Brazil's fight against corruption

Amidst a major economic downturn and political crisis, a billion-dollar corruption scandal is edging towards its finale. Despite all the bad news, there are grounds for optimism.

BRIAN NICHOLSON

It might seem strange, with the economy in freefall, factories closing, more than two million people losing their jobs, at least 50,000 homicides a year, and hundreds of young mothers in panic about the effects of the Zika virus, that Brazilians should name corruption as their country’s biggest problem. But so it was at the end of 2015. The Datafolha polling institute found corruption placing ahead of health, unemployment, education, violence and the economy for the first time since the question was introduced in 1996, receiving 34 per cent of spontaneous replies in the nationwide survey, up from nine per cent a year earlier.

A follow-up poll by the same institute showed that, while most Brazilians saw the current administration headed by President Dilma Rousseff as harbouring more cases of corruption than any previous government since the end of military rule in 1985. They also saw it as having done more to investigate and punish the guilty parties.

These results raise an important question: given all the other problems, why are Brazilians so focused on corruption? Is it really getting worse, or is it simply receiving more attention because of more energetic police and court action, in particular the massive, ongoing ‘Car Wash’ investigation?

‘I think Brazil is winning the fight against corruption because it is demonstrating the strength of its institutions,’ said Ricardo Veirano, Co-Chair of the IBA Latin American Regional Forum. ‘The judiciary is not always perfect but it has taken a tough stance on corruption, and has generally been very deliberate, articulate and mature in doing what they need to do. You might sometimes see things that you would prefer to be different, either in the judiciary, or the prosecutor general’s office, or the press, but the fundamental thing is that we have institutions that are working.’

“ The system of infinite appeals is a Brazilian pathology

Judge Sérgio Moro
Head of the Car Wash investigation

Leopoldo Pagotto, a São Paulo-based lawyer who is IBA Anti-Corruption Committee Secretary, is in no doubt. ‘Brazil received a worse ranking in the 2015 Transparency International index of perception of corruption (falling from 69th to 76th), but this was unjust, because we have never had so many victories in this area, as in the last three or four years.’

Best known is the landmark ‘Big Monthly’ case that led to the 2013 jailing of politicians and their associates (see Global Insight,May 2012) and the Car Wash investigation, which also involves nationally known figures. Other potentially large corruption cases are under investigation, besides Car Wash. One involves alleged bribes to secure favourable judgments in a federal tax tribunal; dozens of major companies are reportedly under investigation, with total tax evaded running into billions of dollars. In keeping with a Brazilian Federal Police penchant for catchy names, often with a classical allusion, it’s dubbed Operation Zealots. There’s also a substantial cartel case involving multinational companies and the supply of rolling stock to the São Paulo subway.

Away from the headlines, there are thousands of less visible cases. The Federal Prosecutor’s Office website lists ‘The 100 Principal Cases of Fighting Corruption in 2015’. Many involve rigging public procurement tenders; others range from fraud in supplying school meals to misuse of public funds and the irregular granting of public loans.

‘The year of 2015 was a high point in the fight against corruption,’ says Assistant Prosecutor-General Nicolao Dino Neto, introducing the list. ‘The Car Wash case is ongoing, it’s the biggest corruption investigation ever conducted in Brazil, and paradoxically while the negative side of this shocks us all, at the same time it makes us proud and gives us hope, because we see that the agencies responsible for repression and control are carrying out their institutional duties.’ In the ten months through October, he says, the Prosecutor’s Office was handling 26,000 corruption-linked investigations and achieved 901 criminal convictions.

Root causes

Pagotto makes a distinction between major, or ‘grand’ corruption, and run-of-the-mill scams. ‘Petty corruption exists in Brazil but it is combatted; there are mechanisms and situations to counter it and many people have been punished for this. The problem was in the area of major dishonest schemes – this is where we came up against a very serious problem of impunity within areas of major political/economic power.’

David Fleischer, an American social scientist and professor emeritus at Brasília University, sees corruption as ‘a constant plague’ on the country’s political system since the 19th century. ‘Politicians are always avid to get contributions to their next campaign, but Car Wash is very different because although the bribes were divided up among several parties, a lot of it was also going into the pockets of the directors of Petrobras, and involved some 20 different construction companies.’

The story so far….

Car Wash began in March 2014 as a routine Federal Police probe into money laundering (see Global Insight, April 2015). This quickly unearthed a multi-faceted slush-fund scheme whereby political parties within the pro-government coalition allegedly nominated directors at the state-controlled Petrobras oil firm. These then allegedly channelled contract kick-backs to their respective parties, often keeping a skim for themselves.

