez ideology).

The Law of Productive Development, Attraction of Investment, Employment Generation and Fiscal Stability (Investment Law) enacted in august 2018, offers to investors the possibility of obtaining interesting benefits such as: tax exemptions (income tax and currency remittance tax), reduction of custom tariffs, legal stability and entering into arbitration agreements while entering into Investment Agreements with the State, which has given law firms a new scope of work that involves project finance, tax, regulatory matters and contracts.

Furthermore, Ecuador offers investors a dollarized economy and a much more transparent State which has promoted transparency and the implementation of ISO 37001 anti-bribery among its government institutions and companies. These benefits have caused almost a 130% increase in foreign direct investment in comparison to the former government as per studies of the Central Bank of Ecuador.

However, despite the new foreign investors that came in different industries due the favorable conditions of the Investment Law and the effort of the current government to solve the extremely high debt left by the former government (which in addition to other matters caused a division among the elected political party, some in favor of the previous government and some in favor of the actual government), the economy of Ecuador was affected again by a combination of different factors.  These are the social unrest events that occurred not only in the country but also in the Latin American region around October 2019, followed by the oil crisis (price-drop), the damages in the local oil pipelines due to massive landslides and COVID-19.

COVID-19 impact not only revealed the deficit in the country’s health system but also caused the lockdown of the country and the suspension of most economic activities for a couple of weeks. As a consequence, certain small businesses have faced bankruptcy or many other, have had to reduce their production capacity and employment force, generating many opportunities for law firms in debt restructuring, ADR and labor advice, that had to innovate their services to provide legal assistance while working from home.

In addition, Ecuador has upcoming presidential elections on February 2021, and the political scenario is uncertain due to the fact that most of the high public official (President, Vice President and some ministries) of the former government have been prosecuted in relation to corruption allegations, and there is low probability that they can run for a public position. As such, after 14 years of having the same political party in government, there is a high probability of having a different political party achieving the presidency.

Some of the key aspects take into account while deciding to invest in Ecuador are the following:

Key Indicators for 2020 and forecast

Current Business Environment

Tax Regulation

Bellow a brief description of the main taxes applicable to commercial activities in Ecuador:

a) Income Tax

Income tax taxes the rent obtained by persons and local and foreign companies. Under the Ecuadorian law, income refers to:

Income from Ecuadorian source obtained free of charge of from work or capital.

Income obtained from abroad by persons domiciled in Ecuador or by Ecuadorian companies.

The tax basis is the total taxable income, less returns, discounts, costs and expenses deductible and attributable to such income. In general terms, the rate for companies is of 25%.

b) Value Added Tax

Tax on the value of transfer of ownership or import of goods, services, copyrights, industrial property and related rights. A 12% rate is applied over the price of goods and services. Some exceptions may apply to certain goods and services that will be taxed with a 0% rate.

c) Currency Remittance Tax (ISD)

The Currency Remittance Tax (ISD) taxes transfers in cash, through money orders, bank transfers, shipment, withdrawals or any payment of any kind, of currencies sent abroad, with the exception of an account clearing made with or without the intermediation of financial institutions.

The tax rate of 5% is applied over the value of the currency transfer. This tax is declared and paid by the financial institution by which the financial operation is carried out.

d) Capital Gains Tax or Property Transfer Tax

The tax rate for Capital Gains Tax and Property Transfer Tax ranges from 2% to 10%.

Labor – Profit sharing

15% of the net earnings of a company are distributed to all employees in the payroll. It can also apply to employees of companies that provide the company complementary services such as catering, security, cleaning and courier services. From the 15%, 10% is divided and distributed to all employees. The remaining 5% is distributed in accordance with the employee’s household.

Profit Sharing in mining, oil, and hydroelectric companies: as an exception to the general profit sharing rule, that the 15% of the annual profit must be distributed to all employees, in the case of mining, oil and hydroelectric companies it is only distributed 3% to all employees in the payroll, and 12% is distributed to the state.

Public Private Partnerships

The government has promoted Public Private Partnerships (PPP) which can be established for the provision of goods, building infrastructure, or services. All terms and conditions of PPPs are set out in a contract that must be signed with the public entity.

The PPPs have, among others that might be agreed upon the contractual parties, the following incentives:

a) Legal stability.

b) Income tax Exemption: Income tax exemption for ten years in projects in the prioritized sectors determined by an inter-institutional committee, period which starts from the first fiscal year in which the company generates operating income.

c) Currency Tax Remittance Exemption:  All companies that participate in an PPP will be exonerated from ISD in the following scenarios:

• In the importation of goods for the execution of the public project, whatever the import regime used.
• In the acquisition of services for the execution of the public project.
• The payments made by the company to the financiers of the public project, including capital, interest and commissions, provided that the agreed interest rate does not exceed the reference rate at the date of registration of the credit. The benefit extends to subordinate loans, provided that the borrowing company is not in a situation of undercapitalization in accordance with the general regime.
• The payments made by the company for distribution of dividends or profits to its beneficiaries, notwithstanding where they have their fiscal domicile.
• Payments made by any person or company due to the acquisition of shares, rights or participations of the structured company for the execution of a public project in the PPPs modality or for transactions that fall on securities representing obligations issued for the financing of the public project.

d) Reduction of tariffs: Customs tariffs that are related to the PPP projects will also be exonerated

e) International or domestic arbitration agreements

The incentives mentioned above may be enjoyed for the term agreed upon in the contract, with the exception of the income tax exemption, which can only be 10 years.

Investment Contracts

The Investment Law and COPCI benefits are directed to those new investments (either made by foreign or local investors) that meet the criteria of new productive investments in prioritized sectors of the economy that increases production and generates new employment.

The benefits granted by the government will depend on the investment project, its location, its industry, whether is a new company or an existing one, amongst other criteria, as shown bellow:

a) Total or partial income tax reduction from 8 to 15 years.

b) Currency Remittance Tax (“ISD”) exemption for the payment of imported machinery and raw materials, and for the payment of profits to foreign shareholders.

c) Tax stability for up to 15 years of the current applicable income tax rate. This provision does not provide stability for municipal, customs nor VAT Taxes.

d) Temporary exemption of custom tariff.

e) International or domestic arbitration is available for investors.

Initially, the aforementioned benefits apply for those investments made up to August 2020, but the President has recently extended the benefit for 2 years more, until 2022.

See more from Paz Horowitz at: www.pazhorowitz.com

Fraudsters, money launderers, and corrupt government officials in Latin America (LATAM) have been running rampant, capitalizing on the coronavirus emergency. COVID-19 is posing unprecedented challenges to compliance professionals in LATAM, both in-house and external, for preventing, detecting, and reacting appropriately to compliance risks, especially in a remote working environment replete with financial strains, and massive surges in alerts caused by changes in the behavior of clients, employees and third parties.

Against this unprecedented backdrop, we present the following summary of recent compliance trends for organizations doing business in LATAM.

Additional corruption risks

With governments in the region allocating significant resources via expedited public procurement processes, the risk of corruption has dramatically increased in LATAM. Further, as pressures grow on sales representatives, consultants, and distributors to keep businesses afloat, individuals are tempted to bribe government officials. Not surprisingly, law enforcement agencies in Mexico, Guatemala, Honduras, Panama, Colombia, Ecuador, Bolivia, Argentina and Brazil are conducting criminal investigations against a number of senior officials for participating in schemes to misappropriate emergency COVID-19 funds, or for engaging in the fraudulent purchase of ventilators, masks and other medical supplies.

Critically, multinationals face heightened exposure to corruption allegations, because such enterprises can potentially, in the course of regular business operations, inadvertently assist, sponsor, or provide financial, material or technological support for forms of corruption such as the misappropriation of public funds, collusion, opaque contracts, and overpricing. The risk is even higher when organizations interact with government officials, especially in situations involving government procurement and inspections, customs clearance, licensing and permitting and donations.

Ramifications for multinationals operating in LATAM of being involved in, or associated with, corrupt practices is significant. For example, they can be the target of US enforcement actions, including criminal investigations under the Foreign Corrupt Practices Act (FCPA) for suspected involvement with bribery of foreign officials, and/or under the US Money Laundering Control Act for engaging in monetary transactions in corruption proceeds. Additionally, foreign companies believed to be involved in corruption can have their assets blocked under the Global Magnitsky Human Rights Accountability Act.

In fact, the US Government has continued to aggressively fight corruption in LATAM this year through criminal and civil penalties, in addition to economic sanctions. Notably, the Department of Justice (DOJ) has criminally charged individuals and corporations for FCPA violations in connection with the bribery of foreign officials in or from countries such as Uruguay, Brazil, Panama and Venezuela.

The US Government also recently released new compliance guidance to enhance its FCPA-related enforcement efforts globally. On 1 June 2020, the DOJ released its revised Guidance on Evaluation of Corporate Compliance Programs to further explain its assessments of the design, implementation, and effective operation of corporate compliance programs in criminal cases. And, a month later, the DOJ and the Securities and Exchange Commission (SEC) released a new edition of their FCPA Resource Guide, which advises on prosecutorial guidelines in FCPA matters.

