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Wednesday 8 April 2015

Brazil's 'Operation Car Wash'

As investigators attempt to reveal the truth behind the allegations swirling around the country’s major oil company Petrobras, collaboration agreements have been used to great effect. However, they’re not without controversy and not everyone’s in favour.

Brian Nicholson

Brazilians love their soap operas. The country’s most-watched TV channel normally shows at least three per evening, interrupted only by the national news. Now the news, too, has a nightly drama of its own, albeit without the customary starlets and eternal triangles, but just as gripping, far more serious and promising to run for quite some time. Like any blockbuster, it combines intrigue with a novel twist: malfeasance that cynics say is remarkable, mainly for the enormous sums involved, is being exposed by energetic use by federal police of a new organised crime law and a type of collaboration that’s a cross between plea bargaining and turning state’s evidence.

Operação Lava Jato– literally, ‘Operation Car Wash’ – started more than a year ago as a garden-variety federal police investigation into money laundering through a chain of petrol stations. Since then it has blossomed into a near-nightly parade of handcuffed executives, police raids and filmed depositions – not to mention apoplectic defence lawyers and indignant politicians.

With investigations ongoing, details still emerging and no convictions handed down, the broad outlines of Car Wash were clear. More than a dozen major Brazilian construction companies stand accused of paying bribes via middlemen to secure million- and billion-dollar contracts with Petrobras, a publicly quoted oil company in which the Brazilian government holds a controlling stake and (it has been alleged) pro-government parties controlled appointments to key positions that handle procurement. Most bribes were split between the middlemen, Petrobras executives and parties that support the government, investigators say, with much channelled via offshore shell companies into campaign slush funds. A few allegations of bribes for opposition politicians are also being investigated.

Car Wash is undoubtedly Brazil’s biggest-ever corruption case – and it’s still emerging

Leopoldo Pagotto
Regional Representative for Latin America,
IBA Anti-Corruption Committee, São Paulo

Almost lost in the noise is a potentially huge antitrust angle. Witnesses have said that the construction companies formed a multi-year cartel to share out contracts and pad prices, perhaps extending beyond petroleum to highway and hydropower contracts.

With the exception of those who have agreed to cooperate, all companies, executives, middlemen, politicians and parties mentioned have denied any wrongdoing. Petrobras says it was a victim, while construction companies and some foreign suppliers to Petrobras say they faced de facto extortion – a situation of ‘pay to play’.

How much was syphoned off? No final figure has yet emerged, but certainly hundreds of millions of dollars. Witnesses have mentioned skims of up to three per cent on contracts worth tens of billions of dollars between 2003 and 2012.

How many people are involved? Possibly more than 100, counting company executives, intermediaries and politicians.

‘The real lesson appears to be the existence of some form of ongoing, endemic corruption within state-owned enterprises that are responsible for dishing out very large contracts that should be for the public benefit,’ says Australian lawyer Robert Wyld, Co-Chair of the IBA Anti-Corruption Committee, who has been watching Car Wash unfold from afar. Some people, he says, treat public companies as
‘a personal cash cow’.

‘Car Wash is undoubtedly Brazil’s biggest-ever corruption case – and it’s still emerging,’ says São Paulo-based lawyer Leopoldo Pagotto, the Regional Representative for Latin America on the IBA Anti-Corruption Committee.

Like a can opener

Brazil is no stranger to corruption. However, several attempts to bring major cases to trial have failed to achieve convictions, sometimes because of police work, sometimes because Brazil’s anti-corruption laws offer innumerable possibilities for technical challenges, particularly when evidence comes from wiretaps, and frequently because the convoluted judicial system allows cases to drag out until they prescribe, particularly when elected officials are involved. In Car Wash, police and prosecutors are bending over backwards to avoid previous errors.

The snag with corruption cases is often a multi-player version of the prisoner’s dilemma: as long as everyone denies everything, the hard evidence may be inconclusive. In Car Wash, the secret has been persuading some suspects to provide detailed confessions in exchange for reduced penalties. In Portuguese it’s called colaboração premiada,which translates literally, albeit awkwardly, as ‘rewarded collaboration’. Journalists and even lawyers frequently call it delação premiada(‘rewarded accusation’), and it is often mistranslated simply as plea bargaining. In fact, it’s closer to turning state’s evidence, or Queen’s evidence. The Organisation for Economic Co-operation and Development (OECD) Working Group on Bribery, in its latest (Phase 3) report on implementing the OECD Anti-Bribery Convention in Brazil, published October 2014, calls it ‘cooperation agreements and judicial pardon’.

