The Biggest Corruption Scandal of Brazil

By Madhav Grover

The people of Brazil elected its new leader Jair Bolsonaro from the Social Liberal Party (PSL) as its next president after defeating Fernando Haddad from the worker’s party (PT). The worker’s party had ruled the country over the last two decades and had lost to a PSL candidate which marked a massive shift in Brazil’s political Scenario. The sudden change in politics occurred due to the state own company Petróleo Brasileiro or Petrobras also the largest petrochemical company in Latin America was being implicated with large scale corruption and money laundering.

Petrobras and Brazil’s booming oil industry in the early 2000s were seen to be the answer to brazil’s development plan of the future. The company had a famous slogan “Victory of Petrobras is a Victory of Brazilians,” (Rapoza 2017) but this narrative soon changed and sent shockwaves not only across Brazil but also Latin America.

Petrobras and the government

Petróleo Brasileiro was formed in 1953 as Brazil’s National oil company. The government had a majority stock and was listed in Sao Paulo and New York and counted various middle-class and lower-middle-class Brazilians as its stakeholders. The company was partially privatized by the government of the party of Brazil’s Democratic Movement headed by Fernando Henrique Cardoso in the 1990s after the military rule ended. The Workers’ Party (PT) government of Luiz Inácio Lula da Silva steadily restored state control of the company during his rule which ended in 2010. This process was turned into a nationalist cause when in 2007 Petrobras discovered new oilfields, under the ocean on the Santos basin. It was the biggest Deepwater offshore oil finds in decades, the PT was keen to keep these deposits out of private hands.

The Brazilian police were investigating alleged corruption and money laundering done by black market money dealers or Doleiros. They were monitoring Doleiros at Posta De Torre, a Gas station in Brasilia during one operation found them receiving illegal cash reporting it as earning and laundering that money., and in March 2014 he accepted to give the source of the money after accepting a plea deal offered to him (Leahy 2016). He implicated Paulo Roberto Costa who was a former Petrobras head of refining and supply who cooperated with the police and more findings unveiled how the system worked given as follows:

  • There was an intricate framework on how the illegal activities played out in Petrobras and how different private companies were involved.
  • It usually started with Petrobras inviting firms to compete with each other to get the tender to develop certain projects in the country or abroad.
  • The major engineering companies later formed a cartel to coordinate on these bids and get these tenders.
  • Once the construction executives get a contract, they would resort to overcharging Petrobras and a select group of top executives would be paid money to turn a blind eye to this operation and would be given bribes in return.
  • The private firms would earn big sums of money due to these inflated contracts and would reward the executives. The politicians in Brazil including top government officials would often be bribed or given campaign donations to get people installed in Petrobras as executives.

Corruption scandal

It is believed that a total sum of $5.3 billion was circulated as part of the whole operation. One of the major projects undertaken by Petrobras was the Comperj project which was revealed after this scandal. The Rio De Janeiro Petrochemical Complex or Comperj project was situated in Itaborai near Rio. The project included two refineries and one Petrochemical Plant with a total coverage area of 45 square km. The location was also very important as it was near the coast of the Santos basin which included Brazil’s newly discovered oil reserves. The project was estimated to generate 200,000 new jobs in Itaborai which resulted in a population surge of about 50,000 people moving to the town in 2010 which was a population growth of about 16%. There were an estimated 160 new businesses which opened in the area creating further economic growth. The scandal unveiled that one of the Biggest construction companies of Latin America Odebrecht was given the contract to build Comperj (Segal 2015).

The initial cost of the project in 2010 was about $6 Billion, but by 2015 the cost became $14 Billion. The company then laundered money through illegal businesses like using the Posta De Torre Gas station before paying bribes to government officials and Petrobras executives (Beauchamp 2017). These bribes would make sure that the cartel of companies being headed by Odebrecht would continue with their activities bribes would ensure the Petrobras executives to turn a blind eye to this operation and the government officials to control and sustain dominance over Petrobras.

Implications

 The Operation ‘Car Wash’ led to arrests of over a dozen high-level Petrobras which along with the fall of global petrol prices led to the stock value of the company plummeting from 2014-2015 dooming developmental projects like Comperj. The scandal also shocked the ruling Worker’s Party (PT) and the government officials with the arrest of the Ex-President Luiz Inácio Lula da Silva along with various other officials of receiving kickbacks from corporate firms. This development affected his successor Ex-President Dilma Rousseff who was impeached due to being caught transferring funds from different developmental schemes and her vice president Michel Temer who became president was also charged with corruption related to the scandal. The state governor of Rio De Janeiro, Sergio Cabral was convicted of receiving bribes of $800,000 to give the Comperj project to Odebrecht. Various big firms in Brazil such as Odebrecht SA, EBX Group, OAS, Camargo Correa were implicated of running the cartel. The Ex-CEO of Odebrecht SA, Marcelo Odebrecht and EBX Chairperson, Eike Batista who was once the richest man in Brazil was imprisoned (Beauchamp 2016).