Also, the US Government has expanded its economic sanctions related to countries that are believed to be under corrupt regimes, such as Venezuela. Specifically, the US Government has sanctioned several individuals, entities, and vessels for operating in designated sectors of the Venezuelan economy, or for their attempts to evade US sanctions related to Venezuela.

Coronavirus-Related Fraud

Law enforcement agencies from Panama to Argentina are investigating criminals impersonating government agencies, international organizations, and healthcare facilities to solicit donations, steal personal information, or distribute malware (imposter scams); fraudsters misrepresenting that the products or services of publicly traded companies can prevent, detect, or cure the coronavirus (investment scams); companies selling unapproved or misbranded products that make false claims pertaining to COVID-19 or fraudulently marketing COVID-19-related supplies (product scams); individuals and entities stockpiling items in high demand to sell them at extremely high prices online and in person (price gouging); and insiders conducting transactions based on, or tipping others with, material non-public information about the negative impacts of COVID-19 on the financial performance of shares (insider trading). Business email, telework, and social media scams, ransomware attacks, and phishing email schemes have also proliferated in regions such as Puerto Rico, Guatemala and Mexico.

Organizations should take great care to familiarize themselves with emerging trends associated with coronavirus-related fraud identified by regional law enforcement agencies, in order to promptly detect and report criminal activity. In addition, businesses applying for relief programs offered by governments in LATAM should track and understand the eligibility requirements under local statutes, to prevent future civil and/or criminal liability for sanctioning benefits fraud.

Increase in Money Laundering (ML) And Financing of Terrorism (FT)

On April 8, 2020, the Financial Action Task Force of Latin America (GAFILAT) issued its ‘Statement on COVID-19 and its associated Money Laundering ML and FT risks.’ In it, GAFILAT cautioned that controls aimed at preventing and combating ML and FT in the region have been compromised by the pandemic, due to a decrease in compliance staff at reporting entities. GAFILAT also warned that criminal organizations are stepping up recruitment to support ML-related activities, and that pawn shop services, lenders, as well as informal financing are being used for ML and FT in the region now more than ever.

In fact, a number of law enforcement agencies in LATAM are witnessing an increase in the recruitment of people, sometimes under the pretext of legitimate employment, to receive deposits of illegal money into personal bank accounts; as well as an increase in illicit financial flows, including trade misinvoicing, tax evasion and the criminal smuggling of cash, gold, diamonds, and illicit goods across borders.

There is also a growing concern among Governments in LATAM of criminals using cryptocurrency in the midst of the pandemic to hide the illicit origin of funds stemming from blackmail, extortions, imposter and investment scams, and charities fraud.

Recommendations

While most government agencies in the region have granted some measure of regulatory relief to organizations upon considering the current circumstances, there is no ‘pandemic defense’ for violating applicable laws. Organizations should make every effort to meet their compliance obligations, such as filing suspicious activity reports and conducting comprehensive, risk-based, and integrated customer and third-party due diligence.

Given the additional risks caused by COVID-19 in LATAM, organizations should also update their risk profile to determine where vulnerabilities exist and enhance their controls, including customer and third-party due diligence procedures, around those vulnerabilities. For example, organizations should design and implement digital identity systems under the on-point guidance issued by the Financial Action Task Force (FATF) on 6 March 2020. In it, the FATF explains several factors for assessing whether a digital identity system is sufficiently reliable and independent to conduct customer due diligence.

Lastly, organizations should make the best of technological resources to provide employees, customers, and third parties with training programs, together with mentoring and capacity building support, so all stakeholders are familiar with the red flags of fraud, corruption, and money laundering, and can take timely and appropriate remedial action.

See more from Diaz Reus at: diazreus.com

The responses to The Legal 500 and GC magazine’s GC Powerlist: Latin America Survey illustrate the far-reaching and continuously expanding role that in-house counsel are playing in their businesses across the region. General counsel are a multitool, able to step in and assist their company as needed. But this also means that the differences between in-house roles are becoming more distinct: the portfolio of one general counsel might look very different from another, even in the same jurisdiction.

For example, as a part of the survey, participants were asked about the role they play in their organization’s technology investment policy. When asked how involved they were, nearly as many characterized themselves as ‘very involved’ as they did ‘slightly involved/not involved at all’ (30% and 29%, respectively).

Similarly, though the majority reported being ‘very involved’ in the event that the company needs advice on debt restructuring (72%), the second-most common answer was that the legal team is never consulted in these scenarios (14%).

‘Yes, I am proud to say that my team is very responsible with their work and with the company,’ gushes Alejandro Fernandez, head of legal at Cotemar in Mexico.

‘But how they are showing commitment is amazing. They just do not comply with their daily activities, but they interact with other areas to provide support – even if there is not related to legal performance.’

The versatility of in-house counsel has come to the fore over the course of 2020, but a widely held view among the Latin American in-house counsel interviewed for this survey is that the challenges of this year have merely given the opportunity for lawyers to demonstrate a level of adaptability and utility that was always there.

‘It has just confirmed that we are committed and always business oriented, and very creative in addressing difficult times, such this one,’ says Catalina Gavivria, legal vice president at  SBS Seguros in Colombia.

‘We are always asking about business results and we know that if we deliver our work quickly, it will facilitate business.’

When asked what he’d learned about his team over the past year, Jorge Hirmas, general counsel at Orica in Chile, pointed to ‘resilience, the capacity to adapt and quickly adopt change and perform under unprecedented strenuous and stressful circumstances’. The words ‘adaptability’ and ‘resilience’ came up a lot over the course of the research conducted for this report.

‘Resilience, empowerment, independence, high accountability’, were the words offered by Pablo Urrego at Diageo.

‘Creativity is a part of our job’, says Alfonso Videche, regional legal director for Colgate-Palmolive.

Sanitary and economic crises are challenging Chile’s modernization. Great leadership to guide Chile in combining the right experiences from the past and adapting the country to new demands and reality will be needed to overcome social and economic difficulties Chile is currently facing.

Chile is generally regarded as South America’s most stable and prosperous country, renowned for competitiveness, political stability, economic freedom, and low perception of corruption. Its market-oriented economy, based on a neo-liberal model implemented in the 70’s, is characterized by a high level of foreign trade, open market policy and sound financial institutions and policy. Chile is member of the OECD, being the only South American member (together with Brazil) with a GDP worth USD$282.3bn, and a GNI of USD$15,010, similar to countries like Poland or Croatia. It has the second-lowest tax burden in the OECD and the government maintains a tight rein on fiscal spending, ensuring the highest credit rating among the major economies of Latin America. It is an active member of the Pacific Alliance, the principal regional multilateral trade platforms, and has bilateral free trade agreements with basically all of the major economies in the world.

Being primarily a mining-based economy, Chile enjoyed for several years high economic growth figures of about 5%. Growth rates were, pre-COVID-19 , between a more modest 2% and 4% and similar rates are expected for 2021.

Chilean economic policies favor foreign investments. FDI increased by 63% from USD$7bn to USD$11bn in 2019, sustained by investment in utilities, mining and services. FDI stocks reached USD$268bn, a rise of more than USD$100bn if compared to 2010. Investments are mainly oriented towards mining, finance and assurance, transportation, energy and manufacturing.

The coronavirus crisis and simmering discontent over inequality in a neo-liberal economic model have forced the conservative government under President Sebastian Pinera to adopt measures that both allow for political reforms and stimulate the economy. It announced a constitutional referendum which will be held in October, which may lead to a new model that minimizes social disparities and equalizes the distribution of wealth, and is in the process of implementing a fiscal stimulus package worth USD$11.8bn (4.7% of GDP) to increase productivity and innovation in key sectors.

The stimulus package covers, among other things, increased investment in infrastructure, implementing protective measures to protect workers against a loss of income, providing support through tax measures and the creation of social funds and state backed credits. In parallel, the parliament just adopted a controversial reform, not backed by the government, allowing citizens to have 10% of their pensions savings paid out as emergency coronavirus aid and is discussing legislation prohibiting utilities companies to cut basic services (water, gas, electricity and internet) in case of non-payment by their clients. The Central Bank of Chile, for its part, reduced the fiscal policy interest rate to 0.5% and announced an increase of its bond purchase program of USD$4bn as well as measures loosening regulatory credit requirements.

An injection of over USD$8bn is projected into water and other infrastructure, including short-term projects worth USD$150m starting in 2020. The projects include road maintenance, the building of irrigation systems, drinking water facilities, hospitals, ports, airports, and inland water management systems. Most of these projects will be carried out through private or public concessions and the Ministry of Public Works has already initiated the first tenders in the public health care sector worth USD$2.5bn.

