Transnational Dispute Management www.transnational-dispute-management.com ISSN : 1875-4120 Brazilian Car Wash Operation: Petrobras Case Issue : Vol. 17, Issue 6 by M.L. Labate Mantovanini Pádua Lima and Published : October 2020 P.C. Goldschmidt This paper is part of the special issue on “State-controlled Entities” prepared by: About TDM C. Bondy Prof. J. Chaisse Dr. H. Chen TDM (Transnational Dispute Management): Focusing on recent View profile View profile View profile developments in the area of Investment arbitration and Dispute Management, regulation, treaties, judicial and arbitral cases, voluntary guidelines, tax and contracting. Visit www.transnational-dispute-management.com Dr. J. Górski D. Sejko R. Weeramantry for full Terms & Conditions and subscription rates. View profile View profile View profile Open to all to read and to contribute TDM has become the hub of a global professional and academic network. Therefore we invite all those with an interest in Terms & Conditions Investment arbitration and Dispute Management to contribute. We are looking mainly for short comments on recent Registered TDM users are authorised to download and developments of broad interest. We would like where possible for print one copy of the articles in the TDM Website for personal, non-commercial use provided all printouts such comments to be backed-up by provision of in-depth notes clearly include the name of the author and of TDM. The and articles (which we will be published in our 'knowledge bank') work so downloaded must not be modified. Copies and primary legal and regulatory materials. downloaded must not be further circulated. Each individual wishing to download a copy must first register with the website. If you would like to participate in this global network please contact us at [email protected]: we All other use including copying, distribution, retransmission or modification of the information or are ready to publish relevant and quality contributions with materials contained herein without the express written name, photo, and brief biographical description - but we will also consent of TDM is strictly prohibited. Should the user accept anonymous ones where there is a good reason. We do contravene these conditions TDM reserve the right to send a bill for the unauthorised use to the person or not expect contributors to produce long academic articles persons engaging in such unauthorised use. The bill will (though we publish a select number of academic studies either charge to the unauthorised user a sum which takes into as an advance version or an TDM-focused republication), but account the copyright fee and administrative costs of identifying and pursuing the unauthorised user. rather concise comments from the author's professional ’workshop’. For more information about the Terms & Conditions visit www.transnational-dispute-management.com TDM is linked to OGEMID, the principal internet information & © Copyright TDM 2020 discussion forum in the area of oil, gas, energy, mining, TDM Cover v8.0 infrastructure and investment disputes founded by Professor Thomas Wälde. Brazilian Car Wash Operation: Petrobras Case Maria Lucia L. M. Padua Lima* and Paulo Clarindo Goldschmidt** Abstract The purpose of this paper is to examine the case of Petróleo Brasileiro S.A. (Petroleum of Brazil -Petrobras); the largest mixed capital Brazilian company. Founded in 1953, the company is currently the focus of major corruption investigations in the so-called Car Wash Operation. The severe crisis caused by the systemic corruption that affected Petrobras has created a domino effect within the whole oil and gas extraction and production chain in Brazil, leading to a contagion effect throughout the Brazilian economy. To illustrate the systemic corruption developed in Petrobras during the years of the PT governments (2003- 2016), this paper will feature the Pasadena case, an emblematic corruption scheme. Besides this case, many additional ones also occurred during the PT period. The correlation between all of these cases is their determination to use Petrobras with the ulterior purpose of corrupting the Brazilian democratic institutions, without neglecting the personal enrichment of the superiors. Petrobras was one of multiple companies to suffer the abuses of PT's mismanagement. 