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Car Wash: the show goes on...and on...

Brazil’s corruption investigation has seen leading businessmen locked up, uncovered what the US Department of Justice has called the ‘largest foreign bribery case in history’, and prompted a surge in demand for compliance lawyers. The next phase will see dozens of politicians investigated and a rupture between judiciary and legislature must be avoided.

Car Wash takes its name from a routine 2014 investigation into money laundering and currency fraud at petrol stations. From such mundane beginnings, federal police and prosecutors stumbled almost by accident onto a vast network of multi-year international bribery operations involving the government-controlled Petrobras oil company, some other state companies, a dozen major construction companies and several political parties. For previous extensive coverage from the International Bar Association, see features in Global Insight from April 2015 and April 2016, as well as podcasts, that can be accessed at ibanet.org.

‘Was I surprised by the extent and sophistication of Car Wash? Yes, very much so. I think any citizen of any country would be surprised to have the biggest corruption case in his or her country,’ says Horacio Bernardes Neto, IBA Vice-President and a partner at Motta Fernandes in São Paulo. ‘These giant companies are so well organised, with such an enormous commitment to society and the country, and yet, at the same time, they had this huge corruption programme.’

Bernardes, who is due to take over the IBA presidency in 2019, noted in particular the professionalism of some confessed corporate offenders: ‘That some companies had specific departments to deal with corruption has surprised me a lot,’ he says.

Also remarkable, Bernardes says, was the methodical manner in which investigators have moved ahead. They started with the intermediaries who handled payments, then targeted executives at Petrobras and some other state companies who approved padded contracts in exchange for kickbacks. These went into party funds or private pockets, sometimes via multiple offshore accounts. Next came the construction companies that received the contracts, often agreeing winners and prices before tendering. And the final, monumental step, yet to unfold, will see investigations into and potentially the criminal indictment of politicians identified as alleged beneficiaries.

‘I have been surprised to see a new generation of judges and prosecutors who are very well educated and intelligent,’ Bernardes says, singling out in particular the lead investigating judge Sérgio Moro of the Fourth Federal District in Curitiba, southern Brazil.

The Federal Prosecutor’s Office in Curitiba, headquarters of the Car Wash investigating team, publishes a running total. As of mid-February, it reported criminal charges had been filed against 260 people, with 25 of them convicted to date on offences including corruption, participation in organised crime, money laundering and crimes against the international financial system. There were also seven charges of dishonest administration filed against 38 individuals and 16 companies, while 71 individuals have signed collaboration agreements and nine companies have negotiated leniency deals. Reimbursements and fines requested by prosecutors totalled R$38.1bn – some US$12.3bn at mid-February exchange rates.

A ‘Department of Bribery’

Undoubtedly, the single most eye-catching settlement to date was a plea deal announced just before Christmas by the United States Department of Justice (DOJ) after Brazilian, US and Swiss authorities collaborated to piece together the web of shell companies and offshore accounts used to channel Car Wash bribes. The deal involved Odebrecht SA, the parent of Construtora Norberto Odebrecht SA, a Brazilian construction company ranked sixth in the world in terms of volume of international business in 2015 by Engineering News-Record magazine, and Braskem SA, the largest petrochemicals company in Latin America, created and controlled by Odebrecht and Petrobras.

Odebrecht and Braskem pleaded guilty to one charge each under the Foreign Corrupt Practices Act. They agreed to pay a combined total penalty of at least US$3.5bn to resolve charges in the US, Brazil and Switzerland – the final amount will depend on Odebrecht’s ability to pay.

According to the DOJ, the leniency agreement resulted from ‘an extraordinary multinational effort to identify, investigate and prosecute a highly complex and long-lasting corruption scheme that resulted in the payment by the defendant companies of close to US$1bn dollars in bribes to officials at all levels of government in many countries’.

Calling it the ‘largest foreign bribery case in history,’ the DOJ release says the two companies ‘used a hidden but fully functioning Odebrecht business unit – a “Department of Bribery” so to speak’. There was even a bank in Antigua, purchased specifically to facilitate the payment of bribes.

A massive, third-generation, family-held conglomerate with interests in construction, petrochemicals, oil and gas, real estate, environmental services and agribusiness, Odebrecht has operations in two-dozen countries, mainly the Americas, Europe and Africa. Billings in 2015 were R$132.6bn – some US$40bn at the year’s average exchange rate. Odebrecht company lawyers issued repeated and sometimes indignant statements of innocence and pledged full cooperation even as Car Wash investigators closed in on other large Brazilian construction companies. Then, in June of 2015, federal police arrested CEO Marcelo Odebrecht and seized 11 mobile phones at his home. Later, in separate raids at homes of Odebrecht staff, they found spreadsheets containing monetary amounts and code names, as well as files that identified beneficiaries. Since then, no less than 77 Odebrecht directors and executives, including Marcelo Odebrecht and his father and Board Chairman Emílio Odebrecht, have negotiated collaboration agreements with Car Wash prosecutors. Terms of the agreements were unpublished as of late February, but leaks in major Brazilian newspapers say Marcelo faces ten years of imprisonment, progressing after 30 months to day release and then residential custody, while Emílio, at 72 years old, faces four years of residential custody.