The temporary tax measures, loosened credit requirements and government reliefs include, amongst others: 0% stamp tax rate for credit, financial and refinancing transactions (until October 2020); expenses incurred in Covid-19 related measures will be deductible for income tax purposes; deferral of VAT payable with 0% interest; deferral of annual income tax payment for small and medium sized companies; early return on income tax; deferral of payment of real estate tax; deferral of mortgage backed loans; flexibilization of loan maturities for small and medium-sized companies; increase of the credit capacity of the National Bank to mainly support citizens and micro businesses; creation of a social fund for micro businesses; state support to finance credits for micro businesses; and subsidies and socials fund for citizens without formal employment and unemployment insurance.

In addition, and in order to generate additional resources to the State, opposition deputies of the opposition presented a draft constitutional reform that would allow to establish a capital tax, a project currently under discussion in Congress and which has received strong criticism from experts, taking into account the lack of clarity of the tax to be established, lack of clarity in the determination of the associated tax base and the effects that taxes of this kind have generated in legislation, and that are associated with wealth and capital flight.

Employment and security related measures adopted or underway include: temporary unemployment insurance; the possibility for an employer and employee to agree on a suspension of the labor relationship or reduction of the work hours with a proportional reduction of the salary, cases in which the affected employees access to the benefits of their unemployment insurance; suspension of working contracts in case of a mandate by the competent authority with access to the same benefits; safety obligations to assure the health and wellbeing of the employees. New regulation on ‘teleworking’ (Law N° 21.220) was adopted regulating remote work and work by technological means, establishing rights and duties for workers and employers. The adopted measures have been a relief for employers and employees, as they intend to prevent the termination of the labor contracts and the increase of unemployment, and numerous companies has applied those measures. However, projections show that the companies will not be able to reintegrate all the suspended employees, and will have to dismiss them, in which case their unemployment insurances will be depleted, as they already make use of them during the suspensions.     

On the other hand, aid to large corporations has been difficult. Latam Airlines Group, Latin America’s largest air carrier, sought bankruptcy court protection in New York after the COVID-19 pandemic grounded flights across the region. The government has been reluctant to come to the rescue, very much like other governments in the region, although discussions are ongoing. These discussions seem to stall government support to other large corporations as well.

The implementation of these measures and the direct effects of the economic slowdown on businesses are providing legal practices with a vast stream of advisory work. Additional work comes from significant legislation or legal modifications. Most noteworthy, on a fiscal level, is the adoption in February of law N° 21.210, modernizing the tax legislation. It is aimed to grant certainty to taxpayers regarding audit processes, the possibility of conducting out-of-court transactions in respect of ongoing litigation, and the digitization of processes, among other things. Moreover, it introduced a new tax on digital services provided by suppliers residing abroad, so that depending on the tax quality of the local beneficiary of the service, these will be affected by either VAT (at a rate of 19%) or withholding tax. At the income tax level, a number of amendments are being made, the most relevant being the following: corporate tax of 27% for large companies and 25% for small and medium-sized companies under a simplified income determination system;  the is the possibility for small companies of opting for a ‘pass-through’ system, so that the rents generated by the company are taxed directly at the level of its owners. Other modifications relate to changes to the concept of accepted expenditure for tax purposes; incorporation of legal definitions for the determination of the possible establishment of a permanent establishment in Chile; the establishment of a new entity to support and guide taxpayers; and incorporation of a new tax or contribution applicable at the regional level for certain investment projects.

Other recent or upcoming modifications include a recent update of banking regulations, modernization of the criminal code, and strengthening of anti-trust and anti-corruption regulation, amongst others. In parallel, there is a growing emphasis on compliance, corporate governance, data protection and data privacy, stimulating companies and the business community to adopt higher standards of corporate governance and business ethics. 

See more from Schwencke & Cia at: www.schwenckecia.com

Though not exactly a household name, Sergei Magnitsky has come to symbolize the American and Western efforts to combat foreign corruption and money laundering across the globe. Understanding these recent efforts is critical for general counsel operating in international markets.

Sergei Magnitsky was a Russian tax accountant who worked closely with one of Russia’s largest foreign investment firms. Magnitsky eventually uncovered a highly complex $230m fraud, whereby Russian officials used forged documents to claim ownership in the foreign fund and then sued the Russian government for millions in ‘overpaid taxes’, upon which the Russian courts speedily agreed and ‘repaid’. Magnitsky sued the Russian state and paid dearly: he was arrested at home in front of his children, imprisoned, contracted gall stones and pancreatitis, and was eventually beaten to death. What followed was an aggressive series of anti-corruption measures by the United States, the first of which included the Sergei Magnitsky Rule of Law Accountability Act of 2012. Commonly referred to as the Magnitsky Act, the law imposed economic sanctions on Russian officials thought to be responsible for his assassination.

So why is this so important for general counsel?  First, the scope. The original iteration of the Magnitsky Act froze Western assets of specific Russian oligarchs and officials, including finances and real estate, and also barred entry into the United States. But the Magnitsky Act has since evolved far beyond the borders of Russia. On 23 December 2016, the United States passed the Global Magnitsky Human Rights Accountability Act (Global Magnitsky Act), which authorizes the president to impose economic sanctions on human rights abusers and corrupt government officials anywhere in the world.

Second, the Magnitsky Act and its global successor are about money, which is enforced on the international stage through economic sanctions. Economic sanctions are used by the United States to accomplish foreign policy and national security goals. The administration and enforcement of these sanctions are delegated to the Office of Foreign Assets Control (OFAC), a financial intelligence agency that operates under the US Department of the Treasury. Basically, economic sanctions are imposed on countries, governments or individuals that are hostile to US interests. The Cuban embargo and the Iran nuclear-related sanctions are probably the most famous examples of these sanctions. OFAC regulates activity within the Global Magnitsky Act and Magnitsky Act under 31 C.F.R. Parts 583 and 584, respectively.

General Counsel must therefore maintain a basic understanding as to how these laws operate in practice. An individual or entity sanctioned under the Magnitsky Act or the Global Magnitsky Act is summarily included in the Specially Designated Nationals and Blocked Persons (SDN) List, a ‘blacklist’ maintained by OFAC. This occurs after an administrative investigatory process where the subject individual or entity has very limited opportunities, if any, to intervene in order to avoid being sanctioned.

Once an individual or entity is blacklisted by OFAC, all of its assets in the United States, or in possession or control of US persons, are blocked and cannot be dealt with in any way. A Magnitsky sanction is the equivalent of a blanket prohibition to engage in any transactions with the sanctioned individual or entity. These sanctions can be seen already, for example, in Latin America. In 2018, the United States used these sanctions to target government officials in Latin America, most recently against Nicaraguan officials of the Ortega regime (including Ortega’s wife, Vice President and First Lady Rosario Murillo) accused of committing serious human rights violations during the recent anti-government protests where hundreds of Nicaraguans where killed. And in 2017, the parent company for famed jeweler Cartier reached a $334,800 civil settlement with the United States after it shipped jewelry to Shuen Wai Holding Limited, an entity in Hong Kong that had been added to the SDN list in 2008. In 2018, OFAC added 17 Saudis to the SDN list following the killing of Washington Post journalist Jamal Khashoggi.

In light of these enforcement frameworks, here are some of the things that general counsel for companies involved in international business need to be aware of:

Companies engaged in international transactions must exercise great care to refrain from doing business with any individual or entity subject to Magnitsky sanctions. To complicate things further, OFAC has said that, pursuant to its so-called ‘50 Percent Rule’, the sanctions are also applicable to any entities directly or indirectly owned 50% or more in the aggregate by a sanctioned individual or entity. Even if the blacklisted individual or entity does not have an ownership interest in another entity, OFAC has warned that the mere fact that a sanctioned person is representing a non-sanctioned entity (albeit in a non-personal capacity) may lead to a violation.

Companies are strictly liable for violating these sanctions. ‘We did not know’ no matter how sincere, is not a defense. The penalties could be very harsh, including significant fines and imprisonment. Civil penalties of $295,141 or twice the amount of the transaction could be imposed under the Magnitsky Act. The Global Magnitsky Act proscribes penalties of up to 20 years in prison and a $1m fine. The Magnitsky sanctions make for risky business in many areas of the world.

Particular industries could be more susceptible to being identified under the Global Magnitsky Act. One general rule of thumb for identifying at-risk industries is FCPA compliance. Industries susceptible to Global Magnitsky Act violations often mirror those FCPA violations, such as energy, oil and gas, pharmaceuticals, and telecommunications.

Countries with a history of public corruption and human rights abuses warrant heightened scrutiny.

Strong compliance measures ensure adequate prevention and a swift reaction when a violation occurs. Like FCPA compliance, GCs should oversee a risk-based approach tailored to the business operations. And strong compliance begins with comprehensive screening.

Use experienced third-parties. Commercially available screening tools can aid effective screening. Some entities, particularly those owned or represented by a sanctioned individual or entity, can be harder to trace, because their names may not be included in OFAC’s SDN List.

