Since 2002, as Salgema’s successor, Braskem has operated rock salt extraction wells in the City of Maceió, State of Alagoas, in order to provide raw material to its chlor-alkali and dichloroethane production unit. In March 2018, there was an earth tremor in the municipality, and cracks were found in buildings and public roads of the neighborhoods of Pinheiro, Bebedouro, Mutange and Bom Parto. In May 2019, a report by the Geological Survey of Brazil (CPRM) was published, which indicated a potential relationship between the geological event and the extraction activities carried out by Braskem.
On May 9, 2019, Braskem preventively decided to stop rock salt extraction activities in the region and in this context, initiated an investment project for the acquisition of sea salt from third parties as raw material for the plant in Alagoas, replacing brine. The estimated cost of the project was BRL 68 million.
To ensure the safety of communities, on November 14, 2019, based on the results of the studies carried out, Braskem proposed the creation of a protected area around certain wells, in coordination with the Civil Defense and other authorities.
The Company has made its best efforts to understand the geological event and has been conducting, with support from independent institutions and nationally and internationally renowned experts, studies focused (i) on understanding the geologic event and possible effects on the surface, and (ii) on the stability analysis of the rock salt wells. The knowledge produced regarding the event and the actions set forth in search of stability in the region are being shared with the Brazilian Mining Agency (ANM) and other pertinent authorities, with which the Company maintains a constant dialogue.
Also in May 2019, the Alagoas State Prosecutors’ Office (Ministério Público do Estado de Alagoas) and the State of Alagoas Public Defenders’ Office (Defensoria Pública do Estado de Alagoas) filed a public-interest civil action (Residents PCA), seeking the judgement against the Company to indemnify the damage caused to the residents of Pinheiro, Mutange and Bebedouro, in the estimated amount of BRL 6.7 billion. In addition, the Federal Public Prosecutor’s Office of Alagoas filed a new Socio-environmental Public Civil Action (Socio-environmental PCA) against Braskem and other defendants, including its main shareholders, Petrobras, and Novonor, with a request for payment of compensation for socio-environmental damages and others of collective nature, in the amount of BRL 27.6 billion.
Braskem proceeded with dealings with the competent authorities and, on January 3, 2020, signed the Term of Agreement for Support in the Eviction of Risk Areas (Term of Agreement – Residents), together with the Alagoas State Prosecutor’s Office , the State of Alagoas Public Defender’s Office, the Federal Public Prosecutor’s Office (MPF) and the Federal Public Defender’s Office (DPU), which provided for cooperative actions for vacating risk areas and assisting the population located in these areas via the Financial Compensation and Support for Relocation Program(PCF).
On December 30, 2020, the Company and the authorities signed (i) the Second Amendment to the aforementioned agreement to include additional proprieties; and (ii) the Socio-environmental Remediation Agreement (referring to the Socio-environmental PCA), through which Braskem committed to adopt measures to stabilize and monitor the phenomenon resulting from the rock salt exploration activities, as required by the ANM in the closure plan of the mining fronts, as well as repairing, mitigating or compensating for potential impacts of the event. With the execution of these agreements, the Residents PCA and the Socio-environmental PCA against Braskem were extinguished.
Measures adopted by Braskem
Braskem has been making efforts and collaborating with the public authorities, adopting measures for the relocation of residents, payment of financial compensation, stabilization and monitoring of wells and to guarantee assistance to residents and their urban mobility.
With the support of independent institutions and nationally and internationally renowned specialists, it carried out and continues to develop studies focused on understanding the geological event, as well as analyzing the stability of rock salt wells, which no longer operate. The results of these studies are periodically shared with the Brazilian Mining Agency (ANM) and other pertinent authorities, with whom the Company maintains a constant dialogue.
In this sense, measures were presented to the ANM for the closure of the salt extraction fronts in Maceió, including action for the closure and monitoring of their wells, which were approved by the ANM and are being implemented by Braskem.
Regarding the Term of Agreement – Residents, until December 31, 2023, around 14,400 properties were vacated and more than 19,000 compensation proposals were presented to residents, businessmen and traders, with more than 17,900 indemnities paid. The proposal acceptance index is 99.3%; The amount paid by Braskem in indemnities, financial aid and lawyers’ fees exceeds BRL 3.9 billion. More than 1,000 professionals are still mobilized to ensure that all families are assisted in accordance with the schedule defined by the authorities.
Likewise, in compliance with the Socio-environmental Remediation Agreement, Braskem hired an external consultancy specialized in the analysis and management of socio-environmental risks. The report issued by the consultancy was forwarded by Braskem to the MPF, and includes an execution plan with measures for socio-environmental compliance, with a description of the actions and implementation schedule, including activities for the next two years. The planned actions will have a positive impact on the socio-environmental management of all the companies that make up the Braskem group.
