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.