These laws leave little room for error (and zero excuses). Significant investments in a robust compliance program that can conduct the most comprehensive due diligence available, while timely and expensive, will often pale in comparison to the price of violations that could have been avoided. 

See more from Polsinelli at: www.polsinelli.com

Introduction

As the COVID-19 pandemic creates significant uncertainty and unique challenges in the global investment environment, its impact on Latin America presents several opportunities for private equity funds. In navigating the new investment landscape with respect to their Latin American investment programs, there are number of corporate, finance and tax issues PE funds should consider before proceeding with Latin American acquisitions or increasing investment in existing portfolio assets. This article discusses certain tax structuring, transfer pricing, and tax compliance considerations relevant for PE funds holding Latin American portfolio assets or expanding their investment in Latin America.

Tax Structuring Considerations

Acquisition of Distressed Latin American Companies

PE funds are seeking acquisitions of distressed Latin American companies or those requiring capital infusions to survive the economic downturn. For example, targets include, among others, family-held companies with shareholders seeking liquidity or diversification, companies unable to restructure their debt or continue with an existing IPO plan, and real estate holding companies with immediate cash needs but steady revenue flows.

In structuring acquisitions of Latin American targets, PE funds must identify the appropriate vehicles through which to invest. For example, a PE fund might analyze whether it should establish a tax treaty structure to effect an acquisition. In a private equity context, the primary tax consideration for most fund managers is taxation on exit (ie capital gains tax). For example, among others, Argentina, Brazil, Chile, Colombia and Mexico generally impose, with some exceptions, tax upon the sale of shares by nonresident investors. Accordingly, funds might establish a Spanish or Dutch investment structure because of Spain and the Netherlands’ significant tax treaty network in Latin America, or structures with transparent investment vehicles such as Canadian limited partnerships (eg Alberta or Ontario) and certain Luxembourg entities. Funds might also consider establishing local investment vehicles to mitigate taxation on exit, such as Brazilian Fundos de Investimento em Participações (FIPs), which can eliminate Brazilian capital gains tax on exit (although such structure has been scrutinized by the Brazilian tax authorities in recent years). Fund sponsors are rightly concerned that exit taxes in Latin America can reduce a fund’s IRR, especially if some taxes are not creditable against taxes of fund investors.

Tax due diligence is as important as ever. Among other things, deal teams should carefully examine items such as operating loss carryovers, permanent establishment risk for multinational targets, tax compliance, accrued and outstanding income, payroll, and VAT tax liabilities etc. Also, a target’s receipt of government subsidies, credits, or other assistance in response to the global pandemic could restrict its ability to pay dividends or even alter the timing of a future exit. If indeed a target has received such assistance, funds must consider whether the proposed acquisition will jeopardize continued assistance or if a sale or change of control will require immediate repayment of such assistance.

Debt Restructuring and Acquisition of Portfolio Company Debt

Dealing with portfolio company debt is another area that has recently received significant attention. In order to preserve cash to meet operational needs, leveraged portfolio companies have developed strategies for managing their debt service, including working with lenders to obtain a combination of additional borrowings, forbearance and standstill agreements, and debt covenant waivers.

In order to ease the process with lenders, some PE funds have chosen to request capital calls to fund their struggling portfolio companies, while others have lent to their Latin American portfolio companies. Other PE fund groups have instead opted to acquire their portfolio companies’ third party debt. In certain cases, funds seek to acquire the debt at a discounted price and sell it at a premium when market conditions improve, while in other cases, the motivation is simply to maintain some modicum of control over a portfolio company’s debt service. Some funds have considered raising credit funds and/or establishing a special structure for that purpose, such as an Irish intermediation structure.

PE funds must address the Latin American tax consequences arising from each alternative for both the fund and the portfolio company. Some key considerations include:

• Cancellation of debt considerations. As part of a debt restructuring, portfolio companies must consider whether income or other taxes are imposed on any amount of cancelled debt.
• Deductibility of interest payments. To the extent a PE fund lends to a portfolio company or acquires its third party debt, the fund should consider whether the interest paid by the portfolio company is a tax deductible expense, particularly if the fund and the portfolio company are considered to be related or if the fund is organized in a low-tax jurisdiction as determined by local law.
• Withholding taxes. Withholding taxes imposed on interest payments must also be analyzed. Most Latin American jurisdictions, including Argentina, Colombia, and Mexico, impose withholding tax on interest paid to nonresident lenders. An income tax treaty may reduce the withholding tax rate for PE funds using a treaty platform for their Latin American investments. Spain and the Netherlands, for example, are jurisdictions commonly used by PE funds (and other investors) for investing in Latin America.

In addition to the considerations listed above, PE funds must also address transfer pricing concerns, particularly as it relates to whether the terms and conditions of related party debt is arm’s-length and otherwise compliant with local transfer pricing rules.

Transfer Pricing

Reviewing, updating and, if needed, revising transfer pricing arrangements is a method by which portfolio companies may preserve cash and otherwise manage tax positions. For instance, adherence to the arm’s-length principal, in conjunction with contractual provisions in intercompany agreements (e.g., force majeure), permits related parties to adjust their intercompany arrangements to reflect economic reality. For example, in the absence of an advantageous income tax treaty, many Latin American jurisdictions impose significant withholding taxes on service payments, royalties, and management/monitoring fees paid abroad. Analyzing existing arrangements may yield opportunities to mitigate or otherwise restructure the payments, resulting in potential tax savings.

In any case, as Latin American governments seek to raise revenue through taxes and increased tax audits, portfolio companies should ensure their transfer pricing documentation and cost-sharing policies are compliant with local country transfer pricing requirements and of course, reality. They should examine whether their transfer pricing has reacted to supply chain and operational changes brought on by the pandemic, and whether such changes require remedial changes to internal pricing of goods and services. While Chile, Colombia, and Mexico are the only Latin American members of the OECD, the domestic legislation of a number of Latin American jurisdictions contain many of the same or similar principles set forth in OECD transfer pricing guidance. For those Latin American jurisdictions that do not explicitly adopt OECD transfer pricing principles, such principles may serve as secondary or supplemental guidance in interpreting domestic transfer pricing legislation (eg Brazil).

In assessing transfer pricing risk, portfolio companies should examine their current intercompany transaction flow and supply chain and corresponding intercompany agreements. Mature portfolio companies with older transfer pricing policies may discover their intercompany transaction flow and supply chain has evolved over time, such that their intercompany agreements do not accurately reflect current reality. For example, the method of compensation (eg profit split, cost-plus etc) originally provided for in an agreement may no longer be appropriate. Similarly, an intercompany agreement may not describe services actually provided between related parties. Because it is common for government auditors to request intercompany agreements in connection with a transfer pricing audit, such auditors can seize on the fact that intercompany agreements are not being followed, are otherwise inconsistent with reality, or do not even exist.

Tax Compliance

As Latin American governments continue developing strategies for battling the pandemic, they are also developing strategies for an economic recovery. While the pandemic’s true cumulative economic impact is still very much unknown, past economic downturns show us that PE funds can expect to see increased audit activity within their portfolio of Latin American companies.

Accordingly, PE funds should work closely with the management of their Latin American portfolio companies to ensure they have a robust tax compliance program in place such that they are well positioned to defend against potential tax audits or avoid potential penalties of lax internal pricing and arm’s-length documentation. They should consider and reassess material uncertain tax positions that, if successfully challenged, could result in significant tax liability and substantial penalties.

Conclusion

The COVID-19 pandemic will continue to generate significant challenges for many Latin American businesses, some of which sought additional funding and credit facilities from their shareholders and lenders, while others concluded filing for reorganization or bankruptcy is their only viable alternative. PE sponsors with Latin American investment programs face substantial challenges, but many others find investment opportunities notwithstanding the current economic environment. Addressing tax structuring, transfer pricing, and tax compliance considerations in Latin America is an important part of overcoming inevitable obstacles and seizing on new investment opportunities.

During COVID-19, the Peruvian government has approved transitory regulations that, by making the management of labor relations more flexible, have allowed the continuity of labor relationships. For example, the Emergency Decree extraordinarily allows employers to apply leave without payment to its employees, provided that it is approved by the Ministry of Labor. In addition, regulations for remote work have been issued, which have allowed employers to vary form face-to-face provision of services to home office, with a less rigid regulation than that of telework, which already existed in our legislation.

In any case, this flexibility has a temporary scope. Labor relations in Peru are mainly ruled by the provisions contained in the Labor Productivity and Competitiveness Law and by the labor case law. Peruvian labor laws and, above all, labor case law, have quite a protectionist slant toward employees. For example, according to Peruvian legislation, temporary hiring is an exception and, as such, it has various requirements for its validity, which are also strictly controlled by the authorities. In addition, the constitutional case law has determined that an employee can request his or her replacement in the event of an unjustified dismissal.