In addition, Braskem also assumed the commitment of no longer carrying out the rock salt extraction activity in the affected region in Maceió and committed itself not to start new rock salt extraction activities in other locations while the Socioenvironmental Compliance Improvement Plan is not implemented.
More information on the consequences of the geological event and on the measures adopted by Braskem are available at https://www.braskem.com.br/alagoas.
In view of the process filed by the Federal Government against Braskem due to the alleged failure to pay the social security contribution for members presumably affected by excessive noise and exposure to benzene, between April 1999 and February 2006, Braskem clarifies that, in relation to the Notice of Violation that questions the payment of the Contribution of Risk of Accident at Work (RAT) to fund special retirement, referring to the period from January 2013 to December 2015, this was judged entirely null in the first instance due to the recognition of errors in the criteria for defining the calculation base, the lack of analysis of mandatory documents and the impossibility of filing based only on the Professional Social Security Profile document of the members. The process is currently under analysis at the second administrative level. In addition, there is no outstanding debt by Braskem, since a guarantee was offered in full amount of the required debt.
It is noteworthy that Braskem hired legal and technical opinions that attested to the unconstitutionality and illegality of the RAT Contribution requirement in the referred cases. These documents demonstrate that presumed exposure to harmful agents is not the case, and that there is no special activity carried out by its employees that justifies the charge.
With regard to the safety of its employees, Braskem reinforces that it has as a golden rule the safety of its members in the performance of their activities, and that collective and individual protection equipment is used to reduce possible exposure to harmful agents below the internationally accepted tolerance limits. In addition, despite not understanding that the RAT Contribution is due, the Company, on a voluntary basis, has implemented several precautionary actions, including:
i) Reduction in the number of members working in areas considered to have a supposed risk of exposure to harmful agents;
ii) Alteration of routes for workers within the industrial units to avoid passing through places of supposed risk of exposure;
iii) Reduction of manual collection of benzene samples and replacement by online analysis;
iv) Investments in the replacement of noise-emitting machines and equipment;
v) Training and increased control of the supply and use of PPE, among other measures.
There are two Public Civil Actions filed by the Federal Public Prosecutor’s Office (MPF) against Braskem, for alleged damage to federal highways caused by excessively loaded trucks from the company’s operations, which were judged unfounded in the first and second instance, with favorable decisions to Braskem. In the first claim, the STJ understood that it should suspend its judgment until the decision of a repetitive appeal on the matter and, in the second action, a potential filing of an appeal by the MPF is awaited.
Braskem understands the importance of observing the situation of roads in Brazil, as well as ensuring their maintenance and upkeep, and, in this regard, it emphasizes that it complies with all related legislation on the subject and has scales in all its units for weighing trucks.
Finally, it is also worth remembering that several factors contribute to the possible detrition of the roads, such as poor preservation, poor quality of materials used in their construction and maintenance, in addition to external factors that contribute to the weight of trucks circulating on these roads, whether it the gross weight (rain, for example), or per axle (cargo displacement due to braking, for example).
In June 2018, São Paulo Prosecutor’s Office filed a class action against 12 companies located in the Capuava Petrochemical Complex, located in the ABC region, in the State of São Paulo, including Braskem, due to alleged emission of atmospheric pollutants and alleged prevalence of people with Hashimoto’s thyroiditis in the vicinity of the Complex. The companies presented their respective defenses and are awaiting a court decision.
Braskem reaffirms that there is no causal link between the company’s activities and the alleged prevalence of Hashimoto thyroiditis in the region, and that the Public Prosecutor’s Office has not been successful in proving a higher prevalence of the disease in comparison with other regions where there are no industrial activities.
The Company informs that its operational activities are duly licensed, framed in current legislation, and under inspection by the competent bodies, notably the Environmental Company of the State of São Paulo (CETESB).
In addition, the Company constantly invests in new technologies to improve the safety of its activities and also in actions to reduce atmospheric emissions, which has been monitored by CETESB — which also exercises this control and monitoring over other companies located in the Industrial Complex.
Braskem adopts the best practices regarding compliance when contracting third parties, in line with current legislation, including the legal framework regarding the regular outsourcing of services (Law No. 13,467/2017). In this context, it has internal guidelines and regulations for hiring, in addition to having control tools and carrying out audits in partner companies.
It is worth mentioning that only reputable companies, with the financial capacity to provide services, are hired and chosen without any interference from Braskem team members, including the remuneration policy practiced by said companies. It should also be noted that Braskem adopts several measures to ensure adequate working conditions for those who perform services in its vicinity, including medical or outpatient care on its premises in cases of emergency.
