A Plan To Share FCPA Penalties with Brazil has Been Thwarted… by Brazil: The Supreme Court’s Invalidation of the Lava Jato Foundation

A frequent criticism of how the US Department of Justice (DOJ) enforces the Foreign Corrupt Practices Act (FCPA) is that the fines recovered typically go to the US Treasury, rather than being used to make reparations for the damages caused by corruption in the countries where the bribery took place. Those who hold that view were likely encouraged by the non-prosecution agreement (NPA) that the DOJ concluded with Petrobras, the Brazilian state-owned oil company, in September 2018. The US enforcement action against Petrobras is a development of the so-called Lava Jato (Car Wash) investigation, in which firms paid off some Petrobras’ senior employees to benefit them in the contracts they had with the oil company. Such senior employees also shared a portion of the briber of politicians and political parties. In Brazil, Petrobras (and its shareholders, including the Brazilian federal government) are considered the victims of this scheme, but the US DOJ considered Petrobras a perpetrator (as well as a victim), because Petrobras officials had facilitated the bribe payments, in violation of the FCPA. Thus, the DOJ brought an enforcement action against Petrobras, and the parties settled via an NPA that required Petrobras to pay over US$852 million in penalties for FCPA violations. But—and here is the interesting part—the NPA also stated that the US government would credit against this judgment 80% of the total (over US$682 million) that Petrobras would pay to Brazilian authorities pursuant to an agreement to be negotiated subsequently between Petrobras and the Brazilian authorities.

This unusual agreement was the result of unusually close cooperation between U.S. and Brazilian authorities, especially the Lava Jato Task Force (group of federal prosecutors handling a series of Petrobras-related cases). After the conclusion of the NPA between the DOJ and Petrobras, the Task Force then entered into negotiations with Petrobras and reached an agreement under which Petrobras would use US$682 million that it would otherwise owe to the US government to create a private charity, known unofficially as the Lava Jato Foundation, with the Foundation using half of the money to sponsor public interest initiatives, and the other half to compensate minority shareholders in Petrobras. According to the agreement, the Foundation would be governed by a committee of five unpaid members from civil society organizations, to be appointed by the Task Force upon judicial confirmation. Once created, the Task Forcewould have the prerogative to have one of its members sitting at the Foundation’s board.

This resolution of the Petrobras case seemed to be a win-win resolution and a promising precedent for future cases: The US imposed a hefty sanction for violation of US law, but most of the money would be used to help the Brazilian people, who are arguably the ones most harmed by Petrobras’s unlawful conduct. Yet this arrangement has proven extremely controversial in Brazil, both politically and legally. Indeed, the issue has divided the country’s own federal prosecutors: The Prosecutor General (the head of the Federal Prosecutor’s Office, from which the Lava Jato Task Force enjoys a broad independence) challenged the creation of the Foundation as unconstitutional. She prevailed on that challenge in Brazil’s Supreme Court (Supremo Tribunal Federalor STF), which suspended the operation of the Foundation.

What, exactly, was the legal argument against the creation of the Lava Jato Foundation, and what are the implications of the STF’s ruling for this approach to remediating the impacts of foreign bribery going forward?

  • The main legal objection to the agreement between the Lava Jato Task Force and Petrobras was that the Task Force had no legal authority to negotiate and execute such an agreement. The Lava Jato Task Force has the special authority to handle criminal cases arising from the investigation into bribery and related crimes at Petrobras. But, the STF reasoned, the Task Force’s authority to handle these criminal cases did not give it the authority negotiate an agreement with Petrobras, because that agreement did not follow any conviction of Petrobras in Brazil and is not directly connected to any specific Task Force power. True, the agreement was anticipated in the NPA that resolved the US government’s criminal investigation of Petrobras, and the Task Force was involved in those discussions. But this NPA, the STF reasoned, was the sole product of a foreign nation enforcing its own laws, and so could not give the Task Force any additional authority to negotiate an agreement with Petrobras.
  • The STF also objected to the direct participation of the Lava Jato Task Force prosecutors in the management of the Foundation. This aspect of the Foundation’s design may indeed be problematic, though it would also be relatively easy to cure by removing the Lava Jato Task Force from the management or leadership selection process for the Foundation, except for some limited oversight role to ensure that the terms of the agreement were being followed.
  • The Prosecutor General also argued that there was no legal basis for creating a private entity to receive funds from Petrobras. The Prosecutor General argued that under Brazilian law, there is a set order of priority for money recovered in criminal cases: First, to the victims (if they can be identified); next, to the Federal Government; and after that, to specific funds (such as the National Fund for Penitentiaries and the Fund for Collective Rights). Furthermore, the Prosecutor General pointed out, the NPA with the US DOJ only says that the US will credit the penalty money paid by Petrobras to “Brazilian authorities,” not the Lava Jato Task Force or some private foundation. The STF did not rule on this issue, but it is reported to be in conversations with the relevant stakeholders.

The STF’s ruling thus leaves Brazil (and the US and Petrobras and others interested in these sorts of arrangements) in a state of uncertainty. As noted above, the concerns about prosecutorial involvement in the management of the Foundation would be relatively straightforward to address. Much more difficult are the first and third issues flagged above: (1) Who in Brazil has the authority to negotiate with Petrobras the sort of agreement envisioned by the US NPA? (2) Under any such agreement, what entity or entities in Brazil are entitled to receive the money?

