Brazil’s Lava Jato investigation: the biggest corruption scandal of the last decade

The largest and most infamous corruption scandal of the last decade began with a criminal investigation into the operations of Brazil’s largest corporation: Petrobras. The scandal got its name because the organizers of the bribery, kickback and money laundering scheme used a financial services company in Brasília located next to a gas station and car wash (Lava Jato). The investigation started with a seemingly minor complaint made in 2009 to the Federal Prosecutor’s office in Curitiba, Paraná, by a businessman concerned that somebody was using his company to launder money. Prosecutors followed this lead and discovered that political operators affiliated with the government had been funneling illegal campaign contributions from companies doing business with Petrobras in exchange for favourable treatment in construction contracts and in the procurement of goods and services.

The scandal exploded onto the national scene in 2014, when a team of highly motivated federal prosecutors mounted an aggressive investigation under the supervision of a judge with experience in public corruption cases (Sergio Moro). Unlike most corruption scandals, which typically lead to prolonged investigations and inconsequential legal outcomes, this scandal triggered an avalanche of information which destabilized governments in Brazil, Peru and Ecuador.

The first accusations centred on the construction of an oil refinery in Pernambuco, but the probe soon revealed it extended to other projects and every major construction company in Brazil. Unsurprisingly, the recipients of the bribes were high-level government functionaries, including both allies and opponents of the governing coalitions of President Lula da Silva and his successor Dilma Rousseff. The evidence extracted from the plea bargains negotiated by the prosecutors was unprecedented and, because shares of Petrobras are traded on the New York Stock Exchange, the indictments triggered investigations by regulatory and judicial authorities in the United States. Eventually, the sworn testimony of business executives collaborating in exchange for leniency forced the Supremo Tribunal Federal (STF) to accelerate the prosecution of influential elected officials, including governors, members of Congress and eventually, of a sitting president (Temer).

The criminal investigation demonstrated how bribes distorted investment decisions by public officials. Reportedly, companies paid between one and three per cent of a contract’s gross value for hundreds, perhaps thousands, of overpriced construction projects. The kickbacks were laundered through domestic and offshore bank accounts, which allowed companies to camouflage the bribes as fees paid to legal firms and consulting companies or as the procurement of (overpriced) goods and services.

Petrobras officers benefited in exchange for their willingness to manipulate the terms of a public bidding process to favour a specific company, while companies conspired to divide up the lucrative contracts among themselves. Politicians were rewarded for their votes in Congress, while high-level functionaries in state ministries and regulatory agencies were rewarded for their loyalty to a political party. The task force eventually arrested 292 individuals, of whom 278 either pleaded guilty or were convicted of crimes that included fraud, bribery and money laundering. Prominent individuals from five of the country’s largest political parties were found guilty in a court of law, while persons from an additional thirteen parties were indicted for illegal activities and representatives from another fifteen parties were investigated for questionable behavior.

The cost to Petrobras was reflected in its balance sheet of 2014 when it registered a US$2 billion write-down to offset the bribes paid to the companies that had participated in the bid-rigging scheme. The investigation in the United States led to a 2018 settlement in which Petrobras agreed to pay US$853 million in fines levied by the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC), of which about 80% was returned to the Brazilian state. Shortly thereafter, the company settled a class-action civil suit filed on behalf of investors for an additional US$2.6 billion. A criminal investigation brought by the DOJ in Manhattan led to the arrest and conviction of the CEO of Odebrecht, Brazil’s largest construction company and, at the time, the country’s second-largest privately held company.

At the heart of the scandal was a secret agreement among thirteen construction companies, known as the Cartel de Empreiteiros, who agreed not to compete on individual Petrobras contracts. The conspiracy to defraud the government went well beyond the cartel’s business transactions with Petrobras and infected the Programa de Aceleração do Crescimento (PAC), a national programme to improve basic infrastructure and stimulate the national economy via public works projects. Between 2007 and 2015, the program allocated about R$2.1 trillion (about US$500 billion) to projects across the country. Assuming the custom of paying a bribe of between one and three per cent, the graft associated with the PAC could be as high as US$5 billion to US$15 billion. If those practices led to overbilling, however, then the total cost to the nation probably exceeded US$50 billion.

The impacts of the Lava Jato scheme are still reverberating through the Brazilian economy. Government resources were wasted on non-productive expenditures, and the scandal also delayed strategic investment in several key sectors. According to a study by a policy institute linked to labor unions, the Lava Jato scandal reduced investments, leading to a net loss of about 4.4 million jobs and a reduction of R$172 billion (US$34 billion) in investments in energy production and construction. An environmental activist might not bemoan the loss of those types of investments, but the Fundação Getulio Vargas estimated it reduced national GDP by about 3.5 per cent each year between 2014 and 2017 (US$ 10 billion to US$ 20 billion per year). This is a conservative estimate, however, because losses compound over time and inflict permanent damage on Brazilian society.

