Answer discussion questions at the end of the case. Your total word count must equal or exceed 350 words.The Survival of Odebrecht in Brazil after an International Construction
Bribery Scandal
Abstract
Odebrecht S.A. of Brazil is a holding company with assorted subsidiaries. Investigators
revealed that many contracts Odebrecht received for construction projects resulted from
bribery. Authorities in Brazil, Switzerland and the U.S. investigated and successfully
prosecuted the case. Between 2001 and 2016, Odebrecht and its co-conspirators paid
roughly $788 million in bribes pertaining to over 100 projects in 12 countries, mainly in
Latin America but also Angola and Mozambique in Africa. The company established an
elaborate infrastructure inside the firm called the Division of Structured Operations to
manage the corrupt payments. The structure included an off-book accounting ledger and
communications system. The ill-gotten benefits totaled around $3.336 billion (United
States District Court Eastern District of New York, 2016, pp. B7-8). Odebrecht must
change internally as it withstands economic pressure from fines and lost business. The
next hurdle is to enter bankruptcy and renegotiate its debt with creditors.
Case
Odebrecht SA of Salvador, Brazil paid millions in bribes to win more than 100
construction projects in twelve countries. The company used banks willing to collude in
illegal payments, wired money from New York-based accounts, and offered international
politicians funding for their political campaigns in exchange for construction contracts.
Authorities in Mexico, the Dominican Republic, Chile and Guatemala all faced
corruption charges involving Odebrecht.
Odebrechts’s transgressions coincided temporally with Lava Jato (Stauffer, 2016,
February 22). Key moments included the following:
•
On March of 2014, the Brazilian federal police arrested a Petrobras purchasing
agent who received a Range Rover as a gift from a known criminal.
•
The aforementioned convicted purchasing agent traded information for leniency
leading to the arrest in November of 2014 of 18 people, including the former
Petrobas engineering and services director.
•
Subsequent arrests in December 2014 included personnel from assorted
engineering firms. Petrobas in turn banned 23 suppliers.
•
In mid-2015, the investigation broadened to include the speakers of both houses
of Congress and 32 sitting politicians in relation to the Petrobras scandal.
•
Around mid-2015, the investigation included Marcelo Odebrecht and Odebrecht,
the focus of this case.
Odebrecht made illegal payments through political campaigns thereby enhancing the
political careers of politicians in many of the dozen countries where it wanted to carry out
assorted construction projects, including roads, pipelines, airports, dams, and more. The
company admitted making corrupt payments in over half the countries in Latin America
as well as Angola and Mozambique. Odebrecht adopted a quid pro quo approach where
campaign contributions were contingent on obtaining building contracts. Convictions of
politicians in other countries included the vice-president of Ecuador, Jorge Glas. Many
other politicians in other countries are under investigation. Peru’s case is particularly
egregious with four former presidents though one, Alan Garcia, committed suicide (BBC,
2019, April 17).
Odebrecht paid bribes totaling around $3.3 billion from 2005-2014. In 2012 and 2013, it
paid as much as $730 million annually (Prada, 2017, April 15).
A summary of the critical events follows (Smith, Valle, & Schmidt, 2017, June 8). Emilio
Odebrecht, son of founder Norberto Odebrecht and father of CEO Marcelo Odebrecht,
claimed that by 1991 Odebrecht had established a practice of supporting politicians to
help the firm secure contracts. In court, Emilio described this as standard practice for
political parties in Latin America. When Marcelo took over, he estimated that Odebrecht
paid .5% to 2% of corporate revenues primarily to Brazilian politicians and executives of
state companies. Beneficiaries included those involved with Petrobras, the statecontrolled oil company of Brazil. Black-market bankers delivered payments in armored
cars. Luis Inácio Lula da Silva (known as Lula), a populist Brazilian president, initiated
numerous public works projects that Odebrecht executed. In statements published on his
website, Lula denied any corrupt involvement with Odebrecht. The bribery and bidrigging scheme began as early as 2001 and went on until 2016. Odebrecht used off-book
transactions paid through a network of shell companies and offshore bank accounts. In
2006, Marcelo turned to a long-term employee and family friend, Hilberto Silva, to
systematize the bribery and kickbacks to avoid losses from mishandling the payments.
