Friday, May 26, 2017

A Culture Of Corruption Engulfs Brasil's Elites

Culture of corruption engulfs Brazilian elite

Presidential scandal strikes at the core of the system of patronage but incentives that fuel bribery will be hard to eradicate Share on Twitter (opens new window) Share on Facebook (opens new window) Share on LinkedIn (opens new window) Email22 Saved YESTERDAY by: Joe Leahy and Andres Schipani in São Paulo When Brazilian lawmaker Rodrigo Loures entered the traditional São Paulo pizzeria Camelo late last month, he could not have known he was about to spark a political crisis so severe it might precipitate the downfall of the country’s president, Michel Temer.  Under surveillance by federal police investigating political corruption in Brazil, Mr Loures used the toilet before going to the parking lot where he met a contact driving a Maserati sports car — Ricardo Saud, an executive of JBS, the world’s largest meatpacker.  Mr Loures was then seen walking away wheeling a suitcase containing R$500,000 ($153,000) — the first instalment of an alleged R$15m bribe from JBS for him and Mr Temer, according to documents filed with the Supreme Court. Unbeknown to Mr Loures, Mr Saud was co-operating with the police as part of one of the biggest plea bargains in Brazilian history, involving seven senior executives of São Paulo-based JBS and its holding company J&F.  “It's unbelievable, these guys were doing their dirty business here . . . they are shameless,” says a manager of Camelo, who declined to be identified. He says police had told him before the sting that they wanted to use his security cameras to catch a “paedophile”. 

 The JBS plea bargain, made public by the Supreme Court last week, has sent the centre-right government of Mr Temer, who has proved to be a competent leader despite low approval ratings, into what many analysts believe is a death spiral. Markets have crashed as investors who had bought into Mr Temer’s promises of delivering an ambitious reform programme to rescue Latin America’s largest economy from its worst recession sold their holdings. Joesley Batista, one of the owners of the meat producer JBS, with Michel Temer. Taped conversations between the two have been a key part of corruption allegations against the president © EPA Rating agencies have placed sovereign and corporate ratings on notice for a possible downgrade and shares of JBS, one of the country’s biggest multinationals, have plunged. On Wednesday, the army quelled anti-Temer protests in Brasília.

 The bribery scandal involving Mr Temer and JBS has struck at the core of the system of political patronage and corporate favouritism that has poisoned the country’s attempts to realise its full potential. For Brazil’s increasingly bold independent prosecutors, federal police and judges, the JBS plea bargain represents a new triumph in their three-year battle to tackle endemic corruption. An investigation that started with a probe into the state-owned oil company, Petrobras, and its largest construction group, Odebrecht, is focusing on JBS, one of the principal beneficiaries of huge subsidised public loans.

 Yet the unanswered questions are whether the spectacular results of these investigations, which have implicated a large swath of the political elite, will end up dismantling the corrupt nexus between government and big business, or whether it will leave the incentives that give rise to bribery in place. Mr Saud, in his testimony to prosecutors, said JBS had spent nearly R$600m on bribes for 1,829 candidates representing 28 parties in various elections. Of these, 167 were elected to the lower house of congress, 28 to the senate and 16 as state governors. With Mr Temer under investigation, all of Brazil’s five living past and present presidents are being probed for corruption.  “It is a corruptocracy,” Paulo Sotero, director of the Brazil Institute of the Woodrow Wilson International Center for Scholars, says of Brazil’s political system in which congressmen sell their services to the highest bidder. “It’s completely self-serving, it has nothing to do with the interests of the country, it is exhausted. We have to remove it.” 

 The Batista brothers  Few groups have come to sum up this system better than JBS. Founded as a small butcher serving work crews during construction of Brasília in the 1950s, the group boomed during the 13-year rule of the leftist Workers’ party, or PT. Luiz Inácio Lula da Silva, Brazil’s president between 2003 and 2010, was keen to build national champions in the model of China’s state-owned companies or South Korea’s chaebols. Starting in 2007, Brazil’s development bank, BNDES, invested R$8bn in JBS equity, accumulating a 21.3 per cent stake. It also lent directly and indirectly nearly R$4bn in partly subsidised loans to the group. Revenue at JBS grew from R$4bn in 2007 to R$170bn last year. The two brothers who run the company, Joesley and Wesley Batista, listed it in 2007. And then they went on an acquisition spree. Their holding company, J & F, diversified into pulp and paper and bought a controlling stake in Alpargatas, the company that makes Brazil’s Havaianas flip flops.  JBS was not the only large company to enjoy heavy support from BNDES, whose portfolio of soft loans with subsidised interest rates expanded nearly fivefold over the past 10 years to R$876bn last year.

