Why the Trump Organization Was Cited in a Brazil Corruption Probe

It may have found itself managing a hotel backed by “shady” characters and “possible corruption.”

When Donald Trump pulled his name off a beachfront hotel in Rio de Janeiro in December, his company said it was due to delays in the project and called the move part of “normal housecleaning” in the weeks before he took up the presidency.

Brazilian prosecutors and lawmakers investigating pension funds that backed the project paint a picture that may provide a different explanation. In court documents and interviews, investigators say the Trump Organization, in a deal negotiated by daughter Ivanka and son Donald Jr., found itself managing a hotel backed by shady characters, profligate pension funds and built on, prosecutors suspect, corruption. 

The federal prosecutor’s office is investigating whether the FIP LSH fund that owns the hotel—it sat unfinished with prostitutes loitering at its entrance during a recent visit—bribed two state pension funds in exchange for $41 million of investment and artificially inflated the property’s value. They are also examining whether the Trump Organization profited “via illicit payment of commissions and bribes” to the pension funds, according to the court documents. No one from the Trump Organization or the company itself has been targeted in the probe.

Investigators have questioned the level of due diligence undertaken by the Trump Organization. Ricardo Ayres, a legislator in Tocantins state who led a public probe of the pension fund for his state’s workers, says Trump should have seen what he was involved in and gotten out much earlier. “It’s curious that the Trumps didn’t seem to know that their biggest deal in Brazil was bankrolled by shady investors,” he said in an interview from his office in Palmas, capital of Tocantins. 

Adam Rosen, a lawyer for the Trump Organization, said due diligence was performed on the Rio project as it is on all Trump endeavors. “We had no knowledge of any irregularities with respect to the project prior to the announcement of the investigation,” he added. LSH Barra said that the hotel, now called LSH Barra Hotel, will maintain its quality standards and will seek a partnership for a new brand following the amicable termination with Trump, which it says was unrelated to the criminal probe. It said the company is collaborating with prosecutors in the investigation.

Trump’s lawyers did seek assurances that no dirty money was involved to head off potential violations of the U.S. Foreign Corrupt Practices Act, or FCPA, says Paulo Figueiredo Filho, the Brazilian developer who struck the deal with the Trumps in 2013. “They were very worried about that,” he said.

Paulo Figueiredo Filho, at the work site of the hotel in Rio, on Aug. 18, 2015.
Photographer: Marizilda Cruppe/The New York Times via Redux

Figueiredo, who left his post as executive director of the hotel company in late 2015 and moved to the U.S., says Trump couldn’t have known if there was illicit funding because the investors were not public. “Those guys were acting in good faith,” Figueiredo said in an interview last month in Miami. He said he hasn’t been contacted by investigators and doesn’t believe he is a target of the criminal probe because he had no role in the fund that owns the hotel.

A person familiar with the Brazilian investigation, who spoke on condition of anonymity, said prosecutors suspect that discrepancies between investment cost and appraised values are a sign of corruption that could have ended up benefiting the Trump Organization. The person added that for Trump and other investors, due diligence can’t end once the deal is reached but must continue as the project is being built and after it is finished. Others, like Ayres, note that Brazilian pension funds are notorious for their questionable investments, something they say anyone doing a little homework would know. Last year, Brazilian prosecutors announced a sweeping probe of questionable investments and fraud in government pension funds across the country.

“Pension funds in Brazil have always been very politically influenced with most managers appointed by politicians so a lot of obscure things have happened,” said Sergio Lazzarini, a professor at Insper business school in Sao Paulo.

People sit at a park across from the hotel in Rio, on Dec. 14, 2016.
Photographer: Dado Galdieri/Bloomberg

Figueiredo said the deal worked as follows: The hotel owners agreed to pay Trump fees for putting his name on the 13-floor, trapezoid-shaped building and a cut of revenue for managing it, a common arrangement for Trump around the world. The Trump Organization stuck with the deal as public scrutiny of the pension funds Igeprev and Serpros mounted, dating to at least mid-2014. Trump had the chance to opt out of the licensing deal in December 2015, according to a person familiar with the contract. But his company stayed another year, walking out two months after the criminal probe was announced and a few weeks before his inauguration.