Arguably, the Lavo Jato scandal and the disillusionment with the political elite set the stage for the election of Jair Bolsonaro, whose actions threatened democratic institutions and led to a rollback of environmental regulations key to the conservation of the Amazon and the welfare of Indigenous communities. Bolsonaro was narrowly defeated by Inácio Lula da Silva in the 2022 elections; however, Lula must now govern a country where a significant share of the population sees him as a corrupt politician who is free thanks to a dubious decision by the Supreme Court.

Lava Jato in the Legal Amazon

The scandal has impacted the Pan Amazon in multiple ways, particularly by the construction of numerous infrastructure projects executed by the PAC and financed by SUDAM.

Many of these investments were controversial because their environmental and social impacts were not given appropriate due diligence as the decision-making process was tainted by conflicts of interest, including:

• Urucu – Coari – Manaus Natural Gas Pipeline System: A construction consortium composed of Camarga Correa, OAS and Andrade-Gutiérrez admitted to paying kickbacks of R$ 15 million on total contracts of approximately R$ 1.5 billion. The total amount of fraud might be larger, however, because in 2007 a Petrobras petroleum engineer, now deceased, denounced over-billing equivalent to 50% of the total budget of R$2.5 billion, which by 2014 had increased to more than R$4.5 billion.
• Madeira hydropower complex: These two dams were built and operated by two separate consortia. Energia San Antonio was built largely by Odebrecht, which has admitted paying bribes to politicians who supported the project. Energia Sustentável do Brasil was built by Tractebel, a French company that was not directly implicated in the Lava Jato scandal. Nonetheless, the fair value of the contract has been questioned following the revelation of campaign contributions of approximately R$1.8 million made by Tractabel to the Rousseff re-election campaign in 2014.
• Belo Monte hydropower facility on the Xingu: Andrade Gutiérrez, Camargo Corrêa and Odebrecht pleaded guilty to kickbacks of R$ 150 million out of a R$ 2.6 billion contract. Payments were funneled to Senators Renan Calheiros (PMDB), Edison Lobão (PMDB), Valdir Raupp (PMDB), Romero Jucá (PMDB), Jader Barbalho (PMDB) and Delcídio do Amaral (PT). The charges against all five defendants were dismissed in 2023 following a judgment by the Tribunal Supremo Federal that prosecutors had acted inappropriately during the investigative phase of the prosecution.
• Amazonian Highways: The Cuiabá – Santarem highway (BR-163) was paved at a cost of ~R$2 trillion (US$ 400 million); the ongoing improvement of the Transamazônica (BR-230) was budgeted at ~R$1.3 trillion (US$ 260 million); BR-364 in Acre was allocated R$1.1 trillion (US$230 million), and the ongoing pavement of BR-319 between Humaitá and Manaus received ~R$466 million (US$95 million).

Lava Jato in the Andean Amazon

The infrastructure investments in Brazil occurred simultaneously with a similar construction boom in Peru financed by multilateral investment banks via the Iniciativa para la Integración de la Infraestructura Regional Sudamericana (IIRSA). These investments in basic infrastructure were built by five members of the Brazilian cartel (Odebrecht, Andrade-Gutiérrez, Camargo-Corrêa, OAS, Queiroz Galvão), and Peru’s largest domestic construction company (Graña & Montero).

Odebrecht was the most active and participated in several high-profile projects not only as a contractor but also as an investor and concessionaire. These investments were made using the public-private partnership model promoted by the IDB, where the corporate partner raises the financial capital for construction in exchange for long-term management contracts. The companies met their investment obligations by borrowing money; because of an idiosyncrasy of international bond markets, however, the securities were classified as sovereign debt. Cost overruns plagued every project, and at least one was canceled, which has piled billions of dollars of debt onto the country’s sovereign balance sheet.

The Peruvian government estimates Odebrecht overcharged by at least US$283 million on contracts between 1998 and 2015; however, independent sources place that number at ~US$1.3 billion – approximately nine per cent of the debt associated with the various projects worth US$17 billion. The scandal calls into question multiple contracts over several decades, among them high-profile infrastructure projects in the Peruvian Amazon, including:

• Corredor Interoceánico Sur. Built between 2005 and 2008 at approximately double the estimated cost of US$1.2 billion; this IIRSA-sponsored initiative was financed by the IDB, BNDES and Odebrecht, which was awarded a 25-year operating concession.
• Corredor Interoceánico Norte. Built between 2005 and 2013 at a cost of US$1.2 billion; this IIRSA initiative was financed by the IDB, CAF and Odebrecht, which was awarded an operating concession lasting 25 years.