Federal police now reckon Petrobras could have lost up to $20bn in the form of contract over-pricing between 2004 and 2014. Perhaps $3bn of kickbacks went to political parties, company directors and middlemen, the rest being kept by construction companies that – allegedly – acted as a cartel to divvy up major jobs such as refinery and oil rig construction. Executives have been charged within the ambit of Car Wash, while the companies face anti-trust investigations that are running in parallel. Prosecutors have recovered R$2.9bn – some $750m at late February exchange rates – while tax authorities speak of perhaps $2.5bn to come in arrears and fines. More than 170 people have been charged with crimes including money laundering, corrupting public officials, exchange fraud and racketeering with more than 80 convicted, although all initially remained free on appeal. Potential jail time exceeds 800 years.

However, all this is just part of the story, and may be only the prelude to a potential political earthquake, because more than 60 politicians were also placed under investigation as a result of information gleaned during Car Wash investigations. They include the presidents of the Senate and Chamber of Deputies and several other senior figures, mainly in the pro-government coalition. All deny wrongdoing.

Cases against politicians move on a slower track because the Brazilian constitution grants federal ministers and congressmen ‘privileged jurisdiction’ – they can be investigated and tried only by the Supreme Court or the Superior Court of Justice.

The alleged involvement of several politicians has complicated government response to the country’s economic crisis. GDP shrank by almost four per cent in 2015 and is likely to repeat that this year. The last time Brazil had two consecutive years of negative growth was in the Great Depression, 1930 and ‘31. But, even then, it was less severe. Inflation has reached 10.7 per cent with the bank rate a dizzying 14.25 per cent. But Congress – where dozens of pro-government legislators are under investigation – has been slow to vote corrective measures.

‘The global scenario makes Brazil’s situation more challenging, as it does for any other commodity exporter,’ Lisa Schineller of the Standard & Poor’s ratings agency said in February, explaining a second downgrade for the country’s sovereign bonds, pushing them further in ‘junk’ territory, ‘but this is not what prompted the ratings change, which was rather a result of actions and inaction in domestic policy’. Then she added: ‘We are maintaining a negative outlook, given the fluid political dynamics.’

Both Fleischer and Matthew Taylor, an American political scientist at the American University in Washington and an Adjunct Senior Fellow at the Council on Foreign Relations, says they see Brazil’s political and electoral systems as partly responsible for corruption. ‘The causes of grand political corruption are electoral rules, campaign finance, Brazil’s coalitional presidentialism, and how this feeds over into political appointments,’ Taylor says. ‘All of that is within the political realm but it is exacerbated by a tradition of judicial impunity, and all this has contributed to the vicious cycle that we see playing out in these repeated scandals that we see across presidential administrations.’

Taylor, co-editor with Oxford University’s Timothy Power of Corruption and Democracy in Brazil: The Struggle for Accountability (University of Notre Dame Press, 2011) stressed that there were credible accusations of vote-buying in Congress during previous administrations, so the Car Wash affair must be seen in context.

Too much of a good thing?

In some ways, Brazil is suffering from a surfeit of democracy following the 1964–85 military dictatorship. As of early 2016, the country had 35 political parties registered with the Superior Electoral Court. With no electoral threshold, 28 were represented in the 513-seat Chamber of Deputies and 20 in the 81-seat Senate, many with just one or two members. Such fragmentation makes coalitions inevitable. Given that many congressmen and parties appear to be ideologically flexible, joining the pro-government bloc normally involves negotiating not so much about policy but rather ministerial positions and second-rung jobs, preferably ones that control large budgets. As the number of coalition members grows, so the government has subdivided the ministries, to a peak of 39 last year.

‘Coalitional presidentialism in the last 30 years has been really remarkable for guaranteeing some form of governability – most presidents come into office with their parties holding less than 20 per cent of the Congress, and within a few months they have coalitions that reach 80 per cent,’ Taylor notes. ‘However, as we see currently, it can be extraordinarily expensive.’

Car Wash helps clean up judiciary image

Federal agent Newton Ishii was relatively unknown until Operation Car Wash. But thanks to his habitual dark glasses and frequent TV news appearances leading despondent bigwigs into interrogation, he has become a national figure, gaining the ultimate recognition – he became a popular face-mask at the pre-Lenten Carnival. Other Car Wash investigators and prosecutors have also become widely known, but none rival Presiding Judge Sergio Moro – described in a Washington Post profile as ‘Brazil’s new hero’. Le Monde called him ‘The Brazilian Eliot Ness’.

It`s a sign of how Car Wash is burnishing the image of the judicial system, which already benefitted from the Big Monthly trial, when televised sessions transformed the then Supreme Court President Joaquim Barbosa into a star.

