Brazil’s largest corruption investigation in history hits new heights … and lows

Brazil’s experience in running what is likely the largest corruption investigation ever has reached new heights in the past month as the country's president and other politicians were recorded in suspicious dealings with the president of one of its largest business groups.

The scandal centered around JBS, a food group with a large presence in the United States, has had a double effect on public opinion. On the one hand, it has shown that being a corrupt politician or a crooked businessperson has become a much riskier career choice than ever in Brazil. But it has made clear as well that the traditional beneficiaries of Brazil’s crony capitalism remain keen on maintaining their old practices.

The scandal also marks the latest big corporation in Brazil to announce reinforcements to a discredit compliance programme. JBS has announced the hiring of Marcelo Proença, a commercial lawyer and a professor at the University of São Paulo, to turn the company’s compliance structures around. It has also hired White & Case, the law office, to help with the quest. The group thus follows the likes of oil giant Petrobras, construction group Odebrecht and petrochemical company Braskem, which all had their arms twisted by prosecutors into adopting anticorruption practices.

According to media reports, JBS has committed to invest 2.3 billion reais, the equivalent to almost $700 million, into the revamping of its compliance and anti-bribery systems. Considering the confessions made by company’s executive in the past few weeks, Proença will need every cent of it. Not the least because the problems are concentrated at the very top of the organisation.

The whole brouhaha started in mid-May, when recordings of a conversation between JBS’ president, Joesley Batista, and president Michel Temer were leaked to the media. In the tape, Batista, a famously connected businessman, apparently explained to the president the efforts he was making to suffocate corruption investigations involving himself, his company, and several politicians.

His endeavours included allegedly paying bribes to prosecutors and judges, as well as a monthly allowance to Eduardo Cunha, a top member of Temer’s political party who has been stewing in jail. The goal was to guarantee that Cunha would not sing to prosecutors.

Temer is heard in the tape assenting to the plan and, according to some interpretations, urging Batista to keep up with the good work. The recordings, however, were not fully conclusive about the president's direct involvement with the irregularities, and Temer has been able to muddle through since then.

But Batista’s recorded conversation with Temer was just an appetizer for a whole package of revelations made by his brother Wesley Batista (who was also a member of the JBS board) and five other executives. They confessed to making bribery payments in exchange for favorable access to subsidized funding, the approval of executive orders that attended the company's Interests and other shady advantages.

“It is worrying to see the eventual repetition of JBS Group’s modus operandi in similar operations by other organizations, as well as the probable employment of the same kind of irregularities by other economic groups.”
Raimundo Carreiro, President, TCU

For several years, JBS had privileged access to billions of dollars in low-cost loans provided by BNDES, Brazil’s development bank, which was employed to expand its business to areas such as fashion, dairy products, energy transmission, and pulp and paper. The money also helped the group to become one of Brazil’s national champions by expanding its presence to several foreign markets. JBS operates in the U.S. under well-known brands such as Pilgrim’s Choice and Swift, among others.

To achieve its impressive growth, the group confessed having made payments, legal or illegal, to 1,893 officials across the country. One of its executives, Ricardo Saud, used to boast that he controlled the largest voting bloc in the Brazilian Congress.

The confessions also delivered some stories that are set to gain a place of honor in Brazil’s already plentiful corruption canon. Aécio Neves, a former presidential candidate, was recorded asking for 2 million reais, or $608,000, to pay legal costs as he answers to several corruption court cases. But his lawyer never saw the money, which was tracked by the police in the bank account of another politician who was once accused of transporting cocaine in his private plane. Neves said that he asked the money as a loan to buy a new house for his mom, although no mention of the parent's housing woes was made in the recorded calls.

The police also filmed Rodrigo Rocha Loures, a close adviser of Temer, picking up a suitcase with 500,000 reais, or $152,000, in a pizza restaurant in São Paulo. The money was delivered by a JBS executive. Rocha Loures later returned the suitcase to the police, although with 35,000 reais missing. Scandal-weary Brazilians promptly joked that Rocha Loures at least was nice enough to offer and pay for the pizza pie, which explained why the money was missing. He later sent the difference to the police via electronic bank transfer.

In his chat with Joesley Batista, Temer told the business to seek Rocha Loures in order to solve some issues that the company faced with Brazil’s competition commission and other government bodies. The president later denied any knowledge of spurious deals and said that Rocha Loures was a naïve, but good-hearted lad. The adviser has been arrested, though, and Temer’s few remaining supporters are hoping that his good-hearted nature will extend towards not making a deal with prosecutors to spill the beans about his boss. Four personal advisers that Temer took to the presidency last year are either in jail or being prosecuted.

The scandal has dwarfed the impact of the confessions made by 77 executives of Odebrecht last year and still appears to have some legs on it. But it is possible to take some lessons from it already.

First of all, it seems that politicians and businesspeople remain unconvinced that the time has come to mend their ways. Temer received Batista in his official home in Brasilia, late at night, and without any mention in the president's agenda. Worst of all, the meeting took place as recently as March, three years after the start of Operation Car Wash, the monumental corruption investigation that is supposedly turning Brazil's political and business worlds upside down. However, not only Temer, but also Neves, Rocha Flores and other characters involved appear to be acting on the assumption that we were back to the happy days of 2013.