Untouchables no more

The realisation that very rich and influential businessmen could actually go to jail has been an eye-opener for many Brazilians. ‘It is clear to me that Car Wash has created an awareness by boards and management that they must pay attention to compliance; it is not just something that merits superficial oversight. They now see that in addition to affecting the company’s reputation, they can be held personally liable for wrongdoing,’ says Shin Jae Kim, Head of Compliance and Investigation at TozziniFreire.

Her department was created nine years ago with one partner and one associate. Today, there are five partners and 20 associates, with most growth coming in the last two or three years. Car Wash has been a major driver, but companies are not just worried about corruption – there’s also compliance concerns in areas like labour and the environment. Kim sees demand in healthcare, construction, oil and gas, and listed companies across the board. Virtually all of her projects involve multiple jurisdictions: ‘There’s a lot of exchange of information and also experience; we interact with people from different cultures, and see best practises.’

The DOJ says that Odebrecht and co-conspirators confessed to paying bribes of roughly US$788m, relating to more than 100 projects in Angola, Argentina, Brazil, Colombia, the Dominican Republic, Ecuador, Guatemala, Mexico, Mozambique, Panama, Peru and Venezuela.

Another important compliance concern in the wake of Car Wash is corporate relationships with third parties, that is, suppliers, contractors and consultants. ‘In Brazil in the past there was sometimes the idea that if wrongdoing was committed by a third party, then the (contracting) company or the person themselves would not be liable,’ Kim explains. ‘You could maybe not even bother knowing what the third party was doing, providing you got the desired end result.’

Car Wash has revealed many examples of bribes apparently being channelled via ‘consultancy’ fees. In one prominent case, a small company linked to a senior politician received around US$1m dollars for a ‘report’ that was essentially copied from Wikipedia. ‘In addition to setting up compliance programmes,’ Kim says, ‘companies are also focusing on who the third parties are that are providing services – do they have a good reputation, have they got the proper technical experience and profile?’

‘Washing the soul’

Brazilians have an untranslatable expression: lavar a alma. Literally, ‘to wash the soul’. More practically, it describes an act, event or process that leaves one feeling lighter, purified and refreshed – perhaps almost reborn. Bernardes uses this expression to describe the impact of Car Wash on Brazilian society in general: ‘It’s a landmark. Corruption was very much tolerated, my generation was used to paying small bribes. I always fought against this, and I was considered the silly boy in the group because I would not give money to the policeman. What is positive about Car Wash is that now, people think about that. It has changed the mentality of the Brazilian people.’

Car Wash has also won international recognition: prosecutors handling the investigations received Transparency International’s 2016 Anti-Corruption Award in the Law Enforcement category.

The massive public support for prosecutors and judges gives Bernardes and other lawyers additional confidence that strains between branches of government, in particular between lawmakers and the judiciary, will not explode into crisis, even as the process moves inexorably towards investigation and possible indictment of senior political figures. Charges against businessmen are proceeding in regional federal courts, but those against most politicians will be heard in the Supreme Court.

One recent episode illustrates the tensions. In 2015, the Federal Prosecutor’s Office helped organise a public petition in support of ten specific changes to the law designed to combat corruption. Several of the proposals are based on the United Nations Convention against Corruption, which Brazil ratified in 2005. Examples include criminalising off-books campaign funding and illicit enrichment by public officials. The petition was presented to Congress in March 2016 with more than two million signatures.

In December, the Lower House threw out six of the proposed changes and inserted one of its own, making prosecutors potentially criminally liable for their actions. Threatening to resign en bloc, the Car Wash prosecutors’ task force called the addition an ‘intimidation law’ and says it was voted ‘at a time when Car Wash investigations are getting ever closer to crimes of corruption committed by a significant number of influential parliamentarians’. Supreme Court Judge Luiz Fux ordered the Lower House to vote again without disfiguring the original proposals, a step House Speaker Rodrigo Maia called ‘unwarranted judicial intromission into the Lower House’.

Other Supreme Court judges, meanwhile, have started a debate about severely limiting the right of politicians to be judged under special rules and procedures, something that has frequently led to corruption cases delaying and eventually prescribing.

Speaking generally, Bernardes says, ‘There is a kind of fight between the powers but the [Car Wash] matter is in the hands of the judiciary and it is now clear that the judiciary is the deciding power – it has gained a lot of strength. Public opinion is very strongly behind the judiciary, and ordinary people do not support the politicians at all, so the politicians have to be very wise, and this is the reason why they no longer fight very strongly against the judiciary.’