Operation Car Wash began in March 2014 and pointed out, among other aspects, irregularities related to corruption at Petrobras. After the involvement of Braskem’s name in whistleblower that occurred within the scope of the Operation, related to alleged undue payments to the state-owned company, Braskem hired specialists in internal investigation to carry out an independent investigation and report the results, so it could then proceed with the necessary measures, which resulted in the following developments:
• The Company entered into a Leniency Agreement with the Federal Prosecutor’s Office (MPF) and with the authorities of the United States and Switzerland, in the approximate amount of USD 957 million (approximately BRL 3.1 billion at the time);
• Cooperation and negotiation with the Ministry of Transparency, the Government Accountability Office (CGU) and the Federal Attorney’s Office (AGU), which culminated in the signing of a Leniency Agreement with these authorities, in May 2019, dealing with the same facts object of the Global Leniency Agreement mentioned in the previous item and providing for an additional disbursement of approximately BRL 410 million, depending on the calculations and parameters used by the CGU and the AGU;
• Adhesion, by the Public Prosecutor’s Office of Bahia and the Public Prosecutor’s Office of Rio Grande do Sul to the Leniency Agreement signed with the MPF.
In compliance with these Agreements, Braskem paid, until June 2023, approximately BRL 3,429,037,000. There is also the amount of BRL 826,478 million resulting from the Agreement with the MPF and CGU and AGU, to be paid in four annual installments until January 30, 2025 and duly restated.
The internal investigation carried out by Braskem also revealed possible deficiencies in its internal Compliance controls. Thus, in 2016, the Company began the development and implementation of a broad Compliance Program, aimed at mitigating risks, adjusting processes and promoting significant improvements in the general environment of the Company’s internal controls.
Among the implemented actions, we highlight: the approval and revision of the Global Anti-Corruption Policy and the Global Policy on the Compliance System; the establishment of the Ethics Hotline channel, with outsourced and independent management; training and communication to members on integrity topics; improvements in supplier registration and approval processes with the implementation of third-party risk and integrity assessments; mandatory inclusion of anti-corruption clauses in contracts.
It is also worth mentioning the formal and effective participation in the Anti-Corruption working groups of the United Nations (UN) and the Integrity of the ETHOS Institute, as well as obtaining the ISO 37.001 Certification in 2021 on Management and Operation of the Compliance and Anti-Bribery Management System (ESMS) in the Company, among other measures.
Braskem also underwent independent monitoring for a period of three years due to the signed agreements, which attested to compliance with the Global Agreement and the effectiveness of the Company’s new controls, policies and internal procedures. A certification report was generated and submitted to the authorities. Based on the document, the MPF confirmed, in March 2020, the end of monitoring, compliance with the obligations of the Agreement and the effectiveness of the Company’s Compliance Program.
Subsequently, on May 13, 2020, the US Department of Justice (DoJ) and the US Securities and Exchange Commission (SEC) confirmed the end of the monitoring provided for in the agreements with those authorities, since the final report of the independent monitors certified that Braskem complied with its obligations established in the signed agreements and successfully completed the three-year monitoring. The Company is still under external monitoring by the CGU/AGU until the end of 2022.
Allegations of payments related to the Ethylene XXI project
In view of the allegations of improper payments related to the Ethylene XXI project, which were originally published in the Mexican press as part of the testimony of the former president of Pemex to the Attorney General of Mexico, Braskem S.A., together with Braskem Idesa (unit in Mexico), approved the hiring of a US law firm with proven experience in similar cases to conduct an internal and independent investigation into the allegations. The measure followed the standards established by Braskem’s Policy on the Compliance Global System and the governance guidelines of Braskem Idesa.
The investigation was concluded on February 2022, and no evidence was found to corroborate the allegations made by the former CEO of Pemex regarding allegedly improper payments connected or otherwise related to Ethylene XXI project.
Regarding the dispute with the State of Alagoas over alleged underpayment of the Tax on the Circulation of Goods and Services (ICMS), referring to the period from August 2012 to April 2016, Braskem informs that the amount under discussion was paid and there is no more contingency related to the theme.