After Silva’s arrest in March 2016, he testified, “Well, when you are working with cash
that’s off the books, it can disappear. So they needed someone who could guarantee it
wouldn’t disappear.” By 2007, Odebrecht established a division called the Structured
Operations Division. Silva needed employees to establish front companies, specialized
computer programmers to build and maintain a secret messaging system, and employees
to disburse and track assorted payments. Until 2009, the head of the operation reported to
the highest levels within Odebrecht for approval. After 2009, Odebrecht delegated
responsibility to managers. Odebrecht used a bank in Antigua, allegedly routing over $1
billion by the end of 2010. However, Antiguan bank regulators investigated and halted
operations. The Structured Operations Division then bought the Antiguan branch of
Meinl Bank AG, based in Austria, which resolved Odebrecht’s banking problems and
generated fees for Luiz Franca, who served as Antigua’s honorary consul in Brazil. He
had helped Odebrecht for nearly ten years with payment schemes in Antigua, for which
he and others took a 2% commission. At least 33 banks sent Odebrecht’s money to at
least 71 accounts in Antigua. When Marcelo Odebrecht succeeded his father Emilio, he
continued to commit Odebrecht’s funds to support political campaigns in Brazil and other
countries. Beginning in 2015, Brazilian authorities arrested the key Structured Operations
Division personnel along with 75 additional Odebrecht employees that testified in
exchange for leniency. Brazil’s court sentenced Marcelo to 19 years but he too
cooperated and the authorities reduced his sentence to two and a half years in prison and
five years of house arrest (Smith, Valle, & Schmidt, 2017, June 8).
Violations of the Foreign Corrupt Practices Act
The U.S. outlawed bribery in 1977 with passage of the Foreign Corrupt Practices Act –
FCPA (Department of Justice, 2017, February 3). The OECD (2019) waited until 1999 to
implement its prohibition with variation between countries.
Brazil has nine proven FCPA violations from 2012-2019 (United States Securities and
Exchange Commission, 2019, May 13) including:
Braskem S.A. – The Brazilian-based petrochemical manufacturer agreed to pay
$957 million in a global settlement for concealing millions of dollars in bribes
paid to Brazilian government officials to win business. (12/21/16)
Odebrecht controlled Braskem.
In the Lava Jato investigations, federal investigators in Brazil unearthed many other
examples of corruption reaching to highest levels of government and involving its largest
corporations (Felter & Labrador, 2018, November 7).
The FCPA focused on payments to foreign government officials to obtain business. The
FCPA forbids the use of the mails or other means of interstate commerce to engage in
bribery. Since 1977, coverage has always applied to U.S. citizens and foreign issuers of
securities listed with the U.S. The U.S. then amended the law in 1998 to apply to foreign
people and firms that violate FCPA provisions while on U.S. territory. Foreign
companies who listed their securities in the U.S. must also follow the accounting
provisions designed to keep accurate records and maintain internal controls.
Odebrecht used interstate commerce communications and banks while on U.S. territory
and Braskem engaged in corruption with shares listed in the U.S. Moreover, the Division
of Specialized Operations used illegal accounting practices and avoided internal controls
within Odebrecht. In 2014 and 2015, two employees located in Miami conducted
activities related to the bribery scheme. Their location in Miami made them subject to
U.S. law.
The Department of Justice (2016, December 21) described the use of Braskem by
Odebrecht:
Braskem also admitted to engaging in a wide-ranging bribery scheme and
acknowledged the pervasiveness of its conduct. Between 2006 and 2014, Braskem
paid approximately $250 million into Odebrecht’s secret, off-book bribe payment
system. Using the Odebrecht system, Braskem authorized the payment of bribes to
politicians and political parties in Brazil, as well as to an official at Petróleo
Brasileiro S.A. – Petrobras (Petrobras), the state-controlled oil company of
Brazil. In exchange, Braskem received various benefits, including: preferential
rates from Petrobras for the purchase of raw materials used by the company;
contracts with Petrobras; and favorable legislation and government programs
that reduced the company’s tax liabilities in Brazil. This conduct resulted in
corrupt payments and/or profits totaling approximately $465 million.
Braskem was important to drawing the U.S. government into the investigation and
prosecution. Odebrecht owned 50.11% of the shares of Braskem S.A., and Braskem
traded its American Depositary Receipts (roughly comparable to shares) on the New
York Stock Exchange, which made Odebrecht’s illicit actions subject to the Foreign
Corrupt Practices Act, since it controlled Braskem.
Another example of U.S. involvement was Smith & Nash Engineering Company, a shell
company in the British Virgin Islands. Odebrecht transferred money from New Yorkbased bank accounts, and A U.S. citizen was the authorized signatory for the Smith &
Nash account. Again, the U.S. connections made U.S. laws applicable.
Extensive Investigation Network
The U.S. District Court – Eastern District of New York (2016) brought charges against
Odebrecht. A host of U.S. government and foreign agencies were involved in the
investigation and prosecution of the case such as the following:
•
U.S. attorneys from the Business and Securities Fraud Section of the U.S.
