The entanglement of Rolls-Royce in the complex web of corruption cases surrounding Petrobras, Brazil’s state-owned oil company, is a powerful reminder of the scale and reach of a rapidly expanding inquiry.
This now covers more than $20bn worth of government contracts across several sectors. Since November 2014 the police inquiry known as Lava Jato — “Car Wash” — has shaken Brazil’s establishment with a succession of arrests, charges and plea-bargain deals that resulted in the jailing of senior executives from Petrobras and engineering supply companies.
The supreme court had earlier authorised investigation of 48 current or former members of congress, including 12 senators, 22 congressmen, the president of the senate and the speaker of the lower house. The latter, Eduardo Cunha, faces criminal investigation relating to the discovery of a Swiss bank account containing more than $5m. One former president, Fernando Collor de Mello, has been indicted, while a second, Luiz Inácio Lula da Silva, will be questioned as a witness as part of the corruption investigation.
In April, Petrobras attributed $2bn of an enforced $16.8bn writedown to corrupt payments it passed on to politicians as part of a scheme known as “Big Oil”. The scheme depended on political appointees inside the company receiving bribes from engineering companies in exchange for lucrative contracts for building ships, rigs and other infrastructure serving a new offshore oil province. The kickbacks were channelled back to their political parties.
Rolls-Royce — already under criminal investigation by the UK Serious Fraud Office over older bribery allegations in Asia — was named in Brazilian documents early this year for allegedly paying bribes to secure a $100m contract for equipment for Petrobras oil rigs. A Petrobras official told Brazilian police he received a $200,000 bribe from Rolls-Royce.
The allegations by this executive formed part of his plea bargain and also named Julio Faerman, a Brazilian businessman who claimed in 2012 that his company represented Rolls-Royce. He allegedly paid bribes to oil executives and government officials on behalf of Petrobras contractors. Faerman also represented the Dutch engineering firm SBM Offshore, which last year paid $240m to settle a suit brought by Dutch prosecutors alleging SBM paid bribes to win contracts in Africa and Brazil.
“We have repeatedly made it clear that Rolls-Royce will not tolerate business misconduct of any kind,” said a spokesman for the UK group. Rolls-Royce is co-operating with Brazilian investigating bodies, believed to include the federal anti-corruption authority and a congressional inquiry that could summon UK executives to testify. “We have confirmed that we are co-operating with investigating authorities in Brazil but are unable to comment further on the nature of that co-operation,” the spokesman added.
Serious repercussions for Rolls-Royce have included the loss of 400 management jobs from its marine division. The moves are designed to reduce costs and address criticisms from US investor ValueAct, which wants Rolls-Royce to focus on civil aero engines. The changes will tighten the chain of accountability between headquarters and agents in the field who might exploit — or be exploited by — local custom in the oil industry.
While successive corruption investigations in Brazil have revealed different techniques for enrichment of favoured groups, all involve transfer of illicit funds to politicians in exchange for business favours.
Brazil’s still-immature political culture fosters a climate of opportunism where legislators — especially those inside broad ruling coalitions — use office to extract favours. While politicians are well paid and campaign funding laws are clear, the culture of enrichment via public office is deep-seated. In Lava Jato and another scandal of recent years known as “Big Monthly”, prosecutors found a trail of bribe money flowing towards the ruling PT Workers’ Party. The small Progressives party counts 21 lawmakers under investigation.
In every case, the problem has not been the absence of appropriate legislation but a failure to enforce it, intertwined with a history of impunity for elites. Petrobras’s standard contracts, for example, make signatories affirm they are not in breach of the US Foreign Corrupt Practices Act or the UK Bribery Act.
That corruption has quickly become a prominent public issue is largely due to the activities of public prosecutors based in the city of Curitiba, and dubbed “The Nine Horsemen”. They have enabled Brazil’s lead public prosecutor Rodrigo Janot to plead successfully that some of the nation’s most powerful figures should be questioned or indicted.
“In 31 years in the public prosecution service I have never seen anything to set such a precedent,” Mr Janot told a senate committee in August. “This corruption scheme has stolen our pride. That is why we are investigating it thoroughly.”
For foreign companies seeking to do business with Brazil’s state sector, levels of oversight both in the field and from headquarters, are expected to rise.
The Lava Jato prosecutors have made a strong start but there is a long tail of past misdemeanours to address. These include an investigation of advantageous contracts for the 2014 Fifa World Cup and the 2016 Rio Olympic Games.
It may take years before the effects of Lava Jato change business ethics, but Brazil is now debating these ills, rather than consigning them to another ineffectual congressional inquiry. The scandals have also shown that the legal framework and judicial processes for addressing misdeeds are surprisingly robust and politically independent.
The Petrobras-related probe has not to date produced evidence of wrongdoing by President Dilma Rousseff. Public outrage at corruption has, however, been the catalyst for significant political instability, exacerbated by what Octavio Amorim Neto, a professor of political science at Rio’s Getulio Vargas Foundation, describes as the president’s “unrepentant unilateralism”.
Her administration is under investigation for the separate charge of misleading congress over budgetary matters. A survey by Arko Advice, a consultancy, shows 51 per cent of respondents believe she will suffer impeachment proceedings. Corruption is proving just as dangerous to political leaders as it is to foreign companies caught in its web.
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