In fact, this is confirmed by the results of the World Economic Forum. The Global Competitiveness Report 2019, in which, of the 141 countries analyzed worldwide, Peru is in position 134 in terms of job placement and employees’ dismissal.

In addition, during the employment relationship, Peruvian legislation has provided several benefits to which employees in private activity are entitled:

(i) Remuneration: Employees shall receive a minimum wage of S/ 930.00 (Nine Hundred and Thirty and 00/100 Soles) if rendering services for an ordinary working day, (not exceeding of eight daily hours or 48 monthly hours). Reduced working hours shall be proportionally paid.

(ii) Family allowance: Family allowance shall be paid to employees having children under 18 years old or until the age of 24 if they are studying at college or university. The employees are entitled to receive an amount equivalent to 10% of the minimum wage (currently S/ 93.00), irrespective of the number of children the employee has).

(iii) Compensation for length of services: The purpose of this benefit is to serve as coverage in case of termination of employment. It is equivalent to 9.72% of the monthly remuneration approximately. It shall be paid in May and November by the employer in a bank account in the name of the employee.

(iv) Legal bonuses in July and December: Employees are entitled to the payment of two bonuses during the year, each one equal to one monthly salary. The bonuses are paid one in July and one in December, proportionally to the full months worked during the period.

(v) Extraordinary bonuses: Employees are entitled to the payment of two extraordinary bonuses each year, payable on July and December, equivalent to 9% of the monthly salary.

(vi) Profit sharing: This benefit is mandatory for employers with twenty employees or more.

Employees have the right to receive a percentage of the annual income before taxes of the employer.

Depending on the economic activity of each employer the percentage to be distributed among the employees of a company varies between 5% and 10%. The annual amount to be received by each employee may not exceed 18 monthly remunerations.

(vii) Mandatory life insurance: A life insurance policy must be hired by the employer at its cost and expense in favor of all its employees.

Employees are also entitled to paid leave such as weekly rest, maternity leave, paternity leave, sick leave, and vacations. Regarding vacations, employees are entitled to 30 calendar days of paid vacations per year. Once a complete year of service is achieved, the employee must use his or her 30 days of vacations within the subsequent year of accruing the right.

Otherwise, if this does not occur, the employee will earn the right to an additional remuneration and a severance as a compensation for not having taken vacations on time, equal to a monthly remuneration for each one.

On the other hand, employers also have important obligations regarding safety and health at work. Indeed, employers have a legal prevention duty and therefore must devote all their efforts to preventing occupational accidents or diseases, complying with obligations such as training of employees, establishment of a committee on safety and health at work, and risk assessment, among others. Safety and Health at Work is a fundamental aspect for organizations in Peru.

Accordingly, an employee can only be dismissed if there is a cause established by law, related to his/her conduct or capacity, and duly proved. In addition, a formal procedure provided by law must be carried out. In that sense, if a dismissal without a proven cause is carried out, according to our labor case law, the employee could claim: (i) his/her reinstatement to his/her job position; or, (ii) the payment of the mandatory severance for arbitrary dismissal, at their sole discretion.

The authorities in charge of verifying that employers comply with their obligations are SUNAFIL (for its acronym in Spanish) and the judiciary. Indeed, SUNAFIL, through an inspection procedure verifies whether there was a breach and, if applicable, can impose a fine on the employer. Also, employees can pursue a claim to the judiciary to assert any right that has been violated. It is important to note that both are independent routes and it is not necessary to go to one before the other; however, it is usual for employees to request an inspection from SUNAFIL before going to court, since SUNAFIL’s final resolution could serve as a means of proof with important institutional support.

According to our migratory and labor regulations, in order for a foreigner to provide services in Peruvian territory, he or she requires a work visa issued by the migratory authority and an employment contract duly registered before the Ministry of Labor. For this, prior to the effective provision of services in Peru, an immigration procedure must be initiated before the immigration authority (either from Peru or from abroad). It is important to mention that there are certain countries with multilateral agreements with Peru (Argentina, Brazil, Paraguay, Uruguay, Bolivia, Chile, Colombia and Ecuador) and, therefore, there are particular rules for obtaining a work visa.

Finally, in Peru, unionization and the right to strike are constitutionally recognized rights. In this sense, labor unions activity has special protection and is increasingly active in Peru. Unions are representative, especially in sectors such as mining or the industrial sector, and increasingly, they are affiliated with federations that seek to act as interlocutors.

See more from Vinatea & Toyama at: www.vinateatoyama.com

Funding Landscape in Latin America

A lot is different in Latin America, compared to the Anglo-American world. This is also the case as regards litigation or arbitration funding. The language to start with, civil law v common law, duration of court proceedings, popularity of arbitration, the price of legal advice and much more. Whereas litigation funding has a long history in the UK and in the United States, its twin brother – arbitration finance – is still in its infancy in Latin America.

However, the trend in many (not all) Latin American jurisdictions is obvious. Arbitration has become more interesting as proceedings appear to be more reliable, duration more predictable and international enforceability – relatively –easy. The legal skillset is also at hand.

All this led to the establishment of local third party funders in the past years like Leste in Brazil, Lexfinance in Peru or specialised Carpentum Capital operating out of Switzerland but with lawyers on the ground in LatAm. Most recent Hakamana was set up in Chile. These funders are perfectly suited to serve growing local demand and complement or replace bigger Anglo-American investors, usually only funding investor state disputes or other very pricy cases.

Whereas demand is increasing, awareness of arbitration finance in Latin America is still very low. And even if the very basics are known, there are a couple of misconceptions around.

The biggest being that arbitration funding would only be required by clients, lacking of resources to finance a legal proceeding. This is a very traditional view of third party funding and may indeed be the case in jurisdictions who have a very young market in that respect. In the US according to a study on litigation funding from 2019, less than 30% of clients revert to litigation funding for that reason. The vast majority makes use of it as a financing tool in order to hedge litigation risks, outsource legal costs or free up working capital.

Another common misunderstanding is that a funder would acquire the litigation rights, which is not the rule (but it is possible under certain circumstances, eg by way of monetizing an award). Funders usually assume the cost risk. All expenses relating to arbitrators, arbitral institution, experts or law firms are borne by the funding partner up to an amount of committed capital, which is agreed beforehand. In case of a successful outcome, the result is shared – it could be a percentage of the result, or a multiple of the investment or a combination. If the case is lost, investment is also gone. Hence the risk is high, which is why only a fraction of cases will pass the scrutiny.

The Process

In order to survive this process, you should first know, how it works. Each investor may break its process in to various stages, but it always comes down to three crucial steps:

At the outset confidentiality will be agreed, conflicts must be cleared and the funder will check whether a potential investment would be in line with internal guidelines or appetite. Specific proceedings may be ruled out, minimum or maximum investments set and ethical standards applied. That’s the easy part.

In a second round essential documentation is shared, such as basic contracts, correspondence, legal opinions, financial information of counterparty, expert valuations etc. Also important: the budget of the case with an anticipated cash-flow. This phase is the internal due diligence or ‘first level’ review. The funder will decide, if it can invest in the case and calculate on what terms it would do so potentially. If positive, a non-binding offer is made and the client signs a term sheet. At this stage the investor gains exclusivity to pursue the investigations for a certain time frame. Most cases won’t pass this stage either because the probability of success is not high enough, realistic outcome is lower than expected, the counterparty not sufficiently solvent or the case may take too long.

If terms are agreed in principle and no smoking gun detected, the funder will spend even more time and money on an external due diligence or ‘second level’ review. Another lawyer than the client’s one will opine on various aspects of the case. If claim evaluation is an issue, an additional expert may be required to review damage reports, or arbitrators for a specific industry may be asked to share their view on custom and practise in that industry. All this should happen in a speedy and transparent fashion, as the client will be eager to get the final approval for his arbitration finance.

In theory the whole process should take a couple of weeks only, but depending on the complexity and value of the case it may easily take months. Don’t be shy to ask your funder for transparency and commitment to timelines.

The Funder’s View and How to avoid Pitfalls

On the other hand, you can also accelerate the process of arbitration finance in Latin America, if you know what the investor will look at.

You may be surprised, but the merits of the case are not the core issue. It will just be assumed that you don’t come around with a hopeless case, invented stories or a useless lawyer.

It’s the economy of the case. Starting with the collectability and ending with the cost-to-demand ratio. Your case may be as good as it gets on paper, but if you pursue this against a soon to become insolvent party, it does not really help. The quantification of a realistic outcome, rarely equalling the demand, comes next.

The funder will also look at a worst case budget and how it will be paid out. Worst case in our world not being a lost arbitration or litigation, but a proceeding going through annulment and up to execution. Too many lawyers or general counsels omit to think beyond the first award.

