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Petrobras corruption scandal provides anti-bribery policy lessons
June 29, 2017 / 4:10 PM / in 4 months

Petrobras corruption scandal provides anti-bribery policy lessons

NEW YORK (Thomson Reuters Regulatory Intelligence) - Brazilian state-run oil company Petróleo Brasileiro SA, or Petrobras, said this week that it had agreed to settle a shareholder lawsuit by The Vanguard Group, an investment management company, to recover corruption-related losses. The case offers notable lessons in anti-bribery governance and oversight.

The logo of state-run oil company Petrobras is pictured in the company headquarters in Vitoria, Espirito Santo, Brazil, February 10, 2017.

Petrobras did not disclose the terms of the agreement, but the company said it will raise its financial provision for settlements with shareholders to $445 million from $372 million.

The oil company has been the target of more than two dozen lawsuits by shareholders in recent years as a result of a massive corruption scheme in which Petrobras executives allegedly took bribes from contractors who had overcharged the company for work. The company claims it was a victim of the graft.

Vanguard is one of Petrobras’s largest shareholders, a group that includes Brazil’s federal government and other agencies of the Brazilian state.

The settlement offers some lessons from multiple perspectives: Bribery that is undetected by executives reveals gaps in monitoring, record-keeping and compliance controls, and long-term overbilling by contractors signals corporate lapses in vendor oversight and selection.

An effective due-diligence strategy must be a priority for any regulated organization to protect itself and its officers from wrongdoing that represent serious financial and reputational risk.

PETROBRAS CORRUPTION ALLEGATIONS

A government probe of the scandal known as Operation Car Wash has landed several former Petrobras executives and Brazilian politicians in jail.

Launched in March 2014, the operation initially focused on agents known as doleiros (black-market money dealers), who used small businesses, such as petrol stations and car washes, to launder the profits of crime.

Law enforcement soon realized, however, that the doleiros were working on behalf of an executive at Petrobras, Paulo Roberto Costa, the director of refining and supply. This link led prosecutors to uncover a vast and extraordinarily intricate web of corruption.

Under questioning, Costa described how he, Cerveró and other Petrobras directors had been deliberately overpaying on contracts with various companies for office construction, drilling rigs, refineries and exploration vessels. The contractors they were paying had formed an agreement to ensure they were guaranteed business on excessively lucrative terms if they agreed to channel a share of between 1 and 5 percent of every deal into secret slush funds.

The scandal also contributed to the downfall of Brazil’s former president, Dilma Rousseff. She was ousted by Brazil’s Senate last August, ending an impeachment process that polarized her country amid the massive corruption scandal and a brutal economic crisis.

While Petrobras has managed to settle with most of the shareholders out of court, a class-action suit in which plaintiffs claim tens of billions of dollars in damages remains active in New York federal court.

“At the moment, it isn’t possible for Petrobras to make a reliable estimate as to the outcome of the class action,” the company said.

Instead, it hid the corruption scheme and “massively overstated its assets and profitability,” leaving shareholders with huge losses after the advertised growth failed to materialize, the suit said.

In late April, the company said its board of directors approved settlements to end four individual lawsuits filed in federal court in New York.

The plaintiffs in the suits were the New York City Employees Retirement System, Transamerica Income Shares, Inc., Internationale Kapitalanlagegesellschaft, and Lord Abbett Investment Trust--Lord Abbett Short Duration Income Fund. Those four individual lawsuits were consolidated with 23 other individual suits and class actions filed against Petrobras in federal court in New York.

To date, Petrobras has resolved 19 individual actions from a total of 27 that were consolidated with the class action losses.

The latest Vanguard lawsuit held that Petrobras relied heavily on U.S. securities markets to fuel an ambitious growth plan and “assured investors that it would be transparent and responsible in managing that growth.”

Instead, it hid the corruption scheme and “massively overstated its assets and profitability,” leaving shareholders with huge losses after the advertised growth failed to materialize, the suit said.

Despite, the long-running corruption ordeal, the Petrobras executive leadership plans to stay put until the end of its mandate in April 2019.

