from Latin America's Moment and Latin America Studies Program

The Odebrecht Settlement and the Costs of Corruption

A sign of the Odebrecht SA construction conglomerate is pictured in Rio de Janeiro, Brazil, February 26, 2016 (Reuters/Ricardo Moraes).

December 27, 2016

A sign of the Odebrecht SA construction conglomerate is pictured in Rio de Janeiro, Brazil, February 26, 2016 (Reuters/Ricardo Moraes).
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It is hard to overstate the meaning of the settlement announced by U.S. authorities on December 21 with Odebrecht. Under this "largest-ever global foreign bribery resolution,"[1] the construction giant and its petrochemical subsidiary Braskem have agreed to pay at least $3.5 billion to Brazil, U.S. authorities, and the Swiss Office of the Attorney General. Of the total criminal fines, 80 percent of Odebrecht’s payments and 70 percent of Braskem’s payments will go to Brazil, a victory for both Brazilian prosecutors and for the cash-strapped Brazilian government.

For anyone casually following the Lava Jato case in Brazil, the U.S. court documents offer a startling and precise summary of the wrongdoing that has been slowly revealed over the past three years by Brazilian prosecutors in the Lava Jato case. Odebrecht, which operates in twenty-eight countries, has admitted to paying $788 million in bribes in twelve distinct countries, in exchange for $3.34 billion in ill-gotten benefits. Its business model was rooted in a remarkable amount of subterfuge, including a shadow budget administered by a “Division of Structured Operations” using two shadow computer systems (one of which was destroyed in an effort to hide evidence). Payments were made through shell companies set up in Belize and the British Virgin Islands, and the company even bought a bank in Antigua to administer the offshore payment of bribes.

The Odebrecht/Braskem agreements also offer a textbook illustration of several of the most devastating costs of corruption:

  • The economic cost: Odebrecht and Braskem admit to paying $599 million in graft in Brazil alone, for $2.19 billion in ill-gotten gains, a 360 percent return on investment that presumably came at the expense of potential competitors and taxpayers. Said another way, these two companies alone made off with more than a third of the annual cost of Brazil’s much-vaunted Bolsa Familia conditional cash transfer program. Several other companies are still in prosecutors’ cross-hairs, suggesting that the direct economic costs of the corruption uncovered by Lava Jato could reach the double-digit billions. The indirect economic costs are even broader, including the nearly 100,000 Odebrecht employees who have been laid off in the wake of the revelations;

  • The cost to public policy: the charging documents indicate that bribes enabled the two companies to force a variety of changes in pricing policies and tax credits, to pay legislators to rewrite statutes in their favor, and to prevent state-owned oil company Petrobras from terminating a joint venture with Braskem. Such insider efforts surely led to distortions in the policy framework, regardless of whether or not they contributed to the recession, as many critics of the Workers’ Party allege;

  • The cost to democracy: as though the profound crisis in Brazil in recent years were not sufficient proof, the Odebrecht court documents show how corruption consequentially distorted politics. Brazilians have long suspected that off-books campaign contributions have given corrupt politicians an undue edge in Brazilian elections and may have even dwarfed official contributions. Legal campaign contributions during the 2010-2013 political cycle in Brazil totaled $2.2 billion. Odebrecht and Braskem were among the most important legal campaign contributors to candidates for federal office in 2014; their legal contributions that year, though, were a mere 3.5 percent of the total bribes these companies have admitted to paying between 2002 and 2014.

In light of the many costs laid bare in the settlement, it is somewhat odd that reaction has been so low-key on the ground here in Brazil. Many Brazilians seem quite blasé, perhaps reflecting exhaustion after two years of drip-by-drip revelations of brazen corruption. It could be that Brazilians are ambivalent after recent over-reaching by prosecutors; or convinced by some defendants’ recent efforts to play the national sovereignty card. But it is more likely that Brazilians’ calm reaction may simply reflect the recognition that despite its unprecedented scale, the U.S. agreement is only one, early step toward accountability in a long process. Individual plea bargains from Odebrecht executives are still under review, several other companies and their executives are still negotiating agreements of their own, and the years-long criminal cases against sitting politicians are only just getting underway in the high court.

[1] Although the total fines paid by Odebrecht and Braskem are the largest ever, Richard Cassin of FCPA Blog notes that it is not the largest FCPA enforcement action because the value paid to U.S. authorities is smaller than the US$1.6 billion paid by Siemens in 2008.

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