Others included Odebrecht, Petrobras, Embraer, the world’s third largest commercial jet builder, and even Ambev, the Brazilian arm of the world’s largest brewer, AB InBev. “The Brazilian government conceded as much in subsidies [on BNDES loans] over the past seven years as the US loaned to Europe during the Marshall Plan,” says Marcos Lisboa, president of Insper, a business university. Lava jato and other Brazil probes in numbers An anti-corruption protest in Brasilia in December 2016 © EPA 767 Police raids conducted 155 Plea bargains signed with individuals 139 Convictions 1,415 Years of jail time in total for those convicted R$6.4bn In bribes paid that are being investigated Sérgio Lazzarini, an author of books on crony capitalism in Brazil, says the political parties in the government coalition can exert influence over decisions at BNDES, Petrobras, the state-owned companies, public sector pension funds “and so on”. “Private companies say, ‘I want to participate in this, I want to receive this money and these opportunities, so I’m going to strategically align myself with the government’,” he says. “If you had a little more rigour at the BNDES and start to close the tap, you’ve already taken out some of that element.”

 The fallout begins But the true extent of Brazil’s system of patronage began to emerge only after Mr Lula da Silva’s successor and protégé, former president Dilma Rousseff, faced an unprecedented wave of protests in 2013 against government spending on football stadiums for the 2014 World Cup. She reacted by introducing anti-corruption reforms, including strengthening the ability of prosecutors to offer plea bargains to suspects.  In 2014, federal police and public prosecutors began using these powers in what became known as Lava Jato or Car Wash, an investigation into kickbacks from construction companies to former executives of Petrobras and politicians in exchange for contracts.

Next came a probe into Odebrecht, which late last year agreed to what was then the world’s largest corruption payout of $3.5bn after admitting to shelling out $788m in bribes across 12 countries.  “This legislation really empowered the public prosecutor’s office with a new super-efficient tool to combat organised crime,” says Oscar Vilhena, director of law school FGV Direito SP.  The Odebrecht plea bargain alone implicated a large part of congress and one-third of the cabinet of Mr Temer, who was brought to power last year by the impeachment of Ms Rousseff for budgetary violations amid widespread popular dissatisfaction about corruption and the economic downturn. Protesters against Michel Temer set fire to an office in the Ministry of Agriculture this week © Getty Meanwhile, offshoots of Lava Jato, such as Operation Greenfield, a probe into alleged corrupt dealings by state pension companies, began to snare other groups, including JBS. The meatpacker was also accused of paying off health inspectors in a scandal earlier this year known as Weak Flesh. As the noose began to tighten, the Batista brothers decided to bet everything by signing a plea bargain with prosecutors and promising to deliver the biggest prize of all — President Temer. 

 Late on the night of March 7 this year, Joesley Batista sprang his trap. He drove to Mr Temer’s official residence, the Jaburu Palace, for a meeting in which the pair chatted for 30 minutes, according to court documents. The businessman told how he was allegedly bribing everyone from prosecutors to judges and a former speaker of the lower house, according to a recording of the conversation made by Mr Batista. Mr Temer appeared to mutter encouragement before allegedly recommending the lawmaker Mr Loures handle Mr Batista’s business problems, according to the court documents.  Luiz Inácio Lula da Silva with supporters after a court hearing in Curitiba, Brazil, on May 10. The former president is accused of corruption © AFP Mr Batista met Mr Loures six days later and promised him and Mr Temer the R$15m bribe if they could resolve a gas deal for one of JBS’s electricity plants.  Mr Temer has denied wrongdoing in the conversation and vowed not to resign. His lawyers claim the tape of the conversation has been selectively edited to frame him.

