Corruption and the Lava Jato Scandal in Latin America 9780367904135, 9781003024286

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“The Lava Jato case has achieved historical significance as one of the world’s most wide-ranging corruption scandals, toppling powerful figures in a number of countries while simultaneously placing Latin America’s democracies under enormous strain. This wide-ranging volume, featuring fifteen chapters by a diverse group of renowned scholars and rising stars, provides nuanced perspec tives on both the controversial legacies and the tenuous progress left behind by this once-in-a-generation corruption investigation. What worked well, what went wrong, and most importantly, what are the lessons of Lava Jato for a region that continues to struggle to effectively impose accountability on powerful elites?” – Matthew M. Taylor, School of International Service, American University “This thrilling collection of essays and testimonials about the most spectacular corruption investigation of our times is an indispensable read for any student of corruption. Covering not only judicial aspects, but also the day to day practice of systematic corruption and the operation of politics, media, and administration in such a context, it provides tremendous insight into every society where corrup tion is the norm. The mix of authentic voices of actors interviewed and abundant stats and facts work well, conveying material for a great Netflix series.” – Alina Mungiu-Pippidi, author of Quest for Good Governance: How Societies Build Control of Corruption (2015) “Lava Jato is the world’s largest corruption investigation ever and, if judged by convictions and stolen funds identified-and-recovered, it is also its most success ful. This volume is a balanced accounting of this historic and transformative cor ruption case from diverse angles, ranging from in-depth analyses of Lava Jato’s causes and effects in Brazil and across Latin America, to interviews with key players from both sides of this controversial anti-corruption crusade. This volume will be of wide-ranging interest to scholars, activists, and policymakers alike.” – Gregory Michener, Assistant Professor, FGV EBAPE

Corruption and the Lava Jato Scandal in Latin America

Corruption and the Lava Jato Scandal in Latin America brings together key international and interdisciplinary perspectives to shine new light on Lava Jato, or Operation Car Wash, Latin America’s largest corruption scandal to date. Since 2014, this scandal has unfolded in surprising ways to expose collusion between construction companies and state officials in Brazil and 11 other coun tries. The corruption uncovered amounts in the order of hundreds of millions of dollars in bribes and billions of dollars in stolen state funds. The volume features evidence that the main construction company at the center of the scandal was—apparently—deliberate about seeking business in corrupt markets. It also evaluates the ambiguous role played by the media, whose members often relied uncritically on classified information released by the authorities. The volume further contributes to our understanding with studies on a number of other relevant topics, including: the overlap between corruption and the planning of the Rio Olympics; Mexico and Peru’s contrasting responses to Lava Jato; the policy reforms needed to avoid a similar scandal in the future; and the roadmap for how Lava Jato should end. Across 15 chapters by leading and emerging scholars and practitioners, this book engages with these issues from a balanced and unbiased perspective, including interviews with key stake holders on both sides of the case. As one of the first book-length studies to deal with Lava Jato in the English language, this ground-breaking volume is a compelling reading for advanced students and researchers in areas including Corruption Studies, Public Ethics, Political Science, and Latin American Studies, as well as for practitioners working to make governments more accountable. Paul Lagunes is an Associate Professor at Columbia University’s School of International and Public Affairs, USA. Jan Svejnar is the James T. Shotwell Professor of Global Political Economy and Director of the Center on Global Economic Governance at Columbia University, USA.

Routledge Corruption and Anti-Corruption Studies

The series features innovative and original research on the subject of corruption from scholars around the world. As well as documenting and analysing corruption, the series aims to discuss anti-corruption initiatives and endeavours, in an attempt to demonstrate ways forward for countries and institutions where the problem is widespread. The series particularly promotes comparative and interdisciplinary research targeted at a global readership. In terms of theory and method, rather than basing itself on any one orthodoxy, the series draws broadly on the tool kit of the social sciences in general, emphasizing comparison, the analysis of the structure and processes, and the application of qualitative and quantitative methods. Corruption Scandals and their Global Impacts Edited by Omar E. Hawthorne and Stephen Magu Public Probity and Corruption in Chile Patricio Silva Corruption in Argentina Towards an Institutional Approach Natalia A. Volosin Corruption in a Global Context Restoring Public Trust, Integrity, and Accountability Edited by Melchior Powell, Dina Wafa, and Tim A. Mau Corruption and Informal Practices in the Middle East and North Africa Edited by Ina Kubbe and Aiysha Varraich Corruption and the Lava Jato Scandal in Latin America Edited by Paul Lagunes and Jan Svejnar For more information about this series, please visit: www.routledge.com/ Routledge-Corruption-and-Anti-Corruption-Studies/book-series/RCACS

Corruption and the Lava Jato Scandal in Latin America

Edited by Paul Lagunes and Jan Svejnar

First published 2020 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 52 Vanderbilt Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2020 selection and editorial matter, Paul Lagunes and Jan Svejnar; individual chapters, the contributors The right of Paul Lagunes and Jan Svejnar to be identified as the authors of the editorial material, and of the authors for their individual chapters, has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record has been requested for this book ISBN: 978–0-367–90413–5 (hbk) ISBN: 978–1-003–02428–6 (ebk) Typeset in Times New Roman by Wearset Ltd, Boldon, Tyne and Wear

Contents

List of illustrations List of contributors Acknowledgments Foreword PART I

An introduction to Lava Jato 1 Introduction

ix

x

xiv

xvi

1

3

PAUL LAGUNES AND JAN SVEJNAR

2 Lava Jato in perspective

17

ALBERT FISHLOW

3 Competing to be corrupt: the multinational dynamics

of public procurement bribery in Latin America

35

CONNOR WAHRMAN

PART II

Brazil’s experience with Lava Jato 4 Urban planning legacies and corruption: evidence

from the Rio Olympic Games and Lava Jato

49

51

MÁRCIA R. G. SANZOVO AND KARLA Y. GANLEY

5 Captured media? Examining Brazilian coverage

of Lava Jato DANIELA CAMPELLO, ANYA SCHIFFRIN, KARINE BELARMINO, AND DEBORA THOME

68

viii Contents 6 Sunlight is the best disinfectant: investigative

journalism in the age of Lava Jato

82

BEATRIZ BULLA AND CORTNEY NEWELL

7 Lava Jato and Brazil’s web of accountability

institutions: a turning point for corruption control

94

ANA LUIZA ARANHA

8 An interview with Deltan Dallagnol

113

PAUL LAGUNES

9 An interview with Sérgio Moro

129

PAUL LAGUNES

PART III

Lava Jato beyond Brazil

141

10 Comparing Peru and Mexico in the Lava Jato

corruption scandal

143

RAQUEL DE MATTOS PIMENTA AND CATHERINE GREENE

11 Fighting corruption in a hostile environment:

Peru’s Lava Jato special prosecution team

165

DENISSE RODRIGUEZ-OLIVARI

PART IV

Where to from here?