Whatever the name, collaboration has made all the difference in Car Wash. ‘Federal police have used delação premiadalike a can opener, to prise the case apart,’ says Pagotto, whose doctoral thesis at the University of São Paulo focused on the contribution of economic law to fighting corruption.

Collaboration has existed in Brazilian criminal law since at least 1995, but formalised agreements have only now come into their own with the Organized Crime Law of 2013 (Law 12.850). This defines organised crime, lists acceptable investigatory methods and provides a detailed road map for collaboration. One or more of the following results must be achieved: identification of co-authors and participants in the criminal organisation, with their respective crimes; exposure of the hierarchical structure and division of functions within the organisation; total or partial recovery of proceeds; prevention of further crimes; and the safe release of victims. Prosecutors can ask the judge to grant a full judicial pardon, reduce the collaborator’s sentence by up to two-thirds, or substitute prison with a lesser penalty.

Were it not for the collaboration agreements between federal prosecutors and those under investigation, the Car Wash case would not have uncovered evidence of corruption beyond that involving Paulo Roberto Costa

The Prosecutors’ Office

Collaboration is voluntary, with defence lawyers present, but collaborators must tell the truth – and the whole truth. Any future discovery of lying, concealment or omission can lead to the agreement being revoked. The process starts with a signed statement detailing what the suspect will reveal, and the leniency that prosecutors will recommend in return.

For each collaboration agreement, prosecutors weigh factors including the importance and novelty of the information to be provided about crimes and those responsible, the proofs to be offered and the amounts to be recovered. ‘A group of prosecutors conducts a careful analysis... the agreement goes ahead only if there is consensus that the benefits significantly outweigh the costs for society,’ the federal prosecutors’ office says.

When all has been revealed, it falls to a judge to decide if the agreement has been kept. Charges are filed against the collaborator as investigations progress, but any sentence will reflect the agreement.

Q&A with the OECD’s Director of Legal Affairs, Nicola Bonucci

As Director for Legal Affairs at the Organisation for Economic Co-operation and Development (OECD), Nicola Bonucci is closely involved in the organisation’s anti-bribery work. He chaired the IBA Anti-Corruption Committee in 2011 and 2012.

Global Insight (IGI): The OECD convention focuses on foreign bribery. Does that mean you are not interested in what we might call domestic bribery?

Nicola Bonucci: No, it doesn’t. When the Anti-Bribery Convention was negotiated in 1997 many countries had laws to punish bribery within their borders, but only the United States had legislation to punish bribery of a foreign official, so the convention sought to address this omission. I cannot comment specifically on Petrobras, but when you look at cases of that kind, you see that foreign and domestic bribery issues are often related. Also, the OECD has done much work concerning the passive side of bribery – the integrity of public officials and procurement processes, and other issues that are more targeted to domestic bribery.

IGI: Are you following the Petrobras case?

NB: Let’s say we are keeping an increasingly close eye on it, because it appears to have ramifications outside of Brazil.

IGI: Some Brazilian commentators have compared the Petrobras case to Italy’s ‘Mani pulite’ [‘Clean hands’]. Would you agree?

NB: The ‘Mani pulite’ case involved thousands of people. It covered wider, systemic corruption that went far beyond one single company. From what I have seen so far there may be similarities in terms of the impact on public opinion, but differences in terms of scale.

IGI: How does Brazil compare with other countries at a similar level of development, in terms of combatting corruption?

NB: Unfortunately, even some major countries are not implementing the Foreign Bribery Convention as fully as we would wish; we see very uneven levels of implementation. Talking specifically about preventing foreign bribery, I would say Brazil is around average – neither particularly good nor particularly bad. Our latest (Phase 3) report on Brazil was focused less on legislation and regulations, more on what effectively happens on the ground. There are various ongoing foreign bribery investigations in Brazil; it’s not just the Petrobras case.

IGI: So is it fair to say Brazil’s main challenge is implementation?

NB: Yes. Brazil’s Corporate Liability Law (12.846/13) is good legislation, it incorporates good elements, but now we have to see if the legislation will bite. The proof is in the pudding.

IGI: What is the OECD’s attitude to collaboration agreements?

