21 Jun 2019
In December 2016, “the largest foreign bribery case in history” was settled in the United States. It was described as such by the Department of Justice when US prosecutors struck a $3.5 billion plea agreement with Brazilian construction giant Odebrecht and its subsidiary Braskem.
The Odebrecht prosecution came amid a larger investigation into Brazil’s state-controlled oil company Petrobras. Dubbed “Lava Jato”, or “Operation Car Wash”, the probe was launched by the Federal Police of Brazil in 2014 when it emerged that the company had paid millions of dollars to high-level politicians in return for contracts.
In the summer of 2015, Odebrecht was separately found guilty of violating Article 102 of the Swiss Criminal Code, under which companies are liable for not taking action to prevent bribery by directors and employees.
By its own admission, the company used an entirely separate Division of Structured Operations to pay government officials and politicians in Latin America, Africa and Europe in exchange for contracts from Petrobras, cheaper borrowing rates for raw materials and reduced tax payments in the form of favourable legislation.
Nicknamed the “department of bribery” by the DOJ, the division’s operations were kept off the balance sheet through the use of offshore accounts. The scheme went on from 2001 until 2016, during which time Odebrecht paid $788 million in bribes and received over $3 billion-worth of contractual work in return.
This week, the company filed for bankruptcy protection while it restructures over $13 billion in debt. The debt restructuring plan is one of the largest ever seen in Brazil, according to media reports.
But as Odebrecht seeks to put itself on more secure financial footing, the consequences of its criminality continue to reverberate throughout Latin America. Perhaps unexpectedly, not all of them are bad.
The ‘terrible price’ of reform
The investigations into Petrobras and Odebrecht sent shock waves across Latin America. Brazilian president Dilma Rousseff was impeached, Michel Temer, who succeeded her, was arrested and former president Luiz Inácio Lula da Silva was imprisoned.
Marcelo Odebrecht, the company’s former CEO, received a 20-year sentence that has since been cut in half.
Former Peruvian presidents have fared no better. Pedro Pablo Kuczynsk is in pre-trial detention, prosecutors are seeking a 20-year sentence for Ollanta Humala and Alan Garcia committed suicide earlier this year when confronted by the police. Investigations are ongoing in the Dominican Republic, Mexico, Guatemala and the Netherlands.
The prosecutions have countered the longstanding belief of skeptics in the region that the wealthy and powerful would never be held accountable for corruption.
“Unfortunately, sometimes you need a scandal to enable development, and Brazil has paid a terrible price for it,” said Drago Kos, head of the Organisation for Economic Cooperation and Development’s bribery group,
One such development is the way corruption is prosecuted. Before Lava Jato, corruption cases were assigned to individual prosecutors who would take years to complete them because of the workload, according to Guilherme Donega, an expert on business integrity at Transparency International Brazil. Because of statutes of limitations, cases at times went unfinished.
This began to change 10 years ago when the Public Prosecutor’s Office started launching taskforces to investigate cases. The Lava Jato initiative prompted the creation of a taskforce in 2015 to investigate Petrobras and Odebrecht.
“This allows prosecutors to build a deeper knowledge of what is being investigated and gives them more time to work on it,” Donega said.
Another important precedent was established in 2016 when Brazil’s Supreme Court overruled a key decision from 2008, according to the federal judge in charge of Operation Car Wash, Sergio Moro.
In an article published by MIT Press Journals, Moro explained that the 2008 ruling meant that a criminal conviction could only be enforced once a case could no longer be appealed. The finding allowed defendants to slow-walk numerous appeals and effectively evade accountability, according to Moro, who now serves as Brazil’s justice minister.
But the Supreme Court’s decision in 2016 to overturn the prior ruling marked a “judicial revolution” that has upended the ability of criminals to avoid justice, Moro argued.
Within the private sector, Lava Jato has forced Brazilian companies to establish compliance codes—an obligation previously required only of multinational corporations.