183

12 An interview with Glenn Greenwald

185

KARLA Y. GANLEY AND PAUL LAGUNES

13 Corruption in Brazil: beyond the criminal law

199

SUSAN ROSE-ACKERMAN AND RAQUEL DE MATTOS PIMENTA

14 How should Lava Jato end?

213

JESSIE W. BULLOCK AND MATTHEW C. STEPHENSON

15 Lava Jato’s lessons, leaks, and lasting impacts

227

KARLA Y. GANLEY AND PAUL LAGUNES

Index

243

Illustrations

Figures 3.1 Odebrecht business by public procurement corruption 3.2 Odebrecht business by gross capital formation

across sample 3.3 Odebrecht business by public procurement corruption

and gross capital formation

40

41

42

Tables 3.1 Pearson’s correlation coefficient for independent variables 3.2 Associations between predictors and Odebrecht

business, 2001–2016 3.3 Variable descriptions and sources 3.4 Variable values across sample 4.1 Public policies plan—main public transportation projects 4.2 Public policies plan—general infrastructure and urban

revitalization projects 4.3 Public policies plan—environmental and sanitation

projects—Parts I and II 10.1 Summary comparison 11.1 List of high-profile politicians under investigation or

convicted in the Peruvian Lava Jato 11.2 List of key actors in the Peruvian Lava Jato

mentioned in this chapter

42

43

45

46

53

55

56

154

171

175

Contributors

Ana Luiza Aranha holds a Ph.D. in Political Science from the Federal University of Minas Gerais (UFMG). She is currently a researcher and professor at Fundação Getúlio Vargas (FGV) in São Paulo, Brazil. She is also actively collaborating with the United Nations Development Program (UNDP) as an Anticorruption Technical Advisor. Previously, Aranha worked with the AntiCorruption Knowledge Centre of Transparency International’s Brazilian chapter. Karine Belarmino is a Ph.D. student in Political Science at the University of Minnesota. She holds a master’s degree in Political Science from the Instituto de Estudos Sociais e Políticos at the Universidade Estadual do Rio de Janeiro (Brazil). Her research focuses on clientelism, corruption, and the media. Beatriz Bulla is a Brazilian reporter. She is currently the Washington corre spondent of the Brazilian newspaper O Estado de S. Paulo, where she has worked since 2012 covering economics, politics, and justice both in São Paulo and in Brasilia. She has reported on the Supreme Court, the Brazilian presidential elections, the Lava Jato investigations, and the impeachment of President Dilma Rousseff. She received an award for her coverage of Lava Jato in 2017. Jessie W. Bullock is a Ph.D. candidate in the Department of Government at Harvard University. She studies comparative politics and political economy, with research interests in political violence, corruption and machine politics, and conflict. Her dissertation project is about the causes and consequences of organized crime’s involvement in politics in Rio de Janeiro, Brazil. Before joining the Government Department at Harvard, Bullock worked in inter national diplomacy at the US Department of State in both Washington, DC, and Guatemala City. Daniela Campello is an associate professor of Politics and Public Policy at the Brazilian School of Public and Business Administration at Fundação Getúlio Vargas. In 2018, she served as the Oxford-CAF Visiting Fellow at St. Anthony’s college. Campello received her Ph.D. in Political Science from the University of California, Los Angeles (UCLA), and was formerly an assistant professor at Princeton University. Her research lies at the frontier of international and

Contributors xi comparative political economy. Prior to entering academic life, Campello worked for the Rio de Janeiro state government. Raquel de Mattos Pimenta is a Global Fellow at Fundação Getúlio Vargas (FGV) São Paulo Law School. She obtained her Ph.D. from the University of São Paulo (USP) Law School. Her research focuses on anticorruption reforms and institutional analysis in Brazil. De Mattos was a Fulbright Visiting Researcher at Yale Law School (2017–2018) and lead editor of the Yale Journal on Regulation. Albert Fishlow is Professor Emeritus at the University of California, Berkeley, and at the School of International and Public Affairs at Columbia University. He is also the former director of the Columbia Institute of Latin American Studies (ILAS) and the Center for the Study of Brazil at Columbia. In 1999, he was awarded the National Order of the Southern Cross by the government of Brazil. Among his numerous publications, Fishlow authored Starting Over: Brazil Since 1985 (Brookings, 2011), a book that recounts the political and economic history of Brazil since the 1980s. Karla Y. Ganley holds a Master of Public Administration degree from Columbia University’s School of International and Public Affairs, as well as a Master of Public Health degree from Columbia University’s Mailman School of Public Health. One of her areas of specialization is political and economic development. She is also a healthcare systems and population health specialist. Catherine Greene is a financial consultant for the Finance and Markets Global Practice division at the World Bank (WB). She holds an LL.B. from the University of San Andrés (Buenos Aires), and an LL.M. from Yale Law School (2018). Her expertise is in anti-money laundering and public asset disclosure procedures. Greene is currently the publication manager for the U4 Anti-corruption Resource Centre. Paul Lagunes is an associate professor at Columbia University’s School of International and Public Affairs. His research on the political economy of development explores the issue of corruption. Mainly through the execution of randomized control trials in diverse contexts, such as Peru, Mexico, and New York, Lagunes offers insights on the conditions under which anticorrup tion monitoring is most effective. He has published in a number of outlets, and is co-editor with Susan Rose-Ackerman of Greed, Corruption, and the Modern State: Essays in Political Economy. He obtained his Ph.D. from Yale University. Cortney Newell is a humanitarian aid worker currently stationed in Cúcuta, Colombia, where she is the coordinator of a cash assistance program for vulnerable Venezuelan migrants. After starting her career as a journalist in Tennessee, she has worked in international community development and humanitarian aid on three continents. She has participated in research on such topics as corruption in Latin American, gender-sensitive humanitarian