Both funds had disclosed their investments well before—it appeared in Serpros’ 2013 annual report and Igeprev’s president referred to the fund’s Trump hotel stake in a Senate hearing in May 2015—and had each been mired in scandal for more than a year. In May 2015, regulators began the overhaul of one of the pension funds, Serpros, representing retirees of a finance ministry data processing company, and replaced its entire board starting in May 2015. Federal police investigated the other fund, Igeprev, which represents pensioners of the Tocantins state, leading the prosecutors to request, beginning in June of 2015, asset freezes of five former fund executives, including a former governor’s son who had chaired the fund.

Trump’s involvement in the project dates to late 2012, when Figueiredo said he had lunch with Ivanka Trump in West Palm Beach. Figueiredo is the grandson of Joao Figueiredo, the last leader of the military regime that ruled Brazil from 1964 until 1985, and his father was a real estate developer. He dreamed of building a hotel on the beach in Rio and wanted Trump’s name on it. Figueiredo, now 34, says he’s inspired by Trump’s best seller, The Art of the Deal.

As lunch began with Ivanka, Donald Trump’s helicopter landed nearby, and the future president stepped out. “He pulled up a chair, and we spent 20 minutes or a half hour talking about politics,” says Figueiredo. A few months later, Figueiredo picked Trump over more than a dozen other operators to manage the hotel.

Figueiredo said he negotiated for seven months with Ivanka, Donald Trump Jr. and their lawyers, making several trips from Rio to Trump Tower in Manhattan.

The hotel in Rio’s Barra de Tijuca suburb was the closest that the Trump Organization came to completing a project in Brazil. A Trump-branded golf resort fizzled years before when Brazilian investors got cold feet. In a 2014 visit, Donald Jr. promised to deliver the biggest office complex of any major developing country in downtown Rio, but that project never broke ground either.

Most of the 170 rooms of the Rio hotel were still being finished by the time last summer’s Olympics rolled around, but that didn’t stop Trump from delivering on his promise to open for the August games. When it pulled out of the deal in December, Trump Hotels said that the developers were “significantly behind on the completion of the property, and their vision no longer aligns with the Trump Hotel brands.”

Andrea Lopes, the administrator of the fund that owns the hotel, said one of the reasons for the delay was Trump’s demand for high-end sheets, wallpaper and other materials that had to be imported.

That level of ambition and luxury was no longer evident during a visit to the hotel this past November. With many rooms still unfinished, prostitutes were seen standing near the Trump sign at the entrance, soliciting clients passing by on the beachfront drive. The sign was removed a month later.

The hotel in Rio, on Dec. 14, 2016.
Photographer: Dado Galdieri/Bloomberg

Hundreds of miles north, in Palmas, an internal report by Igeprev, seen by Bloomberg, found that the fund’s former president, Flavio Sales, acted without approval from his own investment committee when he put 35 million reais ($11 million) into the Trump hotel in August 2014. Sales failed to conduct risk and viability studies before making the “imprudent and highly risky” investment against the fund’s norms, the report stated. The committee also was perplexed at how Igeprev appraised a 56 percent increase in the hotel’s value in four months, even as Rio’s real estate market was cooling down because of hotel oversupply caused by the Olympics buildup. 

Prosecutors suspect the actions are part of “reckless management” of the Igeprev pension fund that, they say, follows the same modus operandi of other corrupt pension funds. Sales denied any wrongdoing, adding in a phone interview that he knows the “rules of the game” after spending 30 years working for the central bank, including as a manager.

In the court filing that disclosed the criminal probe, a federal prosecutor also cited suspected corruption in the other Trump project in Rio, a $1.5 billion plan to build five office towers near the old port, which never got off the ground. The prosecutor wrote that the Trump Organization “was favored in a suspicious way” by an alleged bribery scheme that involved kickbacks from a builder to the former head of Brazil’s lower house of congress to secure investment by the state bank.

One group stands to lose big: the pensioners. The Tocantins fund estimates its retirees lost more than 264 million reais and counting from 10 allegedly illegal investments, a hole that could grow to 1 billion reais if another 24 questionable bets including the Trump hotel end up posting losses.

“For us, it was a bad deal,” says Clayrton Cleiber da Silva, 41, an administrative assistant in Tocantins and union leader who demanded investigations of all the investments including the Trump deal. He contributes 11 percent of his salary to Igeprev. “You’re fearful that there won’t be anything left when we go to withdraw on our retirement,” he added.

Trump has no such problem. Despite his walkout, he still stands to earn money from the hotel. As part of the deal, the owners are now in talks to pay him for the use of his name for the five months before it was removed.