Tag Archives: Petrobras

The Continuing Controversy Over the Destination of the Petrobras Penalties: The Coronavirus Crisis Has Ended One Debate, But May Start Another

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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?

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Brazil: A Model for International Cooperation in Foreign Bribery Prosecutions

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Much ink has been spilled celebrating the extraordinary crackdown on corruption in Brazil over the past few years (including on this blog). Headlined by the massive Operation Car Wash (Portuguese: Lava Jato)—in which officials received nearly $3 billion in bribes to overcharge Petrobras, Brazil’s state-controlled oil company, for construction and service work—high-profile corruption investigations have swept through Brazil, threatening to upend its reputation as a bastion for unchecked graft. Although corruption in Brazil remains a serious problem, the extensive investigations have worked to elevate the nation as an inspiration for countries looking to address their own corrupt political systems and hoping to become “the next Brazil.”

In addition to the headline-grabbing investigations targeting the upper echelons of the Brazilian government, Brazilian authorities have also worked closely with U.S. authorities investigating bribery activity in Brazil, leading to significant penalties both under Brazilian law and under the U.S. Foreign Corrupt Practices Act (FCPA). This is a significant development, because it demonstrates the possibility for close collaboration on cross-border bribery cases between a developed country (usually on the “supply side” of transnational bribery cases) and a developing country (on the “demand side”). Commentators have complained that too often supply-side enforcers like the United States take an outsized role in transnational bribery cases, with the countries where the bribery takes place doing too little. Other commentators have cautioned that an increase in prosecutions by other countries, in the absence of some sort of global coordination mechanism, may lead to races to prosecution or to over-enforcement. China’s nearly $500 million fine of British pharmaceutical giant GlaxoSmithKline in 2014 for bribing Chinese doctors and hospitals was emblematic of these fears, providing an example of an aggressive, unilateral approach to demand-side enforcement – while putting DOJ in the unfamiliar position of pursuing FCPA violations as a cop late to the scene.

Through its recent enforcement actions, Brazil has provided a different model. While there have been successful joint enforcement actions in the past—such as the Siemens case—the recent series of coordinated U.S.-Brazil actions exhibit how developed and developing countries can work together in anti-bribery enforcement, sharing in the investigative responsibilities, negotiations with companies, and even the financial returns.

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Why the Repeal of the U.S. Publish-What-You-Pay Rule Is a Major Setback for Combating Corruption in the Extractive Sector

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Bonnie J. Palifka, Assistant Professor of Economics at Mexico’s Tecnológico de Monterrey (ITESM) contributes today’s guest post:

Last Friday, following the U.S. House of Representatives, the Senate voted to repeal a Securities and Exchange Commission (SEC) regulation that required oil, gas, and minerals companies to make public (on interactive websites) their payments to foreign governments, including taxes, royalties, and “other” payments. The rule was mandated by Section 1504 of the 2010 Dodd-Frank Act, but had only been finalized last year. President Trump’s expected signature of the congressional resolution repealing the rule will represent a major blow to anticorruption efforts, and a demonstration of just how little corruption matters to his administration and to Congressional Republicans.

The extractive industry had lobbied against this rule, arguing that having to report such payments is costly to firms and puts them at an international disadvantage. Some commentators have supported their efforts, arguing, for example, that the Section 1504 rules are unnecessary because the Foreign Corrupt Practices Act (FCPA) already prohibits firms under SEC jurisdiction—including extractive industry firms—from paying bribes abroad. This argument misses the mark: The extractive sector poses especially acute and distinctive corruption risks, which the FCPA alone is unlikely to remedy if not accompanied by greater transparency. Continue reading →

Guest Post: Why Disclosures in Foreign Settlements Don’t Spur Domestic Prosecutions in Argentina

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Natalia Volosin, a doctoral candidate at Yale Law School and clerk in the Asset Recovery Unit at Argentina’s Attorney General’s Office, contributes the following guest post (adapted and from an op-ed previously published in Spanish in the Argentine newspaper Infobae):

