This blog post continues my multi-part exploration of the Petróleo Brasileiro S.A. – Petrobras (Petrobras) Foreign Corrupt Practices Act (FCPA) enforcement action. Today we take up some of the more prominent bribery schemes and how they funded the bribery piggy bank.

The Petrobras FCPA enforcement action came in the form of a Non-Prosecution Agreement(NPA) with the Department of Justice (DOJ) and Cease and Desist Order(Order) with the Securities and Exchange Commission (SEC). The penalties were stunning. The FCPA Blogreported the settlement included a criminal penalty of $853.2 million. The SEC penalty included $933.5 million civil penalty of profit disgorgement but Petrobras was given credit for the $2.95 million it had previously paid to settle its shareholder lawsuit in the US.

Under the NPA, Petrobras will pay 10 percent or $85.3 million of the criminal penalty to the DOJ and another 10 percent to the SEC. Petrobras will pay the remaining 80 percent or $682.5 million to the Ministerio Publico Federal in Brazil.” The DOJ fine represents a 25% discount off the low end of the range of the US Sentencing Guidelines. (We will explore how this was achieved in a subsequent blog post.) In addition to the eye-popping monetary fine and penalty, there was no independent monitor required by the DOJ or SEC.

The bribery schemes were as comprehensive in an organization as one could ever want to see, to the point of the management of the organization. The Order noted, “Petrobras is overseen by a board of directors, which has the authority to hire and fire Petrobras’s division directors and other senior officers of its subsidiaries. The Brazilian government has historically appointed a super-majority of the members of this board. From at least 2003 to April 2012, prominent Brazilian politicians abused this power by appointing people of their choosing to specific executive positions, and demanding recompense from the appointees. The appointees and their co-conspirators engaged in corruption schemes that benefited themselves and their political patrons, including by diverting billions of dollars from overpriced contracts for infrastructure projects.”

When you have that type of corruption at the top it is no wonder the entire organization was corrupt. But Petrobras operated as more than just the piggy bank for the ruling party in Brazil. It was the piggy bank for many others as well.

The bribery schemes were initially creative but as time passed they became hardened into fixed costs. The basic scheme involved cartels of contracts, which received inside and confidential information on bid information. These cartels, consisting of contractors in league with corrupt Petrobras officials, would agree to split up the contracts awarded by Petrobras with an uplift of 1% to 3% which would become the bribery fund. According to the NPA, through this process “more than U.S $2 billion has been estimated to have been generated and used to make corrupt payments. Up to $1 billion of these bribes were then paid to political parties and corrupt politicians. The remaining was kept by corrupt Petrobras officials.”

But this corruption did not stop with corrupt contractors. Even a legally operating contractor could be forced to pay monies which became bribes. For instance, if a legit company was awarded a Petrobras contract, it would be required to use only Petrobras approved subcontractors. Many of these subcontractors were corrupt and they would fraudulently and falsely charge the clean contractors. This fraud scheme generated bribe payments by which the Brazilian subcontractors would kickback a portion of the overcharges to corrupt Petrobras employees to keep them on the approved subcontractor list.

A classic manner in which this scheme was used was in the refurbishment of a refinery. Here  corrupt Petrobras officials simply used the opportunity as one to engage in massive fraud and corruption. In the case of the Abreu e Lima Refinery (RNEST), in the Brazilian Northeast state of Pernambuco, hundreds of millions of dollars in bribes were generated through over 300 contracts with 900 amendments.

Another scheme involving refineries was to wildly over pay for the facility and then have a part of the overpayment used to fund bribes. According to the Order in one such scheme, “Petrobras’s purchase of a Texas oil refinery in 2006 from a Belgium company, which had acquired the refinery for $42.5 million in 2005. Executive 1 knew that the equipment and structures of the refinery had deteriorated, that the oil it produced did not meet Petrobras’s needs, and that it would require a massive overhaul to fix the physical condition of the refinery. Nevertheless, he recommended that Petrobras purchase the refinery. In return, he received a $2.5 million bribe, which he used for his personal benefit and passed on a portion to his political patron.”

But it is even better than that as the refinery, previously owned by a Belgium company called Astra Oil, was purchased in 2005 for $42.5 million. Amazingly, Astra Oil then sold the refinery to Petrobras, in a series of transactions beginning in 2006, for $1.2 billion. That is certainly one hefty return on investment. Petrobras far overpaid for the purchase as even Petrobras’ internal evaluation was for only$742 million. It was on this inflated valuation that Petrobras officials made their offer, funded the transaction and got their bribery piggy bank.

Then there was the corruption in the drillships and shipyards. Obviously the FCPA enforcement actions involving SBM Offshore N.V. and Keppel Offshore & Marine Ltd. are well-known. Yet all the work in these areas was also a piggy bank for bribes to be funded and paid out of going forward. Once again hundreds of millions in bribes were paid in these two arenas.

Tomorrow I will consider how Petrobras was able to garner a NPA with no monitor required. 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2018

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