Corruption probe implicates Brazil's development bank -report

RIO DE JANEIRO, July 17 (Reuters) - Money from a public investment fund financed by payroll deductions was irregularly used to capitalize Brazil’s BNDES development bank, according to leaked plea deal testimony from a wide-reaching corruption probe published in O Globo.

According to the report published on Saturday, FI-FGTS, the investment arm of Brazil’s public severance fund, allegedly transferred 17 billion reais ($5.18 billion) to BNDES in transactions that breached the fund’s own rules following pressure from senior politicians and bank executives.

The daily newspaper said the information was provided to prosecutors in testimony by Fabio Cleto, a former vice-president at state bank Caixa Economica Federal which manages the public investment fund. O Globo did not explain how it acquired the information.

Caixa declined to comment, while BNDES did not immediately respond to requests for comment. A spokeswoman for the Prosecutor-General’s office declined to comment saying they do not give details on testimony until it is officially made public.

Prosecutors leading the so-called “car wash” probe into corruption at state-run companies have told Reuters they are certain Brazil’s public lenders will become a focus of the sweeping investigation, but have not yet detailed any findings.

The 17 billion reais were transferred to BNDES in two transactions, according to the O Globo report. The first saw FI-FGTS buy 7 billion reais worth of BNDES debentures as a sweetener to get the development bank on board with the creation of the FI-FGTS, which was started in 2007 and seen by some as a rival to BNDES.

The second was last year, when the FI-FGTS bought 10 billion reais in debentures in order to help liquidity at the development bank, which had seen funding from the Treasury tightened after the arrival of Joaquim Levy, the finance minister at the time.

Both transactions were made against an FI-FGTS rule that it not invest in financial institutions or development banks, Cleto is reported to have said in his testimony.

$1 = 3.281 reais Reporting by Stephen Eisenhammer; Editing by Alan Crosby