Brazilian Marcelo Odebrecht, the disgraced former CEO of his family’s construction firm, left prison today to see out a ten-year bribery sentence under house arrest at his mansion in São Paulo. Peru’s President Pedro Pablo Kuczynski is this week fighting a motion in Congress to oust him for receiving suspect fees from Odebrecht. And in Ecuador, Vice-President Jorge Glas has been deposed and faces six years in jail for graft.
Four years after Brazilian police and prosecutors began Operation Car Wash, a vast criminal probe that has exposed the biggest-ever bribery and corruption racket in the region, its impact continues to reverberate around the region.
The investigation has uncovered layer after layer of how Odebrecht, Latin America’s largest civil engineering firm, and several other major Brazilian companies paid industrial-scale kickbacks over the past decade to politicians and officials to bag billions of dollars’ worth of public works contracts.
Diligent detectives have unearthed details showing how the scheme was a truly multinational enterprise. In a landmark USD3.5bn settlement a year ago this week with authorities in Brazil, the US and Switzerland, Odebrecht admitted to paying USD800m in bribes in a dozen countries, mostly in Latin America.
Judge Sergio Moro and other Brazilian magistrates have so far jailed dozens of businessmen like Marcelo Odebrecht and top politicians like former Congress chief, Eduardo Cunha. Scores more are under investigation.
What does this carnival of corporate chicanery mean for businesses and investors in Latin America? Here are five reasons why it marks a positive turning point for the region, and five reasons why it makes sense to be sceptical that bribery and corruption won’t continue to thrive.
Firstly, the intense and persistent media coverage of the scandal has propagated a simplistic view that corruption and bribery is spiralling out of control in Latin America. That’s wrong. High-profile cases like Operation Car Wash have come to light because anti-bribery agencies are working, not because they’re failing.
The second bit of good news is that impunity for white-collar crime can no longer be taken for granted by the unscrupulous among Latin America’s business jet-set. The same goes for politicians like Luiz Inácio Lula da Silva, who has been convicted of corruption. He has appealed but faces several other similar charges.
A third lesson is that prosecutors in Latin America are becoming more willing to collaborate with their foreign counterparts, making it easier to clamp down on transnational corruption. Brazilian prosecutors sent over 200 cooperation requests to more than 40 countries. In turn, prosecutors elsewhere sent several hundred evidence requests back to pursue law enforcement against their own corrupt politicians.
A fourth point to note is that judicial systems are becoming more effective. Many of the convictions in Brazil would not have been secured had it not been for the use of leniency deals, which were introduced by law in 2013. The success of Operation Car Wash will probably spur a more extensive use of such deals to investigate and dismantle complex financial crime structures and schemes elsewhere in Latin America in the future.
The fifth consequence of Operation Car Wash is that it is encouraging more robust anti-corruption legislation and compliance across the region. Brazil is implementing a ‘clean companies’ act, Colombia is introducing legal protection for whistle-blowers, and Peru is bringing in corporate administrative liability for firms involved in bribery. Furthermore, the new ISO 37001 anti-bribery management systems standard is gaining recognition in the region.
But it’s not all good news. Here are five reasons to be doubtful that Operation Car Wash marks the dawning of a squeaky-clean, corruption-free future in Latin America.
Firstly, there is entrenched resistance to change among politicians. Brazil is a prime example of this. Deltan Dallagnol, Operation Car Wash’s coordinating prosecutor, says that legislators are clearly uninterested in meaningful anti-corruption reforms. A proposal of ten measures drafted by prosecutors a year ago was watered down beyond recognition by Congress, leaving prosecutors threatening to resign en masse.
Judge Moro goes further, saying that Brazil needs nothing less than a ‘Real Plan’ to root out bribery and corruption—a reference to a comprehensive economic policy in the mid-1990s that stopped hyperinflation in its tracks. The final verdict on whether Operation Car Wash has been a success or a failure, he adds, will be the 2018 elections, when the public will have a chance to replace crooked politicians with genuine reformers.
Brazilians are sceptical things will improve. A recent Datafolha survey found that while 45% thought the frequency of corruption crimes would fall after Operation Car Wash, 51% thought it would remain the same, or even worsen.
Secondly, the pace of Operation Car Wash has slowed dramatically. Attorney-General Raquel Dodge, who replaced Rodrigo Janot in September, has toned down the investigation and halved the number of prosecutors on the case. This is bad news for Brazil’s prospects of recouping the cash stolen from the public purse.
Admittedly, it can take ages to recover money lost to embezzlement. US lawyers seeking the missing billions from Bernard Madoff’s Ponzi scheme have taken almost a decade to recover 70%. Operation Car Wash prosecutor Paula Cristina Conti says USD1bn has so far been recovered—that’s only 13% of the money traced through leniency deals.
Thirdly, Operation Car Wash has had distinct consequences in different countries in Latin America.
Some of the most remarkable law enforcement action has been seen in Peru, historically Odebrecht’s largest market outside Brazil. Former presidents Alejandro Toledo and Ollanta Humala have been indicted for corruption, and current President Pedro Pablo Kuczynski is under intense scrutiny. Furthermore, business executives from Peruvian companies Graña y Montero, ICCGSA, and JJ Camet are being prosecuted for colluding with Odebrecht in bribery schemes.
In Colombia prosecutors are charging a number of politicians, and a former deputy transport minister was last week sentenced to six years’ imprisonment. And in Ecuador, Vice-President Jorge Glas is facing six years in jail for receiving USD13.5m from Odebrecht when he was minister for strategic sectors between 2010 and 2012.
But elsewhere the impact has been limited. In Panama, two sons of former president Ricardo Martinelli and three of his ministers have been indicted but the cases are bogged down in procedural wrangling; in Mexico the only person formally under investigation is Emilio Lozoya, the former CEO of Pemex.
And in Venezuela, where Odebrecht admitted paying USD98m in bribes—the largest tranche outside Brazil—no prosecutions have yet been brought. Worse still, Attorney-General Luisa Ortega fled the country in August after the government booted her out of office.
This shows that while in countries such as Peru and Colombia anti-bribery law enforcement is robust and improving, in others, like Mexico and Venezuela, counter-corruption agencies are weak and vulnerable to political interests.
A fourth point to note is that crime adapts, and corruption in Latin America will take on new and more sophisticated forms. For example, government contracts are nowadays mostly awarded through competitive tenders, rather than as a result of a minister handing business to an old friend for a kickback. But the corrupt have found new ways to come out on top, such as by tailoring the technical specifications of a tender to suit a particular bidder.
And lastly, in many countries bribery and corruption will continue to be seen by a slice of the population as the most effective way of climbing the social ladder and of getting business done in an environment of tortuous bureaucracy. It’s how unscrupulous politicians and civil servants rise up the ladder, how unethical companies obtain a municipal operating licence, and how some individuals jump the queue to get a utility connection.
Operation Car Wash, then, is resulting in some changes for the better in the battle against graft in Latin America. But corruption will continue to flourish in many parts of the region. And similar scandals will emerge again in the future.