Brazil ‘Carwash’ Probe Yields Largest-Ever Corruption Penalty

Odebrecht SA, Latin America’s biggest construction company, and an affiliate agreed to pay more than $3.5 billion to resolve bribery allegations involving Brazil’s state-run oil company, the largest corruption penalty ever levied by global authorities.

Odebrecht pleaded guilty in Brooklyn, New York, on Wednesday to conspiring to pay bribes in violation of the Foreign Corrupt Practices Act. An Odebrecht affiliate, the petrochemicals maker Braskem SA, also pleaded guilty. The two admitted to paying officials of Petroleo Brasileiro SA, the Brazilian oil giant known as Petrobras, to win contracts.

Odebrecht agreed with U.S. authorities to a $4.5 billion penalty, but it said it could pay only $2.6 billion, according to U.S. District Judge Raymond Dearie. The judge said the final number would be determined at an April 17 hearing and said it could be higher or lower than $2.6 billion. Braskem agreed to pay $632 million to the U.S. Justice Department and $325 million to the U.S. Securities and Exchange Commission.

The convictions mark the first corporate resolutions in the U.S. stemming from a nearly three-year investigation of more than a dozen companies in the international corruption scandal known as Operation Carwash, which has helped plunge Brazil into recession. They are probably not the last, however, with the SEC and Justice Department saying their investigations are continuing. Brazil and Switzerland are also investigating the role of individuals and banks, respectively.

“Odebrecht has admitted that for more than a decade it operated an off-books internal financial structure whose sole purpose was to facilitate bribery on a massive scale,” Deputy Assistant Attorney General Sung-Hee Suh said on a conference call with reporters. “This was a hidden but fully functioning Odebrecht business unit — a department of bribery so to speak — that systematically paid hundreds of millions of dollars to corrupt government officials in countries on three continents.”

The illicit payments were made through “carefully disguised” wire transfers to shell companies or using cash-stuffed suitcases left at predetermined locations, Suh said. In addition to Brazil, Suh said there were 11 other countries where the bribe payments were made. They include Argentina, Angola and Mexico.

Earlier: Petrobras ‘Carwash’ Probe Said to Bring $2.5 Billion Bribe Fine

Much of the penalty money to be paid to the U.S. will flow back to Brazil, where the Carwash probe started with a focus on illicit payments made to executives at Petrobras. It then spread to other industries in Brazil, implicating construction companies, shipyards and leading politicians from several parties.

Of the penalties to be paid by the companies implicated in the scandal, 80 percent will go to Brazil as reparations to help counter the negative effect of the scandal on the nation’s economy, the Justice Department said. The remaining 20 percent is to be split between Switzerland and the U.S.

Guilty Pleas

In the Brooklyn federal court on Wednesday, Odebrecht general counsel Adriano Chaves acknowledged the company’s role in the conspiracy and entered a guilty plea. Braskem’s general counsel, Gustavo Sampaio Valverde, also entered a guilty plea for the company.

In Washington, the SEC accused Braskem, which is controlled by Odebrecht, of nearly a decade of bribery. Of the $325 million in disgorgements it sought from Braskem, it said that $260 million would go to Brazil.

From 2006 and through 2014, Braskem paid bribes to political parties and officials in the government of Brazil in order to assist the company in obtaining or retaining business in that country, according to the SEC complaint.

Complex Network

The bribery scheme used a complex network of offshore shell companies, bank accounts located in traditional tax havens, individual currency dealers and off-book financial accounts, the SEC alleged. In 2006, former senior executives at Braskem diverted company funds into Odebrecht’s off-book accounts in order to make the bribe payments, the SEC alleged. The diverted funds were approved by senior Braskem and Odebrecht executives.

Braskem made about $250 million in improper payments to the illicit network that Odebrecht used to make the improper payments, the SEC said. At least $75 million of those payments was used for bribes that directly benefited Braskem, the agency said. The companies received a gain of $3.3 billion from the conspiracy, according to information read in the Brooklyn court.

The SEC didn’t bring a case against Odebrecht. The agency has jurisdiction over Braskem, it said, because the company has shares registered with the agency.

Odebrecht’s $750 million perpetual bonds rose 2.7 cents to 58.01 cents on the dollar, the most since Dec. 2 when the bond price surged 10 percent as reports of the settlement were circulating.

“Odebrecht has cooperated fully and will continue to do so,” the company said in a written statement. “The company is glad to be turning the page and focusing on its future.”

