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Cablegate: Brazil: Competition Policy Overview

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RR RUEHWEB

DE RUEHBR #0176/01 0491234
ZNR UUUUU ZZH
R 181233Z FEB 10
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 0491
INFO RUEHBR/AMEMBASSY BRASILIA
RUEHRG/AMCONSUL RECIFE
RUEHRI/AMCONSUL RIO DE JANEIRO
RUEHSO/AMCONSUL SAO PAULO

UNCLAS BRASILIA 000176

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EFIN EIND EINV BR
SUBJECT: Brazil: Competition Policy Overview

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Summary

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1. (SBU) Brazil's Competition Policy System (SBDC)
is awaiting Congressional approval of major reforms to restructure
its three constituent agencies, add much-needed professional staff,
and implement substantive reforms (notably, pre-merger notification
requirements). In a February 1 meeting, Arthur Badin, President of
the Brazilian Administrative Council for Economic Defense (CADE),
discussed the prospects for passage of the reform (which he
predicts will be signed into law by July) and consequences for SBDC
if the reform does not pass. SBDC has made substantial functional
improvements in the last 10 years and is active internationally.
As SBDC continues its modernization process, prospects for
increased cooperation between the United States and Brazil on
competition policy are excellent. End summary.

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Background - Current Competition Policy System in Brazil (SBDC)

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2. (U) SBDC comprises three agencies - CADE, the
Ministry of Justice's Secretariat for Economic Law (SDE), and the
Ministry of Finance's Secretariat for Economic Monitoring (SEAE).
SDE investigates anticompetitive conduct and issues non-binding
opinions in merger cases. SEAE issues non-binding economic-impact
opinions in merger reviews, may issue non-binding opinions related
to anticompetitive conduct, and also performs a competition
advocacy role within the government of Brazil. CADE has the
exclusive authority to make final rulings on the investigations
performed by SDE and SEAE.

3. (U) SBDC was created in 1962 and first amended
in 1994, creating CADE as an autonomous body under the umbrella of
the Ministry of Justice. The President, Attorney General, and
seven Councilors (equivalent to Federal Trade Commissioners) of
CADE are appointed by the Brazilian President and approved by the
Senate. A 2000 amendment mandated a strong emphasis on combating
cartels, along with the adoption of a consumer welfare perspective,
giving SBDC important new powers in conducting investigations,
notably powers to conduct dawn raids and to institute a leniency
program that provides reduced penalties and criminal immunity for
cartel members who report themselves to SDE. (NOTE: Only the first
cartel member to report the illegal activity and cease involvement
qualifies for the reduction in penalties, which varies depending on
SDE's degree of prior knowledge about the cartel. END NOTE)

4. (U) Further amendments in 2007 clarified
procedures for settling anti-competitive conduct cases (e.g. abuse
of market dominance) and extended CADE's authority to reach
settlement agreements in cartel cases, which had previously been
excluded. A company under investigation can propose a settlement
at any point during the SBDC analysis but must reach agreement
within 30 days of beginning negotiations. In leniency cases, the
company must admit guilt, but in other cases CADE may grant a
settlement with or without an admission of guilt. Settlements in
non-leniency cases entail administrative but not criminal immunity.

5. (U) Although the three current agencies of SBDC
have attempted to divide labor efficiently amongst them, there is
some overlap and delay inherent in the way the system is presently
organized. For example, even in cases SDE determines to dismiss,
CADE must conduct a second review. In 2009 (data not including
December), the full SBDC analysis of merger cases took an average
of 179 days, including an average 44 days in CADE after SDE and
SEAE reviews are completed. That said, 2009 data represent a
substantial improvement in processing time from 2005, when cases

took 252 days to be reviewed, 81 in CADE. The decrease in the
average processing time for merger reviews is due in large part to
a "fast-track" procedure that CADE and SDE formalized in 2003 for
cases considered to be uncomplicated and not likely to cause damage
to competition. From 2005-2009, 73% of merger cases were examined
under the "fast-track" procedure, freeing resources to focus on
cartels, considered the most economically damaging type of
anti-competitive conduct. SDE, particularly, focuses much of its
attention on cartels through the dawn raid and leniency programs,
in addition to maintaining a cartel tip hotline and conducting
public awareness campaigns about the effects of cartels on
consumers.

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Much-Needed Reforms

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6. (U) Draft law 3937 of 2004 proposes to unify
the functions of the three existing agencies of SBDC under one
reformulated CADE. The new CADE would maintain its current
position as an independent agency linked to the Ministry of
Justice. The bill would also extend the terms of CADE's seven
councilors from two to four years, impose pre-merger notification
requirements, and create 200 permanent staff positions for the new
CADE. These proposed reforms have been praised by the OECD, the
International Competition Network (ICN), and the U.S. Federal Trade
Commission (FTC).

7. (SBU) CADE President Arthur Badin told Econoff
on February 1 that he considers the reform bill Brazil's only way
to make "the next big leap to modernization of competition policy."
Badin said further reductions to case processing time would not be
possible if the reform bill does not pass. If the bill passes, he
predicted 93% of cases will be decided in fewer than 20 days due to
elimination of duplicative analyses and the implementation of
mandated timelines for each phase of review. Passing the bill is
Badin's number one priority, and he said he is confident it will be
signed into law by July. The reform bill was approved by the
Brazilian Chamber of Deputies in December 2008 and subsequently by
five committees in the Senate. It must now be voted by the full
Senate, sent back to the Chamber for final approval, and then
forwarded to the President for signature in order to pass into law.
If the reform does not pass in the first half of the year, it will
very likely suffer from waning attention in the run-up to the
October 2010 Brazilian elections for President, governors of 26
states and the federal district, two-thirds of the Senate, and all
members of the Chamber of Deputies. Badin, while confident that
the bill will pass into law before July, said that quick passage is
critical, since it is unclear when or if a new government - which
will not be in place until January 2011 - would consider the
reforms again.