Pedro Freitas, Partner at Veirano Advogados and Co-Chair of the IBA Mining Law Committee, says he does not foresee any full-blown crisis: ‘Car Wash is a huge case with implications for several politicians and big corporations, so you have to have very strong institutions to handle something of this magnitude. In general, the institutions are working well; this has been going on for some time, and people are generally accepting the rules.’

Professor Conrado Mendes, who teaches constitutional law at São Paulo University, says Car Wash has undoubtedly had a destabilising effect on the political system ‘because it has illuminated a corruption machine that cuts across all parties and affects the strongest political leaders in Brazil’. However, he says that for the last 20 years or so, the Brazilian judiciary has been gradually expanding the reach of its power towards areas that have traditionally been understood as within the exclusive province of the political branches. ‘This is not something that was sparked by Car Wash, but a much more general phenomenon; it has created some tension between the two branches in different moments, but nothing that has become a political turmoil.’

Mendes also raises concerns, expressed by a number of lawyers, about Car Wash prosecutors’ ‘abusive and heterodox’ use of provisional arrest and collaboration agreements, and says the justice system now faces a challenge in showing that it has not been politically oriented or engaged in a witch-hunt against one party.

Extra time and penalties

How and when might Car Wash end? As of December 2016, the Supreme Court had started formal investigations into five politicians; eight more were under consideration. Another three-dozen cases were still being processed by the Prosecutor-General’s Office. But the floodgates could open as prosecutors start to work through all the accusations against politicians contained in the 77 collaboration agreements made by Odebrecht executives. Bernardes predicts that it will take four or five years for the Supreme Court to process everything, and sees a real possibility that construction companies will face cartel actions in Brazil and abroad.

However, as Car Wash drags on, the political and economic uncertainties will remain. ‘Without final closure for the companies involved, without final penalties and final fines, properly reflected in the balance sheets, people don’t know exactly what the risk is. This is bad for economic activity,’ Freitas notes.

On the political side, he suggests the multiplicity of payments uncovered could be split into four broad categories: classic corruption, with payments for direct benefits; legal, on-the-books contributions to a politician or party but with suspicion of a quid-pro-quo; illegal, off-the-book contributions but not always proven to be tied to a specific benefit; and situations where a company was effectively extorted. There has already been talk of a partial amnesty, for example for off-the-books political contributions. Freitas adds, ‘There was a move in the Lower House to do this last year, but public opinion was against it. So it’s impossible to say how things will turn out.’

Turning the page

How a major company, mired in scandal, is seeking redemption

In 2010, the Odebrecht Group was named the ‘World’s Best Family-Owned Company’ by Switzerland’s International Institute for Management Development. Six years later, Odebrecht pleaded guilty to massive, far-reaching and systematic international corruption, starting in 2001. With its CEO from 2008 through 2015 in jail and his father, the board’s Chairman, facing a residential prison term, as well as public-sector contracts being axed or questioned in several countries, the group’s construction division has reportedly fallen to around half of its 2014 size, laying off more than half of its 107,000 employees and seeing billings drop by more than 50 per cent.

Car Wash is the driver, although Brazil’s economic slump is also a factor. Now Odebrecht has issued a public apology and is instituting an ‘enhanced compliance programme’ under the supervision of the US Department of Justice (DOJ).

‘We are turning the page,’ the company’s Chief Compliance Officer (CCO) Olga Pontes told Global Insight. ‘This is a new chapter, and it started with the restructuring of group corporate governance approved by the board in April of 2016.’

This restructuring calls for the boards of all group components to include at least 20 per cent independent members, and the institution of a central compliance committee, drawing members from each board and reporting to the main board. Another important change is that now the CCO is independent, reporting to the board via the compliance committee, whereas previously the CCO was also the company’s general counsel, reporting to the chief executive officer.

‘Odebrecht is not a listed company, but the system we have been implementing over the last 12 months matches the best practise among Securities and Exchange-listed companies,’ Pontes says.

It’s frequently stated that good governance in any organisation starts at the top, and the leniency agreement signed with the DOJ states that ‘criminal conduct was directed by the highest levels of the company’. So, was Odebrecht brought low by a lack of leadership? ‘No,’ Pontes says, ‘there was leadership. What happened was that some leaders in the company accepted inadequate business practises.’

Given that the group works in 26 countries, not all of which figure very highly on Transparency International’s Corruption Perceptions Index, the obvious question is if Odebrecht’s new code of conduct might represent a commercial disadvantage in some markets? ‘One of our commitments is to say “no” to any business opportunity that is not consistent with best international business practises,’ Pontes says. ‘We will seek to influence the markets where we operate that might be recognised as having “non-orthodox” business practises.’

Under the terms of a leniency agreement signed with the DOJ, Odebrecht is committed to retaining independent compliance monitors for three years, reporting back to the DOJ.