Unhappy campers.

Photographer: Miguel Schincariol/AFP/Getty Images)

The Sunny Side of Brazil's Petrobras Scandal

Mac Margolis writes about Latin America for Bloomberg View. He was a reporter for Newsweek and is the author of “The Last New World: The Conquest of the Amazon Frontier.”
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When a major political payola scandal hit Brazil a few years back, a colleague and I had a friendly falling-out over which scam was the country’s worst. I’d picked the mensalao, a congressional payola scheme that saw the conviction of 25 moguls and government higher-ups and the near-unseating of President Luiz Inacio Lula da Silva. My friend went for the pork-for-votes scheme that Lula’s predecessor had run to buy re-election.

We were both wrong.

Nothing in Brazil compares to the looting of Petrobras. The damage goes well beyond the hundreds of millions of dollars that bent officials skimmed from at least $23 billion of supply contracts with Brazil’s state-run oil company, which doubled as a cash machine for campaign slush funds. With the multinational’s reputation in tatters, 39 executives and former public officials are on trial for overbilling, kickbacks and money laundering. The so-called petrolao scandal nearly cost President Dilma Rousseff re-election and has spooked investors, turning yesterday’s emerging market promise into a Latin American sinkhole.

It’s easy to look at the spreading stain in Brazil and shrug. After all, the pillage at Petrobras came to light almost by accident, when federal police looked into some fishy money-changers operating out of a gas station. Only then did investigators discover the wonderland of fraud, graft, and money-laundering, where crooked high rollers swapped their purloined reais for dollars and spirited the loot off to Swiss bank accounts.

Likewise, the mensalao of mid 2005-06 broke thanks not to diligent sleuths, but to a junior ally in Lula’s congressional coalition who sounded off when his cabal got shafted in the votes-for-campaign-cash deal. “None of the political scandals of the last ten years came as result of Brazil’s corruption control mechanisms,” said Gil Castello Branco, an economist who runs the government watchdog group, Contas Abertas (Open Books).

The upside is that the carnival of crime belatedly has jolted Brazil’s drowsy democracy to life, stoking public opinion, engaging a battle-worthy press, and queueing an arsenal of anti-corruption mechanisms that are working with extraordinary rigor and competence.

Start with Operation Carwash, the intensifying cross-border corruption probe into Petrobras. Federal police have seized assets and jailed culprits. Prosecutors have flipped a dozen confessed crooks into state witnesses.  The Finance Ministry’s financial crimes unit is chasing the electronic money trail from the corner offices of Brazil’s biggest contractors to banks in Bern. And the newest idols in a land in thrall to heroes in cleats are a federal judge specializing in organized crime and the Supreme Court.

Another tool is the witness security program, by which penitent criminals can be induced to turn coat against accomplices in exchange for reduced sentences. Created in 1990, and tailored since to organized crime, the statute flickered to life during the mensalao scandal, when the Supreme Court showed that not even Brazil’s mightiest were “too big to jail,” as political journalist Elio Gaspari put it.

Globalization has helped. With assets abroad and shares traded on the New York Stock Exchange, Petrobras is no longer a monster in a bell jar. The U.S. Securities and Exchange Commission is probing the oil major’s misdeeds, and some ten U.S. law firms have filed class-action suits on behalf of minority shareholders.

Corruption-busting in Brazil has a long way to go. Opaque budgets and discretionary bidding help camouflage theft of public money. State giants Petrobras and the national development bank, BNDES, are still largely exempt from the scrutiny of the spending authority, SIAFI, and did their best to stonewall Brazil’s Freedom of Information law. “State companies are the politicians’ Disneyland,” says Castello Branco. “They have plenty of money, are prey to political manipulation and lack transparency.”

A rigorous anticorruption law has been in force since January-- under which crooked companies can face scorching fines and be banned from bidding on public contracts--President Rousseff has yet to issue regulations implementing the bill. Until that happens, clever lawyers will find wormholes for bandits to slither through. And Brazil has seen enough of them.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mac Margolis at mmargolis14@bloomberg.net

To contact the editor on this story:
James Gibney at jgibney5@bloomberg.net