Both contracts were awarded during the administration of President Alejando Toledo (2001–2006), who has been accused of accepting a US$20 million bribe. Odebrecht (now Novonor) continues to operate both concessions, one of which is profitable (Norte) and one of which is not (Sur).

• Central Hidroeléctrica Chagalla. This hydropower facility on the upper Huallaga River was built between 2010 and 2016 with a total investment of US$1.2 billion. The project was approved during the government of Alan García and financed by the IDB and BNDES. In 2017, Odebrecht sold its interest to a Chinese company for US$1.3 billion, presumably to reduce the debt on its balance sheet and prepare for its reorganisation under Brazil’s bankruptcy laws.
• Gasoducto Sur Peruano was a US$7.4 billion project that was supposed to integrate southern Peru and northern Chile with the gas fields of Camisea. The concession was awarded in 2015 to a consortium composed of Odebrecht, Graña & Montero, and a Spanish energy company (ENEGAS). Odebrecht pled guilty to paying a US $5 million bribe to an executive of Petroperú and, allegedly, to then President Ollanta Humala (2011–2016). The allegations of graft forced the government of Pedro Pablo Kuczynski to cancel the project in 2017. In an audacious move, Odebrecht (now Novonor) sued the Peruvian state in 2020 for breach of contract and is demanding indemnification of US$ .2 billion.

According to the US Department of Justice, Odebrecht paid US$29 million in bribes to at least two and possibly four of Peru’s recent presidents. In 2018, Alejandro Toledo was indicted on charges of extortion and bribery, followed by similar charges against Alan García, Ollanta Humala and Pedro Pablo Kuczynski. Odebrecht also made contributions to the leading opposition candidate, Keiko Fujimori, who is being tried for money laundering and other crimes.

Ecuador terminated all government contracts with Odebrecht in 2008 following a dispute related to overbilling on the San Francisco Hydroelectric Power Plant; the company negotiated a return in 2010 by bribing the vice president with US$33.5 million, a sum hidden within its contract bid to construct a refinery for Petroecuador. The payoff, which was revealed in a US courtroom, was a precursor of an additional US$150 million in fraudulent charges between 2011 and 2015 at five mega-projects that were originally contracted at US$1.4 billion. These and other bribes were revealed in 2017 in the Escándalo de Sobornos, which led to the incarceration of the Odebrecht’s chief of operations and the former vice president who had solicited the bribe (Jorge Glas); the graft was approved with the knowledge and assent of then-President Rafael Correa, who was convicted in absentia and is currently living in exile in Belgium.

Brazilian construction companies began operating in Bolivia in 1987 as the country emerged from a period of economic instability when multilateral agencies provided special assistance loans for infrastructure projects. Andrade Gutiérrez was awarded several contracts that, although never subject to a serious investigation, were reported to have been awarded via a flawed, non-transparent bidding process. Odebrecht has adjudicated only one small project in Bolivia, and it was not implicated in the criminal case brought by the US Department of Justice. Nonetheless, declarations by defendants employed by Odebrecht in Peru and OAS in Brazil have alluded to payments made to Bolivian officials.

The most controversial project was awarded to OAS, which submitted an uncontested US$400 million bid to build a road that would transect the Territorio Indígena y Parque Nacional Isiboro-Sécure (TIPNIS). This project, which was to be financed by BNDES, was put on hold when the Indigenous inhabitants of TIPNIS voted to reject the project. The government continues to insist that construction will move forward and has worked to change the decision made by the communities within the TIPNIS.

Banner image:Brazil’s Lava Jato investigation  decided to make this hugely expensive Amazon infrastructure project a primary focus of its investigations. BNDES has provided loans totalling 80 percent of the total cost of the dam, R$15.2 billion (US$3.8 billion), a bill largely footed by Brazilian taxpayers. Image courtesy of Lalo de Almeida/Folhapress.

“A Perfect Storm in the Amazon” is a book by Timothy Killeen and contains the author’s viewpoints and analysis. The second edition was published by The White Horse in 2021, under the terms of a Creative Commons license (CC BY 4.0).

To read earlier chapters of the book, find Chapter One here, Chapter Two here, Chapter Three here, Chapter Four here and Chapter Five here.

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