The multi-billion dollar bribery scandal swirling around Petrobras is causing political and economic ructions in Brazil, but graft on a similar—or greater—scale relating to oil companies is occurring elsewhere in Latin America.
According to prosecutors and the Brazilian police, the total amount of money and suspicious payments linked to the Petrobras corruption scandal, which first emerged in March 2014, could total as much as BRL10bn, about USD3.8bn.
One former Petrobras executive, Pedro Barusco, who is cooperating with prosecutors, claimed that over 18 years he amassed USD100m in bribes, the bulk of which was channelled into accounts at private banks in Switzerland, allegedly including J. Safra Sarasin, Banque Cramer, PKB Privatbank, Pictet, Julius Baer, and Lombard Odier.
Prosecutors allege that several of Brazil’s largest construction companies, including OAS, Odebrecht and Camargo Corrêa, formed a cartel to drive up the value of contracts with Petrobras, in turn allowing them to cover the cost of bribes to Petrobras officials, which were often in the order of 3% of the value of contracts.
Some foreign companies are also alleged to have paid bribes in return for securing business, including Rolls Royce, SBM Offshore, Keppel Corporation and Sembcorp Marine.
Brazilian investigators have sought cooperation from Switzerland, Singapore, Panama, the UK, and Hong Kong. Switzerland’s attorney general this month froze USD400m of assets in relation to the scandal, and since last year has opened nine investigations – it has so far identified 300 accounts at over 30 Swiss banks that were apparently linked to the bribes. Monaco has also frozen accounts belonging to a former Petrobras director, holding some EUR10m.
The scandal has wide-reaching implications. At the political level, President Dilma Rousseff—who was chair of Petrobras during the 2000s when much of the bribery occurred, but who has so far escaped direct blame—has seen her approval ratings plunge to 10%, barely three months after taking office for a second term.
Rousseff’s political party, the PT, is also on the defensive, since a portion of the bribes was also allegedly channelled to the organisation. The Supreme Court judge leading the investigation has authorised investigations into some 50 current and former politicians, many of them PT members or supporters of the government.
At the economic level, the scandal is also hugely damaging. Petrobras’s exploration plans are likely be curbed, not only because of the lower price of oil, but also because the company, already strapped for cash, will have a tougher time raising finance due to concerns over its corporate governance. Potential joint venture partners and services companies concerned by FCPA and Bribery Act violation risks are now more cautious over Brazil.
The one positive consequence of the scandal is that it is driving the country to strengthen compliance. Rousseff earlier this month decreed the necessary regulations to enact Brazil’s own anti-graft legislation, the so-called ‘clean companies act’, approved in January 2014.
For the first time, these regulations introduce sanctions on payers of bribes, not just the recipients, and they impose criminal liability on companies. The law also requires commitment to compliance at the board level and periodic risk assessment. Fines range from 1% to 5% of gross annual revenue.
In its October 2014 report on Brazil, the OECD found that foreign bribery investigations have been opened in only five cases in the 14 years since Brazil joined the anti-bribery convention in 2000.
But is the corruption surrounding Petrobras really on the epic scale that would appear?
By Latin American standards, and looking at the energy sector in particular, the short answer is No.
Firstly, the magnitude of the Petrobras bribery scandal pales in comparison to the graft surrounding Venezuela’s oil company PDVSA. Earlier this month, the US Treasury identified USD2bn of funds that had been siphoned off by intermediaries in corrupt deals with top PDVSA officials to a private bank in Andorra, Banca Privada d’Andorra, BPA.
That’s just the tip of the iceberg. A host of other opaque and very likely corrupt deals have led to billions more being funnelled into private bank accounts in places such as Panama, Switzerland, Liechtenstein and Monaco. All of these totalled would easily surpass the supposed USD3.8bn embezzled from Petrobras.
Secondly, the alleged bribery rate of 3% of a contract’s value, the figure ‘quoted’ in relation to many of the pay-offs received by Petrobras executives, is low. According to a recent analysis of 427 transnational bribery cases conducted by the OECD, bribes on average amounted to just over 10% of a contract’s value.
Recent investigations carried out by Latin iQ in the region have found bribery rates ranging as high as 25%.
The key difference between Brazil and Venezuela is that, in the former the institutions are working, in the latter they are not.
So if the degree to which anti-corruption frameworks and mechanisms function or do not is a crude indicator of how pervasive corruption is in a given country, what might be the magnitude of corruption surrounding Mexico’s state-owned oil corporation, PEMEX, which is roughly the same size as Petrobras?
This is an important question for foreign investors, since Mexico is currently opening up its upstream energy sector to multinational oil & gas companies—and strategically it is the country in Latin America which has most to gain from the loss of business confidence in Brazil.
Corruption surrounding PEMEX could well be greater than at Petrobras, but less than at PDVSA.
A lot of PEMEX’s business with suppliers and partners is opaque. Several billion dollars’ worth of drilling and other oil services contracts has in recent years been awarded directly, rather than through tenders. Mexico’s federal audit office, the ASF, has identified scores of irregularity-tainted contracts worth billions of dollars.
But investigations into alleged incidents of bribery surrounding PEMEX surface only sporadically, or meet resistance.
In a PEMEX-related scandal, Citigroup’s subsidiary in Mexico Banamex was last year stung by a USD400m fraud resulting from business loans granted to Oceanografía, a major oil platform and pipelines maintenance contractor. The fraud stemmed from loans to Oceanografía that turned out to be collateralised by forged invoices to PEMEX.
Anti-corruption mechanisms in Mexico are weaker than in Brazil. Although Mexico has been a signatory to the OECD anti-bribery convention since 1999—a year before Brazil—the OECD noted in its most recent monitoring update, from June 2014, that Mexico had yet to register any prosecutions for foreign bribery.
That may now be about to change.
In February, the Mexican congress agreed to create a national anti-corruption system. How it will work is still short on detail, and the plan still has to be approved by the senate, but one element will be that the ASF’s powers will be strengthened, enabling it to undertake more robust audits and investigations of state entities.
Mexico’s legislature also recently approved a general transparency law, which extends the spectrum of subjects and entities, including federal and regional administrations, as well as political parties and labour unions, obliged to disclose and detail how public resources are managed. Final passage of the law is expected next month.