Home – Here’s Why You Can’t Put a Price on Enhanced Due Diligence

Here’s Why You Can’t Put a Price on Enhanced Due Diligence

Posted on 11-17-2015 by Ulyana Androsova

 The Petrobras bribery and corruption scandal feels more like a telenovela—the dramatic Latin American version of a soap opera. Honestly, as investigators uncover new stones, the wild twists and turns of the scandal offer more melodrama than a series finale. According to a New York Times article earlier this summer, when Alberto Youssef began naming names associated with the Petrobras bribery scheme, he allegedly told his lawyers, “Guys, if I speak, the republic is going to fall.”  What followed is a story that emphasizes why anti-bribery and corruption regulations are necessary.

 Hidden Connections Reveal Political Risk

He wasn’t exaggerating. As part of his plea agreement, he shared with his lawyers—and then with prosecutors—a tale that, as the New York Times puts it, “… has all but devastated Brazil’s status as an up-and-comer on the world stage.  One lawyer notes, “It was kind of like, in Brazil, we know that corruption is a monster. But we never really see the monster. This was like seeing the monster.”  The scandal started small, with just a few top Petrobras officials scheming with other companies to overcharge Petrobras for construction and other services. The officials “earned” kickbacks which they then shared with select politicians, since Petrobras is 51 percent government-owned. The scale of the bribery was incredible, and President Dilma Rousseff, who was chairwoman of Petrobras for at least part of the time that the scheme was in play, has been tainted—if not charged—by implications of collusion.

 The impact of this scandal on Brazil has been devastating. Petrobras accounted for approximately 10 percent of Brazil’s GDP and was a huge player in making Brazil a popular emerging market for investors and other businesses.  Now, the company has lost more than half its value in just one year, and its downfall has caused the Brazilian economy to contract as well.

 Petrobras Bribery and Corruption Scandal Hits U.S. Soil

In addition to investors that were bullish on Petrobras for emerging market bonds, other companies are feeling the pain of inadequate due diligence. Now a refinery near Houston has caught the attention of regulatory enforcement officials in the U.S. And because Petrobras is 51 percent state-owned, it’s clear that the FCPA regulations apply.

 According to the FCPA blog, the bribery and corruption allegations stem from the sale of the refinery by Astra Oil, a Belgium company, which purchased the refinery in 2005 for $42.5 million, conducted its own valuation of the company at $742 million and then sold it to Petrobras a year later for $1.2 billion. The overpayment was then used to funnel bribes to corrupt officials. As the FCPA blog points out, “This revelation may well be significant as it shows how a culture of corruption can lead to systemic corruption and then the actual method of corruption. It also demonstrates yet another mechanism to create pots of money to pay bribes; the over-valuation of properties which can then be purchased at premiums with the selling company using the overvaluation to fund bribes back to the purchase.”

 While such drama might win ratings on TV, the reality of the Petrobras scandal is that untangling the web of corruption will likely bring the company to its knees—and lead to serious fines, reputational damage and in many cases, jail time, for those associated with it. While a proactive due-diligence strategy is obviously not a priority for an organization that appears to be supported by rampant corruption, it’s exactly what other companies need to protect themselves from elaborate schemes that represent serious financial and reputational risk. Is your due-diligence process up to the task?

 3 Ways to Apply This Information Now

  1. Check out other posts about FCPA compliance on our blog.
  2. Request a free trial of Lexis Diligence® to explore the due-diligence resources and tools available—all in a single dashboard.
  3. Share this blog on LinkedIn to keep the dialogue going with your colleagues and contacts. 

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