November 20, 2012 8:00 pm

Courts tackle corruption in Brazil

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Corruption in Brazil used to be smooth sailing for the well-initiated.

Those who knew the system could inflate invoices on public works projects and channel the funds to an election campaign or into overseas bank accounts.

But suddenly things have become trickier. In what is believed to be Brasília’s first successful attempt to recover illicit funds from abroad, a court in Jersey in the British Channel Islands has ruled that $10.5m of stolen public money in bank accounts linked to Paulo Maluf, a congressman, belongs to the government.

The court ruled that the 81-year-old politician, whose long career as a former mayor of São Paulo and governor of the state of the same name has been dogged by corruption claims, diverted the money from a road project in Brazil’s richest metropolis to accounts on the island. Mr Maluf was unavailable for comment but in a published statement questioned the ruling and held out the possibility of an appeal.

“We find and hold in summary that in late 1997 and early 1998 the municipality was the victim of a fraud substantially as alleged . . . [and] that Paulo Maluf was a party to that fraud,” the Royal Court in Jersey said in its ruling .

The case, which follows a ruling in the Supreme Court in Brasília this month, when politicians were given jail sentences for a vote-buying scandal known as the Mensalão, or big monthly allowance, represents one more chink in the armour of impunity traditionally enjoyed by corrupt and powerful politicians in Brazil.

With corruption a growing concern in all large fast-growing economies, particularly China and India, improvements in enforcement in Brazil provide some rare good news.

“This result clearly demonstrates the commitment of the authorities in Brazil to fight political corruption and to repatriate the proceeds of that corruption from abroad,” said James Sidwell, a partner at Lawrence Graham, legal advisers to the Brazilian government on the Jersey case.

Mr Maluf, whose career began under Brazil’s military dictatorship between the 1960s and 1980s, twice served as mayor of São Paulo and once as governor. Still a force in the city’s politics today, his name nevertheless remains synonymous with corruption allegations.

In 2005, Mr Maluf served 40 days in prison for witness intimidation. In 2007, the New York state prosecutor in the US placed him and his son, Flavio, on the Interpol list of suspects wanted for alleged fraud and theft over overseas accounts. Last month, he was ordered by a São Paulo court to return $21m in a separate case dating back to 1996.

His career has been long and always marked by accusations of corruption

- Silvio Marques, São Paulo state prosecutor

“His career has been long and always marked by accusations of corruption,” said Silvio Marques, the state prosecutor for São Paulo. Mr Marques claims that Mr Maluf owes the state a total of $1.7bn in corruption claims. Mr Maluf has always denied wrongdoing.

The prosecutor said the Jersey case took off in 2002, when an employee of a contractor involved in a large São Paulo road project, Avenida Agua Espraiada, confessed to authorities that the company had been diverting funds from inflated invoices to Mr Maluf and his son. Black market money dealers, known as doleiros, channelled this money to an account in New York known as the Chanani account, according to the Jersey ruling.

The prosecution team demonstrated that the Malufs were connected to this account through various transactions. Paulo Maluf once used it in 1999, for instance, to pay Sotheby’s auction house in New York for two gold watches worth $56,385, according to the Jersey court ruling. From the Chanani account, the money was sent to Jersey accounts held by two companies known as Durant International Corporation and Kildare Finance.

While Mr Maluf and his son could not be reached for comment, in a note published widely in the Brazilian press, they argued that the congressman himself was “not a defendant” in the Jersey case and the ruling proved that he did not have any accounts in his own name there. The movements of funds also occurred in 1998, while he had left office in 1996. Mr Maluf also challenged Jersey’s jurisdiction over the matter and said the ruling was subject to appeal.

Whether or not the case will have repercussions for Mr Maluf at home will depend on the Supreme Court, the only tribunal in Brazil allowed to try a federal politician.

But analysts said this case and the Mensalão showed that enforcement is improving in Brazil. The challenge now is to tackle the underlying reasons for the corruption, such as the difficulty for politicians of financing increasingly costly electoral campaigns.

“The good news is that these institutional oversights are structural and here to stay,” said Chris Garman, analyst at Eurasia Group, a political risk consultancy. “The bad news is that if you look at some of the underlying drivers for these corruption scandals, they are not going to go away anytime soon.”

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