Record Penalties

In all, the penalties set a record for a multi-country corruption settlement and may hint at the size of penalties still to come from other companies under investigation. The previous record for anti-bribery penalties was imposed against Siemens AG, which in 2008 paid $800 million to the U.S. for violations of the Foreign Corrupt Practices Act and another $800 million to German authorities.

Brazilian prosecutors investigating Operation Carwash — a reference to a service station used to launder money that was identified early in the investigation — say that contractors for Petrobras bribed executives of the company in exchange for lucrative contracts and then inflated the costs. Petrobras has said it has improved its compliance standards and has fully cooperated with the investigations.

Recipients of the Brazil bribes included at least one official at Petrobras, the state-owned oil company, as well as senators and representatives of the Brazilian congress, and foreign political party officials with at least two leading political parties in Brazil, the SEC alleged in the complaint.

A government official at Petrobras intervened on Braskem’s behalf over the pricing formula for a 2009 agreement for the purchase from Petrobras of naphtha, the raw material used in Braskem’s production of petrochemicals, the SEC complaint alleges. This reduced Braskem’s price of naphtha by approximately $94 million from March 2009 until February 2014, according to the SEC.

Legislative Help

Braskem also received several tax credits and other benefits from legislative measures that allowed it to avoid approximately $187 million in expenses and costs, the SEC alleges. Braskem made about $8 million when executives at the company bribed officials in the Brazilian government, who used their influence to prevent Petrobras from terminating a joint venture agreement involving a polypropylene plant, the SEC alleges.

Earlier: The Undoing of a Brazil Giant, Told by Bankers Fearing the Worst

Odebrecht, a construction powerhouse with projects from Central America to Africa, has been among the hardest hit by the investigation. Its chief executive officer was arrested in June 2015 and later ordered to serve 19 years in prison, an unusually harsh sentence in a nation with a history of white-collar corruption and impunity. The firm has been blocked from signing new contracts with the state oil producer, and jittery state and private banks have cut off funding.

“Odebrecht’s biggest challenge now is to generate cash to pay the penalty. I’ve never seen such a big penalty,” said Carlos Gribel, the head of fixed income at Andbanc Brokerage in Miami who used to recommend Odebrecht group bonds to his clients. “It will have a smaller pipeline, a smaller structure, but will survive.”

Effect on Brazil

Brazil is suffering from its worst recession in a century, partly because of fallout from the sweeping corruption scandal, which caused waves of job losses in the construction, oil and shipbuilding industries. Although the settlement allows Odebrecht to start bidding again on public contracts, providing fuel for the country’s crippled infrastructure sector, the remaining investigations against corporate executives could implicate more public officials and deepen the country’s political crisis.

Some of the illicit cash paid to Petrobras made its way to the country’s political parties, prosecutors have alleged. Insiders at Petrobras and a cartel of contractors allegedly siphoned large sums from inflated construction and service contracts. Prosecutors have called former President Luiz Inacio Lula da Silva the mastermind of the graft scheme, and Eduardo Cunha, the former speaker of Brazil’s lower house of Congress, faces charges of money laundering, corruption and tax evasion. Lula’s successor and protege, Dilma Rousseff, was never implicated, but the scandal fueled social unrest that contributed to her impeachment in August.

Brazil’s Ibovespa — the world’s best-performing currency and stock market through the end of November — has become one of the worst performers in December as investors fret that the same political undercurrents that derailed Rousseff’s administration were now threatening President Michel Temer’s administration.

The Justice Department and SEC opened their investigations in October 2014 with a focus on Petrobras, though much of that early work was done by Brazilian investigators, a person familiar with the situation said at the time. The wider examination of companies that had dealings with Petrobras started more recently, people familiar with the matter told Bloomberg News earlier this year.

Wide Probe

U.S. authorities are looking at any company that has been named publicly in the Brazilian investigation, the people said. Those include the builders OAS SA, Camargo Correa SA and Andrade Gutierrez SA. Executives from the companies reached plea bargains in the scandal. The federal police said builders also paid bribes to win contracts at Centrais Eletricas Brasileiras SA, the utility known as Eletrobras, and a former executive was arrested. 

Prosecutors from the Justice Department’s foreign corruption unit have been assigned to various pieces of the probe, the people said, and are working with the U.S. attorney’s office in the Eastern District of Virginia and the SEC on a possible case against Petrobras.

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