xii Contributors programming in the Middle East, and mobile technology for economic devel opment in Africa. Newell obtained her MPA in Development Practice from Columbia University’s School of International & Public Affairs. Denisse Rodriguez-Olivari is a Ph.D. candidate in Political Science at Humboldt University – Berlin, with studies at King’s College London in the Department of International Development. Her dissertation examines the effects of the judicialization of grand-corruption in the Lava Jato scandal in Peru and Brazil. She completed a postgraduate certificate at the London School of Economics and Political Science as a Hansard Society Scholar. She also holds a master’s degree in international development, with a specialization in Politics and Governance, from the Global Development Institute at the University of Manchester. Susan Rose-Ackerman is the Henry R. Luce Professor of Law and Political Science, Emeritus at Yale University. Her research interests include the political economy of corruption, and comparative administrative law. Among her numerous publications, she has authored several books, including: Corruption and Government: Causes, Consequences and Reform (1999; 2nd edition with Bonnie Palifka, Cambridge University Press, 2016); From Elections to Democracy: Building Accountable Government in Hungary and Poland (Cambridge University Press, 2005); Rethinking the Progressive Agenda: The Reform of the American Regulatory State (The Free Press, 1992); and Corruption: A Study in Political Economy (Academic Press, 1978). Márcia R. G. Sanzovo is a third-year graduate student at Columbia University, pursuing a Master of Public Administration degree at the School of Inter national and Public Affairs and a Master of Business Administration degree at Columbia Business School. Her two areas of specialization are urban and social policy, and social enterprise. Sanzovo has prior experience in manage ment consulting in Latin America and in the Brazilian nonprofit sector, where she led a nationwide project to support municipal education offices in improving their workflow. Anya Schiffrin is the director of the Technology, Media, and Communications specialization at Columbia University’s School of International and Public Affairs. Among other topics, she writes about journalism and development as well as the media in Africa and the extractive sector. Schiffrin is on the Global Board of the Open Society Foundations and the advisory board of the Natural Resource Governance Institute. Her most recent books are African Muckraking: 75 Years of African Investigative Journalism (Jacana, 2017) and Global Muckraking: 100 Years of Investigative Reporting from Around the World (New Press, 2014). Matthew C. Stephenson is the Eli Goldston Professor of Law at Harvard Law School. His research focuses on public law, legislation, administrative law, and anticorruption. In addition to his academic research, Stephenson has

Contributors xiii served as a consultant on corruption control, governance, and judicial reform projects for the World Bank, the International Monetary Fund, the United Nations, Transparency International, and other NGOs and governments. He is the founder and editor-in-chief of the influential Global Anticorruption Blog. Jan Svejnar is the James T. Shotwell Professor of Global Political Economy and director of the Center on Global Economic Governance at Columbia University. His research focuses on the effects of government policies on firms, labor, and capital markets; corporate, national, and global governance and performance; and entrepreneurship, innovation, and investment. In 2012, Svejnar received a Neuron Prize for lifelong achievement from the Karel Janeček Endowment for Research and Science, and, in 2015, he was awarded the 2015 IZA Prize in Labor Economics from the Institute for the Study of Labor. Among his numerous publications, Svejnar coedited the volume Labor Markets and Economic Development. Debora Thome is a Ph.D. candidate in Political Science at Universidade Federal Fluminense (Brazil). Her research concerns women and power, public policy, and inequality. During the 2017–2018 academic year, she served as a visiting scholar at Columbia University, and, prior to launching her academic career, she worked as a journalist for Brazilian mainstream news outlets. Connor Wahrman obtained his master’s degree from Columbia University’s Quantitative Methods in the Social Sciences program. It is in this program that Wahrman wrote a thesis on the dynamics of public procurement corruption. He currently conducts consumer insights and communications research for The Collage Group, a leading US multicultural market research firm.

Acknowledgments

This volume is the product of fruitful collaborations. It is also the beneficiary of much good will and effort by those who supported our original vision. With these paragraphs, we hope to convey our genuine appreciation for everyone who played a part in making this publication a reality. Stated simply and with convic tion, this volume would not exist without the contribution of those listed in the lines that follow. Considering that our project essentially grew out of a series of events organ ized, in no small part, by the Columbia Global Centers | Rio de Janeiro, we begin by thanking Thomas J. Trebat. In his years of service as the Rio Center’s executive director, Thomas has made a genuine contribution to bridging United States–Brazil relations. We benefited greatly from his constant encouragement, intellectual guidance, and logistical support. Current and past members of his team, including Daniella Diniz and Laura Nóra, also helped us at key moments along the way. Rice University’s Baker Institute and Columbia University’s Center for Development Economics and Policy (CDEP) provided additional institutional support. The volume’s home base and launch pad was the Center on Global Economic Governance (CGEG) at Columbia University’s School of International & Public Affairs. At CGEG, David Caughlin provided vital administrative assistance. Similarly, Theresa Murphy coordinated a number of relevant tasks and also read through early drafts of what eventually became polished chapters. Among other things, Christopher Law made sure that Teresa Lawson’s careful and efficient work as a professional copyeditor was compensated in a timely manner. Cortney Newell and Joshua Son transcribed the interviews featured in the volume. João Pompeu Melhado assisted with research and other important tasks, such as pro viding frank and informed opinions about current affairs in Brazil. On a related note, we are immensely grateful to all those who shared their time and perspective with us. For instance, Marcos Troyjo—now serving in Brazil’s Ministério da Economia—proved persuasive as he laid out the means by which controlling corruption could ultimately promote development. Wagner Rosário and his team at the Ministério da Transparência e Controladoria-Geral da União (CGU) afforded us with a wealth of information regarding the institu tional framework within which corruption is fought in Brazil. Others who sat

Acknowledgments xv down to talk with us are Gustavo Azenha, Guilherme Donega, Ilona Szabo De Carvalho, André Oliveira, Maria Barcellos-Raible, Daniel Guanaes, Paulo Galvão de Carvalho, Paulo Vasconi Speroni, Tiago Amaral Ciarallo, and, of course, Vicky Murillo. Victor Pougy coordinated the interview with Glenn Greenwald. Erika de la Garza contributed to organizing an event that helped crystalize our thinking on a number of relevant issues. However, we would be remiss if we did not also highlight the special contributions made by Raquel de Mattos Pimenta and Karla Ganley. Raquel brought a number of relevant readings to our attention and selflessly reviewed key portions of the volume. As to Karla, every single chapter in this volume benefited from her intellectual contribution. Her inspiring work ethic and passion for research makes her the ideal collaborator. We are similarly grateful to the other chapter authors who, starting in March of 2018, agreed to help us reflect on the ever-evolving topic that is Lava Jato. It is difficult to predict how the events described in this volume will ultimately unfold; however, everyone listed here contributed to producing what readers will hopefully con sider is a thoughtful and balanced volume. Any mistakes are our responsibility as its editors.