Therefore and in order to shorten the time up to a positive funding decision, you should:

• target the right investor. Ideally someone with the appetite for your arbitration in terms of size and jurisdiction as well as understanding for the local legal culture;
• think twice (at least) about the economics of the case. Potential outcomes, realistic result, duration and cash-flows are to be considered;
• work with a capable lawyer having a good track record in the legal sector at stake;
• have crucial documentation at hand and avoid piecemeal production of documents;
• be transparent and disclose the good, the bad and the ugly. Rest assured that the investor will find the weak spots anyway.

If you understand the process and know that the investor tackles a claim from a slightly different angle, arbitration finance in Latin America or elsewhere will be no secret science, but an accessible tool of dispute resolution. 

See more from Carpentum Capital at: carpentum-capital.com

The COVID-19 pandemic hit Paraguay’s economy very hard and just when the country was recovering after a period of stagnation (-3% year-to-date in the first half of 2019). 2019 wasn’t a good year for employment either, the combined unemployment and underemployment rate reaching 14.5% in the first half of the year and retracting to 12.9% in the second half. This favorable path continued during the first two months of 2020 but with the beginning of COVID in March, began to slow down. Social distancing measures have most severely affected the service sector although informal labor was also badly affected.

The Government and the Paraguayan Central Bank (BCP) adopted a series of exceptional measures to address the economic and financial needs of both individuals and companies. In this regard it’s worth mentioning the BPC’s decision to reduce the policy interest rate by 175 basis points to 2.25% and the temporarily relaxed provisioning rules not to penalize credit restructurings and prolongations as well as the Government’s anti-crisis fiscal package approved by Parliament.

Another measure to alleviate the crisis has been low interest loans granted by the National Development Bank (BNF) to finance MSME’s payroll during the outbreak; in line with this it is worth mentioning that in June credits granted to the private sector grew by 4.1% YtD and loans granted to MSMEs reached USD$217m in July, while in May they totalled USD£130m.

Nevertheless, in 2021-22 growth is expected to return to 4% due inter alia to consistent macroeconomic policies, anchored in inflation targeting and a gradual return towards the FRL ceilings. Another key role in economic recovery will and is being played by public investments particularly in public works.

Legal Updates

The pandemic has represented an opportunity to introduce major and necessary changes that have helped modernize the local legal framework.   

Corporate Law

The Executive Branch enacted Decree 3605/2020 allowing PLCs to hold their board and shareholders meetings through telematic means provided that a series of requirements are met such as, inter-alia:

a) Real time presence and participation of authorized participants is ensured;

b) Meetings are recorded and kept within corporate files for 5 years and;

c) Mechanisms for the accreditation of rights to participate are established.

This provision represents a breakthrough in Paraguayan corporate practice and a clear advantage for foreign investors and shareholders as they can now take part in company decisions avoiding delays and fines especially during the pandemic. This exceptional measure will remain in force until 31 December 2020 and we are confident it will become a definitive practice.

Another important provision enacted is the suspension until 15 September 2020 of the application of fines and sanctions for non-compliance with the mandatory requirement of converting bearer shares into nominative shares.

Labor Law

This may be the field that saw the biggest changes. These sought to help businesses and employees cope with the crisis and reduce the negative impact on employment. Some of the most important decisions adopted by the Government are:

a) Contributions to the Social Security Institute (SSI) may be refinanced without interest for up to 18 months.

b) During the pandemic and whenever the nature of their work allowed, employers are encouraged to implement home and teleworking so as to avoid the spread of the virus; this measure is provisional and will last until the 31 December, nevertheless a draft bill has been presented to Congress in order to make it definitive.

c) A new regulation aimed at simplifying the application process for requesting employees’ job suspension was enacted. The procedure will remain in force during the pandemic and will benefit MSMEs only.

Anti-Trust and Regulatory Law

As a consequence of the COVID-19 crisis a lot of effort was made by the Government as well as the media and citizens in general aimed at controlling the public expenditure and public bidding processes. As a result of this, the National Competition Commission (CONACOM) undertook a series of formal investigations under Paraguayan Competition Law.

a) One was aimed at determining if prohibited agreements practices had been performed; the investigation was focused on public bidding processes for the purchase of medicines and medical related goods.

b) In another, CONACOM’s Investigation Department initiated preliminary investigation proceedings in order to identify possible violations of the Competition Law in connection with the latest operation involving a concentration proceeding between the biggest meat processing company and one of its competitors.

This is the first time CONACOM has used its investigative powers and its power to initiate ex officio proceedings; we believe this will improve the level of transparency of our public system and, at the same time, will force local businesses to strengthen their compliance policies, in particular those businesses in a dominant position.

Tax Law

Along with labor, tax law was the other field to see the greatest number of significant changes. During the crisis the Government enacted a series of important tax relief measures such as, inter alia:

a) Tax Deferrals;

b) Exception of penalties for late filing;

c) Exception of import duties and VAT reductions on all goods qualified as of first need;

d) Deadline extensions for filing and payment of the Withholding Tax on Dividends, Corporate Income Tax, Income Tax on Individuals, Income Tax on Agricultural Activities and Income Tax on Commercial, Industrial and Service Activities.

Procedural Law

The Executive branch enacted the Law by which the Judiciary’s summer recess is suspended thus all judicial activities and deadlines remain.   

Bankruptcy Law

A draft bill to modifying the bankruptcy law is being studied by the Legislative branch. The current law dates back to 1969 thus its modernization is seen as being key to improving the country’s business climate; the new law will allow companies at risk of insolvency to swiftly put their accounts in order and hence re-emerge more stably while also benefiting creditors. This law will be particularly important in the aftermath of the pandemic crisis.

Data Protection Law

Currently Paraguay does not have a general Data Protection Law, however, as a result of the increase in social and commercial activity on the internet due to social distancing measures it became apparent that the country could no longer remain without such an important provision; as a consequence a bill is currently being studied in Congress and is expected to be enacted by the end of 2020 or the beginning of 2021.

Conclusion

We cannot ignore the negative effects produced by COVID-19. However, we believe that Paraguay will re-emerge stronger wherever we can capitalize on the opportunities arising from the crisis aimed at accelerating the modernization process and increasing transparency of institutions.

So far, our country has taken adequate measures and has better coped with the crisis than some of the other countries in the region. In truth, the pandemic’s impact has been less harsh than in those countries whether in respect to fatalities and infections or in economic terms.

As for opportunities for the years ahead these will certainly come from the public sector particularly public works (civil and road) and from telecommunications as both sectors have shown a very dynamic performance over this period. 

See more from Vouga Abogados at: www.vouga.com.py

At the best of times, the role of the in-house counsel is marked by loosely defined and ever-expanding boundaries. It is part of why the role demands a sufficiently flexible and open-minded candidate in order to be done effectively.

Enter COVID-19: norms of business and the global economy have been thrown into turmoil as countries across the world struggle to balance the need to control the flow of the pandemic with economic survival.

As of the start of August, four of the top ten countries for confirmed cases of coronavirus are Latin American. Businesses working in the region will be as pressed as businesses anywhere to weather the storm, adjust their practices and adapt to whatever world in which they find themselves operating after the peak of the pandemic has passed.

How do in-house counsel across Latin America feel about the effects of the pandemic? What have their experiences been? How do approaches differ between counsel and across businesses?

In The Legal 500’s GC Powerlist: Latin America Survey, we asked counsel working in the region all of these questions and more.

Status Report

While the pandemic hasn’t exactly affected all countries equally, most of the in-house counsel surveyed for this report could agree that it had affected their work, and that of their legal team.

46% of respondents felt that the COVID-19 pandemic had affected the output of the legal team to at least a moderate degree, with 20% feeling that the impact had been ‘great’. The single largest group were those who felt that the pandemic had ‘slightly’ impacted their legal team’s output, at 37%.

All but a small number of in-house counsel working in their country’s defense sector reported that them and their teams had been working from home during the pandemic.

‘I think everyone would agree that working from home under these circumstances would be ideal,’ said one GC working for an aviation and defense contractor within the region.

‘But for us, it is not permissible. We are working with documents and files that are highly sensitive, and that cannot be risked in remote working. Many of our employees are given a special government pass to be commuting during the pandemic.’

The majority of respondents (76%) felt that home-working had been ‘highly’ effective, and another 20% characterized home-working as having been ‘somewhat’ effective. The rest felt it was too difficult to say; not a single respondent reported feeling that home-working had been less than effective.

Measuring success remotely

This data begs the question: how can the effectiveness of home-working be properly gauged?

It’s a question which takes on added import among the speculation that this period of remote working will extend beyond the pandemic if not become the norm entirely. Despite virtually all respondents reporting their team working from home since the start of the pandemic, just over half (58%) said that they had been monitoring the effectiveness of homeworking for their employees.

For many, the proof is in the pudding:

‘We manage to complete integration projects and M&A initiatives in a record time,’ says Alejandra Castro, head of legal at Bayer, based in Costa Rica.

‘The feedback of the business is that the team is not only very responsive but also very involved in every company’s decisions. Home office has increased the overload of work in the organization but we have manage to keep performance on track.’

