One of the largest international corruption scandals is unfolding across Latin America. At its center are a Brazilian construction dynasty and a story of bribery at the highest levels of government that has become all too familiar in Latin America’s largest country.
On December 21, 2016, the United States Justice Department announced that Odebrecht, a Brazilian construction conglomerate, and Braskem, a Brazilian petrochemical company in which Odebrecht is a majority shareholder, pleaded guilty to charges related to a global corruption conspiracy that spans more than 100 projects in 10 countries in Latin America and two in Africa.
The US Justice Department report states that the Brazil-based companies funneled nearly US$800 million in bribes to officials of foreign governments, state-owned companies, and political parties to gain an unfair advantage. These bribes led to more than US$3.3 billion in “ill-gotten benefits.”
Bribery and corruption were so integral to Odebrecht’s activities that the conglomerate established a separate office within the corporate structure, the Division of Structured Operations, to manage these illegal activities. These activities included bribing politicians, political candidates, and other officials directly or through campaign contributions; colluding with other companies to rig competitive bidding procedures; and money laundering.
Odebrecht and Braskem came to an agreement with officials in the United States, Switzerland, and Brazil to pay a US$3.5 billion penalty. The United States has jurisdiction in this case under the Foreign Corrupt Practices Act because the defendants funneled money through financial institutions in New York. It is unclear how the new head of the Securities and Exchange Commission, Jay Clayton, will affect the Odebrecht case going forward or similar cases that may arise in the future. Clayton has previously expressed his concerns about the Foreign Corrupt Practices Act.
The Swiss have similar jurisdiction and found Odebrecht guilty under corporate criminal law “in that they did not take all reasonable organisational measures required to prevent the offences of bribing foreign public officials … and money laundering.”
The multibillion-dollar settlement is the largest foreign bribery settlement to history.
The following is a partial list of current information that has come to light about Odebrecht’s illegal activities in the 10 Latin American countries named in the United States Justice Department’s case against Odebrecht.
La Nacion reported that prosecutors are investigating Gustavo Arribas, the head of the Argentina’s intelligence agency, La Agencia Federal de Inteligencia. Arribas is accused of receiving five bank transfers from Odebrecht.
An additional controversy arose after it was suggested that Argentina might compensate Odebrecht for canceling a contract made under the Kirchner government. However, several days the Ministry of Energy quashed such rumors and announced that Odebrecht would not be compensated.
The Justice Department report found that between 2007 and 2014 US$35 million in bribes were made in Argentina resulting in US$278 million in benefits for Odebrecht.
The Odebrecht scandal is tied to Operation Car Wash, an investigation into the state-owned oil company, Petrobras, which has resulted in hundreds of arrests including many members of the Brazilian legislature.
One critical connection between Odebrecht and Petrobras as well as several other companies was a conspiracy to rig the bidding process for Petrobras infrastructure projects. This collusion ensured that a company received a contract for a higher amount than in a competitive market.
In addition, it was revealed that Odebrecht bribed Petrobras officials and members of the Brazilian government, especially during the presidencies of Lula and Rousseff.
The Justice Department report found that between 2001 and 2016 US$439 million in bribes were made in Brazil resulting in US$1.4 billion in benefits for Odebrecht.
The Odebrecht scandal in Colombia revolves around two mega construction projects: the Ruta del Sol II highway and a navigability project on the Magdalena River. Portafolio reported that a contractor, an ex-Viceminister of Transportation, and an ex-Senator have been arrested.
The highest profile Colombian to be accused of benefiting from the scandal is the sitting president, Juan Manuel Santos. Reuters reported that US$1 million might have been funneled to Santos’ 2014 presidential campaign. Oscar Ivan Zuluaga, who ran against Santos in the 2014 presidential election, is also being investigated for similar accusations. President Santos has called for an investigation into the allegation.
The Justice Department report found that between 2009 and 2014 US$11 million in bribes were made in Brazil resulting in US$50 million in benefits for Odebrecht.