Foreword

In early 2014, a supposedly routine money laundering investigation by the Brazilian Federal Police was drawn to a gas station in the heart of the capital city of Brasília. This unassuming gas station, which also ran a car wash busi ness, housed a small office connected to a black-market dollar dealer who was being investigated. Once public prosecutors joined the Federal Police and started following the money trail originating from that office, they lifted the lid on a web of corruption of unimaginable proportions. Today, after some six years have passed, that web has been found to cover over ten countries. A number of former Latin American presidents have been implicated. The revelations of bribe payments are in the order of hundreds of millions of dollars, involving major public procurement contracts worth billions of dollars. The political, economic, and judicial repercussions stemming from Lava Jato have been unprecedented and will continue to be felt for decades to come. In Brazil, Lava Jato has led to more than 150 convictions and directly impli cated, among others, former presidents, a former speaker of the house, former state governors, senators, several ministers of state, some of the wealthiest and most influential businessmen in the country, high-level executives from the most celebrated state-owned company, and innumerous other politicians, political operatives, and entrepreneurs. In Peru, Lava Jato has led to the indictment of four former presidents, two of whom were arrested, another who committed suicide when he was about to be arrested, and yet another who, in early 2020, was still in the US trying to avoid extradition to Peru. Lava Jato has also proven controversial. In Brazil, some regard the Operation as a landmark in the fight against endemic corruption. For the first time in history, high-level politicians and businessmen were arrested for trading access to public contracts for campaign contributions and bribes. This break with impu nity was made possible because of the coordination of a wide range of actors in the judicial system, including the Public Prosecutor’s Office, the Attorney General, the Federal Police, the Office of the Comptroller General, and the Federal Court of Accounts, and to innovations brought about by the introduction of new legal tools, such as plea bargain agreements. Those who approve of the Lava Jato Operation see it as representing an institutional change that may finally allow Brazil to rid itself from the systemic corruption that has dominated

Foreword

xvii

the country for decades, and that is perceived to have grown to become a quasiinstitutionalized attribute of the political system since the early 2000s. For the Operation’s critics, Lava Jato is a conspiracy by the right-wing elite in Brazil to regain political control and to weaken the Worker’s Party (PT), which held the presidency from 2002 to 2016. From this perspective, the aggres sive social policies pursued by the PT and the strong popular support it had with the poorer segments of the population, particularly centered on the charismatic figure of former president Lula, have led the right-wing conservatives to resort to non-democratic means to regain power. The Lava Jato Operation, then, would be motivated, chiefly, by the goal of dismantling the PT and reducing its elect oral prospects through indictments, bad press, and even arrests. This would explain the high number of PT politicians targeted by the Operation and the dis proportionate focus on them by the media. This would also help explain both Dilma Roussef’s impeachment process—though, officially, it had an unrelated justification—and Lula’s imprisonment. To be clear, the view that Lava Jato is a conspiracy seems incongruent with the fact that investigations and harsh prison sentences reached prominent members of various parties and influential businessmen from the private sector. However, that view gained credibility when Sérgio Moro, the judge overseeing many of the cases, accepted a political position as Minister of Justice in the government of Jair Bolsonaro, the first elected president since Dilma Roussef. That view was again reinforced, in late 2019, when the media reported that Sérgio Moro and the chief prosecutor responsible for the case, Deltan Dallagnol, exchanged, throughout the judicial process, messages that impartial observers might well regard as, at the very least, inappropriate. So, from this perspective, rather than a positive institutional development, the Lava Jato Operation would seem a travesty of justice concocted to disguise a political conspiracy that weakened Brazilian democracy and gave rise to the far-right political movement identified with Jair Bolsonaro. These competing narratives will probably never go away and are likely to become an integral part of Brazilian political history. We are still coming to terms with Lava Jato. The scandal’s continuing impact on the political and eco nomic landscape of Brazil and Latin America will undoubtedly remain the subject of extensive analysis and debate far into the future. And this is why this new volume that Paul Lagunes and Jan Svejnar have edited is such an important and welcome first step in trying to bring the Lava Jato Operation into perspective. The book provides a balanced and overarching view of the Operation and relies on the contribution of distinguished scholars and practitioners, as well as on interviews with some of Lava Jato’s main prot agonists. It begins by outlining the economic, political, and institutional land scape that existed around the time when the Lava Jato Operation began in Brazil. It then describes the limitations of public procurement in Latin America and discusses how the process is prone to corruption, using the example of the Olympic Games in Rio de Janeiro as an illustration. Following, it lays out two opposing views on the role of the media in the political developments triggered

xviii Foreword by Lava Jato: one perspective arguing that investigative media gave up its role and was manipulated by the elite to debase democracy, and another arguing that the media was a key player in the success of the Operation in exposing corruption and promoting institutional change. The book then presents the sometimessurprising insider views from the two key figures responsible for the judicial proceedings and from one of the main journalists who denounced its abuses: Public Prosecutor Deltan Dallagnol, former Federal Judge Sérgio Moro, and The Intercept founder and editor Glenn Greenwald. Some international perspective on the scandal is provided by comparisons between the Lava Jato cases in Mexico and Peru, and by the analysis of how the political and institutional settings in these countries may have conditioned the development of the investigations and their consequences. Finally, the last few contributions offer reflections on the future, focusing on potential corruption-reducing reforms in Brazil that go beyond criminal law and on the long-term legacy of the Lava Jato Operation. This volume is bound to become a key reference in the future study of Lava Jato. It is a valuable contribution that sheds dispassionate light on the merits and shortcomings of the process. Hopefully, it will also stimulate further research on the topic and help us devise better institutional responses to reduce corruption, strengthen democracy, and improve the efficiency of government spending in Latin America. Rodrigo R. Soares

Part I

An introduction to Lava Jato

1

Introduction1 Paul Lagunes and Jan Svejnar

Introduction The corruption scandal goes by several names. Some refer to it as, “Petrolão,” which plays off of the word for “oil” in Portuguese.2 In English, there are those who refer to it as, “the Odebrecht scandal” or “the Petrobas scandal,” given the names of the companies at the center of the affair. However, the most common label for the scandal is actually “Lava Jato,” which means “Car Wash.” Authorities in Brazil began uncovering Lava Jato in March of 2014. Prosecutors in the southern city of Curitiba were looking into the activities of black-market money dealers known locally as doleiros (Cifuentes, 2014). These doleiros were using gas and car wash stations to launder money, which is how the scandal— or, more precisely, the operation that uncovered the scandal—got its name (“Caso Lava Jato: Entenda O Caso,” n.d.).3 As the authorities extended their search, they found that a particular doleiro (Alberto Youssef) had links to Paulo Roberto Costa, a high-level executive of Brazil’s state-owned oil company Petrobras (Cifuentes, 2014; Segal, 2015). Thus, what began as a local investigation into money-laundering, uncovered collusion between Petrobras employees and construction companies seeking con tracts for public works projects (Davis, 2019, p. 163). The oil company’s employees took bribes, a portion of which they then shared with the politicians who had appointed them to their posts in Petrobras (Watts, 2017). Prosecutors found that corrupt practices involving Odebrecht, the region’s largest construction group, actually covered a total of 12 countries. In alphabetical order, these coun tries are: Angola, Argentina, Brazil, Colombia, the Dominican Republic, Ecuador, Guatemala, Mexico, Mozambique, Panama, Peru, and Venezuela (“Odebrecht Bribed Across Latin America,” 2016). All told, the corruption scheme resulted in inflated costs for public works projects at the expense of taxpayers (“Petrobras Reaches Settlement With SEC for Misleading Investors,” 2018). In one sense, Lava Jato is nothing new. The state of corruption in Latin America has long given observers cause for concern (Arellano-Gault, 2020, p. 7; Morris & Blake, 2009, p. 2). One of the earliest records of this in Latin America goes as far back as an eighteenth-century report (Juan & de Ulloa, 2011 [1749]). The report describes how colonial officials sold public offices; members of the

