Brazil’s Corruption Fallout

Federal investigators in Brazil have uncovered corruption at the highest levels of the government and in the country’s largest corporations.

July 13, 2017

A Petrobras refinery in Cubatao, Brazil. Paulo Whitaker/Reuters
Backgrounder
Current political and economic issues succinctly explained.

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Brazil

Corruption

Latin America

Politics and Government

Economic Crises

Introduction

Corruption probes that began in 2014 have reached the highest levels of the Brazilian government and corporate elite, implicating President Michel Temer, former presidents, and dozens of cabinet officials and senators. Operacao Lava Jato (Operation Car Wash) and overlapping investigations have led to prison sentences for top executives and politicians, mass layoffs, and billions of dollars paid in fines.

The scandals have complicated efforts to revive the economy amid its largest downturn in more than a century. The country’s biggest corporations have faced numerous setbacks, and the fallout from the scandals is expected to reverberate through Brazil’s 2018 general election. Millions of Brazilians have demonstrated in favor of the investigations, and many hope that shedding light on the scandals will end the widespread corruption that has plagued their country.

What is Lava Jato?

Federal prosecutors led by Judge Sergio Moro launched Lava Jato in March 2014, after the Finance Ministry’s intelligence unit discovered unusual bank transactions involving the state-owned oil company Petrobras. They suspected that Petrobras was accepting bribes from firms, including the construction giant Odebrecht, in exchange for contracts.

According to the public prosecutor’s office, by July 2017 Lava Jato had resulted in accusations against almost three hundred people and more than 150 convictions for crimes including corruption, abuse of the international financial system, drug trafficking, and money laundering. Executives from both Petrobras and Odebrecht, including the latter’s former chief executive, Marcelo Odebrecht, were sentenced to jail time. Facing financial losses that stem in part from the probe, the two companies have laid off more than one hundred thousand employees.

281
People accused of crimes in Lava Jato
Source:
Brazilian Federal Public Ministry

In April 2017, Odebrecht was ordered to pay fines totaling $2.6 billion to authorities in Brazil, Switzerland, and the United States after admitting to paying officials in twelve countries approximately $788 million in bribes; the company may also reach plea deals with other Latin American countries in which it operated. More than a dozen other corporations, as well as foreign leaders including Colombian President Juan Manuel Santos and former Peruvian President Alejandro Toledo, have also been implicated in Lava Jato.

Another investigation, Operacao Carne Fraca (Operation Weak Flesh), was announced publicly in March 2017; it began as a result of Lava Jato and pursued allegations that employees of JBS and BRF, the world’s largest beef and poultry exporters, respectively, bribed food inspectors to approve the sale of spoiled products. In the following months, the European Union suspended its meat imports from Brazil, along with China, Egypt, Japan, Mexico, and the United States. (Some of the bans were lifted soon thereafter, but EU and U.S. restrictions remain in place.) JBS’s heads, brothers Joesley and Wesley Batista, made plea bargains with prosecutors and resigned from their positions in May; their testimonies spurred a probe into President Temer. JBS’s controlling shareholder agreed that month to pay a record $3.16 billion fine after its executives admitted to bribing 1,829 politicians a total of nearly $600 million.

1,829
Politicians paid bribes by the meatpacking firm JBS
Source:
Financial Times, citing court testimony

Several other corruption probes that have overlapped with Lava Jato have resulted in more than a dozen arrests. These include Operacao Panatenaico, which concerns alleged bribes paid by construction companies in exchange for contracts to build stadiums for the World Cup Brasilia hosted in 2014; Operacao Greenfield, an investigation into alleged fraud at the pension funds of state-run companies; and Operacao Zelotes, which is looking into bribes allegedly paid by companies including JBS and Ford’s Brazilian subsidiary to tax officials to reduce their corporate liabilities.

Which current or former public officials have been investigated?

Supreme Court Justice Edson Fachin authorized prosecutors in April to open investigations into hundreds of individuals who had been named in testimony by Odebrecht employees as part of their plea deals. The list included four former presidents, eight ministers, some seventy members of the National Congress, and three governors. The most prominent politicians among those investigated include:

Luiz Inacio Lula da Silva. The former president (2003–2011), once considered a leading candidate for the 2018 presidential election, was sentenced by Judge Moro in July to nine and a half years in prison for corruption and money laundering. Lula, who said he will appeal his conviction, also faces charges in four other criminal cases. The federal prosecutor’s office has referred to Lula as the mastermind behind the entire corruption scheme targeted by Lava Jato, and some officials from his administration are serving prison sentences for related crimes. He is often described as a mentor to his successor, Dilma Rousseff, who was his chief of staff from 2005 to 2010.