NB: The OECD secretariat has no preconceived notion about what is good or bad. However, we note that this kind of mechanism is being used more frequently; there are similar systems in the US, the UK and the Netherlands, for example. Without taking a position on substance, one can understand why. One of the difficulties in bribery cases is getting the evidence. There can be a lot of suspicion, but finding the smoking gun is not easy. When it is foreign bribery, there are additional problems. Pragmatically, we can see that a number of foreign bribery cases outside Brazil have been resolved using a similar mechanism.

As of early March, prosecutors say they have negotiated 12 collaboration agreements with individuals including currency dealers, former Petrobras executives, middlemen and businessmen. Charges were filed against 87 individuals for crimes including corruption, participating in a criminal organisation, and money laundering. For reasons explained below, none of those initially charged were politicians.

One of the great motivators for collaboration appears to have been the landmark ‘Big Monthly’ case (see Global Insight, June 2012), in which Brazil’s Supreme Court imposed sentences of up to 40 years for corrupting public officials, graft, money laundering and illegal currency transactions. It was widely noted that the businesspeople involved received far longer jail terms than the politicians. Now, in Car Wash, businessmen have been leading the rush to confess.

Like a dragon

As in a children’s cartoon, where pulling the tip of a tail may uncover a huge dragon, the Car Wash case has grown and grown. The petrol station investigation originally sought someone called Primo (Cousin). He was identified as Alberto Youssef, a black-market currency dealer known from an earlier corruption case. Investigators kept pulling the tail, and discovered that Youssef had given an expensive imported car to Paulo Roberto Costa, a Petrobras director responsible for billion-dollar procurements. Both Costa and Youssef have since provided police with copious detail under collaboration agreements – Youssef’s collaboration testimony exceeds
100 hours, all recorded and encrypted.

‘Were it not for the collaboration agreements between federal prosecutors and those under investigation, the Car Wash case would not have uncovered evidence of corruption beyond that involving Paulo Roberto Costa,’ the prosecutors’ office says. ‘We had evidence of bribes of less than R$100m [some US$31.5m at early April exchange rates]. Today we are investigating dozens of public officials as well as major companies, and there is evidence of crimes of corruption involving values far in excess of R$1bn [US$315m]. Just through the collaboration agreements, we have already recovered around R$500m [US$157m].’

Investigations are being conducted in the southern city of Curitiba, where federal police and prosecutors have established a nucleus of expertise in financial crime. The Car Wash group works simultaneously on two fronts: interrogating witness and suspects; and conducting collaboration agreements. Contents of the agreements are supposedly kept secret until approved by the judge, although some leaks have occurred, while regular witness statements are normally made public.

Prosecutors have split Car Wash into dozens of individual cases, in part to prevent the whole thing collapsing should one element be successfully challenged. They have also taken care to separate non-elected suspects from elected office-bearers and other senior officials. This is because the Brazilian constitution provides ‘privileged jurisdiction’ – federal ministers and congressmen can be investigated and tried only by the Supreme Court (STF); state governors only by the Superior Court of Justice. To this end, prosecutors and police in Curitiba instructed suspects and witnesses to restrict their testimony to what might loosely be called the ‘business’ part of the bribery chain: origins of the money; mechanisms for arranging the padded contracts; and skims received by executives and middlemen. The second part, transfers to political parties, was initially excluded from testimony because the involvement of any person with privileged jurisdiction would require the Curitiba unit to immediately halt that investigation and send it to Brasília.

Collaboration agreement statements are a different matter; they involve full disclosure. Copies go to the prosecutor-general who uses allegations of involvement by politicians to ask the STF to authorise investigations. In early March, the prosecutor-general submitted 28 investigation requests involving 54 people, mainly elected politicians, several of them household names. Investigation requests targeting at least two state governors were being prepared for the Supreme Court of Justice.

The question of multiple jurisdictions plagues Brazilian justice in cases that potentially mix defendants of different status – often the case with corruption. When the Big Monthly trial began in the Supreme Court in 2012, defence lawyers argued that the non-politicians among the 37 accused should be tried in state-level courts. Judges agreed with prosecutors that politicians and non-politicians alike were involved in a single conspiracy, and must be tried together. In Car Wash, defence lawyers have argued that, because politicians are apparently involved, everything should be moved to Brasília.

Psychological torture?