4

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judiciary placed their verdicts up for auction; and customs agents allowed merchants who paid an unofficial quota to import goods at reduced tax rates (McFarlane, 1996, pp. 42–43). Simply stated, the world has long known that Latin America, as a whole, struggles with accountability. However, in another sense, Lava Jato is like nothing previous. It is a corrup tion scandal that has embroiled a vast portion of the continent, triggered massive protests, and—directly or indirectly—contributed to toppling more than one president. In a somewhat recent opinion piece, Matthew Taylor, a scholar whose joint effort produced the volume Corruption and Democracy in Brazil, writes: “[Lava Jato] could be the single largest corruption investigation ever under taken, anywhere” (Taylor, 2016).4 There is even an 16-episode television show about the scandal.5 But setting audience’s morbid interests to one side, for several years now, many have been working to make sense of this elaborate, multi-year event that has frequently yielded new surprises. Many months into writing and compiling this volume, Lava Jato again caught us and others off guard when an online news outlet (specifically, The Intercept) began publishing previously undisclosed exchanges between some of the authorities involved in the Operation. The reporting on these private exchanges, which allege that there may have been certain improprieties committed by those handling Lava Jato cases, is discussed at various points in this volume. However, those who thought that Lava Jato was fading or reaching its end were left scratching their heads toward the end of 2019. That is when the Operation extended its investigation to include the world’s largest container shipping company, Maersk, because of allegations regarding multimillion dollar bribe payments to Petrobras (Schipani, 2019). Highlighting these unforeseen developments serves to demonstrate Lava Jato’s complexity and to underscore the need for research on the subject. This volume is a response to that need. Including this introduction, we collect a total of 15 chapters that capture the insights of 19 authors who have studied Lava Jato. Of these authors, 9 are Brazilian or are area specialists with extensive experience studying Brazil.6 In particular, Albert Fishlow, Professor Emeritus at University of California, Berkeley, and Columbia University, and former director of the Columbia Institute of Latin American Studies and the Center for the Study of Brazil at Columbia, has accumulated half-a-century of wisdom regarding this one country. A similar comparison can be made with Susan Rose-Ackerman, another of our chapter contributors, who is the Henry R. Luce Professor Emeritus of Law and Political Sciences at Yale University. RoseAckerman published her first of seven books about corruption in 1978. Among the other authors contributing to this volume are governance experts, current or former journalists, data analysts, and development specialists. All have their own views about Lava Jato, a fact that we believe makes for a richer and more balanced take on an inherently contentious topic. Looking ahead, the following sections provide additional background information about Brazilian politics and about the Lava Jato scandal. As an introduction to this volume, the contextual information provided in the next few

Introduction 5 pages is far from exhaustive; however, the information we do include should prove helpful to readers who are approaching our project with limited prior knowledge on Brazil, Latin America, or corruption. We conclude this chapter with a section that maps out the structure and content of the volume. But before proceeding, a conceptual note is in order. The definition of the term corruption, which is central to this volume, is a subject of much debate (Anechiarico & Jacobs, 1996; Gardiner, 2002; Heidenheimer, 1974; Scott, 1972). In addition to discussing the power dynamics associated with this debate, as evidence of the debate’s amplitude, Arellano-Gault (2020) compiles a sampling of over 20 definitions for the term. Some of these definitions endorse a broad understanding of the word, while others insist on a narrow interpretation. On the one hand, the advantage of defining corruption broadly is that doing so accounts for the structural factors that give rise to the problem in the first place. From this perspective, corruption is understood as deviations from widely held principles (e.g., Kurer, 2005, p. 230; Mungiu-Pippidi, 2015, pp. 14–15; Rothstein, 2011, pp. 14–30). On the other hand, the advantage of narrower definitions of the term is that they do not require that everyone agree on what is right and good for society (Rose-Ackerman, 2018, p. 98). An example of such a definition states that corruption is the abuse of entrusted power for private gain (Corruption Perceptions Index 2018: Frequently Asked Questions, 2018b). This particular definition is the one we generally subscribe to for the purpose of this volume.

From scandal to scandal Corruption scandals are not new to Brazilian politics. In fact, contrary to what some would like to believe, corruption was also present under military rule, which lasted from 1964 to 1985 (“Brazil: Protesters Storm Congress Seeking Military Rule,” 2016; Geddes & Ribeiro Neto, 1992). Corruption scandals have also tormented every presidential administration since civil order was reestab lished in the mid-1980s (Taylor & Buranelli, 2007). A congressional inquiry found endemic corruption in José Sarney’s administration (1985–1990) (Long, 1988). Fernando Collor de Mello’s term, which began in 1990 with promises of clean government, ended with impeachment in 1992 after the president’s own brother accused him of accepting corrupt payoffs (Pereira, Power, & Raile, 2011; Pérez-Liñán, 2007; Weyland, 1993). On Itamar Franco’s watch (1992–1995), the congressional budget committee misappropriated funds (Taylor & Buranelli, 2007, p. 60). Fernando Henrique Cardoso (1995–2003) faced accusations of congressional vote buying (Taylor & Buranelli, 2007). During Luiz Inácio Lula da Silva’s presidency (2003–2011), Brazil experi enced a number of corruption scandals, including those known as Banestado, Caixa Dois, and Bingos (Astor, 2006; “Brazil Bingo Staff March Over Ban,” 2004; “Brazil Corruption Charges Urged,” 2004). But the most important scandal—a scandal that comes up multiple times throughout this volume—was the one called Mensalão, a scheme in which coalition parties accepted large clandestine monthly payments (mensalão) in exchange for their support of Lula’s party,

