Can a business caught up in ‘the most efficient corruption machine in modern business’ bounce back? SM looks at what happened at Odebrecht
The Division of Structured Operations sounds like the kind of sinister bureaucracy Kafka or Orwell would have imagined. In real life, this unit of Odebrecht, the scandal-plagued Brazilian construction giant, had one simple purpose: it paid bribes. And it paid so many of them, the US Department of Justice believes it is the biggest foreign bribery scandal ever. At the time of writing, 30 governments are investigating Odebrecht, more than 200 people have been convicted in Brazil (including former president Luiz Inacio Lula da Silva) and the scandal has, directly and indirectly, led to the resignation, arrest, prosecution, extradition or ousting of Brazilian presidents Dilma Rousseff and Michel Temer, Peruvian president Pedro Pablo Kuczynski, Peru’s opposition leader Keiko Fujimori, Ecuadorian vice-president Jorge Glas, and Ricardo Martinelli, former president of Panama, and his sons Ricardo and Luis.
Between 2001 and 2016, Odebrecht dispersed at least $788m in bribes, often using shell companies to disguise the source of the funds. The group even acquired the Antiguan branch of an Austrian bank to make it easier to distribute the bribes.
Fake companies, fake invoices and fake customers were deployed in an exercise that Business Week has called “the farthest-reaching, most efficient corruption machine in modern business”. If that sounds like hyperbole, consider the fact that, by its own admission, the company paid out up to 2% of its annual revenue – sometimes as much as $611m – in bribes.
All this money was paid to ministers and officials to win contracts for more than 100 infrastructure projects in Angola, Antigua, Argentina, Brazil, Colombia, Ecuador, Guatemala, the Dominican Republic, Honduras, Mexico, Mozambique, Panama, Peru and Venezuela. The payments weren’t all high tech. Day-to-day bribes were paid out by black marketeers called doleiros – roughly translated as dollar men.
To guarantee secrecy – and control what was effectively a ‘shadow’ budget – the Division of Structured Operations used two computer systems to manage larger, more regular payments: Drousys, for the participants to communicate, and My Web Day, which generated, tracked and recorded payments. Managers organising the bribes worked in code, giving their clients such derisory nicknames as Decrepit and Totally Ugly.
Five years ago, the Brazilian authorities launched Operacao Lavo Jato (aka Operation Car Wash), an initially covert investigation into corruption at state-owned oil company Petrobras that soon unearthed bribes paid by Odebrecht to win contracts. This was political dynamite, as Brazilian business writer Fernando Duarte explains: “Petrobras was the one business every Brazilian felt proud of, a symbol of the country’s power, and a company that was managing our oil.”
Recognising the danger Car Wash posed, executives in the Division of Structured Operations began a damage limitation exercise, bribing some clients to keep quiet, getting rid of incriminating documents, trying to acquire ‘golden visas’ for senior staff to move abroad, and destroying the physical encryption keys to the My Web Day system.
It was too little, too late. Management illusions that the damage could be controlled were shattered on 21 December 2016, when Odebrecht agreed to pay $3.5bn to settle bribery charges brought by the Department of Justice. The fine was a record for corporate bribery, but an array of company initiatives – increasing the number of compliance staff by half, dismissing 51 staff for misconduct, creating a chief compliance officer and embedding compliance into employees’ performance reviews – persuaded prosecutors not to impose stiffer penalties.
In Brazil, the authorities initially took a tough line. Marcelo Odebrecht, former CEO and grandson of company founder Norberto, was sentenced to 19 years and four months in prison for paying out more than $30m in bribes. “Putting Marcelo in jail was a powerful symbol,” says Duarte. “Odebrecht had been one of the crown jewels of the private sector in Brazil. It was the company every graduate wanted to work for. It punched above its size as a lobbyist. So when the news broke, it came as a complete shock, especially to those Brazilians who had argued the private sector was less corrupt than the government sector.”