But the work doesn’t always speak for itself, particularly when the benefits brought by having a competent legal team are often difficult to quantify. In these instances, broader brush strokes are required when attempting to track how the team is coping under pandemic pressure.

‘We have shifted to goal based work, improved communication and knowledge sharing practices across the regional legal team, keep each other updated on target completion and adopted legal project management practices to keep everything on track,’ says Jorge Hirmas, general counsel at Orica.

Communication was repeatedly emphasized in survey responses and the interviews conducted with general counsel from across the region as being of particular importance in adjusting to entire workforces being taken off-site.

Ana Haynes, general counsel at Essilor in Brazil, said that they monitor home-working ‘through video calls, through the delivery of many work demands, through constant feedback and phone and video interactions, as well as surveys performed by our company.’

Sheila La Serna, Chief Legal at Profuturo, shares her organisation’s approach amongst the pandemic in Peru: ‘From the outset of the Sanitary Emergency Declaration and Social Isolation declared by the Government of Peru, we conducted daily videoconference meetings first to assess how the team was keeping up with their current home office situation, what needs they had (i.e. accesibility to our systems or physical attendance to the office, and health status) and furthermore, set a schedule considering housekeeping and child care hours since the majority of our members in the legal department are  women.’

‘Also, the CEO and senior management shared with the teams some podcasts with updates con health monitoring, challenges and quick wins during the COVID-pandemic. From June 2020 on, we had a twist for good knowing that “no size fits all”: we agreed on having virtual sessions twice a week only,  to review how we started and finished the week, but we kept communicating one -on -one by Whatsapp (legal department chat and individual chats), email and mobile when necessary.

‘After that, the team´s motivation rose because they felt they had more flexible time to spend with their families,  and I saw a change on our productivity measured by quicker responses made and greater number of emails that were replied during the day.’

One common sentiment was that there has been a realization (or validation, in many cases) that employees are just as effective when working from home, particularly when properly supported by the organization.

‘[We have] follow up conference calls and meetings,’ says Catalina Gaviria, legal vice president at SBS Seguros in Colombie.

‘Nonetheless, we are confident that our team is composed of great people who are very professional and committed to the result of the company! Therefore, more than conducting follow up meetings to tasks (which we do), during these times is always important to keep a warm contact. We usually use video to see each other, we ask daily how we are, talk about our personal and family concerns.   We even celebrate special dates as happy birthdays of the team, by sending food and celebrating!  We are convinced that a happy team always provide great results and are always effective, open, and available.’

Mental health

The COVID-19 pandemic comes at a time where an increasing amount of attention is being paid to health and wellbeing at work. The legal profession is in many parts of the world associated with long hours and high pressure, and despite a prevalent myth that these concerns do not exist in-house, general counsel must be careful to ensure they and the teams they lead are taking care of themselves.

Just under half (49%) of all respondents to the survey sent out as a part of this report felt that in-house counsel have appropriate resources available to them in order to assist with stress or mental health issues, and 37% answering in the negative.  A little over half (54%) of respondents reported that their organization has an employee mental health policy.

Of those who reported their organization having such a policy, the most commonly cited feature of the policy in use was the specification of a chain of command or point of contact for support. The second-most commonly cited feature was flexible working arrangements.

When asked to identify the leading causes of mental health problems for in-house counsel, the most commonly given answer was the high stress nature of the job (68%), followed by long hours (57%).

Now, thanks to COVID-19, the workforce is remote, which means the line at which work ends and recreation begins is even more difficult to manage. This was a concern expressed by many participants in this research, but just as common was a feeling that the pandemic has given teams the opportunity to explore how to keep their motivation and mental well being high.

‘We have been in constant communication with team members within my region, and also with the rest of the members of the Law Function within Cargill across the globe,’ explains Michelle Canelo, legal director at Cargill in Honduras.    

‘We have been monitoring feedback we receive, how are people feeling, dealing with the challenges that came with Covid-19, not only work related, but with new challenges from home with family. being mindful of the needs of our team members, providing them with resources, accessories that could make their job at home more easily, for example, coordinating that team members received the chair, their docking station, monitors, files needed, printers, headphones, etc from office and deliver to their homes, so that they can work better and take care better of their posture, their overall health.   

‘We’ve been also talking about mental health and how we can support each other, listening, talking of our challenges, etc.    we even had happy hour every month, getting together virtually at the end of the day, and sharing, a cup of coffee, a glass of wine or other, and a good non-work related conversation.’

Lasting change

For the in-house community, the upheaval of 2020 has manifested in a variety of ways.

The practically universal uptake of home-working for the duration of the pandemic is an easy example. But the in-house counsel surveyed also pointed to other areas that have seen change.

For example, respondents largely reported being more likely to renegotiate obligations with business partners as a result of the pandemic: 71% said they would be more likely, as opposed to 16% who said they would not; the rest were undecided.

45% of those surveyed said that they expect the way in which external firms will deliver their services to change as a result of the pandemic, compared to just 26% who did not expect any such change; the remainder were undecided.

‘I expect external law firms to be more proactive, more efficient, more agile and for their business understanding to improve,’ says Ricardo Estrada, senior lawyer for the wider Latin America region at GlaxoSmithKline.

‘I also think they need to be open to provide support 24/7 and to team with other external law firms and forget about how to compete with them, rather [focus on] how to team up for work.’

‘We are already living a change,’ emphasizes Sheila La Serna at Profuturo.

‘Most of the firms we work with have acknowledged the importance of adding value to in-house teams during COVID pandemic. Webinars, live or recorded and podcasts with legal content are now trends in many firms to keep clients engaged.

‘Delivery is definitely quicker and it is expected to continue that way.  Legal service will not disappear in the near future but I think that digitalization of the services, blockchain and artificial intelligence will challenge traditional law firm service sooner or later.’

As for homeworking, counsel were almost united in their expectations going forward: 77% said they expected homeworking to become more frequent, and another 17% said they expected it to become the norm. Just 2% said they expected the pre-COVID status quo to persist.

Some readers may know that González Calvillo has uninterruptedly partnered with The Legal 500 in sponsoring the Private Practice Powerlist: US-Mexico for several years. Looking back, each of the issues from 2017 onwards contained widely distinct business messages from our firm, ranging from record-breaking transactional work and law firm profits on 2017, to the forced adaptation of the Mexican economy to geopolitical changes in 2018, and finally the stagnation of our economy in 2019 due to a series of erratic decisions by President Andres Manuel Lopez Obrador and his administration. Market uncertainty and increasing concerns for investors were well underway at the outset of 2020. But cliché as it may be, nothing could have prepared anyone for what was about to happen this year.

Here we are, then, in the midst of 2020, facing what is now clearly the most severe global economic debacle since the Great Depression, let alone the vast human tragedy. By the time we write these words, we already know Mexico will not fare well from COVID-19. While developed countries across Asia, Europe and North America have already installed rescue and recovery plans of inconceivable dimensions -mostly aimed at saving small business who are primary sources of employment-, our government has opted to stay stale, basically. Experts have already pointed to the potential loss of Mexico’s investment grade by 2021, likely depending on the results of the midterm legislative elections coming next summer.

So where does this leave us lawyers besides working from home during many months? Well, this depends on whether one sees the glass half full or half empty.  Truth be told, our profession has been and continues to be one of sustained privilege; most of us have been able to continue serving our clients and attending each of our affairs without serious interruption and mostly seamlessly. All from the safety of our homes.

All of a sudden, a hefty chunk of clients to law firms were forced to alter their strategies, radically. The legal industry had to adapt swiftly to new needs; the experience accumulated in years of deal-making had to be abruptly applied to helping longstanding clients, with many of whom we have developed close friendships, survive. Those firms lucky enough to have invested in insolvency litigation and restructuring are now beyond busy. Sadly, expectations are that there will be an incalculable number of bankruptcies in Mexico as a consequence of the virus, exponentiated by the lack of robust economic assistance directives and support by the current administration.

But not all is lost. In addition to insolvency work, we are proactive witnesses of the notable uptick in revenue stemming from our technology practice group. Big-Tech companies, led by GAFAM, have evidenced that the world is accelerating towards technological solutions in most if not all of the components of our daily lives; the NASDAQ index is trading at all-time highs while fintech and ‘app’ companies are showing no signs of deceleration. Who had heard about Zoom just a few months ago? This appears to be welcome news for fund formation, private equity and M&A generally. Even during the pandemic, there have been substantial transactions announced between traditional banking institutions and technology companies, unimaginable just a few years back. Most of these deals imply considerable regulatory hurdles, so law firms carrying demonstrable sophistication and experience in banking, securities, pension funds and insurance are likely to be involved to sort these obstacles. Given the size of some of these deals and the potential competitive overlapping effects that they may have on the relevant markets, antitrust counsel to help navigate these challenges becomes critical.