These huge companies being implicated in the scandal caused halts in various projects in countries such as Brazil, Argentina, Peru, Colombia, Guatemala, Honduras, Brazil, Cuba, Dominican Republic, and Venezuela. In Brazil alone, 11 major projects funded by these companies were brought to a halt such as Angra Dos Reis Nuclear Plant (ANGRA III) halted in 2015 due to $16 million paid in bribes (Watts 2017). The Magdalena River Project was Halted in Colombia being developed by Odebrecht after an admitted the company paid $11 million bribes to the Colombian Government officials discovered in 2017 (Winter 2017). The Olmos Irrigation Project was halted in Peru being built by Odebrecht as it showed Three former presidents of Peru taking bribes for the project found by a probe in 2018. There were more than 23 infrastructure projects which were halted in Venezuela partly due to the economic crisis there and the involvement from these Brazilian firms who were implicated in the scandal (Bray 2018).

Present scenario

The scandal hit Brazil during its recession causing loss of thousands of jobs the unemployment rate in 2018 was as bad as 13.1% creating social and political unrest in the country (Winter 2018). The scandal uncovered systematic corruption in Brazil which for the first-time instigated people to come together and stand up against this problem at a major scale. This impacted the world as Brazil was seen to be one of the major upcoming economies and is seen as the biggest regional powers in South America.

The scandal has also threatened the ideals of democracy in the country as it has shown a bias in the legislative structures of the country. The newly elected president is a big supporter of the military rule which rocked the country in the 1960s and leaned towards becoming an authoritarian leader which hasn’t been seen in Brazil for decades (Simões 2018). The scandal raises new questions for Brazil’s future and the impact it’ll have on its democratic framework, and the checks and balances Latin American countries need to safeguard themselves from such models of systematic corruption.

Madhav Grover is a student of BA Global Affairs at Jindal School of International Affairs. 


References

  1. Watts, Jonathan. 2018. “Operation Car Wash: The Biggest Corruption Scandal Ever?”. The Guardian. https://www.theguardian.com/world/2017/jun/01/brazil-operation-car-wash-is-this-the-biggest-corruption-scandal-in-history.
  2. Leahy, John. 2016. “What Is the Petrobras Scandal That Is Engulfing Brazil? | Financial Times”. Ft.Com. https://www.ft.com/content/6e8b0e28-f728-11e5-803c-d27c7117d132.
  3. Rapoza, Kenneth. 2017. “Brazil’s Petrobras Not a Victim of Corruption, But A Participant.” Forbes.Com. https://www.forbes.com/sites/kenrapoza/2017/08/29/brazils-petrobras-not-a-victim-of-corruption-but-a-participant/#3ba43fbb64c2.
  4. Segal, David. 2015.”Petrobras oil scandal leaves Brazilians lamenting a lost dream.” The New York Times 7.
  5. Washington de Queiroz, Jorge. “Corruption-Can Brazil win this war?” Master’s thesis, The University of Bergen, 2015.
  6. Winter, Brian. “Brazil’s Never-Ending Corruption Crisis: Why Radical Transparency Is the Only Fix.” Foreign Aff. 96 (2017): 87.
  7. Rios, Ricardo A., Caio S. Lopes, Fabio HG Sikansi, Paulo A. Pagliosa, and Rodrigo F. de Mello. “Analyzing the public opinion on the Brazilian political and corruption issues.” In 2017 Brazilian Conference on Intelligent Systems (BRACIS), pp. 13-18. IEEE, 2017.
  8. Kaufmann, Daniel. “Corruption matters.” Finance & Development 52, no. 3 (2015): 20-23.
  9. Beauchamp, Zach. 2016. “Brazil’s Petrobras Scandal, Explained.” Vox. https://www.vox.com/2016/3/18/11260924/petrobras-brazil.
  10. Bray, Chad, and Stanley Reed. 2018. “Petrobras Of Brazil To Pay $2.95 Billion Over Corruption Scandal”. Nytimes.Com. https://www.nytimes.com/2018/01/03/business/dealbook/brazil-petrobras-corruption-scandal.html.
  11. Simões, M., 2018. Brazil’s polarizing new president, Jair Bolsonaro, in his own words. The New York Times.
  12. Image Source- GlobalIssues

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