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A corruption scandal at Petrobras, Latin America's largest company, may lead to major fines among its contractors. (Photo: Petrobras)
Jim Chanos,  founder of Kynikos Associates: The economics are just so poor at Petrobras that we really have called it a scheme, not a stock. (Photo: Bloomberg TV)
Monday, November 17, 2014
Analysis

The Petrobras Scandal: Record Corruption Fines?

The Petrobras scandal may result in record fines over corruption charges.

BY LATINVEX STAFF

Brazilian companies like Odebrecht and Camargo Correa may end up paying significant fines if Brazilian authorities enforce its own new anti-corruption law. The Anti-Bribery Law, which went into effect on January 29, 2014, includes fines that can go as high as 20 percent of the company’s annual gross revenues.

Odebrecht last year reported revenues of $43 billion. A fifth of that would translate into $8.6 billion. Camargo Correa's construction unit earned $2.3 billion last year, which means a 20 percent fine would reach $455 million. Additionally, several other firms are under investigation for paying bribes to Brazilian state oil producer Petrobras. They include Dutch offshore oil company SBM.

Even if the final fines may be smaller, the amounts will have to be significant in order not to undermine the credibility of the new anti-bribery law.

Petrobras itself may also be forced to pay fines, even though it is the alleged victim of the bribes.

President Dilma Rousseff stated Sunday that the scandal may change Brazil forever. "This may change the country forever," she said in Brisbane, Australia during a summit of the G20 Group of Nations, Reuters reported. "How? By ending impunity."

Brazilian authorities in March started a probe – dubbed Operation Car Wash – into money laundering. That investigation led to the arrest of Paulo Roberto Costa, former director of refining and supply at Petrobras, who subsequently told investigators about the widespread corruption at the oil giant.  The scheme involved skimming some $3.9 billion from Petrobras contracts and sharing the proceeds with corrupt officials and legislators.  On Friday, police arrested Petrobras’ engineering director Renato Duque and 17 other people linked to the scandal.

In addition to Brazil’s investigation of corruption at Petrobras, US authorities have also started a probe into possible violations of the Foreign Corrupt Practices Act (FCPA).

“It’s important to bear in mind that bribes would have been paid by Petrobras contractors not by Petrobras,” says Simon Strong, president of Tenacitas International. “The FCPA does not criminalize the acceptance of a bribe by a government official, but those who pay it.”

In addition to Camargo Correa and Odebrecht, other companies implicated in the scandal include Mendes Junior, OAS, UTC, Queiroz Galvao, Iesa Oil and Gas and Engevix. (Dalton dos Santos Avancini, chief executive of Camargo Correa's construction unit, turned himself in to police over the weekend).

And Brazil's comptroller general's office may sanction SBM Offshore after it reached a settlement with Dutch prosecutors for paying bribes in Brazil and other countries, Reuters reported last week.

The FCPA calls for a criminal fine of up to $2 million per violation, points out Thomas Fox, a Texas attorney specializing in FCPA issues.

Meanwhile, Petrobras has been forced to delay its third quarter report due to the corruption. Its earnings release is now nearly two months behind the third quarter report from Mexico’s state oil producer Pemex and six weeks behind the report from Colombia’s state oil producer Ecopetrol.

Originally investors had expected that the third quarter earnings would be released on October 24. Then they were supposed to be released on November 14. But that day Petrobras announced that they would be released on December 12.

However, those results would be unaudited. According to a report in Brazilian newspaper Valor Economico today, accounting firm PricewaterhouseCoopers may have to wait up to a year before signing off on its audited report of third quarter results from Petrobras.

Petrobras -- one of the world’s top ten companies as late as six years ago – has seen its market value drop by $200 billion as a result of its poor track record, according to a Reuters report.  

“The economics are just so poor at Petrobras that we really have called it a scheme, not a stock,” Jim Chanos, the founder of Kynikos Associates, told Bloomberg TV last month. “They keep - these five-year plans that they keep revising…. Their gross cash flow is only covering half of their capital spending and capitalized interest, so they're not covering their dividend. And in fact they're having to borrow the shortfall, and they're borrowing more than $20 billion a year. This is an enormous, enormous sink hole from a financial point of view.”

The latest corruption scandal will not only hurt its market value further, but may even lead to Petrobras being stripped of its investment-grade credit rating, according to another report from Reuters.

“Investors are also concerned that the world's most-indebted major oil company risks a technical default on about $12 billion dollars in bonds if it doesn't report audited earnings by the end of the year,” the news agency says.

The corruption scandal comes after years of systematic meddling by the two past administrations, resulting in ever-weaker results both in terms of efficiency and finances.

The government has forced Petrobras to create jobs through the inefficient construction and operation of refineries, while keeping its income low through price caps on its gasoline sales. Instead of being run as a typical for-profit oil company, Petrobras has been used to further political goals.

Although Rousseff has sworn to fight the corruption at Petrobras and elsewhere, the scandal weakens her image as she was energy minister and Petrobras chairwoman when most of the violations took place.

“President Rousseff has a reputation for being tough on malfeasance but she is likely to find herself on the back foot as more revelations emerge,” Tenacitas International said in an analysis published in Latinvex recently.

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