Surveys by the National Transport Confederation show the percentage of Brazilians saying they always or usually trust the judicial system rising to 34.3 in October 2015, against 28.0 two years earlier. And the judiciary regularly ranks as the third-most-trusted institution, behind the church (unspecified) and Armed Forces, but way ahead of Congress or the Executive Branch.

Curiously, however, 50 per cent of Brazilians told Transparency International (TI)’s latest Corruption Barometer that they think there is corruption in the judicial system. But given that even more – 88 per cent – said corruption is a problem in the public sector as a whole, perhaps the judiciary is relatively ahead.

The IBA’s Judicial Integrity Initiative, which recently conducted a multi-country survey in partnership with the Basel Institute of Governance, found 89 per cent of Brazilian respondents seeing corruption as a problem, but just 27 per cent saying it occurs within the judicial system.

‘This is a significant difference [from the TI result],’ says the IBA Legal Policy & Research Unit Director Jane Ellis. However, TI surveys the general public, while the IBA consulted judges, lawyers, court personnel and prosecutors – by definition, the groups best placed to know – and also civil societies, seeking to incorporate an outside view of what happens within the systems. Replies were anonymous, to encourage frankness.

Other key IBA findings for Brazil: 28 per cent reported incidence of bribery within the judiciary, and 61 per cent incidence of political interference in deciding cases.

Brazil generally ranked worse than European countries and comparable to or worse than Latin American neighbours Chile and Costa Rica, but comparable to or better than Mexico and Argentina. As this edition of Global Insight went to press, the full IBA Judicial Integrity report was due to be released in April.

At this point he refers to a traditional Brazilian saying, used to explain the frequent posture of public officials, both elected and appointed: ‘Create problems to sell solutions.’

Adding to the cost, Brazilian elections use single-constituency, open-list proportional representation. Congressmen fight state-wide elections competing against all other candidates from all other parties, plus their own. In 2014, in São Paulo, the biggest state, there were 1,485 candidates for 70 congressional seats.

Given that any change requires approval by politicians who are successful under the existing system, the prospects for rapid or radical reform would not seem bright.

However, Taylor – who lived five years in Brazil while on faculty at São Paulo University – says he is optimistic, in part because he doesn’t see Brazil as a particularly corrupt country: ‘It’s not plagued by petty corruption like many other Latin American countries. It’s not common to have to pay a bribe to get a driver’s licence, for example, at least in São Paulo.’ And he doesn’t endorse the explanation, popular among Brazilians, that the systemic corruption can be traced back to Portuguese colonisation, which allowed local administrators to become extremely rich: ‘The problem with cultural explanations is that they tend to condemn Brazil to a long term path, and lead to people throwing up their hands and saying there’s nothing that can be done. It’s an enormous cop-out.’

Rather, he sees an ongoing battle to build stronger institutions. ‘What we’ve seen over the past 30 or 35 years is slow, incremental and very painful, but nonetheless a gain in the fight against impunity.’ Does he see the Big Monthly and Car Wash scandals as proof of that? ‘I really do. They remain exceptions that prove the rule that impunity is more common in Brazil than accountability, but nonetheless they signal progress in the right direction.’

Working together

There’s a consensus that Brazil’s new Anti-Corruption Law (No. 12846 of 2013) was a landmark. Often called the Clean Company Act in English, it clarifies definitions of corruption and provides effective sanctions for companies whose executives are found guilty. ‘The old law was very confused and fines were small,’ explained Pagotto. ‘There was punishment for corruption, but only individuals could face criminal charges, meaning that the companies could continue doing business as normal.’ Companies now face fines of up to 20 per cent of the previous year’s gross revenue, and even forced wind-up.

Just as armies can be more effective if they have research departments to constantly improve their weapons, so Brazil’s police and prosecutors have benefitted from numerous obscure bureaucratic and legislative improvements spawned by a 2003 initiative called the National Strategy to Combat Corruption and Money Laundering (ENCCLA). Headed by the Justice Ministry, ENCCLA brings together 60-odd agencies and private-sector bodies in an annual conference, with working parties for specific topics.

‘ENCCLA has been behind many of the important changes,’ Pagotto said. ‘In the past, authorities acted without integration, all the agencies had their own responsibility to fight organised crime and corruption but there was no integration – the authority that countered money laundering perhaps did not talk to prosecutors, for example. What ENCCLA did was to bring the agencies together, it created and institutionalised mechanisms for cooperation, facilitating inter-agency contact. Of course there was governmental leadership, but ENCCLA was essentially done by professional civil servants.’

One obscure but significant improvement was to make sure that investigative agencies have proper access to data provided by financial institutions and other sectors vulnerable to money laundering that are required to report suspicious activities, for example jewellers and art dealers. ENCCLA also fathered a few more visible changes like the creation of specialised Federal Police offices to deal with financial crimes and streamlined online access by judicial authorities to federal income tax data. The group has also drafted and submitted to Congress various proposals for new legislation in areas such as organised crime, money laundering, lobbying, and confiscation of illegally obtained property.