8. (SBU) In addition to gains in efficiency due to
the proposed reorganization, the positions created by the reform
bill will provide critical human resources. Currently, the three
competition agencies are understaffed and have high rates of
employee turnover. For example, CADE has fewer professional staff
(49) than the number of PhD economists in the Federal Trade
Commission's Bureau of Economics alone (approximately 70). CADE,
SDE and SEAE employees are often seconded from other ministries, do
not necessarily have specific competition policy training, and have
limited options for promotion and career growth within the
competition system. Badin stated the creation of 200 new positions
and a structure for career growth within CADE is critical for
training and retaining talented economists and analysts. Badin
noted the budget for the new positions has already been approved by
the Ministry of Planning. He generally did not consider budget an
issue for CADE, as the agency brings in more revenue from case fees
than it expends and expects to expend in the new, reorganized
agency.

9. (SBU) The reform bill also includes several
important substantive changes. One of the most significant is the
implementation of pre-merger notification requirements. Today,

parties to a merger are not required to notify SBDC until after the
merger takes place. Therefore, the parties do not have the pending
merger consummation as incentive to assist in the merger review as
quickly as possible. In practice, this also limits the possible
remedies, since it is very difficult to reverse a merger once it
has been consummated - Badin compared it to "unscrambling eggs."
The reform bill would require the parties to notify CADE before
taking action to consummate the merger and implements deadlines for
several stages of review by CADE. The proposed deadlines vary
depending on whether CADE requests additional information and, if
so, at what stage , but are generally in line with international
standards and would allow "non-complex" cases to be decided in
fewer than 20 days.

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OECD Peer Review

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10. (SBU) The Organization for Economic Cooperation
and Development (OECD) is currently conducting a peer review of
competition law and policy in Brazil. In the last peer review
(2005), the OECD found that SBDC had made significant progress in
implementing sound competition policy in Brazil. "The [SBDC]
agencies," the report said, "exhibit a strong institutional
dedication to high standards of integrity, autonomy, sound policy,
and fair procedure; have an excellent leadership cadre; and enjoy a
supportive business community." Nonetheless, the report cited a
counter-productive institutional structure, inadequate staff,
certain problematic statutory provisions, and a slow judicial
review system as areas for improvement. The OECD report recommended
several alterations to the competition law, which were subsequently
incorporated into the reform bill discussed above. The current
OECD report is not yet available, but CADE President Badin told
Econoff he anticipates that most weaknesses the report is likely to
identify would be remedied by passage of the pending reform
legislation.

11. (SBU) One area not addressed by the reform bill is
the judicial appeal process, which is notoriously slow in Brazil.
According to CADE's 2008 annual report (the most recent available),
only 3.8% of fines assessed between 2002 and 2004 were paid and
only 18% of decisions between 1994 and 2005 were implemented, due
mostly to lengthy and ongoing judicial appeals. Badin acknowledged
the problems with the judicial system, but noted these broader
systemic issues are beyond the scope of specific competition policy
system reform.

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International Engagement

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12. (SBU) CADE is an active member of the
International Competition Network and attends all meetings of the
OECD Competition Committee. Badin said CADE is discussing with the
OECD the possibility of opening a competition training center in
Brazil to provide courses for competition authorities in the
region. CADE currently coordinates a training course (with funding
from the Brazilian Cooperation Agency [ABC] - USAID equivalent) for
competition practitioners from Latin America, which Badin said is
particularly helpful for dealing with regional "peculiarities"
(such as, "a negative connotation associated with plea bargains")
not necessarily found in the American or European models.

13. (SBU) In 1999, the United States and Brazil signed
a formal cooperation agreement regarding cooperation between the
countries' competition authorities. FTC's Office of International
Affairs describes the history of cooperation with CADE as both
"long and deep." Recent examples of such cooperation have included
a visit by two FTC economists to a CADE training on merger analysis
and the participation of two CADE economists in an FTC program

allowing foreign anti-trust officials to work at FTC for three to
six months. As a result of discussions at the December 2009
meeting of the Bilateral Consultative Mechanism between the Office
of the United States Trade Representative and the Brazilian
Ministry of External Relations (MRE), FTC and CADE have begun
informal information exchanges regarding competition in the generic
drug industry. Both Brazil and the United States have expressed
interest in expanded exchanges on competition policy and technical
issues of mutual concern.

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Comment

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14. (SBU) The competition reform bill currently
pending before the Brazilian Congress is critical to enable SBDC to
modernize and fully implement international best practices. CADE,
which may soon become the single competition authority in Brazil,
is eager to deepen engagement with the United States. President
Badin welcomed continued cooperation between the United States and
Brazil on competition policy and particularly praised exchanges
such as the opportunity for CADE economists to work at FTC and
Embassy Brasilia's efforts (currently underway) to arrange a
Voluntary Visit by a group from the CADE prosecutor general's
office to the United States. In competition policy, as in many
areas, Brazil is emerging as a regional and global player. It may
be particularly useful for the United States to consider supporting
efforts, such as perhaps the regional training course funded by
ABC, that position Brazil as a partner for developing effective
competition policy throughout the region and beyond. End comment.
SHANNON

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