But analysts say his reform programme, which is aimed at restoring public finances through an overhaul of the country’s over-generous pension system, will be paralysed while he remains in office.  As rumours swirl about who might replace him and how, analysts say Lava Jato is accelerating the collapse of the old political guard who have ruled Brazil since the end of military dictatorship more than 30 years ago.  The former president of Brazil, Dilma Rousseff, who was impeached by the Senate in 2016 after being accused of breaking budgetary laws © Reuters “Over the years, the political parties became sclerotic,” says Sergio Fausto of the Fundação Fernando Henrique Cardoso. “Now Lava Jato will open new opportunities by accelerating the political mortality rate in the country.” But others caution that Lava Jato has its limits. Political reform is needed to change the incentives that lead politicians to become corrupt in Brazil. For instance, most analysts say that there needs to be rules to prevent the plethora of small political groups in congress: Brazil has 35 registered parties.  The system allows opportunistic politicians to set up parties to access government funds that are set aside for political groups.

They can then sell free television time awarded during elections to larger parties. Once in congress, some small parties have also extracted bribes for supporting legislation.  Brazil’s proportional representation system also allows too many politicians to enter congress without significant popular support in their own right, analysts said. The law, meanwhile, has protected corrupt politicians by allowing only the slow-moving Supreme Court to try them in cases of wrongdoing rather than the more dynamic lower courts.  News Brazil’s reforms in doubt James Kynge asks Andres Schipani and Jonathan Wheatley where the scandal engulfing President Michel Temer leaves the country’s crucial economic reforms.

 Mr Sotero says that, without political reform “you could put 10 Mother Teresas and 200 Pope Francis’s in congress and after two months even they would have gone bad. The system creates all the wrong incentives.”  The Lava Jato investigation is not without its own failings too, critics say. Having negotiated their plea bargains, Brazilian media reported that the Batista brothers had decamped to New York, infuriating public opinion after they escaped prison in their deal with prosecutors. JBS also executed foreign exchange transactions ahead of the plea bargain, allegedly anticipating a sharp fall of the real against the dollar amid concerns over the reform programme. Brazil’s market regulator has opened five investigations into the transactions, including into alleged insider trading. JBS has denied wrongdoing.

 Protesters on the streets of Brasília after a tape led to accusations that the president, Michel Temer, had endorsed bribery © Bloomberg For ordinary Brazilians, such stories serve only to confirm their deep distrust of politicians and big business — a factor that will be an important feature in elections next year. So far there are no clear candidates but political outsiders are expected to do well. After the scandals involving Ms Rousseff and Mr Temer, Brazilians will be hoping for competent and honest government.  At Camelo in the wealthy Jardins neighbourhood, where the Temer drama began, no one is holding their breath. One of the customers finishes a pizza in front of the restaurant’s Arabian Nights-themed decor. Leaving a tip on the counter, he jokes to the manager: “Here, it may not be like the Batistas, but unlike our politicians at least, I am leaving something extra for you.” Fateful meeting reflects culture of impunity On its list of corporate values, JBS, Brazil’s largest meatpacker, describes itself as “direct, truthful and transparent in its relations”.

One person who seemed to have taken these declarations at face value was President Michel Temer, who in spite of a long career as a backroom political dealmaker allowed himself to be secretly taped by JBS chairman Joesley Batista in March, allegedly endorsing bribery payments to politicians, judges and prosecutors. “Naivety. I was naive to receive someone at that moment,” Mr Temer told newspaper Folha de São Paulo. He was trying to explain why he hosted Mr Batista at his Brasília residence knowing that the executive was already under investigation.  Mr Temer’s seeming ingenuousness probably says more about the sense of impunity that politicians in Brazil have felt until now than anything else. Illegal party donations known as caixa dois are so prevalent in the country that many of those caught up in the corruption investigations have argued that it is not really a crime if the black market money is for politics rather than personal enrichment. To furnish this money, ruling coalitions have typically divided among themselves jobs in government ministries, state-owned companies and regulatory agencies. From these positions, they are able to extract rents from groups such as JBS. They form such close relations with their contacts in these companies that conversations over bribes become second nature, court documents show.  Mr Batista also secretly taped conversations in which senator Aécio Neves, the former presidential candidate of the PSDB, the centre-right coalition partner of Mr Temer, asked him for money. The Supreme Court has suspended Mr Neves from the senate and ordered a probe into his conduct.