Emerging Markets Institute

Operation Car Wash: As Brazil faces challenges ahead, a silver lining appears

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Image Credit: RSdBarros on Flickr

By Shruti Sudarsan, Emerging Markets Institute summer intern
*Opinions in this article are of the author and do not necessarily reflect
those of Cornell, Johnson, or the Emerging Markets Institute.

In March 2014, Brazil’s Federal Police arrested a former director of the state-owned oil firm Petrobras for his ties to an infamous money launderer. By November 2016, federal prosecutors and investigators uncovered enough evidence of a sprawling bribery and kickback scheme that the corruption scandal was soon nicknamed Operation Car Wash. Brazil’s Operation Car Wash has been unique in its transnational nature; investigators list 14 countries, with implications for former and/or current heads of states as well. This includes Argentina, Chile, Colombia, Dominican Republic, Ecuador, Guatemala, Mexico, Panama, Peru, and Venezuela.

The groundwork for uncovering this operation and other corruption schemes was laid a decade earlier, with reform-centered civil workers fighting to reduce rampant political and corporate impunity. As these institutions were effective in fighting elite graft, this process of cleansing came at a cost; Operation Car Wash has severely affected Petrobras, a state-owned juggernaut that some experts consider “too big to fail.” A term first popularized by U.S Congressman Stewart McKinney in 1984, the “too big to fail” theory describes an economy where certain corporations are so large and interwoven in the economy that their failure would have a disastrous effect throughout the country. This is certainly the case for the embattled oil company Petrobras; a study by Forbes indicates that “$87 billion was expected to be lost in GDP this year because of Petrobras’ corrupt ways.” Getulio Vargas Foundation Environmental Solutions and Infrastructure Group estimates that engineering, consumer spending, and oil and gas service firms will also suffer greatly from Petrobras’ reduction in investments to cover the costs of the scandal. The importance of Petrobras for Brazil’s economy is clear as day. With its gargantuan size and burgeoning indebtedness, a weak Petrobras has fueled fears of a weak Brazil. That being said, the uncovering of Operation Car Wash is emblematic of a new Brazil, a Brazil characterized by efficient institutions and a changing cultural belief.

Brazil’s commitment to the international anti-corruption regime

Public institutions in Brazil have historically been used for and by a variety of private interests. As numerous corrupt schemes have taken place during the past few decades, the population has experienced deep unease with the many scandals that have involved corruption in the political environment. At the core of the Brazilian population’s dissatisfaction is the misappropriation of public resources to benefit private enrichment and influence peddling. However, Operation Car Wash has been historic in its ability to shatter the sense of impunity embraced by the wealthy and the powerful.

Brazil’s commitment to the international anti-corruption regime is a testament to its promise of a clean government and corporate environment. To name a few, Brazil is a signatory of the United Nations Convention against Transnational Organized Crime (UNTOC) and the Financial Action Task Force (FATF), an intergovernmental organization that combats money laundering; in 2002, Brazil ratified the Organization of American States (OAS) Inter-American Convention against Corruption, and in 2006, the country joined the United Nations Convention against Corruption (UNCAC). These international treaties play an important role in creating dialogue between countries and establish mechanism for mutual evaluation. As universal repositories of legitimacy, such international treaties help domestic actors push for new laws and practices.

A new Brazil defined by interagency institutions and a compliance boom

Since the country signed and ratified the UNCAC in 2006, the convention has become an integral part of shaping domestic anti-corruption and anti-money laundering law. For example, the National Strategy to Combat Corruption and Money Laundering (ENCCLA) is an interagency organization that has sought to fight against money laundering and corruption through coordination and joint policy making among public officials. A central institution in uncovering Operation Car Wash, ENCCLA has acted as a powerful response to Brazil’s pervasive problem of interagency coordination. Thus, ENCCLA has acted as a force of bureaucratic activism, providing legitimacy for initiatives related to corruption and anti-money laundering. The 2013 Clean Company Act has also been instrumental in holding companies liable for any corrupt acts.

In the birth of Operation Car Wash, companies have also made an increased effort to ensure compliance with the Clean Company Act. Brazil is currently witnessing a compliance boom, where the alarming financial repercussions faced by major Brazilian businesses has served as the main fuel-source for the nationwide rise of compliance within Brazilian corporations.

Since 2014, Petrobras has set control mechanisms into motion to improve their anti- corruption and anti-money laundering standards. In response to the scandals, Petrobras have taken measures to increase transparency. To highlight a few:

  • Increased collaboration with public authorities, such as Federal Court of Auditors – TCU, Ministry of Transparency, Inspection, and Controllership General of the Union – CGU, and the Public Prosecutor.
  • Establishment of a new Information Channel, that is independent, confidential, and impartial. This channel acts as an avenue to receive allegations of fraud, corruption, money laundering, or any other irregularity.
  • The company has also initiated Internal Inquiry Committees to investigate evidence of nonconformities related to corporate rules and procedures or regulations. Failure to abide by these conducts will result in stricter disciplinary measures to employees at various hierarchical levels, thereby increasing accountability at all levels of the company.
  • In December 2014, Petrobras created a Special Independent Committee that has acted as the reporting line for the internal independent investigations. These investigations have been carried out by two independent law firms, the Brazilian firm Trench, Rossi e Watanabe Advogados and the American firm Gibson, Dunn & Crutcher LLP.

Since then, Petrobras has reported its highest quarterly profit since the beginning of 2013 from rising oil prices and asset sales. Along with these new regulatory measures, experts hope to see a long term trend of growth and investor confidence in Petrobras’ future. Other major firms like major Brazilian retailer Companhia Brasileira de Distribuição and cosmetics manufacturer Natura Cosméticos SA have also made equal efforts in strengthening their compliance teams to adjust to the Clean Companies Act.

A step in the right direction

The implications of Operation Car Wash will resonate far beyond Brazil’s borders and throughout their history. The aftershocks of the corruption probe are equally significant, as major the upper echelons of Brazil’s society find themselves under a spotlight.

While Petrobras’ graft schemes have severely affected the economy, a silver lining emerges amongst this dark cloud: Brazil is refusing to look away from its deep seeded corruption. Jeitinho Brasileiro, or the “Brazilian Way” refers to this idea of looking away from corruption, i.e., that there is no other way to achieve success in Brazil without bending the rules or laws. Research has shown that jeitinho is pervasive in all sectors of society, from large-scale government and corporate corruption to social interaction. However, the Operation Car Wash investigations have brought about a new wave of accountability that has challenged jeitinho. Institutions such as ENCCLA and companies’ commitment to compliance with anti-corruption laws are steps in the right direction towards making Brazil a more competitive and clean global power.

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About Shruti Sudarsan

Headshot of Shruti SudarsanShruti Sudarsan worked as a summer intern for Cornell’s Emerging Markets Institute. Currently an undergraduate senior at Wheaton College Massachusetts, Shruti is majoring in international relations and sociology with a particular focus on international political economy. During her time at Cornell, she researched Brazil’s Operation Car Wash and the economic consequences of the corruption scandal.

 


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