The so-called “Lavo Jato” investigation into bribery and money laundering at Brazil’s state-owned oil company Petrobras led to the biggest transnational bribery settlement in history: In December 2016, the Brazilian construction conglomerate Odebrecht reached a settlement with law enforcement authorities in the United States, Brazil, and Switzerland; in exchange for its guilty plea, Odebrecht and its affiliate Braskem agreed to pay the three countries a total of $3.5 billion, of which the first firm alone will pay $2.6 billion. (Odebrecht agreed that the total criminal penalty amounts to $4.5 billion, but the final number will be determined according to its ability to pay, though it will be no less than $2.6 billion.) According to the agreement, Brazil will get 80 per cent of the penalty, while the United States and Switzerland will get 10 per cent each.

Some hope that the Odebrecht settlement will provide a boost to anticorruption investigations in other countries. After all, in the settlement documents, the firm acknowledged to having made illegal payments worth $788 million between 2001 and 2016, not only in Brazil, but in a dozen countries including Angola, Argentina, Colombia, Mexico, and Venezuela. In Argentina specifically, Odebrecht admitted that between 2007 and 2014, in three separate infrastructure projects, it paid intermediaries a total of $35 million knowing that they would be partially transferred to government officials. These criminal practices earned the company a $278 million benefit—a return on “investment” of over 694% (the highest among all the recipient countries). Will these revelations have significant consequences for the prosecution of corruption cases in Argentina?

The answer is probably no, at least not in the short term. Continue reading →

Leniency Agreements Under Brazil’s Clean Company Act: Are They a Good Idea?

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Brazil’s 2013 Clean Company Act, the country’s first anti-bribery statute applicable to companies, has grabbed Brazilians’ attention due to its recurrent use in the context of the so-called Car Wash operation. The Clean Company Act has provided the main legal basis for Brazilian public authorities (especially federal prosecutors) to sign leniency agreements with construction corporations whose top executives stand accused of bribing officials in exchange for contracts from Petrobras, Brazil’s state-owned oil giant. Under the Act, Brazilian authorities may enter into a leniency agreement as long as the company admits its participation in the illicit act, ceases any further participation, provides full restitution for damage caused, and cooperates fully and permanently with the ongoing investigation. In exchange, the fines can be reduced by up to two-thirds and, more importantly, the cooperating company may be exempted from judicial and administrative sanctions, including suspension or debarment from public contracts. Over the course of the Car Wash investigation, Brazilian authorities have already signed five leniency agreements with some of Brazil’s largest engineering firms, and at least twelve more companies are currently negotiating leniency deals with Brazilian authorities.

But do these sorts of leniency agreements provide for sufficient deterrence of corrupt behavior? And are they consistent with the interest in punishing those companies that have committed a serious crime? Those who defend Brazil’s increasing use of leniency agreements emphasize that a similar approach has proven to be effective in countries like the United States, one of the most successful countries in the world in the fight against corruption. Indeed, the leniency agreements authorized by the Clean Company Act were modeled on the Non-Prosecution Agreements (NPAs) and Deferred Prosecution Agreements (DPAs) used by US authorities in white-collar criminal law enforcement. However, Brazil is following the US model precisely at a time when the widespread use of NPAs and DPAs is becoming more controversial, in part because of concerns that these sorts of agreements fail to deter economic crimes and allow high-ranking executives to escape accountability for their crimes (for a summary of the criticisms of those agreements, see here and here). Perhaps more importantly, even if one views the US experience with NPAs and DPAs as successful overall, there are several reasons why this model might be more problematic in the Brazilian context. Continue reading →

A Tale of Two Regions: Anticorruption Trends in Southeast Asia and Latin America

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OK, “best of times” and “worst of times” would be a gross exaggeration. But still, when I consider recent developments in the fight against corruption in Latin American and Southeast Asia, it seems that these two regions are moving in quite different directions. And the directions are a bit surprising, at least to me.