Attorney’s Office for the Eastern District of New York,
•
Foreign Corrupt Practices Act personnel,
•
attorneys from the Criminal Division’s Fraud Section,
•
the FBI’s International Corruption squad in New York also investigated this case,
•
the Criminal Division’s Office of International Affairs,
•
the Securities and Exchange Commission,
•
the Ministerio Publico Federal in Brazil the Departamento de Polícia Federal, and
•
the Office of the Attorney General in Switzerland all assisted in either the
investigation or prosecution phases of the criminal proceedings against
Odebrecht.
The international scope and complexity of the crimes required extensive involvement of
agencies from the U.S., Brazil and Switzerland.
On December 21, 2016 Odebrecht S.A. and its petrochemical unit, Braskem S.A.,
pleaded guilty to paying bribes around the world, according to Richard Cassin, editor of
the FCPAblog.
Subsequent to Odebrecht’s admission of wrongdoing in late 2016, it lost contracts in
2017 with the governments of Peru, Colombia and Panama. This eroded its revenue,
reducing its ability to pay the fine (Cassin, 2017, April 14).
The Aftermath of the Scandal
To change course, the company replaced almost all of its board of directors; the two
subsequent CEOs have not been family members (BBC, 2019, April 17). To ensure
compliance after the legal case was completed Odebrecht had to retain an independent
compliance monitor for a period of three years (Department of Justice, 2017).
Odebrecht has been in talks with potential buyers of its assets as well as creditors. Selling
assets could give it cash to weather the current cash flow problems. Conflict with
creditors that hold debt related to a division such as Braskem that Odebrecht was trying
to sell could delay restructuring.
LyondellBasell, a large multinational corporation focused on plastics, chemicals and
refining wanted to buy Braskem but “issues linked to a delayed US filing and a supply
contract for naphtha with Petrobras” were roadblocks. The two companies had been in
negotiations for over 18 months and failed to conclude a deal (Pourriahi, 2019). Braskem
did not file its 2017 annual report on time and would therefore be delisted (Singh, 2019,
May 13). Odebrecht needed to sell Braskem; the delisting in the U.S. made the sale more
difficult. Braskem’s shares declined following the news of LyondellBasell deciding to
discontinue purchase negotiations (Reuters, 2019, June 4).
Odebrecht’s cash problems were also due to reduced cash flow from Latin America’s
construction industry after corruption was exposed. A court intervened to block
Braskem’s dividend payment, thereby frustrating shareholders and increasing insecurity
in the eyes of investors. The construction unit Odebrecht Engenharia e Construcao SA
faced difficulty negotiating with majority bondholders.
Legal proceedings could take years. In mid-2019, Odebrecht SA filed for bankruptcy
protection to restructure its debt of approximately 51 billion reais ($13 billion). It
petitioned the judge to protect its Braskem unit from its seven creditors. Odebrecht had
pledged shares of Braskem as collateral to its creditors. Odebrecht saw Braskem as
pivotal to its restructuring since it contributed almost 80% of the conglomerates’ 2018
revenues.
Odebrecht sold assets to raise cash: a sanitation company for $800 million and a
hydroelectric plant for $1.4 billion.
Odebrecht had to sell its headquarters in São Paulo. The sale enabled Odebrecht to settle
the debt it incurred to pay for the construction of the headquarters (LAVCA, 2019, May
23).
Odebrecht’s largest creditors, however, are Brazilian state-owned lenders (Reuters, 2019,
June 17). This meant that the state could exercise political influence in the bankruptcy
proceedings.
A judge finalized the fines Odebrecht owed to U.S., Brazil and Switzerland. The reduced
fine was $2.6 billion, distributed to the U.S. ($93 million), Brazil ($2.39 billion), and
Switzerland ($116 million). Odebrecht continued to attempt to negotiate plea deals in
other countries from Argentina, to Portugal where it had bribed officials for construction
contracts (Pierson, 2017, April 17).
Odebrecht has changed leadership and published its commitment to combatting
corruption on its website. It opened an ethics channel of communications on its website
and on November 9, 2016, after the scandal, it issued a directive on ethical conduct.
Discussion Questions
1.
When working in a business culture permeated by corruption abroad, how
could you enhance the probability that the foreign government would accept
your proposal?
2.
How can Odebrecht carry out convincing reforms and restore public
confidence in the firm?
3.
Imagine you are the judge at Odebrecht’s bankruptcy trial. You believe
Odebrecht should pay its creditors to the extent it can without total
liquidation. Write an opinion expressing what you think would be fair to
Odebrecht and its creditors.