BEST PRACTICE REMINDERS

It’s easy to get lost in the sums and arcane detail of the Operation Car Wash saga and to miss its enormous offering of best practice pointers.

In Brazil, state institutions and private corporate interests are closely entwined, and companies must be mindful of the country’s Clean Company Act, enacted in 2014 to counter widespread corruption in both the private and public sectors.

Like the Foreign Corrupt Practices Act (FCPA)(here) and UK Bribery Act(here), the Brazil Clean Company Act[here] allows for extraterritorial reach in some respects, meaning any company doing business in Brazil can be punished, along with its culpable executives.

As a result, companies need to make the effort to ensure compliance. This includes training employees on the law and how to report any evidence of transgression, plus knowing how to conduct an investigation of suspected violations, possibly tapping outside experts.

The company needs to gather as many facts as possible and consider potential solutions and corrective action for any violations, and consider self-reporting to regulators, after seeking the advice of counsel.

Designing an effective anti-corruption compliance program that meets the requirements of many different jurisdictions is not easy. Multinational companies often use the strictest law or laws in any given area of law and regulation and proceed on the basis of satisfy its goals.

Such companies can and should also take note of the broad global consensus that has developed around what governments and international organizations expect of corporate anti-corruption compliance programs. These include the Good Practice Guidance for Companies compiled by the Organisation for Economic Co-operation and Development; the U.S. Justice Department's and SEC's Resource Guide [here] to the U.S. Foreign Corrupt Practices Act (FCPA Guide); and guidance provided by the World Bank, International Chamber of Commerce [here] and Transparency International[here].

The commonly accepted core components of an effective anti-corruption program include:

-- Support and commitment from the top. Senior management and boards of directors should create a corporate culture that promotes and publicly rewards compliance. In evaluating a company’s compliance, U.S. authorities say they will consider “whether senior management has clearly articulated company standards, communicated them in unambiguous terms, adhered to them scrupulously, and disseminated them throughout the organization.”

With this said, a commitment to compliance must be reinforced by managers throughout the organization and documented by compliance staff.

-- Oversight by compliance officers equipped with autonomy, resources and authority. The responsible corporate officer (or officers) “must have appropriate authority within the organization, adequate autonomy from management, and sufficient resources to ensure that the company’s compliance program is implemented effectively,” the FCPA Guide states.

Best practice also dictates designation of a corporate officer and establishment a department or structural unit responsible for the prevention of corruption and related offenses.

-- Generally applicable compliance measures focused on high-risk areas. An effective program, “should be developed on the basis of a risk assessment addressing the individual circumstances of a company.” High-risk areas, like gifts; hospitality, entertainment and expenses; customer travel; political contributions; charitable donations and sponsorships, should receive the closest scrutiny and periodic investigations with a thorough reporting of their results.

-- Ensuring the compliance of third parties. Companies must perform documented due diligence of business partners, inform business partners of the company’s commitment to compliance, seek a reciprocal commitment, and monitor continued compliance.

Anti-corruption rules are only effective if they are enforced, and this must mean with contractors as well as employees. Their adherence to such laws is integral to the soundness of the hiring company and its reputation, and any pledges must be backed up with demonstrable action -- evidence the hiring firm must require at intervals.

-- Accounting procedures, including a system of internal controls. Internal controls that are crafted to alert the business when policies, procedures and legal obligations are being violated is integral, as are periodic audits, to ensure the integrity of a company’s operations. These targeted audits make certain that controls on paper are working in practice.

-- Confidential reporting and whistleblower portals. An effective program must provide resources for company employees and contractors to obtain compliance information, answer questions, and be able to report potential or actual misconduct.

--World Bank guidance:here

(Julie DiMauro is a regulatory intelligence expert in the Enterprise Risk Management division of Thomson Reuters Regulatory Intelligence. Follow Julie on Twitter @Julie_DiMauro. Email Julie at julie.dimauro@thomsonreuters.com)

This article was produced by Thomson Reuters Regulatory Intelligence and initially posted on June 23. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters

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