If you’d asked me two years ago (say, in the summer of 2014) which of these two regions provoked more optimism, I would have said Southeast Asia. After all, Southeast Asia was home to two jurisdictions with “model” anticorruption agencies (ACAs)—Singapore and Hong Kong—and other countries in the regions, including Malaysia and especially Indonesia, had established their own ACAs, which had developed good reputations for independence and effectiveness. Thailand and the Philippines were more of a mixed bag, with revelations of severe high-level corruption scandals (the rice pledging fiasco in Thailand and the pork barrel scam in the Philippines), but there were signs of progress in both of those countries too. More controversially, in Thailand the 2014 military coup was welcomed by many in the anticorruption community, who thought that the military would clean up the systemic corruption associated with the populist administrations of Thaksin Shinawatra and his successor (and sister) Yingluck Shinawatra—and then turn power back over to the civilian government, as the military had done in the past. And in the Philippines, public outrage at the brazenness of the pork barrel scam, stoked by social media, and public support for the Philippines’ increasingly aggressive ACA (the Office of the Ombudsman), was cause for hope that public opinion was finally turning more decisively against the pervasive mix of patronage and corruption that had long afflicted Philippine democracy. True, the region was still home to some of the countries were corruption remained pervasive and signs of progress were scant (such as Vietnam, Laos, Cambodia, and Myanmar), but overall, the region-wide story seemed fairly positive—especially compared to Latin America where, aside from the usual bright spots (Chile, Uruguay, and to a somewhat lesser extent Costa Rica), there seemed to be precious little for anticorruption advocates to celebrate.

But now, in the summer of 2016, things look quite a bit different. In Southeast Asia, the optimism I felt two years ago has turned to worry bordering on despair, while in Latin America, things are actually starting to look up, at least in some countries. I don’t want to over-generalize: Every country’s situation is unique, and too complicated to reduce to a simple better/worse assessment. I’m also well aware that “regional trends” are often artificial constructs with limited usefulness for serious analysis. But still, I thought it might be worthwhile to step back and compare these two regions, and explain why I’m so depressed about Southeast Asia and so cautiously optimistic about Latin America at the moment.

I’ll start with the sources of my Southeast Asian pessimism, highlighting the jurisdictions that have me most worried: Continue reading →

Electoral Systems and Corruption: Proportional Representation in Brazil

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The Petrobras scandal currently engulfing Brazil is unprecedented in its scale and scope. Ironically, when the party of President Dilma Rousseff, the Workers’ Party (PT), initially became a major political player in 1989, it was seen as a clean, ethical alternative after President Collor de Mello stepped down from office amidst corruption allegations. Yet in the years following its rise to power, the PT has been dogged by corruption allegations, even before the explosion of the Petrobras investigations. During the presidency of Ms. Rousseff’s predecessor, Lula Inácio da Silva, prosecutors unearthed a major scheme, known as the Mensalão scandal, under which public funds were being used to pay members of Congress in exchange for their support of the PT government in crucial votes. At the end of the inquiry, 25 politicians and businessmen were convicted. Several other smaller corruption schemes (including Caixa Dois, Bingos, Sanguessugas, and Dossier) also implicated high-ranking members of the PT during Mr. da Silva’s tenure.

Despite this clear evidence of corruption within the PT ranks, the PT has been able to maintain its relative dominance in Brazilian politics, with three successive victories in presidential elections following Mr. da Silva’s initial rise to power, including Ms. Rousseff’s re-election in 2014, six months after the launch of the Petrobras investigations. This raises yet again a question that scholars and commentators have asked over and over again: Why do voters keep re-electing corrupt politicians? Democracy is supposed to enable voters to hold their government accountable, and most voters claim to dislike corruption and to value integrity in government. So why do parties like the PT keep winning elections? While there are many possible explanations (maybe, for example, voters don’t really care as much about corruption as they claim), part of the explanation in certain countries may have to do with the particularities of the electoral system.

