Inside Brazil’s Massive Corruption Scandal

Paulo Sotero- The Daily Beast, 03/09/2016

Brazil already was engulfed in a debilitating crisis: the economy is in free fall after shrinking four percent last year, and unemployment is rising. Then, last week, former Brazilian President Luiz Inacio Lula da Silva was held for questioning by federal authorities investigating a major corruption scandal involving state oil giant Petrobras, and fresh allegations now link current President Dilma Rousseff directly to the case. The opposition has called for national mass demonstrations on Sunday, pushing for Rousseff’s impeachment.


The still-popular Lula, saying he was “disrespected,” has tried to turn his detention into an opportunity, playing the victim of Brazilian elites and rallying supporters. He called on his own followers to take to the street. But it is uncertain that his efforts will succeed.


The former president, a charismatic and resourceful politician, has been on the defensive for months, under mounting suspicion of criminal activities and personal enrichment involving murky deals with friends, allies and close relatives.


In recent weeks key figures involved in the scandal, such as Rousseff’s former leader in the Senate and senior business executives from Petrobras supply companies, reached plea agreements with federal authorities, and information started to leak incriminating the present and past presidents.


Political tensions are rising to dangerous levels and have pushed the crisis to uncharted territory, with no clear outcome in sight, even thought polls have shown consistently that the investigations into Petrobras by federal law enforcement officials enjoy ample support in society.


The problems are compounded by the bigger predicament in which Brazil finds itself: the exhaustion of its variety of state capitalism and political system, long controlled by self serving politicians with not much to offer.


This in a country already facing its longest recession in more than 80 years and a health emergency brought on by the Zika virus epidemic just as it prepares to attract global media attention as host to the Olympics in Rio de Janeiro in August.


If Brazilians are able to compromise and negotiate their differences, as they have always done, there may brighter side to the story. The massive investigations into Petrobras signals a significant change in public attitudes toward corruption, which has been tolerated since before Brazil became independent from Portugal in 1822.


As of last Friday, 80 notable politicians, business executives and associates had been convicted in federal courts of embezzling public funds, conspiracy, and money laundering, and had served or were serving hard time.

The onslaught cost Petrobras an estimated $3 billion and the evaporation of most of its peak market value, which was $330 billion in 2011, and that was compounded by the fall of international oil prices.


Among the convicted are the CEOs and senior executives of Brazil’s largest construction firms, among them Odebrecht, OAS, UTC and Andrade Gutierrez, once considered beyond the reach of the law.


Shady political operators and former senior managers of Petrobras who had gotten their jobs thanks to connections to the leadership of Lula’s and Rousseff’s Workers Party and two other key parties in the country’s governing coalition are also serving time or under house arrest for fraud, money laundering and conspiracy.

In late February, the chief campaign adviser for both Lula and his successor, President Dilma Rousseff, was arrested on charges related to millions of dollars in unreported income received for political campaign work done in half a dozen countries whose governments had ties to the Workers Party and Brazilian construction companies.


The law enforcement offensive is led by a new generation of well educated and well-paid federal judges, prosecutors, and police officials who grew up in the environment of political freedom and democracy, reinstated in Brazil in 1985, that also produced Lula’s Workers Party.


They are well paid and well educated. Many hold graduate degrees from American and European universities.Their actions are anchored in the constitution adopted in 1988 and in judicial reforms started in 2004 with the creation of institutions of external control of the judiciary branch of government.


“Three decades of democratic rule in Brazil have produced meaningful institutional progress toward establishing a universal and effective rule of law in South America’s largest nation,” as Matthew Taylor of American University told a conference held at the Wilson Center in May 2015.


Prosecution of corrupt politicians actually started a decade ago. In 2005, a federal representative allied to the Lula government revealed that higher-ups in his administration had set up a scheme to buy votes in Congress by paying its members fat monthly stipends to ensure their loyalty.


But it took seven years to investigate the “Mensalão” (monthly allowance), as the case was dubbed. Finally, in 2012 it reached the Supreme Court, which has jurisdiction over criminal cases involving federal elected officials and cabinet members. (The trial was presided over by Justice Joaquim Barbosa, the first and only black judge ever to reach the highest court in this country that has the world’s second largest population of African heritage after Nigeria.)


The trial was televised live for weeks to a mesmerized nation. Twenty-five defendants were convicted. Twelve of them were sentenced to prison terms, including the chief minister of Lula’s cabinet, the president and the treasurer of his Workers Party, and the speaker of the House.


Sérgio Fernando Moro, a 44-year-old federal judge from the Southern state of Paraná who assisted the Supreme Court in the Mensalão trial, would emerge as a key actor in the Petrobras case.


Working on knowledge gained in the Mensalão investigations, in March 2014 Moro and a team of prosecutors launched an inquiry into suspiciously large money transactions detected at a car wash, or “lava jato,” in Brasilia.