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known as the Workers’ Party or PT (“What is Brazil’s ‘Mensalão?’,” 2013). News about these illicit payments broke in 2005, when a disgruntled legislator by the name of Roberto Jefferson publicly accused Lula’s party of bribing its political allies. Essentially, the government paid some 12,000 US$ per month to members of the government coalition as a way to guarantee that proposed bills were voted into legislation (Michener & Pereira, 2016, p. 4). As The Economist (“What is Brazil’s ‘Mensalão?’,” 2013) aptly explains: The money [for the bribes] was said to have come from the public purse via fake advertising contracts signed by state-owned companies with corrupt advertising firms. […] Overlapping congressional inquiries ended up accusing 18 congressmen of involvement in the vote-buying scheme. The biggest name among them was José Dirceu […], who had been chief of staff to the president, Luiz Inácio Lula da Silva, until forced by the scandal to step down. The Supreme Court eventually took up the Mensalão case, but because of the court’s considerable backlog, the trials of more than three dozen politicians did not begin until mid-2012 (Downie, 2012). In the meantime, the PT won two more presidential elections, the first re-electing Lula, and the second Dilma Rousseff in 2010. Rousseff is an economist and politician who, in her youth, had been imprisoned and tortured for her activism by the military dictatorship (Romero, 2012). She began her tenure by firing over five ministers because they were suspected of corruption (Forero, 2011). However, these and other actions, such as the enact ment of a major government transparency law, were seen as insufficient by 2013, as Brazil’s economic outlook worsened (“Brazil,” 2017; “Brazilian Waxing and Waning,” 2016). Crowds took to the streets to protest corruption, and in particular the billions spent on new football stadiums for the 2014 World Cup, among other issues (“Brazil Unrest: ‘Million’ Join Protests in 100 Cities,” 2013; Watts, 2013). Soon after the demonstrations, Rousseff stood for reelection in 2014; her margin of victory was the narrowest in modern Brazilian history (“Resultado da eleição é o mais apertado já visto no Brasil,” 2014). Against this backdrop of growing economic and political anger, the largest corruption scandal in the country’s history unfolded.

Petrobras, the prize Petróleo Brasileiro SA, typically known as Petrobras, is Brazil’s semi-public national oil company. Its contracts run into the billions of dollars annually (Fuentes, 2016). As noted in the opening paragraphs to this chapter, looking to access Petrobras’s wealth, over a decade ago, Odebrecht SA and other Brazilian construction firms colluded to ensure that Petrobras awarded them inflated con tracts (Smith, Valle, & Schmidt, 2015).7 An estimated 3 percent of the money from the contracts was paid as bribes, mainly to top-level Petrobras employees in order to ensure that the oil company

Introduction 7 allotted business to the construction companies in the cartel (Leahy, 2014). Politicians got kickbacks in the form of personal gifts and campaign donations (Segal, 2015). Bribes flowed through a complex network of offshore accounts and black-market financial operators (Justi & Dionísio, 2016; Mella & Gorriti, 2016). One of the contracts processed through the shady scheme involved the construc tion of the Arena Corinthians soccer stadium, a finding that seemed to vindicate the protests that had preceded the World Cup (Stauffer & Parra-Bernal, 2016). The scheme might have continued unhindered, if not for the investigation that became known as “Operação Lava Jato” or “Operation Car Wash,” run by Brazil’s Ministerio Público Federal (MPF, the Federal Public Prosecutors’ Office) (Watts, 2017).8 In March 2014, investigators discovered that a particular doleiro, or black-market dealer, named Alberto Youssef had given Paulo Roberto Costa of Petrobras a luxury SUV (“Former Petrobras Executive Costa Convicted in Corruption Case,” 2015; “Nota fiscal confirma que doleiro pagou R$250 mil em Range Rover para ex-director da Petrobrás,” 2014). The arrest of both Youssef and Costa began the process of uncovering an intricate corruption network involving managers, businesses, politicians, and doleiros (Parreira, 2016, p. 8). Petrobras executives, appointed by the political parties in the gov erning coalition, would share inside information with Brazil’s largest contrac tors, including Odebrecht (Parreira, 2016). In his plea-bargain testimony, the then-CEO of Odebrecht finally admitted to prosecutors that the construction company had an entire department dedicated to bribery (Pressly, 2018). The department was known as the Division of Structured Operations, and it helped fund the elections of a half-dozen presidents in Latin America (Smith, Valle, & Blake, 2017). It also helped influence heads of state in Peru and Venezuela, as well as legislators across the region (Smith et al., 2017). All told, the Division of Structured Operations paid nearly 800 million dollars in bribes so as to secure government contracts worth over billions of dollars in profit for the company (Shiel & Chavkin, 2019; Smith et al., 2017). Federal prosecutors in Brazil cannot punish wrongdoers—this is the respons ibility of Brazil’s judiciary. Historically, however, revelations of corruption have not always resulted in punishment for the corrupt (Carson & Prado, 2016). With Lava Jato this changed significantly. Federal and Supreme Court judges have examined extensive evidence, much of it obtained from subpoenaed bank records and from politicians and business people who, arrested on suspicion of corruption, agreed to testify in exchange for leniency. As a result, members of the country’s elite, once untouchable, have been arrested, charged, and jailed. Among those that have been sent to prison are Marcelo Odebrecht, the ex-CEO of Latin America’s largest construction group (Dickerson, Magalhaes, & Lewis, 2016; Shiel & Chavkin, 2019); José Dirceu, a former revolutionary who, as was noted previously, had been Lula’s chief of staff (“Former Brazil Presidential Chief of Staff Sentenced to 23 Years for Corruption,” 2016); Eduardo Cunha, a conservative politician who was speaker of the Lower House of the Brazilian Congress (Phillips, 2017); and even former President Lula himself (Londoño & Darlington, 2018). In April 2018, Lula began serving a

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12-year-prison sentence; however, he was released in November of 2019, after the Supreme Court decided that defendants can remain free until they have exhausted all appeals (Harris & Schipani, 2019). Sérgio Moro is the judge who oversaw much of the Lava Jato prosecution (“Sérgio Moro: Herói Anticorrupção Ou Incendiário?,” 2016), and was even responsible for sentencing Lula (Calamur, 2017). Many have celebrated Moro’s willingness to pursue members of the country’s elite (Barros, 2017; Segal, 2015). However, as we discuss in the next section and is reflected in the opening paragraphs to Chapter 9, Moro is ultimately a controversial figure.