Brazil has a hybrid electoral system: the President is elected in a two-round majority run-off system, elections for the Senate are based on plurality votes within states, and elections to the Chamber of Deputies are based on open-list proportional representation. An examination of this system suggests that it is particularly inimical to holding corrupt politicians accountable, and may have in fact contributed to the seemingly intractable problem of corruption in Brazilian politics. Three problems in particular stand out:

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The Petrobras Investigations and the Future of Brazil’s Democracy: Thailand and Italy as Cautionary Tales

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In March of 2014, when Alberto Youssef, the initial whistleblower for the now infamous Petrobras scandal disclosed his knowledge of the scheme to his lawyers, he prefaced his revelations with a grim prediction: “Guys, if I speak, the republic is going to fall.” While that prediction may have seemed melodramatic at the time, the recent turmoil in Brazil surrounding the Petrobras scandal and the impeachment proceedings against President Dilma Rousseff have led some to begin to question whether Mr. Youssef’s prediction might in fact ring true.

The Petrobras scandal may be the single biggest corruption scheme in any democracy, ever. By some estimates, up to US$5.3 Billion changed hands through inflated construction contracts and kickbacks to Petrobras executives and politicians. Even for a country accustomed to political corruption scandals, this case is unique in its breadth and scope. Dozens of Brazil’s economic and political elite have been implicated, including the CEO of the country’s largest construction firm (sentenced to 19 years in jail), and the former treasurer of Rousseff’s Workers’ Party (sentenced to 15 years in jail), plummeting Brazil into a true political and economic crisis. The investigations transcend party lines: Eduardo Cunha, the speaker of the House leading the charge for President Rousseff’s impeachment (for using accounting tricks to mask the nation’s deficit), has himself been charged in connection with the Petrobras Scandal. Indeed, this scandal appears to be a political reckoning, an indictment of the entire elite class in Brazil.

By most accounts, Brazil is a thriving democracy—elections are free and fair, and there is a multi-party system marked by vigorous competition between rival parties. Civil liberties are generally well respected. Protests against the government have been massive, but by most accounts peaceful and undisturbed by state authorities. But some have gone so far as to speculate that the unprecedented scale of this scandal may lead to a collapse of Brazil’s democratic system. At least one historical example suggests that this might not be so far-fetched: In Thailand, the political deadlock in 2014 following the ouster of President Yingluck Shinawatra on allegations of corruption and abuse of power ended with a military coup, and democracy has yet to return. Yet perhaps another, somewhat less dramatic but nonetheless troubling precedent is even more apt: In Italy in the 1990s, the Mani Pulite (Clean Hands) campaign revealed endemic corruption and led to the collapse of the four governing political parties. In this case, while democratic elections continued, the political void left in the wake of Clean Hands was filled by new, corrupt actors like Silvio Berlusconi, and political graft remains rampant. Though Brazil seems unlikely to suffer a fate similar to Thailand, it is highly plausible that the aftermath of the Petrobras scandal might resemble the Italian experience.

Let’s consider some of the possible parallels between Brazil and Thailand, on the one hand, and Brazil and Italy, on the other.

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Claims Against Petrobras Highlight Prospects for Shareholder Enforcement in US Courts

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The fallout continues from the ongoing investigation of corruption at Petrobras, Brazil’s giant state-owned oil company. (See New York Times coverage here, and helpful timelines of the scandal here and here.) In March of 2014, Brazilian prosecutors alleged that Petrobras leadership colluded with a cartel of construction companies in order to overcharge Petrobras for everything from building pipelines to servicing oil rigs. Senior Petrobras executives who facilitated the price-fixing rewarded themselves, the cartel, and public officials with kickbacks, and concealed the scheme through false financial reporting and money laundering. The scandal has exacted a significant human toll: workers and local economies that relied on Petrobras contracts have watched business collapse: several major construction projects are suspended, and over 200 companies have lost their lines of credit. One economist predicted unemployment may rise 1.5% as a direct result of the scandal.

