How can Brazil fight corruption without destroying its economy?

. Feb 04, 2020
corruption Petrobras was nearly destroyed by corruption and mismanagement.

In October 2019, São Paulo’s benchmark stock index Ibovespa fell almost 3 percent after the Brazilian press reported that the country’s five largest banks were being investigated as part of the anti-corruption Operation Car Wash for their connection to money laundering. Federal Police accused Itaú, Banco do Brasil, Caixa, Bradesco and Santander of laundering some BRL 1.3 billion in bribes received by politicians and business owners.

In one day, the shares of Bradesco, Santander, Banco do Brasil, and Itaú Unibanco fell 3.86 percent, 3.44%, 3.4%, and 2.75%, respectively.

This is just one example of how corruption investigations in Brazil have had an effect on the country’s economy

since the beginning of the Car Wash probe in 2014. Since then, analysts and public figures have debated how the authorities&#8217; actions to put corrupt people behind bars can be improved, so that the economy—and consequently employment and the income of the population—may survive in spite of revelations of embezzlement and bribery.</p> <p>Much has been said in Brazil about the losses caused by Operation Car Wash. Financial analyst Leonardo Palhuca showed back in 2016 that the ordinary shares of state-owned oil company <a href="">Petrobras lost 60.65 percent</a> in value purely as a result of corruption investigations. In the same period, fellow oil and gas companies saw devaluations of 35 percent due to the drop in oil prices and other specific factors.</p> <p>Further projections of the time from consulting firm GO Associados showed that the Car Wash investigations stunted Brazil&#8217;s GDP by some 2.5 percent, while then-interim president <a href="">Michel Temer</a> estimated an effect of 1 percent on everything Brazil produced in 2016.</p> <p>GO Associados went on to state that the public treasury lost BRL 9.4 billion in tax revenue with the slowdown in economic activity, after having an expected primary surplus of BRL 8.7 billion.</p> <div class="flourish-embed" data-src="visualisation/1335629"></div><script src=""></script> <h2>Employment and income</h2> <p>There are few published works of the economic impact of Operation Car Wash, but one of them—lawyer Walfrido Warde&#8217;s <em>O Espetáculo da Corrupção</em> (The Corruption Show)—shows that the losses generated from the investigations added up to BRL 180 billion, equivalent to 3.5 percent of the Brazilian GDP in 2015—while authorities made estimated recoveries of BRL 11.5 billion through corruption convictions.</p> <p>When economic activity falls, the first victims are typically <a href="">employment levels</a> and average income. Mr. Warde&#8217;s book compared the number of people employed in 2013—the last pre-Car Wash year—with 2016: the construction sector and fields with direct expertise went from 1 million workers on staff to just 468,000 three years later.</p> <p>As their reputations and market values were torn apart by <a href="">corruption investigations</a>, most large Brazilian contractors could no longer honor their commitments and filed for court-supervised reorganization, taking the leading firms in one of the country&#8217;s biggest employer sectors one step away from bankruptcy. Odebrecht, the biggest of them all, ran up BRL 98.5 billion in debt and its request for administration became the largest in the country&#8217;s history.</p> <p>Other sectors also felt the pinch after the collapse of the construction sector, with telephone company Oi pleading for reorganization in court to balance its BRL 60 million of debt.</p> <div class="flourish-embed" data-src="visualisation/1335204"></div><script src=""></script> <h2>Leniency agreements</h2> <p>Former President Dilma Rousseff—controversially impeached during the early years of Operation Car Wash—repeatedly stated that only in Brazil does the fight against corruption destroy economic activity. &#8220;Everywhere else in the world, corruption is fought not by destroying companies but by arresting executives. <em>They</em> have to be punished, not companies, which are institutions,&#8221; Ms. Rousseff said on one occasion.</p> <p>And one of the main culprits of this economic breakdown, according to experts consulted by <strong>The Brazilian Report</strong>, are so-called &#8220;leniency agreements,&#8221; which allow companies involved in corruption cases to confess their crimes, renegotiate the terms of their punishment and continue to be awarded public contracts.</p> <p>But it is not the leniency agreements themselves that are to blame, rather the bureaucracy to be upheld and the power dispute between authorities to define who is responsible for certain conducts. In an interview with newspaper <em>O Estado de S. Paulo</em>, Supreme Court Chief Justice Dias Toffoli raised this issue.</p> <p>Though defending Operation Car Wash&#8217;s fight against corruption, Dias Toffoli pondered that its influence on the productive sector was negative, as it destroyed companies. &#8220;It would never happen in the U.S. (&#8230;) In the United States there is a businessman serving a life sentence in prison, because it is possible there, but his company survived. Our legislation worked well for individuals through the plea-bargain agreements. But when it came to the companies themselves, it was not clear.&#8221;</p> <p>Former Federal Comptroller (CGU) Valdir Simão explains that while his former agency has been given the right to negotiate these leniency agreements with companies, the deals often leave executives exposed to the full punishment of the law. As a result, the Federal Prosecution Service (MPF) is called in, but the two agencies have been unable to reach a consensus over non-conflicting penalties for companies and individuals.</p> <p>&#8220;The agreements with the prosecutors were considered incomplete, as the CGU didn&#8217;t approve them and questioned the values of compensation, deeming them to be higher than those agreed with the MPF. The priority should be on the company, which is the producer of wealth,&#8221; Mr. Simão said.</p> <h2>One-stop-shops</h2> <p>Walfrido Warde, the author of <em>O Espetáculo da Corrupção</em>, calls this phenomenon &#8220;state schizophrenia,&#8221; saying that companies looking for a leniency plea &#8220;didn&#8217;t know who to turn to.&#8221; The model of enforcement, with multiple authorities involved, led to overlapping and conflicting sanctions which, according to economic criminal law expert Davi Tangerino, confused companies that simply wanted to confess the crimes they had committed.</p> <p>He cites the U.S. model as a successful example, as it has its own anti-corruption center within the Department of Justice to deal with all such matters. The possibility of creating a &#8220;<a href="">one-stop-shop</a>&#8221; for such complaints is almost unanimous for experts in Brazil. Criminal lawyer Celso Vilardi, responsible for one of the leniency agreements considered a model in Brazil, that of transportation company CCR, supports the creation of a regulatory framework for these negotiations.</p> <p>In the CCR case, the company pledged to pay a fine of BRL 750 million and clarify all cases of corruption involving the infrastructure works it carried out in the state of São Paulo. By negotiating with the authorities, the company also gained benefits for its executives and unified all complaints it would send to the prosecutors.</p> <p>&#8220;I am not convinced that leniency was the reason for losses and productive capacity, because these agreements gave these companies a chance of salvation. But this chance would be higher if there was a rule that guaranteed a single authority would be in charge [of complaints], aiming at the preservation of the company and its productive capacity.&#8221;</p> <p>To solve this problem, Brazilian authorities have been meeting to define how to organize this &#8220;one-stop-shop&#8221;. One suggestion so far is for the Superior Court of Justice to be responsible for ratifying these leniency agreements.</p> <p>&#8220;If the rules were more precise, companies would have to plan their &#8216;post-leniency&#8217; life in light of anticipated costs and losses. But the aforementioned uncertainty brings insecurity even as to the value of fines and compensation,&#8221; says lawyer Pierpaolo Bottini.

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Brenno Grillo

Brenno has worked as a journalist since 2012, specializing in coverage related to law and the justice system. He has worked for O Estado de S. Paulo, Portal Brasil, ConJur, and has experience in political campaigns.

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