Dilma Rousseff. In office since 2011, President Rousseff was impeached in August 2016, during her second term, after being charged with manipulating the federal budget to conceal the size of the country’s deficit. Prosecutors never brought charges related to the Petrobras scandal against Rousseff, though she was the company’s chairwoman from 2003 to 2010. A separate case, which was brought by the opposition, sought to annul Rousseff and Temer’s 2014 election victory over allegations of illegal campaign donations, but was unsuccessful.

Michel Temer. Rousseff’s one-time running mate and vice president took office in August 2016, after Rousseff was impeached. His name did not appear on Fachin’s list, but he has since been charged with taking bribes. JBS chair Joesley Batista handed over to investigators secretly recorded audio that purports to show Temer authorizing hush money for Eduardo Cunha, a former speaker of Congress’s lower house. Like Rousseff and Lula, Temer has denied the allegations against him.

Eduardo Cunha. Cunha was charged in October 2016 with accepting bribes worth $40 million and attempting to obstruct investigations into his activities. In March 2017, he was sentenced to more than fifteen years in prison for corruption, tax evasion, and money laundering. Cunha faces additional criminal charges as well.

Sergio Cabral. The former governor of Rio de Janeiro state was arrested in November 2016 on charges of accepting $64 million in bribes in exchange for construction contracts, including for World Cup stadiums. He was sentenced to fourteen years in prison in June 2017.

Have the probes had economic consequences?

Brazil’s economic troubles predate Lava Jato. Initially thought to be a temporary downturn in the wake of playing host to the World Cup, Brazil fell beginning in early 2014 into its worst recession in more than a century. As the political crisis worsened, investment levels and consumer confidence suffered, leading to a 3.9 percent drop in GDP in 2015 and another 3.6 percent decrease the following year.

Credit: Claire Felter Source: World Bank

The companies involved in the scandals, some of the country’s largest, have been confronted with deep financial consequences. Petrobras, which dominates an industry that in 2014 accounted for approximately 13 percent of Brazil’s gross domestic product, was estimated to have lost at least $88 billion by mid-2015. Petrobras and Odebrecht have sold assets worth billions of dollars to pay its debt obligations. JBS’s stock prices have plunged by more than 30 percent.

In the first half of 2017, Brazil saw its first quarter-on-quarter growth in two years, at 1 percent. But after the Temer recording was released in May, Brazil’s currency, the real, plummeted 8 percent, and economists indicated that political turmoil would make it more likely that the country would sink back into recession. Unemployment in Brazil hit a new high in April 2017 at 13.6 percent, more than double what the rate was in late 2013, prior to the start of Lava Jato.

Temer has pressed Congress to approve a massive economic-reform program that includes austerity measures such as an overhaul of the pension system meant to rein in government debt. However, experts doubt that Temer can move forward with the reforms, which are unpopular, amid corruption investigations.

Where does the Temer administration stand?

Brazilian legislation provides sitting cabinet members and other federal elected officials with special standing; they can only be tried by the country’s highest court, the Supreme Federal Tribunal (STF). Cases against politicians move slowly through the single court, which has traditionally been deferential to politicians, leading to “practical immunity from prosecution,” writes CFR’s Matthew M. Taylor.

Even so, at least seven cabinet ministers or top aides have stepped down since Temer took office due to revelations from Lava Jato and other probes. “His kitchen cabinet has been decimated,” says Taylor. Several smaller political parties have withdrawn their support for the Temer administration.

[Temer’s] kitchen cabinet has been decimated.
Matthew M. Taylor, CFR Adjunct Senior Fellow

In early June, Brazil’s Superior Electoral Court (TSE) cleared Temer and Rousseff of charges that they violated campaign-finance laws in the 2014 election. The STF separately authorized an investigation into Temer in May based on his recorded conversation with Joesley Batista, and some opposition lawmakers have requested an impeachment vote. The prosecutor-general charged the president in June with corruption for accepting a $152,000 bribe from Batista, but two-thirds of Congress’s lower house must approve the charge for it to move forward in the STF. Temer has repeatedly said he will complete his term.

Meanwhile, several politicians have begun campaigning ahead of the October 2018 general election; they include Sao Paulo Mayor Joao Doria, Sao Paulo state Governor Geraldo Alckmin, right-wing congressman Jair Bolsonaro, former Senator Marina Silva, and former minister Ciro Gomes. Lula was widely considered the likely candidate of the Workers’ Party (PT) prior to his July 2017 sentencing, but would be ineligible to run if his conviction is upheld. Experts say it is unclear who besides Lula might be popular enough to make it to the election’s second round.

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Resources Up

CFR’s Matthew M. Taylor discusses the likelihood that Temer will remain in office.

Monica Arruda de Almeida and Bruce Zagaris lay out the costs [PDF] of the corruption probes for Petrobras.

Brazil’s public prosecutor’s office lays out its findings from the Lava Jato probe.

Jonathan Watts examines the network of political and corporate racketeering uncovered by Lava Jato for the Guardian.

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