ICC Commercial Crime Service

How to Save Brazil’s Economy from Petrobras Fraud

Once upon a time, Petrobras, the oil behemoth controlled by the Brazilian government, was the sixth-largest company in the world by market capitalization, and accounted for roughly ten percent of the Brazil’s gross domestic product. At least for now, those days are gone. In Brazil, Petrobras’ plunge is so cataclysmic, according to analysts, that it is a major reason the economy is expected to contract by more than one percent this year. Unemployment is up, and Standard & Poor’s has cut the nation’s long-term debt rating to one notch above junk status. At the center of the precipitous fall, is a fraud so enormous that without significant reforms, the stability of Brazil’s economy could be threatened. Now is the timeto begin the process of shoring up the country’s laws and reputation with targeted measures, while recovering the people’s money.

Starting in 2004, a small number of top Petrobras officials colluded with a cartel of companies to overcharge the oil company for construction and service work. Coupled with “financial inefficiency” the value of the fraud is estimated at US$33 billion. The cartel would decide which of its member companies would win a contract to, for instance, service an oil rig or build part of a refinery. This fake competition was overseen by Petrobras confederates, who were rewarded with bribes. They kept some of the money, but shared much of it with political figures. By way of fraudulent contracts, kickbacks, overseas accounts and overbidding, the scheme has grown into the largest corruption scandal the country has ever seen.

The primary victims of the scandal are thousands of innocent workers and their families. Many workers have been laid off. Congress is paralyzed. The more than 200 companies involved have lost credit lines. Major construction projects have been halted. Analysts have already suggested, Petrobras’ monstrous debt is most likely to be paid by Brazilian taxpayers. The company’s minority shareholders have also been severely hurt. However, aside from those who immediately benefitted from the fraud, everyone is ultimately a victim, including Brazil itself.

Whilst the Public Attorney’s Office will pursue wrongdoers, there is arguably little substitute for independent civil litigation -- cross-burden insolvency and asset recovery proceedings -- to be pursued by foreign and domestic asset recovery specialists. This, at the very least, can bring an air of credibility and integrity to the investigations in such an environment. Any potential enforcement by the state will be treated with a jaundiced eye. The public might quite understandably, under present circumstances, have little faith in it.

In this case, more than R$1 billion (or US$280 million) has been recovered via plea agreements and MLATs. This represents a very poor return (of 0.08%) to date on US$33 billion of reported losses and is neither an indication nor evidence of a rigorous, far reaching and widespread international investigation.

Criminals and their assets are inextricably interwoven despite the efforts they will go to, to distance themselves, one from the other. By forcefully pursuing one, we will find other responsible parties and bring them to book.

How then, does the government begin to restore trust? One approach could be to enact a version of a UK law, the Proceeds of Crime Act of 2002, originally crafted to help prevent and root out fraud at its core, by establishing checks and balances at every level. The law established an Assets Recovery Agency and included among enforcement and judicial reforms, streamlining the process for convictions. Brazilian authorities should urgently consider this approach whilst introducing new, credible and effective legislation. Any new laws must be supported by incorruptible investigatory and enforcement personnel prepared to rigorously investigate wrongdoers, and enforce the law regardless of a suspect’s social position. This would also require a complete overhaul of the judiciary, regulators and law enforcement supported by the provision of a realistic level of resources. Finally, serious consideration must be given to the stream-lining of civil recovery to foreshorten processes,recover assets and bring wrongdoers to justice more quickly. While such reforms take time, the long-term financial security and global reputation of the country is more than worth the effort.

Martin S. Kenney is an international expert on asset recovery and commercial litigation and a member of ICC FraudNet. Based in the British Virgin Islands, Martin Kenney & Co. Solicitors focuses on representation of people harmed by international economic crime, as well as on complex insolvency, bankruptcy and commercial litigation work.





ICC FraudNet is an international network of independent lawyers who are leading civil asset recovery specialists in each country.Our membership extends to every continent and the world’s major economies, as well as leading offshore wealth havens that have complex bank secrecy laws and institutions where the proceeds of fraud often are hidden. Founded in 2004 by the Paris-based International Chamber of Commerce (ICC), the world’s business organization, ICC FraudNet operates under the auspices of the ICC’s London-based Commercial Crime Services unit. ICC FraudNet has been recognized by Chambers Global as the world’s leading asset recovery legal network.