The impact of the Lava Jato scandal A delegation representing the Latin American Studies Association (LASA), a professional organization of scholars who study the region, issued a report arguing that the impeachment procedures against then-president Dilma Rousseff represented an attack against democracy (Chalhoub, Collins, Llanos, Pachón, & Perry, 2017). Echoing this view, opinion pieces published in the New York Times and The New Yorker expressed concerns that Lula’s imprisonment repres ented a political vendetta (Anderson, 2018; Castañeda, 2018). Some also saw injustice in the way that Rousseff’s unpopular successor, Michel Temer, long avoided standing trial on obstruction of justice and corruption charges, by secur ing support among Brazilian lawmakers (Londoño & Darlington, 2018).9 More over, there are those who believe that anger about corruption fueled political support for the presidential candidacy of Jair Bolsonaro, a military veteran and right-wing populist whose disparaging comments against gays, women, and blacks when he was in Congress won him notoriety (Leahy & Schipani, 2018). And to add to this list, those concerned about bias in the way that Operation Lava Jato was carried out were scandalized when Moro decided to join Jair Bolsonaro’s administration as Minister of Justice (Pearson & Magalhaes, 2018), and also when revelations stemming from The Intercept’s reporting raised procedural concerns about the Operation (Greenwald, Demori, & Reed, 2019). Notwithstanding all these concerns, none of which are minor, the vast majority of Brazilians believe that the Lava Jato investigations should continue. A poll released at the end of 2019 showed that support for the Operation is slightly over 80 percent (Romano, 2019). Additionally, the LASA report refer enced above was unwavering in recognizing that the corruption uncovered by Brazilian investigators was, “real and serious” (Chalhoub et al., 2017, p. 10). Based on the strength of the evidence, the United Stated Department of Justice, in collaboration with Brazilian and Swiss authorities, imposed a multi-billion dollar fine on Odebrecht (DOJ, 2016). Eighty percent of that amount will be returned to Brazil (DOJ, 2016). Still, in spite of the prosecutorial success of Lava Jato, it remains to be seen whether Brazil will achieve sustained improvements to its level of governance. Lowering the level of corruption is clearly a difficult endeavor that, if achieved, will ensure a better standard of living for Brazilians in general. With this in

Introduction 9 mind, several of the chapters in this volume put forth concrete policy recom mendations that can and should guide the way ahead.

The structure of the book As a logical extension to this introduction, Chapters 2 and 3 provide additional details and context. In particular, Chapter 2 captures Albert Fishlow’s narrative on Lava Jato and related events. Having dedicated most of his life to the study of Brazil’s economy, Fishlow offers the sort of perspective on Lava Jato that few others can. Next, Chapter 3 by Connor Wahrman analyzes public procurement sectors throughout Latin America, investigating whether Odebrecht, the Brazilian industrial conglomerate implicated in Lava Jato, chose countries in which to do business based on their perceived corruptibility. Wahrman finds empirical evid ence that Odebrecht avoided Latin American markets in which its bribery strategy was less likely to be successful. This revealed preference challenges the claim that Odebrecht was a neutral actor in a corrupt environment, and, instead, suggests that the company exploited regional variation in public procurement corruption as part of its business practices. We then turn to Part II of the volume, which comprises six chapters that focus squarely on Brazil’s experience with Lava Jato. Chapter 4 begins this portion of the volume with a careful study about the implications of government unaccountability at the local level. The chapter’s authors, Márcia R. G. Sanzovo and Karla Y. Ganley, explain that, in preparation for the 2016 Rio Olympic Games, Brazil spent 7.5 billion US$ on urban development projects. However, many of these projects went over budget, and a number of them remain incom plete. Some of the blame goes to corruption: official investigations into the matter have revealed kickbacks, vote-buying, and bribery related to Brazil’s Olympic Games and associated public infrastructure projects. This chapter concludes with a discussion, if not a warning, about how certain aspects of large-scale sporting events can foster corruption. The following two chapters (i.e., Chapters 5 and 6) are best read together, since they engage in a welcomed debate about the role of the media in Lava Jato. On one side of the debate, in Chapter 5, Daniela Campello, Anya Schiffrin, Karine Belarmino and Debora Thome showcase new and relevant research about media coverage of the scandal. Pointing to this research, the authors argue that the coverage was excessively focused on the left-leaning Workers’ Party and was particularly lenient with the other political parties and politicians involved in the scandal. On the other side of the debate, in Chapter 6, Beatriz Bulla and Cortney Newell express their disagreement with the idea that the reporting on Lava Jato was generally unfair. Instead, while explicitly recognizing a set of concerns regarding the media’s reporting behavior, they mainly emphasize the accountability-enhancing role of news outlets in the context of Lava Jato and beyond. These two chapters, together, offer readers a full range of valid views on an undeniably critical matter.

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On the subject of accountability, in Chapter 7, Ana Luiza Aranha discusses the extent to which the Lava Jato Operation represented a new developmental stage for the institutions responsible for controlling corruption in Brazil. Aranha introduces readers to the different government bodies that play an important role in controlling corruption in Brazil and emphasizes the exceptional level of coordination they reached during Lava Jato. She also provides much-needed analysis of the use of leniency agreements, an important legal innovation that has allowed the Operation to make unprecedented progress. Public prosecutors, in particular, have made much use of the leniency agree ments. However, in Chapter 8, the interview with Lava Jato’s lead prosecutor is less about understanding his views on this one legal mechanism, and more about understanding what motivates people like him to fight corruption. Similarly, Chapter 9 features an interview with the judge that oversaw a majority of the cases in Lava Jato. The goal of this specific chapter is to gather insights into Sérgio Moro’s thinking about the massive corruption scandal. Belonging to Part III, Chapters 10 and 11 are the two comparative chapters in the volume. The first of the two is a careful study authored by Raquel de Mattos Pimenta and Catherine Greene about the ways in which Peru and Mexico have varied in their responses to Lava Jato. As of this writing, Peruvian authorities have initiated criminal investigations, launched institutional reforms, and received a great deal of public support. In contrast, Mexico’s authorities have managed to impose only administrative sanctions, with no criminal convictions. Thus, considering that Peru has made greater progress in fighting corruption than Mexico, Chapter 11 provides a close examination of Peru’s Lava Jato Special Prosecution Team. As the author of this chapter, Denisse RodriguezOlivari critically examines the internal and external threats to the Lava Jato probe in Peru, as well as the opportunities and breakthrough during the investigations. Finally, we reach Part IV, which contains the volume’s last few chapters. The common thread across these can be summarized with the following question: “Where to from here?” Chapter 12 features an interview with Glenn Greenwald, whose reporting on Lava Jato has raised questions about how the Operation should be remembered. His core concern is the apparent evidence of close col laboration between the main judge and the prosecutors involved in the case. In Chapter 13, Susan Rose-Ackerman and Raquel de Mattos Pimenta also raise a poignant concern, though their concern is different in nature. Rose-Ackerman and de Mattos Pimenta argue against the excessive reliance on prosecution when attempting to bring corruption to heel. As stated in their chapter: [T]he Brazilian prosecutors are an independent, highly selective body that can serve as a check on the government, on members of the legislature, and on the private sector’s relationship with government. Individuals do need to be brought to justice, but concentrating on the criminal law to reform the structural weaknesses in Brazilian democracy is insufficient. True, some