“The big change that Lava Jato brought is that some of the largest companies have begun to dedicate time and effort to developing internal control structures,” Donega said. “The market demanded companies had a compliance programme.”
Outside of Brazil, the impact of the Odebrecht scandals has varied. Research published by Transparency International and news site JOTA last month showed that, in 2017 and 2018, Brazilian authorities received 118 requests for information related to company from other Latin American nations. More than half of the requests—68 in total—came from Peru, with Panama submitting the second highest number at just 18. Guatemala and Venezuela each submitted just one request.
Donega believes legislation may be one reason for the different pace at which the countries are prosecuting. While an update to Brazilian Federal Law in 2013 allows companies to enter into leniency agreements with prosecutors—a tool that proved instrumental to prosecuting Odebrecht—other nations have only recently considered similar reforms, he said.
“Some of these countries might not yet have a structured system in place to investigate companies’ claims and solve such corruption cases,” he explained.
What’s more, prosecutors in other nations may be reluctant to utilize leniency agreements, according to Ezequiel González Ocantos, an associate professor at Oxford University currently researching anti-corruption judicial activism in Latin America.
“In Latin America, the idea of prosecutorial discretion is less ingrained than in the US, where they are used to investigating everything,” he said. “So the idea that [prosecutors] should forgo some cases in the interests of getting the bigger fish is not in their nature.”
While the use of leniency deals have drawn criticism, they can be an “effective tool to help governments build stronger legislation going forward,” according to Jessie Bullock, a PhD candidate at Harvard University with a focus on corruption and Latin America. The agreements are especially useful in countries where governments are generally ineffective at prosecutions, she said.
One example of legislation that has been presented to the Brazilian Congress as a result of Lava Jato is the Moro anti-crime bill, which aims to tackle gang violence and corruption. The bill would combine the country’s ministry of public security with the ministry of justice to make a super ministry, with greater resources.
Other elements of the legislation concern money laundering, improving plea deals and setting out rules for whistleblower protections.
“It’s a huge overhaul,” said Bullock, adding that the bill has not been a priority. Brazilian lawmaker Rodrigo Maia tried to “exclude it from the agenda until pension reform was passed and also made some comments about how corruption and crime are only secondary to the economic issues in the country at present,” she said.
A better way?
For Ocantos, the Odebrecht debacle begs the question: “is there a better way of fighting corruption than judicialising it?” As alternatives, he cited efforts to improve transparency, mitigate bureaucratic hurdles and amend procurement systems.
Preventative measures like these are expected to be addressed in OECD recommendations later this year. The organization hopes to adopt new standards for companies that will set out positive incentives for investing in compliance systems, reporting wrongdoing and fully cooperating with law enforcement agencies.
At its root, argues Kos, the global fight against financial crime has been hindered by something relatively basic: distrust between the public authorities charged with policing the private sector and the businesses that see themselves treated as targets.
“Until now, the only language governments talked to companies in was the language of criminal proceedings,” said Kos. “The level of distrust between [the two] was simply too great for governments to even start thinking about positive incentives.”
The need for governmental officials to do more to engage companies, including by treating the private sector as an equal in anti-corruption efforts, is one of the most important lessons that can be learned from Operation Car Wash.
“Governments have realised that companies can do a lot as partners in the fight against corruption,” said Kos. “Those that are fully cooperating with law enforcement agencies around the world have proven it is much easier and much more cost effective to deal with cases of corruption if companies participate.”
A healthy dose of introspection could be in order for governmental authorities as well. Leaked emails published by The Intercept earlier this month have raised questions about whether the prosecutions overseen by Sergio Moro were politically motivated. Moro is facing calls to resign and the passage of his anti-crime bill looks doubtful.
“Moro is very politically vulnerable right now and I imagine a lot of legislators will shy away from supporting the bill in the current climate,” said Bullock.
The “largest bribery case in history” may not be over yet.
Hiba Mahamadi is a freelance journalist based in the UK.
Advance your CPD minutes for this content, by signing up and using the CPD WalletFREE CPD Wallet