The enormous scale of the corruption scheme reaches into Brazil’s political and business elite. The CEO of Petrobras has resigned. As of last August, “117 indictments have been issued, five politicians have been arrested, and criminal cases have been brought against 13 companies.” In recent months, the national Congress has initiated impeachment proceedings against President Dilma Rousseff, who was chairwoman of Petrobras for part of the time the price-fixing was allegedly underway. And last month, federal investigators even received approval from the Brazilian Supreme Court to detain former President Luiz Inácio Lula da Silva for questioning. (Lula was President from 2003 to 2010—during the same period of time that Ms. Rousseff was chairwoman of Petrobras.) Meanwhile, the House Speaker leading calls for President Rousseff’s impeachment has himself been charged with accepting up to $40 million in bribes.

As Brazilian prosecutors continue their own investigations, another enforcement process is underway in the United States. Shareholders who hold Petrobras stock are beginning to file “derivative suits,” through which shareholders can sue a company’s directors and officers for breaching their fiduciary duties to that company. Thus far, hundreds of Petrobras investors have filed suits. In one of the most prominent examples, In Re Petrobras Securities Litigation, a group of shareholders allege that Petrobras issued “materially false and misleading” financial statements, as well as “false and misleading statements regarding the integrity of its management and the effectiveness of its financial controls.” (For example, before the scandal broke, Petrobras publicly praised its Code of Ethics and corruption prevention program.) The claimants allege that as a result of the price-fixing and cover-up, the price of Petrobras common stock fell by approximately 80%. In another case, WGI Emerging Markets Fund, LLC et al v. Petroleo, the investment fund managing the Bill & Melinda Gates Foundation has alleged that the failure of Petrobras to adhere to U.S. federal securities law resulted in misleading shareholders and overstating the value of the company by $17 billion. As a result, the plaintiffs claim they “lost tens of millions on their Petrobras investments.”

Thus, in addition to any civil or criminal charges brought by public prosecutors, private derivative suits offer a way for ordinary shareholders to hold company leadership accountable for its misconduct. In these derivative suits, any damages would be paid back to the company as compensation for mismanagement; the main purpose of the suits is not to secure a payout for shareholders, but to protect the company from bad leadership. The Petrobras cases illustrate how derivative suits can offer a valuable mechanism for anticorruption enforcement, but they also face a number of practical challenges.

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Guest Post: Brazil Must Fight Corruption, But Preserve the Rule of Law

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GAB is delighted to welcome back Mat Tromme, Project Lead & Senior Research Fellow at the Bingham Centre for the Rule of Law, who (along with research assistant Domenico Vallario) contributes the following guest post:

Across Latin America, the past year has provided reasons for hope that the struggle against grand corruption and impunity is finally making progress. Prosecutors have gone after corrupt elites in Guatemala and Honduras, while political leaders in Mexico and Chile have also been under pressure for their links to corruption scandals. And in Brazil, the investigations into the corruption scandal at the state-owned oil giant Petrobras have led to charges against around 80 people, including high-ranking political figures like the speaker of the Lower Chamber and former President Collor de Mello, and a former treasurer of the ruling Worker’s Party.

The investigation into the Petrobras scandal is being led by Brazil’s Federal Police and by Public Ministry Prosecutor Deltan Dallagnol, under the watchful eye of Judge Sergio Moro. And Judge Moro’s tenacious attitude to pursuing graft stands in sharp contrast to a judicial system that has traditionally been slow and ineffective, especially in corruption cases: out of ten salient scandals between 1990 and 2010, 841 people were implicated, but only 55 were convicted. Yet Judge Moro’s approach may actually be emblematic of a broader shift in the Brazilian judiciary, as corruption cases that are tried in courts have been on the increase over the past few years.

On the face of it, these convictions should be welcomed as a sign that justice is meted out against the corrupt and that the judiciary is playing its part in tackling grand corruption. Yet some critics have raised legitimate concerns about the arguably overzealous approach the authorities (not only the legislature and the executive, but also the judiciary) have taken in tackling corruption, in light of rule of law and human rights commitments. Continue reading →