The Dominican Republic
Dominican Today reported that Odebrecht will pay US$184 million to the Dominican Republic, and the Public Procurement Office suspended Odebrecht as a state supplier. Soon after the government and Odebrecht reached an agreement, the National Committee to Combat Climate Change filed a lawsuit to prevent the agreement on the grounds that it is too lenient.
The Dominican Republic is one of 10 countries where prosecutors have agreed to coordinate their investigations, a decision lauded by Transparency International. The other countries are Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Panama, Peru, Portugal, and Venezuela.
The Justice Department report found that between 2001 and 2014 US$92 million in bribes were made in the Dominican Republic resulting in US$163 million in benefits for Odebrecht.
As the Washington Post reported, the investigation of Odebrecht in Ecuador is not moving quickly. This may change with the news that prosecutors in Colombia and Ecuador will work together on the Odebrecht investigations in their countries.
Ecuador was in the middle of a presidential election when the revelations of corruption within the Ecuadorian government in connection to Odebrecht surfaced. The first round of voting took place on February 19. A run-off between Lenin Moreno of President Correa’s Alianza PAIS party and Guillermo Lasso of the CREO party will be on April 2, 2017.
Guillermo Lasso accused Moreno’s running mate of personally benefiting from corruption. While the accusation was not made in reference to the Odebrecht scandal, an accusation of corruption in the current climate may seriously damage the Alianza PAIS party in April.
The Justice Department report found that between 2007 and 2016 US$33.5 million in bribes were made in Ecuador resulting in US$116 million in benefits for Odebrecht.
In Guatemala, prosecutors are investigating former government officials of the government of Otto Perez Molina. The most prominent persons of interest are the ex-President Molina, ex-Vice President Baldetti, and ex-Communications Minister Alejandro Sinibaldi. Molina and Baldetti are in prison on other charges, and Sinibaldi has been on the run since June 11, 2016, in connection with a separate investigation.
Excellent reporting from El Periodico chronicled how Odebrecht was able to benefit from fraud. For example, budgets for projects and fees charged by Odebrecht were increased substantially without cause, Odebrecht routinely failed to fulfill their contract, and unnecessary supplies were purchased.
The Justice Department report found that between 2013 and 2015 US$18 million in bribes were made in Guatemala resulting in US$34 million in benefits for Odebrecht.
In-depth reporting by La Prensa show a pattern of fraud and collusion between Odebrecht, Pemex, and the Mexican government over a number of years. The article shows repeated cost overruns and a habitual failure to fulfill contracts awarded to Odebrecht by Pemex.
In addition, Pemex used a web of subsidiaries to hide the fact that it was awarding contracts to Odebrecht without going through the required bidding process.
So far there have been no arrests in Mexico related to the Odebrecht scandal.
The Justice Department report found that between 2010 and 2014 US$10.5 million in bribes were made in Mexico resulting in US$39 million in benefits for Odebrecht.
While scandals emanating from Brazil have pushed the Panama Papers revelations to the background, the firm Mossack Fonseca was back in the spotlight recently in connection to the Odebrecht corruption scandal. La Nacion reported that Ramon Fonseca Mora, a founder of Mossack Fonseca and former Minister-Counsel to President Juan Carlos Varela, accused President Varela of receiving donations from Odebrecht.
The children of former President Martelli were questioned and their lawyer was arrested in relation to the Odebrecht scandal and on other corruption charges.
The Justice Department report found that between 2010 and 2014 US$59 million in bribes were made in Panama resulting in US$175 million in benefits for Odebrecht.
Before the Odebrecht scandal broke at the end of 2016, 2017 was shaping up to be a great year for the Peruvian economy. However, it appears that the “Odebrecht effect” will reduce Peru’s economic growth by nearly a percent this year.
At a press conference, Finance Minister Alfredo Thorne said, “Due to the Odebrecht effect … I think it’s hard to think that we’re going to grow 4.8 percent, I think we could grow one percentage point below that.”
The scandal has also engulfed two former presidents. Ollanta Humala is accused of receiving US$3 million in illegal campaign donations, and Alejandro Toledo is accused of accepting US$20 million in bribes. Humala is on bond in relation to a separate money laundering case, and Toledo is believed to be in hiding in the United States.
