As most readers of this blog are likely aware, the Brazilian state-owned oil company Petrobras has been at the center of a massive bribery scandal in Brazil, and the main focus of Brazil’s so-called Car Wash (Lava Jato) Operation. That Operation uncovered evidence that between 2006 and 2014, corporations paid kickbacks to senior Petrobras officials for inflated contracts, and the Petrobras officials funneled a substantial portion of those illicit proceeds to the political parties in the government’s coalition. These revelations lead to legal actions not only in Brazil, but also in the United States. Because Petrobras issued securities in the U.S., and because U.S. law imposes criminal liability on a corporation for the conduct of the corporation’s employees, Petrobras was potentially liable under the U.S. Foreign Corrupt Practices Act (FCPA), because Petrobras officers had facilitated corruption abroad (that is, in Brazil). In September 2018,Petrobras signed a non-prosecution agreement (NPA) with the United States Department of Justice, according to which the company would pay over US$850 million in penalties. But, crucially, only 20% of that penalty would be paid to the United States; the remaining 80%, according to the terms of the NPA, was to be paid by Petrobras “to Brazil.”
This provision sparked great controversy and debate in Brazil over the destination of that money—a debate that seems to have been ended (for now) by the coronavirus crisis. The root of the problem is that under Brazilian law, Petrobras (the corporate entity) was considered victim of the bribery scheme, not a perpetrator. So, from a Brazilian perspective, it was hard to comprehend why the company should be obligated to pay for crimes that harmed it. Indeed, in many of the Car Wash cases resolved in Brazil, penalties recovered from other entities (such as the firms that paid kickbacks) were transferred to Petrobras. But under the NPA with U.S. authorities, Petrobras was required to pay over US$650 million to Brazil. What Brazilian entity or entities should get that money? And who should decide on the allocation?
Initially, in January 2019, Petrobras and the Car Wash Operation Task Force (the special unit in the Brazilian Federal Prosecution Service that had been formed to coordinate the investigation and prosecution of criminal conduct associated with the Petrobras scandal) reached a formal agreement with Petrobras under which half of the money Petrobras was obligated to pay to Brazil would go to a to-be-created foundation dedicated to the promotion of civic awareness and anticorruption education, while the other half would be used to compensate Petrobras’s Brazilian stockholders (other than the Brazilian government). This agreement was approved by the federal court in the State of Paraná with jurisdiction over the principal cases in the Car Wash Operation.
However, the negative reactions to this agreement, though certainly not universal, were powerful and immediate. Critics accused the Car Wash Operation prosecutors of misapplying and even misappropriating the resources in question. Many of these critics asserted that because the Brazilian federal government represents the country in international relations, the U.S. NPA’s designation of “Brazil” as the recipient of the money means that this money should be paid directly to the Brazilian federal treasury. The controversy triggered an unusual lawsuit in which the head of Brazil’s federal prosecution service—the Prosecutor General—argued that another part of the federal prosecution service—the Car Wash Task Force—had acted unlawfully, because (according to the suit) the Car Wash Task Force did not have the legal authority to decide on the destination of the money Petrobras had agreed to pay to Brazil. (In addition to the suit brought by the Prosecutor General, several Brazilian political parties filed similar suits.)
In March 2019, the Supreme Court justice to whom the cases were assigned issued a preliminary injunction staying the agreement between Petrobras and the Car Wash Task Force; this decision was discussed on this blog at the time. Six months later, in September 2019, the same justice approved an alternative agreement between the Prosecutor General, Congress, and the federal government, according to which most of the money would be used to support general public education, and a smaller portion would be used for environmental protection in Amazonia. Shortly after that, the cases were dismissed.
However, plans changed when the coronavirus pandemic began hitting Brazil in late February 2019. In light of this emergency situation, the Prosecutor General filed an application requesting that most of the Petrobras fine money be used to fund “prevention, containment, combat[ing], and mitigation of the coronavirus pandemic,” rather than to support public education. After reopening the cases and consulting the federal government and the Congress, in March 2019 the Supreme Court justice responsible for the situation authorized this change.
So, this year-long controversy has finally reached its end point. But it’s worth emphasizing that the final resolution is just as heterodox, with respect to traditional Brazilian legal principles, as the Car Wash Operation prosecutors’ initial arrangement. The use of fines paid in an anticorruption enforcement action to support activities in public education, environmental protection, or public health, particularly on the basis of an agreement between the Prosecutor General and representatives of the Congress and government, though approved by the judiciary in this case, does not have explicit support in the Brazilian legal system. And the non-traditional resolution in this case, whose complete content has not yet been publicly released, will raise new challenges, which will only be more pressing given that the money is to be used to combat an emergency.