Not everyone is a fan of collaboration agreements. Luciano Anderson de Souza, a criminal law professor at São Paulo University, is far from alone in expressing reservations.
‘Brazil still lacks a detailed and precise discipline with respect to collaboration agreements,’ he says, ‘and that means the form of collaboration depends almost entirely on subjective calls by the authorities. This creates judicial insecurity.’

Another criticism, echoed by several lawyers, is that collaboration, theoretically a voluntary process between equals, in fact entails a degree of compulsion by the stronger party. ‘It’s often like extorted collaboration,’ Souza says. Federal police kept a dozen Car Wash suspects in prolonged temporary custody, with the investigating judge ruling that some might flee the country; others might seek to tamper with witnesses or evidence. Senior executives, more accustomed to private jets and five-star hotels, were held four to a spartan cell, 12 metres squared with an open squat toilet. Defence lawyers claimed they were being pressured into collaboration, but the Supreme Court rejected several habeas corpus pleas.

A fleur-de-lis, by any other name

Brazilian federal police have a tradition of assigning catchy codenames to their operations. Perhaps the best known before Car Wash were ‘Satyagraha’, recalling Mahatma Gandhi’s philosophy that translates roughly as ‘insistence on truth’, and ‘Sandcastle’. The former was a major investigation into financial fraud, the latter a smaller precursor to Car Wash, but both collapsed under defence allegations of procedural irregularities by federal police or prosecutors.

Many codenames would do credit to a minor crossword compiler with a penchant for languages, history and mythology: ‘Icarus’, for investigating cloned credit cards used to buy air tickets; ‘P.O. Box’, for illegal medicine distribution via the mail; ‘Hygieia’, for corruption in state government cleaning contracts; ‘Eros’, for smuggled Viagra; ‘Workaholic’, for fraud by labour inspectors; and ‘Rowland Hill’, for counterfeit postage stamps.

While the codenames are supposed to conceal the nature of the operation – and many appear to be random – several offer a reasonable clue. ‘Dirty Net’, ‘Persian Carpet’, ‘Peter Pan’, ‘Wizard of Oz’, ‘Dragon’s Cave’, ‘Sweet Innocence’ and ‘Little Martyrs’ were all operations against paedophilia and internet pornography, while ‘Man Overboard’ related to falsification of seamen’s documents and ‘Las Vegas’ tackled illegal casinos. Likewise, ‘Bad Trip’ went after smugglers of chemicals needed to produce illegal drugs. ‘Walking Dead’ and ‘Resurrecting the Dead’ both targeted gangs defrauding the state pension system, while ‘Fort Apache’ sought to disarm the leaders of an Indian reservation, allegedly exploiting their own community. ‘Control+Alt+Del’ was an early attack on internet bank fraud. Sadly, though, ‘Cheops’ related to mundane contract fraud, rather than a pyramid scheme.

One name to catch the eye of any God-fearing criminal was ‘Psalm 96:12’. Even the most recalcitrant of churchgoers could at least use the internet to discover the verse: ‘Let the fields be jubilant, and everything in them; let all the trees of the forest sing for joy.’ Nevertheless, the 2012 operation netted 18 inattentive public officials accused of facilitating illegal deforestation in the Amazon.

And fleur-de-lis? A 2013 operation to arrest a federal policeman turned ‘bad scout’, accused of helping criminals. The name came from the Boy Scouts’ badge.

Apparently, the naming tradition was started by a pun-loving federal police director who later failed to wonder about an investigation called ‘Cutthroat Razor’ – an instrument that turns in on itself, with potentially dangerous results. The operation nabbed him for warning colleagues about internal investigations.

Significantly, the CEO and deputy CEO of a major construction company signed individual collaboration agreements in late February after 105 days in police custody, and just five days after judges turned down another habeas corpus request. Prosecutors deny coercion and say the majority of collaboration agreements were negotiated with suspects in liberty.

Finally, says Souza, there is a risk of collaborators lying: ‘It’s natural for suspects who are tortured – in this case, psychologically tortured – to say whatever their captors want to hear.’

Collaboration is also seen as somewhat dishonourable: ‘Paying for your crime at the cost of another’s freedom does not seem a very worthy form of defence,’ says one lawyer representing a major constructor.

