How the Odebrecht scandal has shaken Latin America

The Odebrecht corruption scandal has not abated; in fact, it is mounting day by day, undermining elected governments in countries across Latin America. The Brazilian construction company has emerged as ringmaster of a sophisticated corruption circus originating in Brazil and extending to another nine countries in the region – plus two in Africa.

While the Brazilian judiciary has spearheaded a bold investigation into the dealings of Odebrecht and other major heavyweights such as Petrobras and OAS – making full use of freshly introduced plea bargains – legal measures outside Brazil have varied widely. Some countries are also actively prosecuting high-profile serving politicians and businessmen but others are almost ignoring the whole issue.

More to come?

With Odebrecht alone estimated to have paid hundreds of millions of dollars in bribes to secure contracts in Latin America and Africa, there is still little clarity over who actually pocketed all of the money, or how and where it was laundered. There is a lingering feeling that the evidence to surface so far may be just the tip of the iceberg for a region that is struggling to recover from the commodity cycle bust and faces a key election year – Colombia, Mexico and Brazil are all holding presidential polls in May, July and October, respectively.

“Operação Lava Jato [Operation Car Wash] is probably the largest corruption scandal that we know of,” says Jimena Blanco, head of Americas politics research at global risk and consulting firm Verisk Maplecroft. “Exposure to corruption is nothing new for any business going into Latin America, but this is really showing how systematic, endemic and institutionalised it is in many countries in the region – particularly, so far, in Brazil.”

The former CEO of Odebrecht, Marcelo Odebrecht, has also given unprecedented insights into the reach of his company’s graft at home and abroad, as part of a massive plea bargain agreement that offered him the chance to confess – as well as to reveal his criminal partners – in exchange for a reduced penalty.

About two-thirds of political campaigns in Brazil have been financed through illicit funds, Mr Odebrecht told a Brazilian court in April. His confessions and those of the other 76 Odebrecht officials who participated in the plea agreements implicated dozens of politicians at all levels. They did not spare current president Michel Temer or former president Dilma Rousseff (who was impeached for breaking budget rules in 2015), although both deny any wrongdoing.

Ms Rousseff’s predecessor and mentor, Luiz Inácio Lula da Silva, was given a jail sentence of 12 years and one month as an early defendant in Operation Car Wash, the original case that burst open like a Pandora’s box, revealing the mismanagement of state oil company Petrobras and quickly leading prosecutors to focus on Odebrecht.

Global reach

The tentacles of Odebrecht’s corruption stretched far beyond Brazil. US prosecutors found the company paid out as much as $439m in nine Latin American countries (Argentina, Colombia, Dominican Republic, Ecuador, Guatemala, Mexico, Panama, Peru and Venezuela) and two African countries (Angola and Mozambique) to “foreign political parties, foreign officials, and their representatives” between 2001 and 2016, which comes in addition to the $349m paid to Brazilian politicians and political parties, according to figures disclosed by the US Justice Department in 2017. These bribes secured the company 100 projects, and profits of more than $3.3bn – but eventually cost it a $2.6bn fine by Brazilian, American and Swiss authorities.

“Whether or not this is only the tip of the iceberg will depend on how far the judiciaries in various countries are willing to go,” says Ms Blanco. “We won’t really understand how far the scheme went in each country unless there is a combination of political and judicial will to investigate it properly.”

Local prosecutors in some of the countries involved are now following the thread of confessions made to their Brazilian counterparts all the way to local participants in the Odebrecht scheme. In Peru, prosecutors took into custody former president Ollanta Humala and his wife; implicated another former president, Alejandro Toledo; and eventually set their sights on serving president Pedro Pablo Kuczynski.

So far, Mr Kuczynski has survived an impeachment vote and remains protected by presidential immunity, but his approval ratings have plummeted in the aftermath of the negative headlines, combined with the controversial pardon he granted to disgraced former president Alberto Fujimori. His cabinet is now widely perceived to lack the political strength to push through long-awaited reforms.

Grinding to a halt

In addition to the political upheaval, major infrastructure investment in Peru has stalled for months since tendering processes came under scrutiny, and major contractors in the country such as Graña y Montero have also come under investigation.

“In Peru we have seen the case extending not only to the political, but also to the business elite,” says Laura Sharkey, analyst for the Andean and Caribbean region for global risk consultancy Control Risks.

“Authorities took into custody two Graña y Montero executives in December. That means that we are still finding out a lot of information. Because of that, it’s very difficult to say what’s going to happen, other than that it’s going to create quite a lot of uncertainty politically.”

In Ecuador, long-time serving vice-president Jorge Glas was given a six-year sentence for his dealings with Odebrecht. In Colombia and Panama, respective presidents Juan Manuel Santos and Juan Carlos Varela have both admitted that their previous campaigns received funds from Odebrecht, although they deny any wrongdoing and have so far been spared criminal investigation. In countries such as Venezuela and Angola, however, the whole issue has been widely overlooked.

Political consequences

Whatever the final reach of local investigations, the Odebrecht scandal has cast a new shadow over a region that has struggled to regain its appeal to foreign investors after the end of the commodity super-cycle. FDI into the Latin America and Caribbean region fell to below $160bn in 2017, from a peak of $206.9bn in 2011, at the height of the previous commodity cycle. There is also a risk that the scandals will have wider political consequences. 

“You certainly see the possibility that this could trigger a new wave of anti-establishment populism,” says Kathryn Hochstetler, professor of international development at the London School of Economics. “In Brazil it is very clear that Jair Bolsonaro, who is very much an anti-establishment character, much in the ‘Trumpian’ line , is [polling well]. But it is difficult to say how high the support is for those candidates at the moment.”

If Mr Bolsonaro is a serious candidate in Brazil, Mexico’s polls are led by the left-wing Andrés Manuel López Obrador, who may finally land the presidency after being defeated in 2006 and 2012. The odds still appear long, however, for anti-establishment candidate Jaime ‘El Bronco’ Rodríguez, the tough-talking governor of northern industrial hub Nuevo León.

Beyond contingent political consequences, the ongoing backlash against Latin America’s chronic corruption of the past “will bring a lot more focus on the integrity of political campaigns and bidding processes and investors will [take that into consideration] in the future”, says Ms Sharkey.

Besides, some regional prosecutors – namely in Brazil, but also Peru and Ecuador – have defied their reputation for being aligned with the ruling elite and have taken a bold step forward towards more modern, independent judiciaries through the use of new tools such as plea bargain agreements. The Odebrecht scandal may well be the tip of the iceberg, but its consequences may not be all bad for Latin America.