By then, the Brazilian judicial system had gained some muscle. Under pressure from major street protests that shook the nation in mid-2013, Congress had passed a law expanding the latitude of prosecutors to negotiate American-style plea bargains with willing defendants. At the end of 2015, more than 40 of them had signed agreements to reveal what they knew in exchange for reduced sentences.


The information provided allowed prosecutors to piece together and expose a massive conspiracy carried out over a decade to defraud Petrobras, Brazil’s largest company. More than 230 persons and 16 companies were investigated.


International cooperation between Brazilian prosecutors and colleagues in the Unites States, Switzerland, Holland, Italy, and other countries was key to the outcome.


The U.S. Security and Exchange Commission and the Justice Department told Petrobras in early 2015 that the company was under investigation for possible violation of American securities laws and the Foreign Corrupt Practices Act. In September 2015, Patrick Stokes, the head of the Justice Department FCPA unit, spent four days in meetings with Moro and members of the “Lava Jato” task force.


Tired of dealing with the ingrained culture of corruption and bureaucracy their businesses face to operate in Brazil, senior executives of local foreign subsidiaries say they applaud the investigations. They enjoy growing support from Brazilian executives as well, particularly among the younger generation.

Lava Jato has not been free of criticism. In mid-January, 105 lawyers representing dozens of defendants published a manifesto in Brazilian newspapers protesting against the conduct of Moro and prosecutors. They compared the investigations to “the Inquisition” and accused the judge and prosecutors of violating their clients’ presumption of innocence and right to due process.

The sharpest criticism was against Moro himself, for allegedly abusing the power to imprison defendants temporarily in order to force them to sign plea agreements.


The attacks against the judge and prosecutors intensified after Lula’s detention. Moro reacted with a note saying that the action had been carried out “only to clarify the truth and does not mean anticipation of guilt.”


The Lava Jato prosecutors said that 117 similar actions had been executed previously “without criticism.” Reminding the country that Lula is not above the law, they added that the former president “deserves respect in the exact measure it is owed to any other citizen.”


The earlier protest by lawyers against Lava Jato was countered by associations of federal judges and prosecutors, reminding the public that Moro and colleagues acted under the supervision of the Supreme Court. The Chief Federal Prosecutor’s office clarified that of the 413 motions to superior courts appealing Judge Moro’s decisions only 16, or less than four per cent, were accepted and found to have some merit.


Federal prosecutor Carlos Fernando dos Santos Lima added that up to 80 per cent of the Lava Jato defendants who are cooperating with the investigations signed plea agreements without going to jail. The lawyers’ uproar quickly died down.

A recent seven to four ruling by Brazil’s Supreme Court has strengthened the prosecutors’ hand. It declared that convicted criminals should be remanded to prison after losing the first appeal. Until now, those convicted were allowed to remain free until the end of the appeals process, which can take years. “The Supreme Court decision closes one of the windows of impunity in Brazil’s penal process,” said Judge Moro, who had advocated the change.


Actions by Moro and colleagues in the Federal Judiciary and the Public Prosecutor’s office in the Lava Jato and other corruption investigations launched since have gained ample public support.

According to opinion surveys carried out in September 2015 and January 2016 by Ideia Inteligência, a polling firm from São Paulo, almost nine in ten Brazilians support the Lava Jato operation despite its negative impact on the country’s economy. Asked whether they would support the suspension of the anti-corruption investigations if that helped to improve the economic situation, 88 per cent said no.


These numbers suggest that a change of attitude towards corruption is under way in a nation once known for the impunity enjoyed by people in positions of economic power and political influence.


It may be too early to call it a cultural change. But the passivity once expected of law enforcement officials in the face of revelations of wrongdoing is a thing of the past. It is gradually being replaced by the new disposition of judges, prosecutors, and the federal police to assert the rule of law.


This was highlighted last September by the head of the Federal Police. Asked by a newspaper reporter to comment on former President Lula’s complaint that the Ministry of Justice had lost control of the Federal Police, its director general, Leandro Daiello, explained that even though the Federal Police is under the administrative jurisdiction of the Ministry of Justice, “The Federal Police is controlled by the law.”


The reporter insisted that federal agents were acting in ways that would lead to investigations of President Lula and other former and current authorities. “We investigate facts, not people,” Daiello replied. “Where those facts take us is a consequence of the investigation itself, as painful as it may be.”


Also targeted for criminal investigation are no fewer than 38 members of Congress, among them the speaker of the Chamber of Deputies and the president of the Senate.


The accusations against Lula stem from the regular use by his family, since he left the presidency in 2010, of a country house in the mountains near São Paulo that was renovated by two of the construction companies under criminal investigation in the Petrobras case.


In a separate inquiry, the former president and his wife face questions about the ownership, which they denied, of a luxurious triplex apartment at a São Paulo beach resort built by construction firms also caught up in the Petrobras case.


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