It seems humanity is not likely to disappear as a consequence of this sad episode. If we concede to this premise, then we can safely assume that demand will pick up on homes, schools, and entertaining generally; leisure travel is already on the rise. In addition, valuations on infrastructure assets have been impacted in ways that can hardly be described. Those investors with longer horizon expectations are probably pleased to detect business opportunities in this jurisdiction that had not been available in decades. This is where solid real estate and hospitality legal teams can and should be tapped. We are especially optimistic on tourism prospects, where substantial investment has been made in our country and, with some long-term tweaks perhaps, it will be back stronger than ever. All of these enterprises typically come paired with strict ESG principles so expert advisors on these issues are additive to transaction outcomes.

We are optimistic, then, as we have been since our firm was founded. We may be working from home and may have had to learn a few tricks to safeguard full team communication and 24/7 availability, but interestingly we have had a chance to share more of our personal side with our team members, both colleagues and co-workers, and make it less a mechanical machine and more a human organization. We have learned and gained from each other in ways we never thought possible. We hope this ultimately derives in enhanced working experiences with our clients, to whom we are devoted. 

See more from González Calvillo at www.gcsc.com.mx

It is not news that the role of in-house counsel has become increasingly demanding and complex. The flip side to that is that the in-house counsel role has become even more strategic, challenging and stimulating than it was 5 or 10 years ago.

We live in a world which is much more regulated than it was a few years ago, which moves and reacts at a much faster pace than before, in a world where the risks (legal, reputational and others) that general counsel has to help manage, mitigate and protect from are several and diverse in nature.

Below, in summarized form, is an attempt to describe some of the most relevant themes sitting atop of the agenda of general counsel across the country.

Data privacy and cybersecurity issues

The Brazilian GDPR, or LGPD, will soon come into force. At the time of writing, the Brazilian Congress is still debating whether to bring LGPD into force on August 2020 or postpone its enactment to May 2021.

In any event this is a concrete fact in the horizon of all businesses and their legal departments. To the extent these businesses are subsidiaries of companies subject to European or US data protection laws less adaption to comply with local regulations will be required, but at the very least some compliance effort will be necessary.

Beyond LGPD, cybersecurity and electronic fraud in general are increasingly seen as by in-house legal teams, which are called upon to deal with all aspects and repercussions of security breaches of companies’ electronic systems, from a data privacy, consumer and/or criminal law perspective.

Fake news

When we hear the expression ‘fake news’ we usually think of it purely in the political context. The truth is that a number of professionals and business are attacked by producers of fake news everyday with an aim to harm their reputation and gain undue market advantage for competing businesses. In Brazil this huge new problem is compounded by the additional difficulty that the crimes of slander, libel etc and their penalties were designed for a time when fake news would spread by analog means, and thus the potential of harm was smaller. Currently there is a bill of law dealing specifically with the issue of fake news being analyzed by Brazilian Congress and the Brazilian Supreme Court is conducting an investigation on the subject.

Tax Reform

With the Brazilian Federal Government and Congress refocusing on the legislative reform after being sidetracked by COVID-19, the first item on the agenda is the Tax Reform. Each of the Federal Government and Congress have proposed and are supporting different bills of law addressing the tax reform. Until this situation is resolved and a common project negotiated it is unclear if, when and how the reform will shape up.

The new tax rules will be a challenge for everyone until fully understood by market agents and interpreted by the administrative and judicial courts. Some of the changes being potentially contemplated are substantial and can have a significant impact on businesses. The legal and business community are paying close attention to the matter and lobbying for the positions they advocate. The Tax Reform will keep both in-house and external counsel busy for quite a while, before and after the approval of the new rules.

Restructuring

Another challenge/opportunity for in-house counsel is the current situation of financial distress for many businesses provoked by the COVID-19 pandemic. This should allow for exposure on the renegotiation of the company’s debts, and sometimes in the Brazilian processes of Recuperação Extra-Judicial and Recuperação Judicial (respectfully pre-packaged reorganization and court-supervised reorganization), hopefully negotiating with the creditors and approving it with the court, as the case may be, the restructuring plan for the company. Conversely, when in-house counsel is employed by a business that is capitalized and seeking acquisitions/consolidation or debt acquisition opportunities, in-house counsel can exercise their legal creativity to the maximum.

We expect the next couple of years to present plenty of these opportunities, which we know come at a heavy cost for many in-house counsel because it generates the pressure to lay-off part of the team, the fear to lose one’s job and all the mental distress that comes with these situations.

Anticorruption

Since the enactment of the Brazilian anticorruption law in 2013 and the beginning of Operation Car Wash, anticorruption compliance and prevention has been at the forefront of the agenda of most businesses and legal departments in Brazil. This is a trend which came to stay and became part of the day to day of in-house counsel, sometimes adding people to the general counsel’s team and more often simply adding regulatory complexity and responsibility in cases where organizational structures do not provide for a separate integrity/anticorruption function lead by another professional.

The state of ESG (environment, sustainability, governance) in Brazil

The discussion around ESG is still in its very early stages in Brazil, certainly less advanced than in the US or Europe. Nevertheless, after the latest annual letter to investors from the CEO of BlackRock and the endorsements that ESG policies have received by a representative group of CEOs of a number of S&P 500 companies, the finance and business world may be coming to realize the size of the environmental threat not only to our health and planet but also to the economy.

When one recognizes the pressure being exercised on the Brazilian Government in light of the illegal burning and deforestation that is taking place in the Amazon, and the strong reaction of world leaders and private investors – both foreign and domestic – it becomes clear that the environment and sustainable practices, together with good governance, are a much bigger concern than ever before for businesses, their customers and, consequently, the general counsel and her team.

Privatizations, concessions and the new role of the BNDES

Another interesting development we are observing stems from the new role attributed to the National Economic and Social Development Bank – BNDES by finance minister Paulo Guedes.

BNDES in the past would finance, through debt and equity instruments, a huge portion of all infrastructure build-out in Brazil plus virtually all its large corporates. This has changed and BNDES is rapidly divesting of various equity stakes it held in publicly-held companies, state owned or not. The most recent example was a block trade of Vale’s shares for R$8.1bn (approximately US$1.5bn) on 4 August 2020, arguably the largest block trade in Latin America’s history.

Additionally, BNDES is in charge of executing the Federal Government’s privatization program and assists, whenever called upon, Brazilian States and Municipalities with their own privatization, concession and PPPs programs. This is an interesting development which provides in-house and outside counsel alike with ample opportunities.

Similarly, PETROBRAS continues to divest from a number of assets, providing for opportunities both on the acquisition and potential buyers’ finance sides.

New and not so new preoccupations of general counsel

Given the increased pressure to deliver more with less resources, general counsel in Brazil have embraced innovation in general, and technology in particular, from within their own company and also from their vendors, be it a law firm, a legal service provider, a Big Four or a lawtech. Competition has never been so intense, but at the same time there are more opportunities to innovate and create new needs that clients did not know they had.

Diversity is another big item on most general counsel’s agenda. Nothing new, obviously, but relevant, especially in an environment where not only women face challenges, but where the LGBTI+, the black and mulato and purely economically disadvantaged populations are given much less opportunity. It is important to acknowledge that the largest companies and law firms have made good progress in the last few years, which is encouraging. However, there is still a lot to be done.

Two other topics frequently mentioned by general counsels are (i) mental wellness related issues in their companies, in their teams and in the profession, and (ii) pro bono legal work. General counsel are trying a number of measures to keep their people happy and healthy at work and this seems to be a fairly high priority for many of them.

Pro bono became more widespread in Brazil in the last decade and many of the more sophisticated firms run more or less structured pro bono programs. Interestingly, very few general counsel based in Brazil seem to take this into consideration in their hiring decisions compared to their foreign counterparts. We expect this to change and to become more important to them going forward. We certainly hope so as it would be a movement in the right direction.

The changing needs of in-house counsel and the challenges they face inside the company

This article would be incomplete without mentioning the current needs of general counsel and their teams in the challenges they face daily in delivering to their internal clients and other stakeholders of their businesses.

We continue to hear that law firms still tend to think more about what is good for them instead of for their clients. We continue to hear that law firms do not listen, do not innovate and do not engage in true dialogue with their clients as to what their needs are and how they can collaborate together. Conversely and to be fair, we sometimes hear the same speech from managing partners of other firms: that the majority of general counsel do not engage in true dialogue with their firms as to what their needs are and how they can collaborate together.

It seems that someone ought to take the initiative of this conversation. Considering that law firms are the service providers in this relationship and usually well paid to deliver solutions, we are of the opinion that law firms should overcome their old ways and their fear to get in front of the client somewhat vulnerably because they will not have all the answers, venture out of their comfort zone and take the first step. Whoever does that earnestly, consistently and diligently has a much higher chance of success at developing a closer and more meaningful relationship with its clients.  

*The author would like to acknowledge the contributions made to this article by his partners, for which he is very grateful.

See more from Veirano Advogados at: www.veirano.com.br/midia