1. Introduction The purpose of this paper is to touch on the Car Wash Operation, launched in March 2014, by Brazilian Federal Prosecutors.1 This Brazilian operation is considered the largest anti- corruption procedure in the world. At the beginning, the focus of the investigations was the largest mixed-economy company in the country: Petrobras. As the Car Wash investigations were carried out, the operation spread to several other targets, not only in Brazil, but also in more than 12 countries through international cooperation agreements. The amount of funds diverted from mixed capital companies such as Petrobras and from other state-owned companies, public institutions, infrastructure projects, public companies’ pension funds and other economic activities with some degree of state intervention is in the trillions. The figures related to this operation provide more accurately the extent of the corruption crimes investigated so far. Thus, more than US$ 1 billion has been returned to the public treasury, US$ 500 million provided for compensatory fines arising from collaboration agreements; US$ 40 million for voluntary waiver values of defendants and US$ 3 billion are expected to be recovered.2 2. Car Wash Operation: Highlights In the early 1990s, Brazil made an enormous effort to return to the international economic scene once the 1980s foreign debt crisis was overcome and the Real Plan3 controlled the * Maria Lucia Labate Mantovanini Padua Lima, professor at FGV DIREITO SP. ** Paulo Clarindo Goldschmidt, professor at FGV DIREITO SP. 1 Ministério Público Federal do Brasil (Brazilian Federal Prosecutors) <http://www.mpf.mp.br/o-mpf>. 2 <http://www.mpf.mp.br/grandes-casos/lava-jato/resultados>. 3 Plano Real (Real Plan) - 1994 Economic Plan that stabilized the Brazilian Economy - <https://www.bcb.gov.br/en/monetarypolicy/realplan>. 1 process of accelerated inflation4 stabilizing the Brazilian economy. As part of this effort, Brazil adhered to the most important international conventions/treaties in order to curb corruption. Accordingly, the country joined the Inter-American Convention against Corruption (IACAC- 1996/2002); the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (2000), the United Nations Convention against Corruption (UNTC 2003). At the same time, the country also endorsed the recommendations made by the US Securities Commission (SEC). It was very clear for the Brazilian government authorities that to be part again of the international economic community and attracting foreign direct investments (FDI) was mandatory not only for solving the foreign debt and inflation problems, but also for embracing the international anticorruption regulation. Consequently, it was necessary to update the national legal framework and develop institutions to combat corruption. It is important to stress the international business environment in favor of anticorruption measures, adopted mainly since the last decade of 20th century, in order to better understand how it was possible to have an anti-corruption operation of the Car Wash magnitude during corrupt governments.5 Another important point to note is the understanding of the Car Wash operation regarding the corruption character existing in the country during the PT governments.6 Built on the conception of systemic corruption7, the Car Wash operation has been working based on the insight that the adoption of corruption practices permanently, centralized, and widespread on the government activities, are the main characteristics of Brazilian Corruption from 2003/2016. This form of corruption has to be distinguished from the traditional corruption that occurs even in many democratic political regimes: the adoption of individual bribery practices with the purpose of electing or reelecting candidates during the election period.8 In 4 The inflation rate average from 1980 to 1994 was 450% per year, with a peak of 80% per month in March 1990. 5 Joaquim Falcão appointed some reasons for the success of the Car Wash Operation under the 13th Federal Court of Curitiba as; “Judges, prosecutors and delegates are young, well paid, hold their positions on merit and in the light of the Democratic State of Law; they use technology a lot and know how to deal with "number intelligence"; they make use of international partnerships in search of information; they realized that corruption is not restricted to Brazil; they employ plea bargaining and leniency agreements. With these instruments they have achieved a flow of information that drives the process and at the same time expands it; they focus on the facts and not on legal abstractions, making the work of defense lawyers difficult; and they have the impartiality of Judge Sérgio Moro, whose agenda is the fight against corruption.” See <http://epoca.globo.com/tempo/expresso/noticia/2016/04/os-sete-segredos-da-13-vara-federal-de-curitiba- responsavel-pela-lava-jato.html>. 6 PT- Partido dos Trabalhadores (Workers Party) from 2003-2016. 7 Systemic corruption defined as “a situation in which the major institutions and processes of the state are routinely dominated and used by corrupt individuals and groups, and in which most people