International experts - Published: 12 January 2017
Domingos PAIVA, PhD
Attorney at Law PAIVA PARTNERS - Paris & São Paulo

On December 21, 2016, US and Swiss prosecutors announced that Odebrecht, Latin America’s largest construction conglomerate, had agreed to a wide-ranging bribery resolution with authorities in Brazil (Ministério Público Federal), the United States (Department of Justice, and Securities and Exchange Commission) and Switzerland (Attorney General) with combined penalties of at least US$ 3.5 billion. These penalties are by far the largest monetary sanction ever imposed in a global foreign bribery resolution, dwarfing the previous record of US$ 1,6 billion imposed on Siemens AG in 2008.

The Brazilian-based conglomerate and its petrochemical subsidiary, Braskem, pleaded guilty within a federal court in New York to criminal charges for corruption and money laundering. Under their respective plea agreements, Odebrecht and Braskem are required to continue their cooperation with law enforcement, including as it relates to the investigations and prosecutions of individuals responsible for the criminal conduct. They also agreed to adopt enhanced compliance procedures and to retain independent compliance monitors for three years.

Under the plea agreements, the United States will credit the amount that Odebrecht pays to Brazil and Switzerland over the full term of their respective agreements, with the United States and Switzerland receiving 10 percent each of the principal of the total criminal fine and Brazil receiving the remaining 80 percent. The fine is subject to an inability to pay analysis, to be completed by the Department of Justice (DOJ) and Brazilian authorities on or before March 31, 2017. This is because Odebrecht has represented it is only able to pay approximately US$2.6 billion over the course of the respective agreements. Sentencing has been scheduled for April 17, 2017.

According to its admissions, Odebrecht and Braskem engaged in a massive and unparalleled bribery and bid-rigging scheme for more than a decade, beginning as early as 2001. During that time, the conglomerate paid approximately a billion dollars in bribes to government officials, their representatives and political parties in many countries in order to win business in those countries.

The wrongdoing was directed by the highest levels of the company. The bribes were paid through a complex network of shell companies, off-book transactions and off-shore bank accounts. As part of the scheme, Odebrecht created and funded a secret financial structure within the company, called “Division of Structured Operations,” which effectively functioned as a stand-alone bribe department within Odebrecht and its related entities.

The funds were generated by the Odebrecht Finance Department, as well as by certain Odebrecht subsidiaries, including Braskem. The funds were then funneled by the Division of Structured Operations to the off-shore entities that were not included on Odebrecht’s balance sheet as related entities. Then the funds were disbursed to the bribe recipient, through the use of wire transfers or through cash payments both inside and outside Brazil.

While the Odebrecht resolutions are unprecedented given the magnitude of the ultimate fines, there are several other notable aspects to the case, including that it marks an extraordinary multinational effort to identify, investigate and prosecute a highly complex and long-term corruption scheme.

The “Petrobras scandal” or “Operation Car Wash”

The Odebrecht settlement is one of the numerous consequences of the “Petrobras scandal” or “Operation Car Wash” (Portuguese: Operação Lava Jato) – an investigation which is being carried out by the Federal Police of Brazil, Curitiba Branch, and by the Federal Judge Sérgio Moro, which was revealed in March 17, 2014. Initially a money laundering investigation, it has expanded to cover allegations of corruption at the state-controlled oil company Petrobras, where executives allegedly accepted bribes in return for awarding contracts at inflated prices to large construction firms (known in Brazil as empreiteiras).

The investigation has led to numerous arrests, leniency agreements, plea bargains, and convictions, with a long list of politicians, corporate executives, and companies involved. The Petrobras investigation has spawned inquiries into Brazil’s largest power utility company, Eletrobras and its subsidiary Eletronuclear, whose former CEO has been sentenced to 43 years in jail for corruption, money laundering, conspiracy, obstruction of justice and illicit capital flight.

On March 8, 2016, Marcelo Odebrecht, Odebrecht’s CEO, was convicted to 19 years and 4 months in prison for corruption, money laundering and conspiracy. Dozens of other Brazilian businessmen and executives, as well as former Petrobras directors, employees and Brazilian politicians have been convicted with similar sanctions. Some of them negotiated a plea-bargain agreement to reduce their punishment in return for cooperation with the investigators.

Currently, most of the proceedings are against individuals, as Brazilian law does not permit criminal proceedings against companies. This is why companies involved with the scandal have been sued for civil and/or administrative offences, by means of the public civil suit (Portuguese : Ação Civil Pública) and the administrative improbity action (Portuguese: Ação de Improbidade Administrativa).