There have also been calls for investigations into Peruvian businesses that partnered with Odebrecht.
The Justice Department report found that between 2005 and 2014 US$29 million in bribes were made in Peru resulting in US$143 million in benefits for Odebrecht.
Because of the opaque and heavy-handed nature of the Chavez and Maduro administrations in Venezuela, Odebrecht found fertile ground for its corrupt business tactics. An article in Diario Las Americas paints a picture of massive corruption run through the myriad of state-owned companies, many of which were formed since Chavez came to power in 2001.
The governor of the state of Miranda and former presidential candidate, Henrique Capriles, has been accused by the NGO Frente Anticorrupcion of receiving US$3 million from Odebrecht. The head of Odebrecht in Venezuela has been arrested in connection with the scandal.
The repressive nature of the Maduro government and its control over nearly all aspects of the government have so far blocked some outside attempts to investigate corruption and bribery related to Odebrecht in Venezuela, including by arresting and deporting a team of Brazilian journalists.
The Justice Department report found that between 2007 and 2014 US$98 million in bribes were made in Venezuela. It is not yet known how much Odebrecht benefited from these bribes.
The current numbers will certainly change as the investigations against Odebrecht and their co-conspirators move forward, but what we do know is striking: more than US$800 million in bribes in 10 countries in Latin America and nearly US$2.4 billion in ill-gotten gains, according to the figures from the US Justice Department.
The evidence presented so far by the criminal investigation and journalists throughout the hemisphere shows a pattern of misbehavior, as well as several solutions that appear necessary to prevent massive fraud and corruption on this scale from occurring again.
From the data and evidence, there were two categories where changes should be made to prevent many of the issues we are currently seeing, i.e. massive bribery and corruption, and a significant risk to economic growth throughout the region.
Some observers have argued that this latest scandal shows that state-owned companies and leftist populism are the problems. State-owned companies played a significant role in this scandal throughout Latin America, especially very large companies like Petrobras and Pemex. This episode shows many significant drawbacks to allowing state-owned companies to have monopoly power in certain industries. While the solution may not be total privatization, the status quo cannot and should not be maintained.
The criticism of leftist governments and the evident corruption within governments in Brazil, Ecuador, and Venezuela cannot overshadow the good that social programs in the countries have produced, Bolsa Familia in Brazil being a prime example. It is important for political parties in Latin America, both on the right and the left, to promote the free market in much of the economy while continuing to support programs that combat poverty and build a healthier and better-educated citizenry.
Within Brazil, there is a debate that will sound familiar to Americans in the United States. Is Odebrecht too big to fail? Does the Brazilian government have to step in to keep Odebrecht afloat or else put their economy at risk?
If Odebrecht went bankrupt, there would undoubtedly be massive ramifications for the broader Brazilian economy. It is clear, therefore, that Brazil cannot allow this scenario just as the country appears to be exiting the worst economic depression in its history. However, it is also clear that the status quo cannot be allowed to continue after this period passes.
Brazil and other countries in the hemisphere cannot allow a single company to so completely dominate an industry or become so large that its failure could compromise the economy at large. This must also be balanced against the need for business in these countries to remain globally competitive.
The Odebrecht scandal will continue to loom large over Latin America for years as the multiple investigations move forward. The ultimate goal of the reforms to anticorruption and oversight laws and regulations must be to ensure that this does not happen again.
Unfortunately, it appears that not only could large scale bribery happen again but it could be done by the same company. As Folha de S. Paulo reported, Odebrecht is attempting to enter into plea agreements that would allow it to continue to do business in the region. Such an agreement would reinforce a perception of impunity, which is what the National Committee to Combat Climate Change argued in the Dominican Republic.
As the investigations go forward and more information comes to light other reforms may become apparently necessary. At the moment, the exceptional journalism happening throughout the hemisphere and the strong condemnation from every segment of society give hope that bribery and corruption at all levels will be sufficiently punished.
*A slight edit was made to reflect that former Panamanian President Martelli’s children were not arrested by Panamanian authorities.
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