Supply Side
Petrobras Corruption Scandal Combines Procurement Issues and Politics

The recent scandal in Brazil around the Petrobras oil business highlights the dangers and extent of corruption and how it can involve both the private and public sector domains.

Petrobras is one of the largest oil firms in the world. It was originally wholly owned by the Brazilian government, but after a sale of shares worth $73 billion in 2010, and flotation on the Brazilian stock market, the government now owns 54 percent of Petrobras, while the Brazilian Development Bank and Brazil’s Sovereign Wealth Fund (Fundo Soberano) each control 5 percent, bringing the State’s direct and indirect ownership to 64 percent.

Between December 2013 and October 2014 Petrobras’ debt rose by 25 billion to $170 billion, and the company was seen as being in a risky position, even before this latest scandal.

The Investigation
An investigation called Operation Car Wash, begun in February 2014 by Brazilian Federal Police and public prosecutors, placed Petrobras at the centre of what looks like a huge corruption scandal. In November 2014, police raids targeted prominent Brazilian politicians and businessmen, including some Petrobras directors, who are under investigation in regards to “suspicious” contracts worth $22 billion.

On 16 March 2015, prosecutors charged 27 people in the Petrobras scandal including João Vaccari Neto, treasurer of the ruling Workers’ Party and Renato Duque, former head of services of Petrobras. Vaccari was charged with corruption and money laundering that was possibly related to allegedly illegal campaign donations solicited from Renato Duque. Both men are protesting their innocence.

But another Petrobras manager, Pedro Barusco, has been charged with corruption and money laundering after he went to the Federal Police in late 2014 to seek a deal, agreeing to return to public coffers $97 million, which he said was bribe money and related capital gains that he had in foreign bank accounts.

And now executives on the supply side are coming clean. Eduardo Leite, vice president of construction company Camargo Correa, told prosecutors that he paid 36 million dollars in bribes to Petrobras officials:

Leite paid the bribes between 2007 and 2012 to two Petrobras officials, one who was in charge of services and the other of the oil company’s supply unit, Globo television reported. Camargo Correa hired third parties as subcontractors to provide services to Petrobras, with the cost of the work being inflated to hide the illegal payments, Leite told prosecutors.”

The political dimension
Vaccari has stepped down, not surprisingly. The arrest places further pressure on the president, Dilma Rousseff, who not only leads the Workers’ Party but was Chairwoman of Petrobras from 2003-10. She has faced street protests, impeachment calls and plummeting opinion ratings since her re-election four months ago. Ms Rousseff served as the head of Petrobras for much of the period when the corruption took place, but she has not been implicated in the scandal; however, more than 40 politicians, including the heads of both houses of congress, are being investigated over the affair.

Procurement and Market Issues
Prosecutors claim that a group of Petrobras contractors, including some of Brazil’s largest construction firms, formed a cartel to extract the highest possible prices for major projects at the oil company, primarily between 2004 and 2012. The companies then returned a portion of the excessive earnings back to Petrobras executives, Brazilian politicians and political parties, sometimes in the form of campaign donations.

We may never know exactly how this worked. Were certain suppliers favoured based on their willingness to pay the bribes? Or was the business carved up with explicit agreement of the cartel and collaboration between buy and sell-side? Presumably, buyers knew there was a cartel if they were involved with the whole affair.

Clearly, many people within the firm, including procurement people, must have known what was going on, and similarly many suppliers and managers from those firms must have been involved. This is not a “one bad apple” incident, it is endemic and widespread corruption. It will take Brazil and Petrobras some time to shake this out of the system – if indeed they have the appetite and desire to even try and do that. Getting proper procurement processes embedded into the business will be a real challenge.

Four suppliers have now gone out of business during this affair. Whether this might have happened anyway with the dramatic fall in the oil price, we don’t know. But this clearly has not helped.

What can we learn?
The more money flowing through any organisation or process, the more chance of fraud and corruption. And when politics is tied up with business, as in this case, there is an added dimension to the normal human greed that drives these scandals. If there is a real investigation here, we suspect that we’ll find both individuals and political parties benefited from the fraud.

Of course, effective procurement processes and systems might have helped avoid this – better purchase-to-pay processes, more rigorous checks on invoices, more robust competition and sourcing processes perhaps. But in a sense, the more widespread the problem, the harder it is to detect from the outside. For instance, if all the bidders for a contract know that they will have to pay a bribe of, say, 10 percent, then they will all build this into their quotes. It is then hard to spot that this is an inflated price, even if the procurement people are honest! If they are corrupt as well, then it is even harder for an outsider – an auditor for instance – to identify.

Similarly, the more internal executives who are involved, the less chance there is of finding a whistleblower. There must however be question about the role of the external auditor – Price Waterhouse – here. Did they examine the procurement processes carefully as part of their audit? Clearly, they should have, although the firm has only been the auditor since 2012.

If indeed this scandal proves to have been measured in the $ billions, then that is money taken in effect from both the shareholders of Petrobras and the Brazilian taxpayer, and put into the hands of individuals and political parties. For a country that still has some real economic and social problems, that is bad news indeed. So this is yet another example of why we must maintain the fight against fraud and corruption in the public and private sector, and always be aware that the procurement process is probably the biggest potential route for such activities.