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US pressures start to mount for scandal-hit Petrobras

US pressures start to mount for scandal-hit Petrobras

Photo by Reuters

6th May 2015

By: Simon Rees

Creamer Media Correspondent

  

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TORONTO (miningweekly.com) – The pressures embattled oil giant Petrobras might face in the US have started to crystallise, with important implications not just for the company but also for its suppliers, contractors and individual executives.

The released its long-delayed but audited financial results on April 22, which revealed the damage of a corruption scandal, with the graft costing it an estimated 6.2-billion reais, or $2.1-billion. The pre-tax impairments announced for year-end 2014 stood at 44.35-billion reais.

If the allegations about NYSE-listed Petrobras were correct, one of the most powerful vehicles that could be arrayed against the company was the US Foreign Corrupt Practices Act (FCPA). Through the Act, companies that were either listed on US public stock exchanges, incorporated in the US, had their principal place of business in the US, or were the agents of any such companies, could be held to account for corrupt behaviour occurring in any jurisdiction.

“And there are plenty of other avenues the US government could take to bring cases against non-US companies and their executives,” Norton Rose Fulbright head of regulatory and governmental investigations in the US Richard Smith told Mining Weekly Online.

CORRUPTION UNPACKED
The depth of the scandal was revealed last year by former Petrobras director and head of the refinery arm Paulo Roberto Costa. Testifying as part of a plea bargain, he claimed that many of the company’s contracts had been purposefully inflated by 3% with contractors and suppliers. The money accrued was then skimmed off and used to pay politicians bribes and kickbacks. He claimed the system had been in place during his tenure at Petrobras between 2004 and 2012.

Those investigating the scandal as part of ‘Operation Carwash, Lava Jato’, had implicated almost 30 suppliers, contractors and engineering partners. More than 100 persons were now formally involved, including executives and politicians. Dozens had been arrested and some jailed already.

Many of the companies implicated had found themselves frozen out of credit markets, making the servicing of their debt highly problematic. Some of the companies had, as a result, been forced to seek judicial recovery, a form of bankruptcy protection.

US COMES KNOCKING
Smith noted that Petrobras had already received a subpoena from the US Securities Exchange Commission (SEC), which would require the production of information to the SEC as part of its investigation.

“But if the press allegations are correct, and there’s evidence that Petrobras took this direction, then the company’s status as a listed entity in the US will place it firmly within US jurisdiction,” he explained.

In terms of gathering evidence, there was an increased willingness among countries, including Brazil, to share information with US agencies. For Petrobras, that might involve the passing on of evidence obtained by the Brazilian authorities during the process of their investigations. In addition, Petrobras’ internal investigation results would almost certainly be shared with US authorities and could be used by it in potential actions against the company and its suppliers.

Under FCPA anticorruption provisions, a company or individual could be fined up to $2-million or $250 000 for each violation. An individual could face five years in prison. In addition, the US government could seek up to twice the benefits sought or received from improper conduct.

Fines had been a common outcome of previous investigations. For example, Alcoa settled with the SEC for $384-million at the start of 2014. Several companies that settled also had monitors embedded within them, ensuring that anticorruption compliance programmes were implemented and closely followed.

Petrobras’ suppliers, contractors and engineering partners might find themselves on the same hook. “There’s a risk various suppliers and upstream partners to Petrobras will be found to have aided and abetted or been agents of Petrobras in corrupt practices. Some of those will have a US connection because they are US-listed. Others may not be, but will nonetheless come under US jurisdiction through their ties with Petrobras,” Norton Rose Fulbright co-head of Brazil practice Andrew Haynes told Mining Weekly Online.

“US authorities are willing to assert that parties engaged with a US-listed company are aiding and abetting, are agents or are conspiring with the US-listed company,” he added.

There has also been a drive by US agencies to pursue individuals more vigorously, with Haynes and Smith both noting that the US Department of Justice (DOJ) and SEC had voiced this as a top priority.

“People also need to understand that settlements in Brazil do not guarantee a bar or ban on US prosecutions over the same conduct,” Smith advised. This might also include those who avoid Brazilian prosecution but whom US prosecutors believe have a case to answer for. Extradition through bilateral legal treaties could be sought in these instances.

US SUITS
Another important US development for Petrobras was the launch of class-action lawsuits in US Federal Court, in New York, by large international institutional investors. There were also several other individual suits arrayed against Petrobras.

“Overall, there are around ten lawsuits brought by different investors in Petrobras,” Haynes explained. The plaintiffs were arguing that Petrobras failed in its duty to ensure anticorruption compliance and that the company made misrepresentations to them within the bond-offering documentation that they subsequently bought into.

These investors were seeking compensation for the losses experienced on Petrobras bonds and shares sent plunging by the scandal’s effects.

Ultimately, if the claims proved successful, Petrobras would have to pay compensation to investors. However, the processes involved were time-consuming and complex, and would probably involve the discovery of documents and deposition of numerous witnesses, including those from the implicated supplier, contractor and third-party companies.

The SEC and the DOJ would surely be noting the evidence for their own purposes. “[These suits] are another vehicle by which the US government would get access to companies’ documents it might not otherwise get access to,” Smith noted.

If not already apparent, the lesson from Petrobras scandal was now clear: companies and individuals in the resource sector that faltered or were perceived to have faltered in anticorruption compliance did not only face domestic investigation but also risked the full weight of US judicial scrutiny. Petrobras had found this out the hard way.

Edited by Tracy Hancock
Creamer Media Contributing Editor

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