The largest and most infamous corruption scandal of the last
decade began with a criminal investigation into the operations of Brazil’s
largest corporation: Petrobras. The scandal got its name because the organizers
of the bribery, kickback and money laundering scheme used a financial services
company in Brasília located next to a gas station and car wash (Lava Jato). The
investigation started with a seemingly minor complaint made in 2009 to the
Federal Prosecutor’s office in Curitiba, Paraná, by a businessman concerned
that somebody was using his company to launder money. Prosecutors followed this
lead and discovered that political operators affiliated with the government had
been funneling illegal campaign contributions from companies doing business
with Petrobras in exchange for favourable treatment in construction contracts
and in the procurement of goods and services.
The scandal exploded onto the national scene in 2014, when a
team of highly motivated federal prosecutors mounted an aggressive
investigation under the supervision of a judge with experience in public
corruption cases (Sergio Moro). Unlike most corruption scandals, which
typically lead to prolonged investigations and inconsequential legal outcomes,
this scandal triggered an avalanche of information which destabilized governments
in Brazil, Peru and Ecuador.
The first accusations centred on the construction of an oil
refinery in Pernambuco, but the probe soon revealed it extended to other
projects and every major construction company in Brazil. Unsurprisingly, the
recipients of the bribes were high-level government functionaries, including
both allies and opponents of the governing coalitions of President Lula da
Silva and his successor Dilma Rousseff. The evidence extracted from the plea
bargains negotiated by the prosecutors was unprecedented and, because shares of
Petrobras are traded on the New York Stock Exchange, the indictments triggered
investigations by regulatory and judicial authorities in the United States.
Eventually, the sworn testimony of business executives collaborating in
exchange for leniency forced the Supremo Tribunal Federal (STF) to accelerate
the prosecution of influential elected officials, including governors, members
of Congress and eventually, of a sitting president (Temer).
The criminal investigation demonstrated how bribes distorted
investment decisions by public officials. Reportedly, companies paid between one
and three per cent of a contract’s gross value for hundreds, perhaps thousands,
of overpriced construction projects. The kickbacks were laundered through
domestic and offshore bank accounts, which allowed companies to camouflage the
bribes as fees paid to legal firms and consulting companies or as the
procurement of (overpriced) goods and services.
Petrobras officers benefited in exchange for their
willingness to manipulate the terms of a public bidding process to favour a
specific company, while companies conspired to divide up the lucrative
contracts among themselves. Politicians were rewarded for their votes in
Congress, while high-level functionaries in state ministries and regulatory
agencies were rewarded for their loyalty to a political party. The task force
eventually arrested 292 individuals, of whom 278 either pleaded guilty or were
convicted of crimes that included fraud, bribery and money laundering.
Prominent individuals from five of the country’s largest political parties were
found guilty in a court of law, while persons from an additional thirteen
parties were indicted for illegal activities and representatives from another
fifteen parties were investigated for questionable behavior.
The cost to Petrobras was reflected in its balance sheet of
2014 when it registered a US$2 billion write-down to offset the bribes paid to
the companies that had participated in the bid-rigging scheme. The
investigation in the United States led to a 2018 settlement in which Petrobras
agreed to pay US$853 million in fines levied by the Department of Justice (DOJ)
and the Securities and Exchange Commission (SEC), of which about 80% was
returned to the Brazilian state. Shortly thereafter, the company settled a
class-action civil suit filed on behalf of investors for an additional US$2.6
billion. A criminal investigation brought by the DOJ in Manhattan led to the
arrest and conviction of the CEO of Odebrecht, Brazil’s largest construction
company and, at the time, the country’s second-largest privately held company.
At the heart of the scandal was a secret agreement among
thirteen construction companies, known as the Cartel de Empreiteiros, who
agreed not to compete on individual Petrobras contracts. The conspiracy to
defraud the government went well beyond the cartel’s business transactions with
Petrobras and infected the Programa de Aceleração do Crescimento (PAC), a
national programme to improve basic infrastructure and stimulate the national
economy via public works projects. Between 2007 and 2015, the program allocated
about R$2.1 trillion (about US$500 billion) to projects across the country.
Assuming the custom of paying a bribe of between one and three per cent, the
graft associated with the PAC could be as high as US$5 billion to US$15
billion. If those practices led to overbilling, however, then the total cost to
the nation probably exceeded US$50 billion.
