Brazil’s elite feel the heat as Petrobras corruption net widens

Public prosecutors in Brazil have charged 36 people, including top executives from some of the country's leading civil engineering companies, with involvement in a multibillion-euro graft scheme at the state-controlled oil giant Petrobras. The case has rocked the government and the country's business community.

Among the charges levelled at the executives are “active corruption”, money laundering and formation of a criminal organisation, which paid politicians bribes to win Petrobras contracts and then overcharged the company by billions to illicitly boost their profits.

The case has left president Dilma Rousseff and her ruling Workers Party on the defensive as it threatens to expose in court how Brazil's political class has for decades worked with private companies to siphon huge sums of money out of state companies.

In a shock to Brazilians, used to seeing white collar crime go unpunished, leading members of the country’s business establishment have been held in jail for weeks as prosecutors build their cases against them.

Announcing the charges, chief federal prosecutor Rodrigo Janot described the scheme as a "lesson in crime". His team are demanding that those charged, who face up to 51 years in prison if convicted, return more than €300 million it says was looted from the public purse.

Prosecutors expect to make further charges in the coming weeks as they are still working through mountains of evidence, much of it provided by Petrobras’s former downstream director as part of a plea-bargain deal to reduce his eventual sentence after he admitted his involvement.

Politically exposed

This could leave Ms Rousseff politically exposed as she was sequentially energy minister, chair of the Petrobras board and president of the country during the years prosecutors say the scheme operated. Ms Rousseff has denied any knowledge of wrongdoing, though at the least questions have been raised about her management of Brazil’s biggest company.

Ms Rousseff’s administration successfully undermined previous congressional inquiries into graft at Petrobras but has been reduced to the role of spectator as independent public prosecutors have built their case.

Her Workers Party’s treasurer has been named as a key participant in the scheme, accused of taking kickbacks from companies that won Petrobras contracts.

Not yet charged, he also denies any wrongdoing.

Because of the importance of Petrobras in Brazilian public life and the sums of money involved – which would dwarf any previous corruption scandal in the country – campaigners say the case will be pivotal in deciding the direction of Brazil’s efforts to combat corporate graft.

"This is a historic moment," says Alejandro Salas, Americas director for Transparency International. "What happens in the coming weeks and months is going to greatly mark the image of Brazil in terms of good governance and the fight against corruption.

“If the authorities do not do anything, it will be a black stain on Brazil’s business reputation because they cannot hide this.”

The case has once again highlighted the role of “fiscal paradises” – foreign tax havens – in global corruption with offshore accounts used by Brazilian companies to pay bribes to politicians who then launder the money and return it to Brazil, often disguised as foreign investment.

Transparency International called on Brazil’s government to bar any company that uses such offshore “fiscal paradises” from participating in public contracts.

“This is a preventative measure that could end a large part of the problem,” says the anti-corruption group’s managing director Cobus de Swardt, who believes Brazil could add between one and two points to GDP growth each year if it stamped out graft.

Pressure on Brazil’s government is also coming from the US, where Petrobras investors have launched a class action lawsuit against the company and its executives while the FBI is also reportedly investigating as the firm’s American depository receipts (ADRs) are traded in New York.

The lawsuit claims that the case built by Brazilian prosecutors places in a new light the poor performance of Petrobras in recent years, when it has struggled financially as the result of huge cost overruns and mounting debts. The company’s shares have crashed to their lowest level in a decade, wiping billions off its value amidst what one analyst’s research note described as “a corporate governance hurricane”.

One of several multibillion euro projects now under scrutiny by prosecutors is the Abreu e Lima refinery in the northeast of Brazil.

Originally budgeted at €2 billion when work started in 2005, it has since ballooned in cost to €15 billion even though it will not become fully operational until next year.

An inquiry by Brazil’s congress said it had uncovered evidence that contractors overbilled Petrobras by €3.4 billion for work done on the project.

Once completed it will be one of the most expensive refineries ever built and analysts estimate it will be decades before Petrobras recovers its original investment, emblematic of a breakdown in internal controls in recent years.

Such profligacy now looks all the more reckless due to the crash in the price of oil. Petrobras has racked up the corporate world’s biggest debt – estimated at about €137 billion by Moody’s – as it executes a €177 billion investment plan which has at its heart the development of huge new offshore reserves which will turn Brazil into a major oil exporter.

The country’s energy regulator says these fields are still profitable at oil below $60 a barrel. But the breakeven price has never been made explicitly clear and some analysts question their financial viability if prices fall below $60 for long.

Energy consultant and former Petrobras manager Adriano Pires says the company operates on a breakeven point for the new reserves of between $50 and $55 a barrel but that for some of the biggest new fields it is higher.

“Therefore the fall in the oil price puts the profitability of some fields at risk,” he says.

“This would eat into the profitability of Petrobras and, because of the debt, put the company’s finances at risk.”