Given the absence of precedent for this sort of arrangement, and the generality of the purpose to which the money is to be spent pursuant to the new agreement, it is unclear how the use of this money will be supervised. The parties to the agreement need to address this issue and provide some guarantee of honest use of the money. Otherwise, the most recent Supreme Court decision may only open a new chapter in the debate over the proper destination of corruption penalties. In this context, at least the following measures should be taken:
- First, the Brazilian Supreme Court should not dismiss the cases, but rather should leave them open to the Court to expeditiously resolve any controversies that arise concerning adherence to the agreement.
- Second, complete information regarding the terms of the agreement must be promptly made available to the relevant federal, state, and municipal Health Councils (legally recognized collegiate bodies composed of representatives of society and government to oversee public health services in Brazil) so that they can perform their oversight functions effectively.
- Third, the agencies, departments, and offices responsible for the use of the money should provide regular reports to the Brazilian Supreme Court about their spending of these funds on combating coronavirus, and the Court should order the Brazilian Controller General’s office and/or the Federal Court of Auditors to assess each agency and issue reports on any possible improprieties.
Thank you for this interesting post, Rodrigo. I’m curious as to whether this kind of NPA agreement between the DOJ and a foreign entity is the first of its kind. You mention the absence of precedent for this kind of arrangement, but is that in regards to Brazil or the whole world?
That leads into my second question: do you think it would be possible for countries to follow a pre-existing plan – either one developed by a country in response to a similar situation or one developed by anti-corruption experts – that would reduce some of the controversy surrounding the destination of these payments? If so, how do you think that plan should be structured? Should countries set these funds aside in advance for specific public needs, like education, or should they be funneled into the national treasury?
Hi Eric. Thank you for your comment.
Regarding your first point, I am not sure, but I guess that the NPA between the DOJ and Petrobras is the first one that was signed with a state-owned enterprise in which the corruption acts were practiced. So far, I have only heard and read about DPAS and NPS between the DOJ and private corporations that benefited from corruption occurred within a government entity.
In relation to your second point, I think that countries should regulate by statute the destination of corruption fines and proceeds. The allocation of this money to public-interest activities, such as public health, public education, environment protection, would be very useful, since such areas are exactly those ones most diffusely affected by corruption.
Rodrigo, thank you for this informative post.
The effect of the coronavirus pandemic on this case and the disbursement of the penalty funds is very interesting (and of course indicative of how severe the current public health crisis is). From the start, it seems that there was discomfort in Brazil with the unusual nature of the NPA – fining Petrobras – and the unconventional allocation of funds by the Car Wash Task Force. Given that the Supreme Court has now authorized disbursement of these funds for a perhaps even more unconventional purpose – combatting the public health crisis – do you think there will be less opposition in the future to using corruption penalties to fund specific (anti-corruption or other) programs rather than the general treasury? Or do you anticipate the circumstances of this pandemic being too unique and overwhelming to have any sort of precedent setting effect?
Hi Rachel. Thank you for your comment.
I think that the destination of corruption fines and proceeds to public health to combat the coronavirus pandemic will help to minimize the resistance against the use of this kind of resource to public-interest activities in general in Brazil. The situation has been useful to demonstrate that the possibility of definition of the purpose of such funds by prosecutors and judges may be a good idea. In fact, all courts around the country have been adopting similar decisions in other cases. Perhaps the Brazilian Congress takes advantage of the opportunity to approve a statute regulating the theme.
Thank you for this interesting post Rodrigo! I’m interested in your take on the NPA–do you think it made sense for Petrobras to pay, or would you have advocated treating the company solely as a victim? Do you think this situation is indicative of a need to draft NPAs in a manner that is more consistent with the negotiating countries’ laws, or do you think the US was correct in its interpretation of Petrobras’ culpability?
I’m also interested in the original concerns raised about mis-appropriation of funds. What were the critiques of prosecutors’ original use of the funds? Was this rooted in lack of clarity regarding the implementation of the NPA, given the inconsistency with Brazilian law? Or were the decisions controversial for other reasons?
Hi Maura. Thank you for your comment.
Regarding your first point, I think that transnational corruption should count on an international legal framework to eliminate or at least minimize the problems deriving from the different legal systems that each case may affect. However, I have not yet developed ideas about how this international legal framework could be established.
In relation to your second point, most critiques were based on the destination of public funds to a private foundation. This foundation would undertake public-interest activities, which could mitigate the objections. But my impression is that the actual motivation underlying the attacks against this solution consisted in the strong opposition that Car Wash has been facing from traditional political and economic agents in Brazil in the last years.