The impacts of the Lava Jato scheme are still reverberating
through the Brazilian economy. Government resources were wasted on
non-productive expenditures, and the scandal also delayed strategic investment
in several key sectors. According to a study by a policy institute linked to
labor unions, the Lava Jato scandal reduced investments, leading to a net loss
of about 4.4 million jobs and a reduction of R$172 billion (US$34 billion) in
investments in energy production and construction. An environmental activist
might not bemoan the loss of those types of investments, but the Fundação
Getulio Vargas estimated it reduced national GDP by about 3.5 per cent each year
between 2014 and 2017 (US$ 10 billion to US$ 20 billion per year). This is a
conservative estimate, however, because losses compound over time and inflict
permanent damage on Brazilian society.
Arguably, the Lavo Jato scandal and the disillusionment with
the political elite set the stage for the election of Jair Bolsonaro, whose
actions threatened democratic institutions and led to a rollback of
environmental regulations key to the conservation of the Amazon and the welfare
of Indigenous communities. Bolsonaro was narrowly defeated by Inácio Lula da
Silva in the 2022 elections; however, Lula must now govern a country where a
significant share of the population sees him as a corrupt politician who is
free thanks to a dubious decision by the Supreme Court.
Lava Jato in the Legal Amazon
The scandal has impacted the Pan Amazon in multiple ways,
particularly by the construction of numerous infrastructure projects executed
by the PAC and financed by SUDAM.
Many of these investments were controversial because their
environmental and social impacts were not given appropriate due diligence as
the decision-making process was tainted by conflicts of interest, including:
- Urucu
– Coari – Manaus Natural Gas Pipeline System: A construction consortium
composed of Camarga Correa, OAS and Andrade-Gutiérrez admitted to paying
kickbacks of R$ 15 million on total contracts of approximately R$ 1.5
billion. The total amount of fraud might be larger, however, because in
2007 a Petrobras petroleum engineer, now deceased, denounced over-billing
equivalent to 50% of the total budget of R$2.5 billion, which by 2014 had
increased to more than R$4.5 billion.
- Madeira
hydropower complex: These two dams were built and operated by two separate
consortia. Energia San Antonio was built largely by Odebrecht, which has
admitted paying bribes to politicians who supported the project. Energia
Sustentável do Brasil was built by Tractebel, a French company that was
not directly implicated in the Lava Jato scandal. Nonetheless, the fair
value of the contract has been questioned following the revelation of
campaign contributions of approximately R$1.8 million made by Tractabel to
the Rousseff re-election campaign in 2014.
- Belo
Monte hydropower facility on the Xingu: Andrade Gutiérrez, Camargo Corrêa
and Odebrecht pleaded guilty to kickbacks of R$ 150 million out of a R$
2.6 billion contract. Payments were funneled to Senators Renan Calheiros
(PMDB), Edison Lobão (PMDB), Valdir Raupp (PMDB), Romero Jucá (PMDB),
Jader Barbalho (PMDB) and Delcídio do Amaral (PT). The charges against all
five defendants were dismissed in 2023 following a judgment by the
Tribunal Supremo Federal that prosecutors had acted inappropriately during
the investigative phase of the prosecution.
- Amazonian
Highways: The Cuiabá – Santarem highway (BR-163) was paved at a cost of
~R$2 trillion (US$ 400 million); the ongoing improvement of the
Transamazônica (BR-230) was budgeted at ~R$1.3 trillion (US$ 260 million);
BR-364 in Acre was allocated R$1.1 trillion (US$230 million), and the ongoing
pavement of BR-319 between Humaitá and Manaus received ~R$466 million
(US$95 million).
Lava Jato in the Andean Amazon
The infrastructure investments in Brazil occurred
simultaneously with a similar construction boom in Peru financed by
multilateral investment banks via the Iniciativa para la Integración de la
Infraestructura Regional Sudamericana (IIRSA). These investments in basic
infrastructure were built by five members of the Brazilian cartel (Odebrecht,
Andrade-Gutiérrez, Camargo-Corrêa, OAS, Queiroz Galvão), and Peru’s largest
domestic construction company (Graña & Montero).
Odebrecht was the most active and participated in several
high-profile projects not only as a contractor but also as an investor and
concessionaire. These investments were made using the public-private
partnership model promoted by the IDB, where the corporate partner raises the
financial capital for construction in exchange for long-term management
contracts. The companies met their investment obligations by borrowing money; because
of an idiosyncrasy of international bond markets, however, the securities were
classified as sovereign debt. Cost overruns plagued every project, and at least
one was canceled, which has piled billions of dollars of debt onto the
country’s sovereign balance sheet.