Companies are also subject to administrative penalties imposed by Brazilian regulators and independent agencies, such as the Antitrust Authority (called the CADE in Brazil). On December 2015, the CADE opened enforcement proceedings against 22 large construction firms (empreiteiras), including Odebrecht, and 59 executives. In this way, the CADE covered conspiracy to violate the Brazilian Antitrust Law tied to its sprawling investigation of misconduct linked to the Car Wash Operation. As of end 2016, these proceedings had resulted in 7 leniency agreements between the CADE and the empreiteiras Setal, Camargo Correa, Andrade Gutierrez, and Carioca Engenharia.

Moreover, since the entry into force of the Brazilian Clean Company Act (Law n° 12.846/2013) in January 29, 2014, companies involved with bribery allegations are also subject to strict liability for the corrupt acts of their employees. This means a company can be liable without a finding of fault. The Act includes administrative fines of up to 20% of a company’s gross revenue from the previous year. These fines can be imposed by government bodies, such as the Ministry of Transparency, Supervision and Control (CGU), which has opened administrative proceedings (Portuguese: Procedimentos Administrativos de Responsabilização – PARs) against 29 firms and which is currently negotiating 12 leniency agreements with some of them.

Substantial Coordination Involving Overseas Prosecutors

The Petrobras scandal or Operation Car Wash further demonstrates the internationalization of anti-corruption law enforcement actions. Since March 2014, Brazilian authorities have requested over 120 legal assistances of their foreign counterparts. Beside the United States, this cooperation includes the Netherlands, Switzerland, Argentina and several other countries around the world.

In the Netherlands, SBM Offshore, a company that provides floating production systems to the oil and gas industry, settled with Dutch authorities in 2014 for US$240 million to resolve charges in connection with the Petrobras bribery scandal and then negotiated a leniency agreement with the Brazilian government. Authorities in the Netherlands have reported receiving information from the Brazilian government in making their case against SBM.

In Switzerland, prosecutors have 60 criminal proceedings underway linked to bribery and money laundering at Petrobras. Most of those proceedings are against individuals and a few are against companies including Odebrecht. The attorney general has already frozen hundreds of millions of dollars in assets from more than 30 banks in Switzerland for their suspected ties to the Petrobras scandal. In addition, the Swiss Financial Market Supervisory Authority (Finma) has opened enforcement proceedings against several Swiss banks for inadequate anti-money laundering controls.

In Argentina, prosecutors are investigating approximately 100 companies for involvement in bribery of government officials stemming from Brazil’s Operation Car Wash. The probe includes inquiries into the Argentine operations of a number of Brazilian firms, including Odebrecht, Andrade Gutierrez, OAS, and Camargo Correa. Similarly, in 2015 Ecuador announced audits of its contracts with Odebrecht, and Colombia’s officials noted that Odebrecht could be barred from bidding on public contracts.

Many other countries are exposed as investigations are ongoing. In Africa and Latin America, 25 infrastructure projects financed by the National Bank for Economic and Social Development (BNDES) have been suspended since May 2016, as the Brazilian bank is carrying out its own investigations. The 25 projects, whose total funding is worth US$7 billion, are linked to Odebrecht, OAS, Queiroz Galvão, Camargo Corrêa and Andrade Gutierrez, in Angola, Argentina, Cuba, Dominican Republic, Ghana, Guatemala, Mozambique and Venezuela.

The fallout of the Odebrecht and the Petrobras scandal continues. The magnitude of the penalties that were agreed upon and the outstanding multinational cooperation efforts that have been carried out demonstrate the global impact of this case. It is now expected that the Odebrecht and Braskem settlements will be sanctioned by Brazilian, US and Swiss authorities in 2017.

 

This article is available in Portuguese

 

Domingos PAIVA, PhD.
PAIVA PARTNERS
Attorney at Law
Paris

 

January 2017

 

The ETHIC Intelligence Expert’s Corner is an opportunity for specialists in the field of anti-corruption compliance to express their views on approaches to and developments in the sector. The views expressed in these articles are those of the authors.

 

 

Domingos Paiva, PhD, is Attorney at Law registered with the Bar Associations of Paris and São Paulo. He is the founder of PAIVA PARTNERS, an international partnership operating in the fields of legal services, tax & compliance. Dr. Paiva advises large corporations and SMEs involved in international trade & investment, particularly in relation to commercial contracts, partnerships, joint ventures, greenfeld investments, M&A, tax law and compliance. He is also compliance auditor and trainer on anti-bribery, anti-money laundering and sanctions for financial institutions and industries in Europe, Latin America and Africa. He holds a Law degree from the Federal University of Pernambuco, a Doctoral degree in Law at Université Paris 1 Panthéon-Sorbonne, and a Postdoctoral degree in Law at the European University Institute (Florence) and the Deutsche Universität für Verwaltungswissenschaften (Speyer). Dr. Paiva is the Chairman of the Best Practices Commission / CCBF.

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