There is also some scepticism on whether economic actors used to the working in cahoots with the state are learning the right lessons. “It is worrying to see the eventual repetition of JBS Group's modus operandi in similar operations by other organizations, as well as the probable employment of the same kind of irregularities by other economic groups,” said Raimundo Carreiro, the president of TCU, the federal audit court, in a statement. “If the facts (revealed by JBS) are proven to be true, we will need to identify the weaknesses of control systems that allowed so many illegal operations without triggering any alerts.”

On the other hand, corruption investigations have progressed so much in the past three years that prosecutors have been able to set high standards to accept new plea bargain deals. In order to “outsnitch” Odebrecht, JBS had to present hard evidence such as recordings and trackable bribery money, as well as spreadsheets with the names of hundreds of officials who received payments from the group.

JBS was lucky enough that Brazil’s federal prosecutors’ office seemed to believe that Temer was making progress in efforts to politically suffocate Operation Car Wash, and therefore it was eager to cut a quick deal in order to crush down the machinations by raising a popular outcry. In fact, it may have been too eager to come up with goods. For the first time, public opinion has expressed wide distaste for a leniency deal signed by the Car Wash team. And that is because the terms of the agreement were considered too favourable for a group of businesspeople who were already under investigation and have breezily confessed buying support from the state in the course of many years.

In exchange for their bombastic material, the Batista brothers and the other JBS executives were allowed to go free after paying symbolic fines. Joesley Batista promptly added woe to injury by flying to the U.S., where he owns a luxury flat on Fifth Avenue in New York, in the comfort of JBS’ private plane. He threw more gas on the fire by sending his yacht to Miami right before the scandal broke up, when he would likely have done better by keeping a low profile.

“The feeling is that crime has paid out,” said Flavio Rocha, the CEO at retail group Riachuelo, in an interview to newspaper O Estado de São Paulo.

To make matters worse, there are signs that JBS made a huge purchase of dollars right before the scandal broke out, after which the Brazilian currency devaluated sharply due to the hike in political instability. The brothers have also been accused of selling shares of the company a few days before the recordings were made public. JBS’ shares have plummeted since then.

JBS is unlikely to escape unscathed from the whole episode. The group has agreed, via J&F, its holding company, to pay a fine 10.8 billion reais, or $3.28 billion, as part of its leniency deal. The deal frees the group from further punishment on corruption charges, but it will have to answer investigations from CVM, the Brazilian SEC, and the tax collection agency on accusations of inside trading and tax evasion. Total fines could reach as much as 31 billion reais, or $9.4 billion, according to estimates by newspaper Estado de São Paulo. As José Roberto Barroso, a member of STF, Brazil's highest court, noted in a public speech, even under a lame duck president like Temer, the Brazilian state has enough tools to perform furious revenge on its enemies. "There is no doubt that JBS will become scorched earth," he forecast.

Public opinion has also reacted angrily to the case, condemning all parties involved, including the Batista brothers. Social media has been swamped by boycott campaigns against JBS brands, and several of Brazil's omnipresent barbecue restaurants have announced that they have stopped buying meat from the group. Most strikingly perhaps was the local Domino's Pizza franchise, which made a very public announcement that it would stop using meat cuts furnished by JBS as the group acts in opposition to its own ethical principles. JBS has also been involved in other operations such as Weak Flesh, which investigates the payment of bribes by meat producers to sanitary inspectors.

"The extent of the irregularities and the bureaucratic way that they were performed are a little surprising, but not the practices themselves," said Maureen Santos, an agribusiness researcher at the Heinrich Boll Foundation in São Paulo. "The sophistication of corruption practices in Brazil has been exposed by the JBS scandal."

It is also not clear what attention the case will get from the American authorities. Considering the extent of JBS US operations, DoJ officials should show plenty of interest on the case, and they have been working closely with their Brazilian peers in the context of the Operation Car Wash.

JBS is now trying to sell assets such as meat processing in non-strategic markets and non-food activities such as Alpargatas, the makers of Havaianas, a brand of beach flip-flops that is one of Brazil's most widely known fashion icons. Alpargatas, by the way, was purchased by JBS at a cut-price from Camargo Correa, a construction group that was nabbed early by the Carwash Operation.

For compliance officers in the United States, it is probably worth keeping in mind that Joesley and Wesley Batista have only been temporarily withdrawn from the group, as the deal with prosecutors states that they will remain only five years away from taking top positions at the company. “Leniency deals should preserve the companies, but demand that control changed hands. And that is because corruption schemes have happened either because a lack of effective monitoring by leaders, or for their own involvement in the irregularities,” said Sergio Lazzarini, an economist at Insper, a business school, who is a preeminent expert on Brazil's crony capitalism practices. “Unfortunately, leniency agreements closed in Brazil have preserved the role of current by those who controlled the companies.”

With the JBS scandal, the Carwash Operation has hit oil and gas, construction, and now agribusiness, three of Brazil's most important business sectors. Who will be next? The rumour mill is turning ferociously around the banking sector, which is characterised by a few large players that concentrate the market and exert immense political and economic power. Antonio Palocci, a former Finance minister who is in jail, is expected to close a plea bargain deal with prosecutors soon. According to reports, he will have to deliver foul play in the relationship between banks and governments if he wants to close the deal. The media has reported that some banks have already sought prosecutors as they try to pre-emptively negotiate leniency agreements. Anyway, Brazil's compliance adventures look unlikely to end any time soon.