from Latin America's Moment and Latin America Studies Program

The Long Arm of U.S. Law and Latin America’s Corruption Malaise

Latin America, corruption scandals, CICIG, Petrobras, U.S. foreign policy, Brazil's Clean Company Law, U.S. Deparment of Justice, Securities and Exchange Commission, U.S. Attorney for the Southern District of New York

March 1, 2016

Latin America, corruption scandals, CICIG, Petrobras, U.S. foreign policy, Brazil's Clean Company Law, U.S. Deparment of Justice, Securities and Exchange Commission, U.S. Attorney for the Southern District of New York
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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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Latin America’s corruption scandals of the past two years are moving slowly toward resolution. As they move forward, it is interesting to note that in a region that has been particularly protective of its sovereignty, foreign cooperation has played a significant role, whether it is via bilateral exchanges between prosecutors, mutual legal assistance treaties, or even United Nations support, as in the case of Guatemala’s International Commission Against Impunity (CICIG). But these various forms of international cooperation may soon be joined by another international anti-corruption effort that is less well understood in Latin America: prosecution by U.S. attorneys.

The Petrobras scandal has so far touched down in Argentina, Peru, Panama, Brazil, and the United States, making it a truly hemispheric corruption case. I was therefore taken aback when a well-informed colleague from the region suggested to me that in his view, the United States would never prosecute Petrobras, because doing so might harm U.S. foreign policy interests. In reflecting on this remark later, I think that he meant that a U.S. government that seems to be trying hard to mend fences in the region would be loathe to be seen as violating national sovereignty or acting in ways that could cast the United States in the familiar role of an avaricious exploiter of Latin American resources.

This perspective has deep roots. Brazilian academics have argued that the United States seeks to limit Brazil’s energy self-sufficiency as part of its broader geopolitical strategy of hegemony. A Brazilian senator echoed this perspective in floor debate last week, noting that, having weakened Petrobras, investors were now seeking a reduced role for the oil company that would hand “the future of Brazil to Shell.” Meanwhile, other prominent Brazilian politicians have shown little understanding of the independence of their own national prosecutorial office, and therefore may not be ready to accept that the discretion of U.S. prosecutors is also significant, even when foreign policy is on the line.

Domestic legal calculations also play a role: Brazilian prosecutors, for example, have been very careful to paint Petrobras as a victim rather than a target. There are many reasons for this prosecutorial caution: there is doubt about the culpability of many of the firm’s directors, Brazil’s Clean Company Law is new and untested, and there are a variety of more attractive targets for prosecution. Furthermore, there may well be trepidation about the political costs of taking down the the crown jewel of Brazil’s state-owned companies: most Brazilians are up in arms that Petrobras has been so violated by graft and gross mismanagement, but they understandably do not want to see it further damaged.

On the U.S. side, however, the big question is not really whether U.S. prosecutors are going to prosecute wrongdoing, but when. Given the sharp drop in Petrobras’ market capitalization—from a high of $380 billion to $23 billion today—the U.S. Securities and Exchange Commission (SEC) may have little option, given that its mandate is to curb behaviors that cause damage to shareholders and stock market integrity. Already, Petrobras has taken a write-down of more than $17 billion for overvalued assets, including $2 billion associated with corrupt acts, and the U.S. Department of Justice (DOJ) and SEC have announced investigations. News reports suggest that Petrobras could be the target of the largest ever penalties ever levied by U.S. authorities in a corporate corruption investigation, exceeding the record-breaking $800 million paid by Siemens in its 2008 agreement with the DOJ and SEC. If such fines came to pass, they would have a shocking effect on a Brazilian public already reeling from more than their fair share of bad news. A former Brazilian Supreme Court justice predicted that for those who are unaware that it is coming down the pike, a U.S. prosecution will be a “humiliation and a devastation.”

U.S. prosecutors will also be keen to understand kickbacks and corruption that may have taken place on U.S. soil, as in possibly fraudulent refinery purchases, or that might have passed through U.S. banks via offshore accounts in Panama or Switzerland, as Brazilian investigators allege. There are a variety of potential avenues for enforcement, ranging from SEC administrative sanctions through a full prosecution under the Foreign Corrupt Practices Act (FCPA), made possible because Petrobras is publicly listed on the New York Stock Exchange (NYSE), and made more likely by the DOJ’s recent efforts to ramp up FCPA prosecutions.

Prosecutions could be led by state prosecutors, the DOJ, by the U.S. Attorney for the Southern District of New York, whose office has been aggressive in prosecuting violations of corporate malfeasance, or by some combination of all of these autonomous actors. Potential oversight bodies could also include an alphabet soup of agencies involved in asset forfeiture and money laundering, in the DOJ and U.S. Department of Treasury, as well as state governments. And of course, Petrobras is already facing civil litigation in the United States, as well as the legal costs associated with nearly 300 foreign business partners who are also potential targets of investigation.

In sum, the international dimension of Latin America’s corruption saga is only just getting underway. Legal action by the United States may not be greeted with acclaim across the Brazilian political spectrum, but together with Brazil’s enthusiastic prosecution of the case, it brings the hope that the regional compliance environment may change for the better.

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