4.
Imagine you are president of Brazil. As president of you have political
constituencies. Workers do not want to be unemployed. Brazil’s state banks
that lent heavily to Odebrecht want to be paid. Odebrecht would like to
continue as a going concern. Write a press release explaining how you plan to
manage these countervailing demands.
References
BBC. (2019, April 17). Odebrecht case: Politicians worldwide suspected in bribery
scandal. Retrieved from https://www.bbc.com/news/world-latin-america41109132
Department of Justice. (2016, December 21). U.S. Attorney’s Office. Eastern District of
New York. Odebrecht And Braskem Plead Guilty And Agree To Pay At Least
$3.5 Billion In Global Criminal Penalties To Resolve Largest Foreign Bribery
Case In History. https://www.justice.gov/usao-edny/pr/odebrecht-and-braskemplead-guilty-and-agree-pay-least-35-billion-global-criminal
Department of Justice. (2017, February 3). Retrieved from
https://www.justice.gov/criminal-fraud/foreign-corrupt-practices-act
Department of Justice. (2017, April 11). United States v. Odebrecht S.A. Criminal
Docket Number: 16-643 (RJD) (Eastern District of New York). F. #2016R00709.
Cassin, R. J. (2017, April 14). DOJ reduces Odebrecht penalties, we revise the top ten
list. Retrieved from http://www.fcpablog.com/blog/2017/4/14/doj-reducesodebrecht-penalties-we-revise-the-top-ten-list.html
Felter, C. & Labrador, R.C. (2018, November 7). Brazil’s Corruption Fallout – Federal
investigators in Brazil have uncovered corruption at the highest levels of the
government and in the country’s largest corporations. Council on Foreign
Relations. Retrieved from https://www.cfr.org/backgrounder/brazils-corruptionfallout
LAVCA. (2019, May 23). Odebrecht Sells Headquarters in Brasil to SDI Gestão and
Barzel Properties. LAVCA (i.e., Association for Private Capital Investment in
Latin America). Retrieved from https://lavca.org/2019/05/23/odebrecht-sellsheadquarters-building-in-brasil-to-di-gestao-and-barzel-properties-em-portugues/
Pierson, B. (2017, April 17). U.S. judge approves $2.6 billion fine for Odebrecht in
corruption case. Retrieved from https://www.reuters.com/article/us-brazilcorruption-usa/u-s-judge-approves-2-6-billion-fine-for-odebrecht-in-corruptioncase-idUSKBN17J1A7
Pourriahi, S. (2019, June 04, 2019). LyondellBasell drops Braskem acquisition bid.
Retrieved from https://www.plasticsnewseurope.com/news/lyondellbasell-dropsbraskem-acquisition-bid
Prada, P. (2017, April 15). Brazil’s Odebrecht paid $3.3 billion in bribes over a decade:
reports. Retrieved from https://www.reuters.com/article/us-brazil-corruptionodebrecht-idUSKBN17H0MW
Reuters. (2019, June 4). Braskem deal failure, dividend freeze complicate Brazil’s
Odebrecht restructuring. Retrieved from
https://www.reuters.com/finance/stocks/company-news/BRKM5.SA
Reuters. (2019, June 17). Brazil’s Odebrecht files for bankruptcy protection after years of
graft probes. Retrieved from https://www.reuters.com/article/us-odebrecht-
bankruptcy/brazils-odebrecht-files-for-bankruptcy-protection-after-years-of-graftprobes-idUSKCN1TI2QM
Singh, V. (2019, May 13). Braskem to be delisted from NYSE. Retrieved from
https://seekingalpha.com/news/3463027-braskem-delisted-nyse
Smith, M., Valle, S. & Schmidt, B. (2017, June 8). No One Has Ever Made a Corruption
Machine Like This One – There’s graft, and then there’s Odebrecht graft.
Retrieved from https://www.bloomberg.com/news/features/2017-06-08/no-onehas-ever-made-a-corruption-machine-like-this-one
Stauffer, C. (2016, February 22). Timeline: Key moments in Brazil corruption probe.
Retrieved from https://www.reuters.com/article/us-brazil-petrobras-timelineidUSKCN0VV2E3
United States District Court Eastern District of New York. (2016). United States of
America against Odebrecht S.A. (WMP/DK:JN/AS. F.#2016R00709. Cr. No. 16643 (RJD) (Title 18, United States Code, Sections 371 and 3551 et seq.)
United States Securities and Exchange Commission. (2019, May 13).SEC Enforcement
Actions: FCPA Cases https://www.sec.gov/spotlight/fcpa/fcpa-cases.shtml
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