The Peruvian government estimates Odebrecht overcharged by
at least US$283 million on contracts between 1998 and 2015; however,
independent sources place that number at ~US$1.3 billion – approximately nine
per cent of the debt associated with the various projects worth US$17 billion.
The scandal calls into question multiple contracts over several decades, among
them high-profile infrastructure projects in the Peruvian Amazon, including:
- Corredor
Interoceánico Sur. Built between 2005 and 2008 at approximately double the
estimated cost of US$1.2 billion; this IIRSA-sponsored initiative was
financed by the IDB, BNDES and Odebrecht, which was awarded a 25-year
operating concession.
- Corredor
Interoceánico Norte. Built between 2005 and 2013 at a cost of US$1.2
billion; this IIRSA initiative was financed by the IDB, CAF and Odebrecht,
which was awarded an operating concession lasting 25 years.
Both contracts were awarded during the administration of
President Alejando Toledo (2001–2006), who has been accused of accepting a
US$20 million bribe. Odebrecht (now Novonor) continues to operate both
concessions, one of which is profitable (Norte) and one of which is not (Sur).
- Central
Hidroeléctrica Chagalla. This hydropower facility on the upper Huallaga River
was built between 2010 and 2016 with a total investment of US$1.2 billion.
The project was approved during the government of Alan García and financed
by the IDB and BNDES. In 2017, Odebrecht sold its interest to a Chinese
company for US$1.3 billion, presumably to reduce the debt on its balance
sheet and prepare for its reorganisation under Brazil’s bankruptcy laws.
- Gasoducto
Sur Peruano was a US$7.4 billion project that was supposed to integrate
southern Peru and northern Chile with the gas fields of Camisea. The
concession was awarded in 2015 to a consortium composed of Odebrecht,
Graña & Montero, and a Spanish energy company (ENEGAS). Odebrecht pled
guilty to paying a US $5 million bribe to an executive of Petroperú and,
allegedly, to then President Ollanta Humala (2011–2016). The allegations
of graft forced the government of Pedro Pablo Kuczynski to cancel the
project in 2017. In an audacious move, Odebrecht (now Novonor) sued the
Peruvian state in 2020 for breach of contract and is demanding indemnification
of US$ .2 billion.
According to the US Department of Justice, Odebrecht paid
US$29 million in bribes to at least two and possibly four of Peru’s recent
presidents. In 2018, Alejandro Toledo was indicted on charges of extortion and
bribery, followed by similar charges against Alan García, Ollanta Humala and
Pedro Pablo Kuczynski. Odebrecht also made contributions to the leading
opposition candidate, Keiko Fujimori, who is being tried for money laundering
and other crimes.
Ecuador terminated all government contracts with Odebrecht
in 2008 following a dispute related to overbilling on the San Francisco
Hydroelectric Power Plant; the company negotiated a return in 2010 by bribing
the vice president with US$33.5 million, a sum hidden within its contract bid
to construct a refinery for Petroecuador. The payoff, which was revealed in a
US courtroom, was a precursor of an additional US$150 million in fraudulent
charges between 2011 and 2015 at five mega-projects that were originally
contracted at US$1.4 billion. These and other bribes were revealed in 2017 in
the Escándalo de Sobornos, which led to the incarceration of the Odebrecht’s
chief of operations and the former vice president who had solicited the bribe
(Jorge Glas); the graft was approved with the knowledge and assent of
then-President Rafael Correa, who was convicted in absentia and is currently
living in exile in Belgium.
Brazilian construction companies began operating in Bolivia
in 1987 as the country emerged from a period of economic instability when
multilateral agencies provided special assistance loans for infrastructure
projects. Andrade Gutiérrez was awarded several contracts that, although never
subject to a serious investigation, were reported to have been awarded via a
flawed, non-transparent bidding process. Odebrecht has adjudicated only one
small project in Bolivia, and it was not implicated in the criminal case
brought by the US Department of Justice. Nonetheless, declarations by
defendants employed by Odebrecht in Peru and OAS in Brazil have alluded to
payments made to Bolivian officials.
The most controversial project was awarded to OAS, which
submitted an uncontested US$400 million bid to build a road that would transect
the Territorio Indígena y Parque Nacional Isiboro-Sécure (TIPNIS). This
project, which was to be financed by BNDES, was put on hold when the Indigenous
inhabitants of TIPNIS voted to reject the project. The government continues to
insist that construction will move forward and has worked to change the
decision made by the communities within the TIPNIS.
