“Everything ends up in pizza” is the expression Brazilians use when referring to the result of all the major corruption scandals to date. It means life goes on and nothing really changes.
A key question is whether Operation Car Wash, the Petrobras corruption investigation, will end up in pizza. Many believe it will. This belief is in part the result of disillusionment from past scandals.
However, sceptics point to the fact that Sérgio Moro, the federal judge in charge of Car Wash, based his strategy directly on the Clean Hands investigation into public works contracts in Italy in the 1990s, which brought down the country’s post-war political system. Clean Hands had an enormous initial impact.
However, far from reducing corruption, the operation boomeranged. Italian corruption metamorphosed and persists with effective impunity.
While it is impossible to predict Car Wash’s outcome, certain key factors distinguish the Car Wash from Clean Hands, suggesting that this time the outcome might not be pizza.
First, there is an increase in anti-corruption enforcement in Brazil and worldwide. Second, Car Wash has international ramifications that will not simply go away. In particular, US authorities are involved and civil suits have been brought in the US not only against Petrobras but also against its auditors.
Third, major companies have been brought to heel and political and business figures, hitherto considered untouchable, are being investigated and convicted. That this could happen leads to the fourth factor: in criminal organisational terms, the Brazilian racket was fundamentally flawed with the result that plea bargain deals — co-operation agreements where successive suspects agreed to spill the beans on others involved in the corruption in return for reduced sentences — have mushroomed beyond the prosecutors’ wildest dreams, threatening to bring down the government.
How could this happen? The explanation can be seen by comparing the Petrobras racket with Italian corruption. Italian corruption is systemic. It is a functioning market with its own internal rules, codes of behaviour and sanctions. These rules include the duty of secrecy and obligations of trustworthiness, in particular the duty to deliver at the agreed price. To “guarantee” performance, the transactions are “underwritten” by the mafia, itself a participant in the transactions, with its own enforcement apparatus.
An effective criminal organisation is supported by two pillars: the duty of secrecy and an enforcement mechanism. The duty of secrecy is the bond which holds the organisation together. The members are mutually compromised — the Brazilian expression for this is rabo prezo, literally meaning having their tails tied to each other. Each has knowledge that can incriminate others. Secrecy is enforced by the ability to pose a credible threat to violators, including the use of violence.
Applying this model to Operation Car Wash, not only were the rules not obeyed, but there was an absence of clear rules. The corruption expanded exponentially. Participants got greedy, asked for more, and failed to deliver. Once the investigation got going, one after another grassed up their co-conspirators to save their own skins. This could only happen because there was no enforcement mechanism to keep the participants in line.
While it is impossible to predict what the legacy of Petrobras will be, it is possible to state the following.
If a new group comes to power and attempts to impose its own regime of wholesale corruption, it will succeed only if all of the following conditions are met:
The corruption needs to become systemic, governed by clear internal rules, coupled with mechanisms to enforce those rules, if necessary by violence. The large-scale systematic application of threats and violence is a specialist criminal activity. Brazilian organised crime has up until now concentrated on narcotics, not on big business or finance. Bringing in organised crime as partners would constitute a radical departure. Many businesspeople would shrink from such involvement.
Public debate would have to be diverted away from corruption. This is improbable given Brazil’s increasingly aggressive press and the impact of social media.
The trend of increasingly effective anti-corruption laws and enforcement procedures would have to be reversed, which is similarly unlikely.
Federal judges, prosecutors and police would need to be neutralised. This will be the area where efforts will be made. In Italy, it was possible to shift the focus of public debate away from corruption and on to allegations that judges are politically biased.
Without these prerequisites, corruption will continue but will tend to fall back into areas without significant foreign involvement.
Petrobras might not end up in pizza. But foreigners beware. Companies and banks doing business in Brazil or with Brazilian companies in the supply chain need to understand how corruption works in Brazil and to ensure that compliance programmes are tailored to the particular reality of the Brazilian environment and culture.
Barry Wolfe is Managing Partner of Wolfe Associates, a boutique specialising in investigating white collar crime and crisis management.