The Pétrobras Scandals

By: Eugene Rostov

The international media provides new information almost daily about the details of the Pétrobras scandals known in Brazil as the Petrolão, which have caused not only a dramatic fall in the stock market price of the company, but also the downgrading of its securities by Moody’s in February, and serious concerns about its management. Even the code name for the investigation called the “Car Wash” (Lava-Jato) by the Brazilian Federal Police, presumably because of the enormous quantity of “energy” needed to launder the extraordinary amounts of money over the course of the operation, has captured the popular imagination. Although newspaper accounts have reported on the plea bargaining testimony of various participants in those scandals disclosing the outline of the basic scandal, which was the alleged overbilling by some of the major Brazilian construction companies providing services to Pétrobras, the existence of the related scandals inside the Petrolão have not always been explained. With that in mind this article will discuss some of those other scandals.

According to the recent testimony of a former mid-level Pétrobras employee, Pedro Barusco, before a congressional investigatory commission (“CPI”) of the Petrolão, the practice of overbilling for services by a cartel of construction companies was institutionalized during the administration of President Lula, sometime around 2003-2004. When questioned in the CPI whether those overbilling contract practices existed in Presidential administrations prior to President Lula that employee responded that his prior solicitations of bribes which began in 1997/1998 were based on his individual initiative. According to the testimony of that former Pétrobras employee, as well as the testimony to the Federal Police of a former Director of Supply in Pétrobras, Paulo Roberto Costa, and an informal money dealer, Alberto Youssef, the principal purpose of the overbilling was for the construction companies to funnel part of the overbilled money (generally around 3% of the service contract amounts) to shell companies, which in turn would make charitable or other contributions to elected members of the coalition of governing political parties in the Brazilian Congress consisting of the Workers Party (“PT”), the Brazilian Democratic Movement Party (“PMDB”), and the Progressive Party (“PP”). The exact formula for allocating those funds among the mentioned political parties is still not completely clear, however, it appears to have been based on the relative proportionate size of the mentioned political parties in the Congress, which would mean that the PT in all likelihood received the largest amounts. In addition, there is testimony and documents evidencing wire transfers and election donations made directly to the PT by companies such as Toyo Setal. It remains to be seen whether those “charitable” contributions may protect the contributors from prosecution for their contributions.

As might be expected, Pedro Barusco and certain Directors involved in the approval process managed to receive some of the overbilled amounts, which went into their personal foreign bank accounts. Many of those foreign accounts have now been blocked by the respective governments as a result of the investigation by the Brazilian Federal Police, such as the freezing of such accounts by the Swiss government. To give an illustration of the possible dimensions to this aspect of the individual accounts, according to testimony by Pedro Barusco, he alone accumulated about US$97 million, which is in the process of being returned to the Brazilian authorities.

In addition to the leakage in the pipeline of money redirected to politicians, political parties, and Pétrobras employees, some of the money also found its way into the hands of intermediaries, who assisted in managing the flows of money. Those intermediaries allegedly include unofficial currency dealers, lobbyists, representatives of the mentioned political parties, and elected public officials. The Brazilian Prosecuting Attorney’s office recently released a list of fifty-four such elected officials who allegedly benefited from the basic scheme. Those individuals include members of the Brazilian Senate and Chamber of Deputies, a former Minister of Mines and Energy, and a number of governors.

One of the problems of the Brazilian congressional investigation may be that some of the named elected officials are also members of the CPI investigating the various scandals including their role in the scandals. Another problem is that the Brazilian Constitution provides a special judicial forum for the trial of elected public officials in the Second Chamber of the Supreme Court of Justice. In view of the fact that various members of the Supreme Court of Justice were nominated by Presidents Lula and Dilma, there may be legitimate questions about the likelihood of convictions for the elected officials who are being investigated.

Nevertheless, for those people who are accustomed to the negligible results of past Brazilian investigations of political scandals and politicians, and thus skeptical that any significant convictions will happen, there are a number of factors that may change that skepticism. One of those factors is the public outrage over these scandals as evidenced by the estimated two million plus people throughout Brazil, who marched in protests through the streets of many cities on Sunday, March 15. In São Paulo alone the Military Police estimated that over a million people marched in the streets of that city. Secondly various class action lawsuits have been filed in the U.S. by investors in Pétrobras American Depositary Receipts. And thirdly, the U.S. Securities and Exchange Commission has initiated its own investigation of civil liability, and the U.S. Department of Justice is investigating the potential criminal aspects of those scandals. In short the skeptics may be very surprised that this time the scandals do not end in “pizza” as the Brazilians say when serious legal scandals disappear from public sight and everyone goes out to eat a pizza.