Petrobras scandal spurs executive arrests

 Marcelo Odebrecht, third-generational familial head of Brazil's largest construction company since 2008, was arrested on Friday, June 19, as part of Operation Lava Jato (Car Wash) in connection with the Petroleo Brasileiro (Petrobras) scandal that has rocked Brazil's economy and development landscape.

Odebrecht was one of 12 people arrested, including a total of five Odebrecht executives, in early morning raids across four Brazilian states, according to sister publication Infrastructure Investor. Otavio Marques Azevedo, who is head of Brazil's second-largest construction firm Andrade Gutierrez, was also arrested during the operation.

The Petrobras scandal first came to light in mid-2013 when Brazilian federal police investigator Erika Mialik Marena was pulling at the thread of a money laundering case involving Alberto Youssef. The alleged black market bank runner had previously been arrested nine times in connection with the movement of illicit cash when she discovered that Youssef had purchased a US$125,000 Land Rover as a gift for former Petrobras division manager Paulo Roberto Costa, according to Bloomberg Business.

In April, Youssef and Costa were charged for their crimes, but due to their collaboration with authorities, will be serving light sentences. Costa will endure one year of house arrest, and still has the opportunity to appeal his sentence.

Since the day of the arrests, Odebrecht's company has issued several statements denouncing imprisonment of company executives.

“The use of imprisonment to prevent repeat offences because the competent authorities had not barred Constructora Norberto Odebrecht from entering into contracts with the government […] is an affront to the most basic principles of the rule of law,” said the release. “Another affront to the rule of law is the presumption of knowledge of allegedly illegal facts by the companies' senior management is enough to justify imprisonment.”

In official testimony, witnesses have described a criminal cartel comprised of construction companies and developers in Brazil that have been fixing prices and contract awards in exchange for kickbacks to Petrobras, which prosecutors claim has led to millions in cost overruns.

One particular project called into question was the Abreu e Lima oil refinery, a project that was initiated in 2007 by former President Luiz Inacio Lula de Silva and saw the original price tag of $2.3 billion inflated to $18.5 billion as a result of cost overruns.

Through its releases, Odebrecht has repeatedly expressed “indignation” in response to the arrests and accusations that the company has made illegal deposits and participated in a construction cartel. The illegal association, through a bribery and money laundering scheme that, according to a bundle of lawsuits filed against Petrobras, “authorities estimate has diverted up to or even more than $28 billion from Petrobras coffers”, is said to have been fixing construction contract prices in Brazil for years.

In a company release issued Monday, June 22, the company flatly denied not only participation in a construction cartel that was fixing contract awards, but also the very existence of such a cartel.

“There are no cartels in the contracting process, which is controlled entirely by the client, as is the case with Petrobras, which has always set its own budgets and standards for technical-financial assessment and performance,” said the release.

The lead prosecutor in the criminal case, however, has asserted that he has “no doubt” that Odebrecht and Andrade Gutierrez were the leaders of such a cartel.

The case against Odebrecht was, in the view of police, given further credence when it was discovered that in a letter addressed to his lawyer Dora Cavalcanti, he included the phrase “destroy rigs e-mail”, which Cavalcanti later said was meant to inform a defense strategy and not to actually destroy evidence.

The company expressed further indignation at the decision to photocopy the letter by the police officer to which it was entrusted, and said in a separate June 24 release that “there is nothing in Marcelo Odebrecht's note to suggest any illegality has been committed”.

“Besides being uncharacteristic of the executive, it would make no sense to suggest 'destroying' (not the contents, as intended, but literally, as interpreted by the police authority) emails that were seized during the operation conducted in November 2014, which were widely investigated and made public,” the company said. “Destroying something that is already in the custody of the PF and Judge Sergio Moro makes no sense. In other words, 'destroy' must have a different meaning.”

In response to the arrests, S&P Ratings Services earlier this week downgraded Odebrecht's debt rating to BBB- from BBB, siting heightened reputational risks while noting a “light” balance sheet and strong liquidity. Moody's Investors Service had already placed Odebrecht's ratings on review. Odebrecht bond prices fell on Friday.

Andrade Gutierrez has denied involvement in the Petrobras scandal, and indicated that it is cooperating with the authorities.

Currently, Odebrecht and Azevedo are being held in preventative prison in Brazil's southern city of Curitiba. Neither has been charged, and there is no word as to how long they will be detained.