  • On the first question, the STF’s decision does specify which authorities in Brazil actually wouldhave the authority to negotiate the sort of agreement envisioned by the US NPA, nor does the NPA reference any specific Brazilian authority. The problem is that although the US views Petrobras as a perpetrator as well as a victim, in Brazil Petrobras (as an entity) is seen as just a victim. There are no “Brazilian authorities” prosecuting Petrobras in Brazil. So, which “Brazilian authorities” would have the authority to negotiate an agreement with Petrobras? There’s no clear answer, and the STF’s ruling didn’t offer much guidance.
  • As for the second question, none of the Prosecutor General’s suggestions regarding who should get the money from Petrobras seem to fit with the purpose of the US NPA. Brazil, again, considers Petrobras the victim in the Lava Jato cases, but it seems nonsensical, and clearly contrary to the purpose of the NPA, for Petrobras to transfer to itself 80% of the fines it would otherwise owe to the US government. Transferring that money to the Brazilian Federal Government is arguably not much different, since the Federal Government is the majority shareholder in Petrobras. As for the other funds mentioned by the Prosecutor General, these may not be a good destination either. In 2017, for example, only 3% of the money sent to the Fund for Collective Rights was effectively used to sponsor public interest activities; most of that money was effectively returned to the Brazilian treasury.

The problem for Brazil is that if it doesn’t figure out good answers to these questions, the consequence may be that Petrobras will end up having to pay that US$652 million to the US rather than transferring the money to Brazil.Brazilian federal prosecutors are in conversations with the Office of the Solicitor General and the Federal Court of Accounts to find a solution that keeps the money in Brazil, and hopefully they will do so in a timely fashion. This is important not just for Brazil, but for others with an interest in encouraging the most prominent enforcers of foreign bribery laws, like the United States, to include these sorts of reparations clauses in FCPA future settlement agreements.

7 thoughts on “A Plan To Share FCPA Penalties with Brazil has Been Thwarted… by Brazil: The Supreme Court’s Invalidation of the Lava Jato Foundation

  1. The Petrobras FCPA resolution was not an “unusual agreement” in that several prior FCPA enforcement have also included credits or deductions for fines paid to foreign law enforcement in parallel matters.

    • It was unusual in the sense that Petrobras was not actually a defendant in any foreign enforcement action. As Victor’s post explains, in Brazil Petrobras is considered solely as a victim–the Brazilian authorities have brought cases against Odebrecht and numerous other bribe-paying firms (as well as scores of individuals), but not against Petrobras as an entity. Thus the Petrobras FCPA resolution with DOJ was unusual in that the DOJ agreed to include credits for amounts that Petrobras agreed to transfer to Brazilian authorities that were _not_ fines in parallel matters, but rather contributions to some sort of charitable enterprise.

      Of course, perhaps that sort of agreement is also not as unusual as I currently think that it is. Do you know of any other FCPA settlements that include credits/deductions for payments to foreign authorities that are NOT fines levied in parallel prosecutions?

      • Not sure what the basis is for saying that “Petrobras was not actually a defendant in any foreign enforcement action.” As stated in the DOJ’s release “in related proceedings, Petrobras reached a settlement with the U.S. Securities and Exchange Commission (SEC) and Petrobras entered into an agreement to reach a settlement with the Ministerio Publico Federal in Brazil.”

        • I think Victor’s post explains this clearly and accurately. Petrobras did enter into an agreement with Brazilian federal prosecutors, but this was not to settle a criminal enforcement action against Petrobras, which was not charged with a crime in Brazil. Indeed, as the post explains, the reason the Brazilian Supreme Court invalidated the agreement between Petrobras and the Brazilian Lava Jato prosecutors was precisely that Petrobras wasn’t a defendant in a Brazilian criminal case, and therefore the Lava Jato prosecutors had no authority to enter into any agreement with Petrobras.

          • Yes, it is unusual in the sense that there is asymmetry in how Brazil and U.S. authorities see Petrobras’ role in the bribery scheme. Brazil authorities see Petrobras as solely the victim of the bribery scheme. Although aggressively prosecuting corruption cases in the context of Lava Jato, MPF wouldn’t probably seek any resolution of this nature with Petrobras (the victim in their view) if there wasn’t an U.S. side of the investigations.

  2. A very interesting development and a great blog post. It makes me wonder whether these remediation/reparation projects will be able to continue as an enforcement agency led practice or whether their success will depend on some kind of formal legitimization through legislation. We have seen some remediation attempts succeed notwithstanding that they lacked higher approval and were only the byproduct of an agreement between an enforcement agency and a corporate wrongdoer, although this blog post suggests that this kind of enforcement agency led approach may not work in Brazil.

    The path forward, in Brazil at least, may be through formal institutions which have the statutorily entrenched authority to negotiate these ‘remediation’ or ‘charitable disbursal’ clauses into settlement agreements. We can already see this happening in the UK, with the publication of the ‘compensation principles’ and the DFID beginning to take control over carrying out these kinds of reparations projects.

    It will be interesting to see which way it all goes in Brazil – I am not entirely familiar with the remediation provisions in the Odebretch case but I hope that this decision won’t hinder their ultimate operation.

    • Hi Sam, the Petrobras case quite unique under Brazilian laws due to the fact that the company is considered the victim in Brazil and there is no clear answer under current resolution how to deal with the situation. The resolution here involves legal discussion and also institutional politics in the sense that multiple authorities will have to find a solution that make them all comfort and gives some stability to the agreement. This is not expected to affect Odebrecht’s or similar cases significantly because these companies are being prosecuted for corruption in Brazil and are perfectly liable under Brazilian laws and therefore “splitting” the fines here is much more straightforward under Brazilian laws.

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