Swifter jailing

Brazil’s fight against corruption also received a major fillip in mid-February when the Supreme Court (STF) decided by a 7–4 vote that armed robber Márcio Dantas should start his 64-month jail term immediately, rather than remaining at large until all possible grounds for appeal were exhausted. STF judges understood that a jail term imposed in a state court could be executed if upheld by the court of appeal, so reversing their own understanding that frequently led to convicted felons escaping punishment through interminable procedural appeals (see ‘Brazil’s slow justice too appealing for some’, Global Insight,April 2013). While the ruling is technically not compulsory for lower courts, it will serve as jurisprudence for the STF.

“ Brazil received a worse ranking in the 2015 Transparency International index of perception of corruption, but this was unjust… we have never had so many victories in this area, as in the last three or four years

Leopoldo Pagotto
São Paulo-based lawyer ;
IBA Anti-Corruption Committee Secretary

The new understanding was warmly welcomed by the Brazilian Federal Judges’ Association, the National Association of Federal Prosecutors and the Federal Police Inspectors’ Association, but strongly condemned by the Brazilian Bar Association (OAB) and defence lawyers. ‘The OAB strongly defends the position that the constitutional principle of presumption of innocence does not permit imprisonment while there remains any right to appeal,’ the Association said in a note, adding that ‘provisional’ enforcement of a sentence would imply ‘irreparable damage to the life of a person unjustly incarcerated,’ should the sentence later be overturned.

Lawyer Celso Vilardi, who has acted for some Car Wash defendants, called the ruling ‘awful… this decision was influenced by Car Wash and other major investigations, and was at the very least precipitated. It might have been better to wait for the end of Car Wash, when pressure from society was lower, to decide this.’ He also called the Brazilian prison system ‘chaotic’ with no room for more inmates.

However, Judge Sérgio Moro, who heads the Car Wash investigation, believes that ‘the system of infinite appeals is a Brazilian pathology’. While the STF decision applied to all cases, he said, it would have greatest impact on white-collar crime: ‘As a rule, access to the higher-level courts is still difficult for poorer people.’

The STF ruling brought Brazil into line with international practice, Moro said: ‘In the United States and France, for example, imprisonment as a general rule follows condemnation in the first instance.’

According to an unofficial tally by the Correio Brasiliensenewspaper, Car Wash defence lawyers have presented more than 800 appeals since March 2014, of which less than four per cent were successful. Prosecutors told the paper that, thanks to the STF decision, they now hoped to see Car Wash defendants and lawyers focus more on the merits of the charges, rather than procedural delaying tactics, with the first jail terms enforced in 2016, probably for construction company executives.

Signing up for change

The Federal Prosecutor’s Office was significantly upgraded by the 1988 Constitution, gaining guarantees of autonomy under the Prosecutor-General, its own dedicated career structure and, crucially, the power to initiate and supervise police investigations. It has also benefitted from significant staff build-ups, both of its personnel and in the Federal Police.

Over the years it has gained in prominence, playing a central role in investigating the Big Monthly case that brought down senior politicians, and has faced repeated efforts to have its powers reigned in. These culminated in 2011 with a proposed constitutional amendment to strip away its investigative authority. However, in 2013 Brazil was swept by massive anti-government demonstrations, and amongst the various demands was rejection of what prosecutors dubbed the ‘Impunity Amendment’. Having previously approved the amendment in various committee stages, Congress quickly threw it out.

“ What we’ve seen over the past 30 or 35 years is slow, incremental and very painful, but nonetheless a gain in the fight against impunity

Matthew Taylor
Co-editor, Corruption and Democracy in Brazil:
The Struggle for Accountability

Since then the Prosecutor’s Office has been increasingly pro-active in the fight against corruption. In early 2016 it announced success in collecting the necessary 1.6 million signatures on a popular petition requesting Congress to implement a list of ten legislative anti-corruption measures. These include legalising sting operations to unearth corrupt officials, criminalising illicit enrichment by public officials, tougher penalties for corruption, procedural changes to speed up trials, and holding political parties criminally responsible for off-the-books financing. To support its campaign the Prosecutor’s Office ran an internet campaign using social media, cute YouTube cartoons to explain each proposal, downloadable campaign posters and a real-time digital signature counter.

A similar popular petition some years ago, organised by NGOs, chivvied Congress into passing a 2010 law barring various types of convicted felons from running for office.
‘If we look at the last 30–35 years, on net, I think they are making progress,’ Taylor says. ‘It’s not big-bang change… it’s been sometimes two baby steps forward and one adult step backward, but I am cautiously optimistic.’


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