What’s in the car wash?

William J. Craig

October 1, 2015

Operation Car Wash is the exposure of widespread corruption in Brazil following a federal police investigation into money laundering through a petrol station chain. The core element of this is how collaboration agreements between the accused and the state are being used to obtain information in exchange for judicial pardons or reduced sentences. Petroleo Brasileiro SA (Petrobras) Chief Executive Officer Maria das Graças Silva Foster and five of her top managers resigned in late 2014 amid a corruption probe that’s wiped out billions of dollars of the oil producer’s value and threatens Brazil’s economic revival.

Image from OE Staff.

Petrobras is mired in allegations that former executives were bribed to award construction contracts, some of which were related to the 2014 football world cup.

The resignation of Foster — a 61-year-old engineer who rose through the ranks to become the first female CEO of Latin America’s largest publicly traded oil company in 2012 — comes after the stock sank as much as 70% from a September peak as she grappled to gauge the losses from the alleged scheme. Foster, herself, isn’t under investigation.

Operação Lava Jato– literally, ‘Operation Car Wash’ – started more than a year ago as a fairly typical Brazilian federal police investigation into money laundering through a chain of petrol stations. Since then it has blossomed into an almost soap-opera style parade of handcuffed executives, police raids and filmed depositions, with an added spicing of top rated defense lawyers and indignant politicians.

With investigations on-going throughout 2015 so far, details still emerging and no convictions handed down, the broad outlines of Car Wash were clear. More than a dozen major Brazilian construction companies, involved in the 2014 FIFA World Cup, and the 2016 Olympic Games, stand accused of paying bribes via middlemen to secure million- and billion-dollar contracts with Petrobras, a publicly quoted oil company in which the Brazilian government holds a controlling stake. It has also been alleged pro-government parties controlled Petrobras appointments to key positions that handle procurement. Most bribes were split between the middlemen, Petrobras executives and parties that support the government, investigators say, with much channelled via offshore shell companies into campaign slush funds.

Witnesses have said that the construction companies formed a multi-year cartel around the two major international events in 2014 and 2016 to share out contracts and pad prices, extending beyond petroleum to highway, stadium construction, transport and hydropower contracts.

With the exception of those who have agreed to cooperate, all companies, executives, middlemen, politicians and parties mentioned have denied any wrongdoing. Petrobras says it was a victim, while construction companies and some foreign suppliers to Petrobras say they faced de facto extortion – a situation of ‘pay to play’.

How much was syphoned off? No final figure has yet emerged, but certainly hundreds of millions of dollars. Witnesses have mentioned skims of up to 3% on contracts worth tens of billions of dollars between 2003-2014.

Te lesson appears to be the existence of a well established system of endemic corruption within state-owned enterprises that are responsible for awarding very large contracts that should be for the public benefit.

Opening a can of worms

Brazil is no stranger to corruption. However, several attempts to bring major cases to trial have failed to achieve convictions, sometimes because of police work, sometimes because Brazil’s anti-corruption laws offer innumerable possibilities for technical challenges, particularly when evidence comes from wiretaps, and frequently because the convoluted judicial system allows cases to drag out until they prescribe, particularly when elected officials are involved. In Car Wash, police and prosecutors are bending over backwards to avoid previous errors.

The snag with corruption cases is often a multi-player version of the prisoner’s dilemma: as long as everyone denies everything, the hard evidence may be inconclusive. In Car Wash, the secret has been persuading some suspects to provide detailed confessions in exchange for reduced penalties. In Portuguese it’s called colaboração premiada, which translates literally, as ‘rewarded collaboration.’ Journalists and even lawyers frequently call it delação premiada (rewarded accusation). The Organisation for Economic Co-operation and Development (OECD) Working Group on Bribery, in its latest (Phase 3) report on implementing the OECD Anti-Bribery Convention in Brazil, published October 2014, calls it “cooperation agreements and judicial pardon.”

Whatever the name, collaboration has made all the difference in Car Wash. Federal police have used the collaboration agreements like a can opener, to pry the case apart.

So far, prosecutors say they have negotiated 12 collaboration agreements with individuals including currency dealers, former Petrobras executives, middlemen and businessmen. Charges were filed against 87 individuals for crimes including corruption, participating in a criminal organization, and money laundering, however, for a variety of reasons none of those initially charged were politicians.

What lies beneath the surface?

As with an iceberg, it is not what is immediately visible which is most devastating, but what is below the surface, so the Car Wash case has grown and grown.

Senior executives, more accustomed to private jets and five-star hotels, were held four to a Spartan cell, 12sq m with an open squat toilet. Defense lawyers claimed they were being pressured into collaboration, but the supreme court rejected several habeas corpus pleas.

In the latest developments, amid rioting in the streets of major cities São Paulo and Rio, and demands for the federal president to resign, the heads of two of Brazil’s largest conglomerates were detained by police as part of an ever widening corruption investigation at Petrobras.

Marcelo Odebrecht and Otavio Azevedo – presidents of the Odebrecht and Andrade Gutierrez holding companies – were arrested in July as part of a federal operation that has now involved 220 police in four states. The Odebrecht and Andrade Gutierrez conglomerates include two of Latin America’s largest building companies.

The arrests are the most senior-level detainment of corporate executives since the Petrobras scandal broke last year. It would appear that the Car Wash will continue to run for some time and may bring down the Brazilian government.

William J. Craig
is a lecturer in the department of Law, a course leader for the LLM/MSc Oil and Gas Law course at Robert Gordon University, and is a member of the European Corporate Governance Institute.