Fallout

The impact of Car Wash is sending ripples through the Brazilian economy. Shares of Petrobras fell 60 per cent in the six months to March, albeit also hit by lower oil prices. With shares traded in Brazil and also in New York as depository receipts, the company faced investigation by both the US Securities and Exchange Commission and its Brazilian counterpart, CVM. Civil suits were filed in the US by shareholders who claimed losses exceeding US$500m due to mismanagement. Moody’s Investors Services downgraded the company to junk. According to Bloomberg, the downgrade could increase Petrobras’ costs for financing debts estimated at US$135bn, and the company announced it would divest US$13.7bn of assets through 2016. Investments have been rescheduled and there were layoffs at shipyards building oil rigs.

A new president and board were appointed, with the first task being to issue a long-delayed, independently audited third-quarter earnings report with a credible estimate of graft-related losses. Before resigning in early February, outgoing president Maria das Graças Silva Foster estimated direct corruption losses were at least R$4.1bn (US$1.3bn) based on statements by former executives.

Many other companies are also suffering. Most of Brazil’s largest constructors have been implicated, and Petrobras has banned them all from bidding for new contracts. If found guilty of bribery the companies would face an automatic ban on participating in any public tender, in any sector. Given that these companies handle the lion’s share of Brazil’s much-needed infrastructure development, including new railroads, highways and huge hydroelectric dams, the implications could be severe. In January, however, President Dilma Rousseff stated: ‘We should punish the people; we should not destroy the companies, which are essential to Brazil.’ Company lawyers reportedly approached the government seeking a deal, offering fines to wipe the slate clean.
Several lawyers have argued that such an outcome would apparently conflict with Brazil’s new Corporate Liability Law (12.846 of 2013), although that law still lacks government regulation.

Brazil still lacks a detailed and precise discipline with respect to collaboration agreements, and that means the form of collaboration depends almost entirely on subjective calls by the authorities. This creates judicial insecurity

Luciano Anderson de Souza
Criminal law professor, São Paulo University

Lurking in the background is the possibility of a massive antitrust case. One businessman who signed a collaboration agreement has reportedly provided a detailed description of a ‘constructors’ club’ dating from the late 1990s. Apparently it was formed to share out Petrobras contracts, without any initial suggestion of political rake-offs. The club reportedly doubled in membership through the last decade and extended its scope to other areas of infrastructure. According to a spreadsheet provided under a collaboration agreement involving a Petrobras manager, 11 club members influenced the results of 87 Petrobras contracts between 2004 and 2012, totalling R$47bn (US$14.8bn) in Brazil and US$11bn abroad, with skims between one and two per cent. Brazil’s antitrust agency, the Administrative Council for Economic Defence (CADE) says the Brazilian subsidiary of a Japanese engineering company and Petrobras supplier has already signed a leniency agreement admitting to a cartel.

Finally, there is the political fall-out. Most allegations concern the period from 2003 onwards, although a few mention bribery before then. Questions have inevitably arisen about Rousseff’s role as chair of the Petrobras board, 2003–2010, which approved top appointments and major contracts. But, Rousseff was not implicated in any testimony published or leaked through early March and has denied all knowledge of corruption. She has pledged a thorough investigation, ‘no matter who gets hurt’. More damaging could be the impact in Congress, which must deal with having several senior members under criminal investigation. Worries are that this could paralyse government just when Brazil must enact unpopular spending cuts to reduce the public deficit.

São Paulo lawyer Luciano Santos, national director of the Movement to Fight Electoral Corruption, says events such as those being investigated at Petrobras occur because of the way Brazil’s political system is financed. Santos helped lead a successful national campaign for a 2010 law banning anyone convicted in second instance by a collegiate of judges from standing for election. Now he is working to curb the cash. ‘We are in favour of public financing of campaigns, allowing individual donations but banning all corporate support,’ Santos says. He argues that, while many democracies allow corporate donations, Brazil – still consolidating its democracy after the 1964–1985 military dictatorship – suffers from a ‘non-republican’ relationship between companies and parties. Banning company donations would not prevent off-the-books support of the kind alleged in
Car Wash, but that could be tackled by energetic use of the 2013 Anti-Corruption Law – once the government gets round to regulating it.

‘Fighting corruption means fighting to reduce the suffering of thousands of poor people,’ Santos says. ‘The problem is not lack of public money; it is misuse of public money and its diversion via corruption. Brazil fails to resolve problems of health and education because money disappears down the drain.’ 


Brian Nicholson is a freelance journalist based in Brazil. He can be contacted at brian@minimaxeditora.com.br