Marcelo Odebrecht served two-and-a-half years in jail but, after agreeing to pay a $2bn fine, admit guilt and testify, he is serving the rest of his sentence (reduced to 10 years) under house arrest. The deal may partly reflect the fact that, as far as the Brazilian government is concerned, Odebrecht is too big to fail. It is now looking to sell assets and renegotiate its debts just to stay afloat. To give a sense of the damage the scandal has already inflicted on the group, revenues sank by 42% between 2015 and 2017 and estimates of the number of employees to have lost their jobs vary from 53,000 to 102,000.
Odebrecht has delivered some first-class infrastructure projects in Africa, Europe and North America, and has spent seven times as much on compliance, but some Brazilian analysts fear the damage to its reputation may be irreversible.
Winning bid cost more
Six years ago, Odebrecht was part of a consortium that won a contract in the Dominican Republic to build a power plant –even though its bid cost twice as much as the China Gezhouba Group’s proposal, and despite the fact Odebrecht was already being investigated by the authorities and was legally disqualified from bidding. The project was later suspended.
In Antigua, which unwittingly became the focal point for Odebrecht’s financial chicanery, prime minister Gaston Browne told Business Week: “They were huge crooks and it hurt Antigua’s image and reputation. I hope they all spend a lot of time in jail.” Panama’s attempt to market itself as the “Singapore of central America” took a knock after Odebrecht admitted paying $96m in bribes to win public contracts. Peruvian economists blamed the scandal for the loss of 150,000 jobs and reducing its economic growth by 0.5-1% in 2017. No wonder governments across Latin America are talking about barring Odebrecht from public tenders.
Luciano Guidolin, who took over as CEO in 2017, insists the business can recover: “Car Wash was not the end – and will not be the end – of Odebrecht.” The group hailed Guidolin’s appointment as a symbol of its transformation but, having worked for the company since 2004, his promotion was hardly a clean break. Adherence to World Bank Integrity Compliance Guidelines was a more significant, if essential, step.
Business as usual?
Odebrecht’s influence in Colombia is so great that even the habitually unsensational Financial Times has raised the question of whether it amounts to state capture. The group was managing $2bn in infrastructure projects in partnership with local firm Grupo Aval, controlled by Luis Carlos Sarmiento, one of the richest men in Colombia. Sarmiento’s lawyer at the time, Néstor Humberto Martínez, advised on the contracts.
Martínez has since done well for himself, becoming attorney general, which means he is now running the office charged with investigating claims Odebrecht paid $33m in bribes in Colombia. He has officially recused himself from the case, but his claim that American lobbyists and private investigators are using the case “to initiate the denigration of the Colombian justice system” hardly suggests impartiality. Nor does the fact president Juan Manuel Santos has admitted Odebrecht partly financed his 2010 election campaign.
The scale of Odebrecht’s corruption is unprecedented, but there is some truth in Emilio’s testimony to the Brazilian attorney general that: “All this that was happening was normal, institutionalised.” Contributing to election campaigns – a means to exert influence – was, the former chairman said, “something normal in how all those political parties functioned”.
“In some instances, it became like an auction,” says Duarte. “You put your bids in and, if you’re a politician, why would you be loyal to a company offering you $8m when one of their competitors had promised you $10m? Odebrecht were not ideological about it, they would pay money to people in any part of the political spectrum who could be of use.”
Emilio’s A-list clients included such prominent socialists as Venezuelan strongman Hugo Chavez, José Eduardo dos Santos (president of Angola from 1979 to 2017) and Lula. This was the milieu in which Emilio’s son Marcelo learned his trade and, instead of challenging the culture, he institutionalised it, creating the notorious Division of Structured Operations.
That Division has been consigned to history. The crimes it committed hasn’t. Although Odebrecht has done things to change its culture – due diligence checks for suppliers, launching a whistleblowing channel managed by a third party, and improving governance – Guidolin is still resisting one obvious change.
He is adamant he won’t rename the business, even though many investigations are still ongoing, more companies are likely to suffer guilt-by-association and the risk of damaging revelations to come remains high. If, as Warren Buffett remarked, it takes five minutes to destroy a reputation, how long does it take to rebuild one? Odebrecht is about to find out.
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