The other processes referring to tax assessments related to the States of Bahia, Rio de Janeiro, Rio Grande do Sul, Pernambuco, and São Paulo are still in progress and discuss the criteria adopted by the inspection regarding the ICMS legislation. On all fronts, Braskem presented documentation that supports the legality of its conduct:
i) Tax credit: property, plant and equipment and purchased goods are essential inputs to the Company’s production and manufacturing process, with the right to credit being authorized, pursuant to applicable legislation. Braskem has a Technical Opinion from the Technological Research Institute (IPT) of São Paulo, confirming these fronts.
ii) Transfer of goods: the Judiciary Branch is in favor of the Company, having already ruled on the non-incidence of the tax on transfer operations between establishments owned of the same holder, recognizing as undue the collection by the Tax Authorities on internal transfers in these operations.
iii) Inventory: the difference calculated by the Tax Authorities is due to the mistaken disregard of internal movement of goods and normal losses resulting from the production process.
iv) Electricity transmission: tax is not due on the costs of using electricity transmission systems (but only on the actual consumption of electricity), with an understanding signed by the Federal Supreme Court in favor of Braskem.
It is worth noting that Braskem maintains a dialogue with the Tax Authorities to clarify how its manufacturing processes and the peculiarities of the petrochemical chain are operated, as well as monitoring the positioning of jurisprudence regarding the topics subject to tax assessments.
Braskem was assessed by the Brazilian Revenue Office due to the alleged non-compliance with the limit on the use of tax credits (tax losses and Social Contribution on Net Profit (CSLL) negative basis) in merger operations, which took place in November 2007, September 2008 and August 2013.
The Company understands that it acted in accordance with the constitutional principles by not applying the 30% limit established for offsetting tax credits, since the use of the credits was effected at the end of the activities of the merged legal entity, and the legislation determines that the limitation should only be applied to the annual use of tax credits throughout the activity of the legal entity that remains in existence after the merger.
At the time of the mergers, this was the majority understanding of the administrative judgment body, the Administrative Tax Appeals Board (CARF), which continues with precedents favorable to Braskem, which recognize this right.
The tax assessment involving the merger carried out in September 2008 was fully canceled at the administrative level, with no further debt being charged to Braskem. The tax assessments related to the mergers that took place in November 2007 and August 2013 are currently the subject of legal proceedings still in progress, with no outstanding collection amount. There are no other mergers subject to assessment.
Due to the alleged misuse of tax credits — related to the Contribution for the Financing of Social Security (COFINS), the Social Integration Program (PIS), negative balances of income tax (IRPJ) and social contribution on net profit (CSLL) – for offsetting various tax debts, Braskem received, between 2016 and 2019, the application of penalties by the Brazilian Revenue Office. There is no outstanding amount and the charges were suspended after the presentation of the defense by the company.
All of these processes, which involve fines for non-validation of the performed offsets are in the initial phase of litigation. It is worth mentioning that the penalties are reflected in other processes, that is, if Braskem wins the main process, the penalty process is automatically cancelled. It is expected that more than 90% of these lawsuits will end favorably for Braskem, since the Superior Tribunal of Justice, in a leading case judgment, recognized the validity of the credits used by the Company in these offsets.
As for the charge of penalties, Braskem has the following counter-arguments: (i) the occurrence of lapsing of the right of action; (ii) impossibility of penalizing the taxpayer who only exercised his credit right; (iii) pending judgment of the main proceedings, which discussed the compensation originally made; and (iv) impossibility of applying a new fine on the same fact, since a culpable default fine is already charged.
Regarding the possibility of applying these penalties, there are two leading cases on the subject in the Supreme Court that await judgment. In 2020, five votes were cast in favor of the taxpayers and none against them, but the trial was stopped before its conclusion.
In 2018, Braskem received a notice due to alleged irregularities in the payment of income tax and social contribution related to the export of products by Braskem Qpar to Braskem Incorporated Limited. In a trial at the first administrative level, the charge was dismissed and the tax assessment canceled in its entirety, unanimously.
Braskem understands that the assessment is void because it is based on a document that contains an error and, in its defense, it presented adequate documentation that confirms the regularity of the operations carried out.
Currently, there is no outstanding debt and the charge is suspended. An ex-officio appeal was filed by the Brazilian Revenue Office, which is pending judgment.
With regard to the subpoena received by Braskem from the Brazilian Revenue Office regarding alleged irregularities in income tax and social contribution related to the tax amortization of goodwill, resulting from transactions involving Braskem’s subsidiaries (OPP Produtos Petroquímicas S/A and OPP Química S/A), which took place between 2011 and 2013, Braskem presented in its defense documentation attesting to the legitimacy of the goodwill generated, the existence of a business purpose in the audited operations, the absence of common control between the parties involved and the participation of third parties.
It is also worth mentioning that the amortization was carried out in accordance with current legislation which, at the time of the transaction, did not bring the restrictions imposed by Law No. 12,973/2014, among them, the impossibility of tax amortization of the internal goodwill.
There is no outstanding debt and the charge is suspended. The process awaits a decision on the appeal filed by Braskem.