Introduction 11 will refuse to make or accept payoffs if the chances of being caught and the level of punishment are high enough, but if the problem is endemic, law enforcement bodies will not be able to deter all corruption. […] Deeper reforms ought to confront weaknesses in the structure of Brazilian democracy. In highlighting those aspects that need to be reformed, Rose-Ackerman and de Mattos Pimenta explain how the electoral system breeds small political parties that tend not to have a programmatic agenda. Some related concerns are: the number of legislators who are unknown to voters; political parties’ reliance on illegal payoffs; and the place of public contracts in a corrupted system. With regards to this last issue, the authors argue that businesses seeking government contracts, regulatory benefits, and tax concessions supply payoffs to executive branch officials in exchange for profitable deals. These payoffs are used to support legislative coalitions, fill party coffers, and enrich individuals in both the executive and the legislature. Improving the system represents a major undertaking, but, in Chapter 14, Jessie W. Bullock and Matthew C. Stephenson add to the discussion of what can be done to make advances. The authors open with a provocative question: Con sidering that Lava Jato will necessarily end someday, how should the Operation be brought to a close? Bullock and Stephenson highlight key objectives that the Operation should aim to accomplish before its conclusion, as well as the ways in which it can shape the anticorruption dialogue in Brazil going forward. In line with the Rose-Ackerman and de Mattos Pimenta chapter, the chapter also insists on the need to address the root causes of corruption and weaknesses in existing institutions. Furthermore, Bullock and Stephenson bring up the idea of the “Lava Jato Spirit” as a way emphasize the need to generate and preserve a hopeful and constructive narrative around this difficult episode in Brazil’s history. The “Lava Jato Spirit” is one of the key takeaways that the concluding chapter highlights from this volume. However, in addition to revisiting some of the volume’s contributions, the final chapter also serves to reflect broadly on the complexity of this vast corruption scandal and to propose areas of future research. Indeed, this volume is certainly not the last word on Lava Jato; however, we venture to argue that it is a contribution to the topic.

Notes 1 Some of the material in this text is drawn from Paul Lagunes and Susan RoseAckerman. “Why Brazil Is Winning Its Fight against Corruption.” The Conversation, February 2, 2016, sec. Economy + Business. https://bit.ly/2mUcBXc. 2 The Portuguese word for “oil” is “petróleo.” It is worth adding that the term “Petrolão” was especially common when the corruption scandal first came to light. 3 Throughout this volume the term “Lava Jato” is used interchangeably to refer to both the corruption scheme and the operation led by law enforcement officials in response to the scheme.

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4 The full reference for the cited volume is: Power, Timothy J., and Matthew M. Taylor. Corruption and Democracy in Brazil: The Struggle for Accountability. Kellogg Institute Series on Democracy and Development. Notre Dame, Indiana: University of Notre Dame Press, 2011. 5 The television show referenced here is The Mechanism: J. Padilha, P. Prado, M. Prado, & D. Rezende (Directors). (2018). Padilha, J., & Prado, M. (Executive producers), O Mecanismo (English Transl. The Mechanism). Netflix. 6 The count goes up to 12 if we look beyond Brazil, pulling together all chapter contributors from Latin America or whose research focuses on Latin America. 7 According to one report, Odebrecht admits to bribing government officials as early as 2001 (Shiel & Chavkin, 2019). 8 Federal prosecutors, along with the Federal Police, the Federal Court of Accounts, and the Office of the Comptroller General, play a central role in the country’s system of accountability (Aranha, 2014). Their agency enjoys significant institutional autonomy to investigate and prosecute corruption (Beauchamp, 2016). 9 As president, Temer apparently secured lawmakers’ support by allocating local pro jects and positions in government, as well by issuing favorable decrees (“Michel Temer, Brazil’s Unpopular President, Avoids Corruption Trial,” 2017).

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Brazilian Waxing and Waning. (2016, April 18). The Economist. Retrieved from https:// econ.st/2xTM1Tk Calamur, K. (2017, July 12). Brazil’s Lula Found Guilty. The Atlantic. Retrieved from www.theatlantic.com/news/archive/2017/07/brazil-lula/533445/ Carson, L. D., & Prado, M. M. (2016). Using Institutional Multiplicity to Address Corruption as a Collective Action Problem: Lessons from the Brazilian Case. The Quarterly Review of Economics and Finance, 62, 56–65. Caso Lava Jato: Entenda O Caso. (n.d.). Retrieved from www.mpf.mp.br/grandes-casos/ lava-jato/entenda-o-caso Castañeda, J. G. (2018, August 21). Why Lula Should Be Allowed to Run for President. The New York Times. Retrieved from www.nytimes.com/2018/08/21/opinion/lula president-brazil-corruption.html Chalhoub, S., Collins, C., Llanos, M., Pachón, M., & Perry, K.-K. Y. (2017). Report of the LASA Fact-Finding Delegation on the Impeachment of Brazilian President Dilma Rousseff. Retrieved from Online: https://lasa.international.pitt.edu/members/reports/ BrazilDelegationReport-2017.pdf Cifuentes, P. (2014, December 1). Investigação Na Petrobras Começou Com Um Estranho Presente De Luxo. El País. Retrieved from https://brasil.elpais.com/brasil/2014/12/01/ politica/1417472349_354451.html Corruption Perceptions Index 2018: Frequently Asked Questions. (2018b). Retrieved from www.transparency.org/files/content/pages/2018_CPI_Methodology.zip Davis, K. E. (2019). Between Impunity and Imperialism: The Regulation of Transnational Bribery. New York, NY: Oxford University Press. Dickerson, M., Magalhaes, L., & Lewis, J. T. (2016, March 8). Odebrecht Ex-CEO Sen tenced to 19 Years in Prison in Petrobras Scandal. Wall Street Journal. Retrieved from www.wsj.com/articles/odebrecht-ex-ceo-sentenced-to-19-years-in-prison-1457449835 DOJ. (2016). Odebrecht and Braskem Plead Guilty and Agree to Pay at Least $3.5 Billion in Global Penalties to Resolve Largest Foreign Bribery Case in History [Press release]. Retrieved from www.justice.gov/opa/pr/odebrecht-and-braskem-plead-guilty-and agree-pay-least-35-billion-global-penalties-resolve Downie, A. (2012, August 15). Brazil Targets Corruption in ‘Trial of the Century’. Christian Science Monitor. Retrieved from www.csmonitor.com/World/Americas/ 2012/0815/Brazil-targets-corruption-in-trial-of-the-century Forero, J. (2011, December 14). In Her First Year, Brazilian President Dilma Rousseff Cleans House. Washington Post. Retrieved from www.washingtonpost.com/world/ americas/in-her-first-year-brazil-president-dilma-rousseff-cleans-house/2011/12/12/ gIQAOMnStO_story.html Former Brazil Presidential Chief of Staff Sentenced to 23 Years for Corruption. (2016, May 18). Guardian. Retrieved from www.theguardian.com/world/2016/may/18/ brazil-corruption-petrobras-jose-dirceu-sentenced-23-years Former Petrobras Executive Costa Convicted in Corruption Case. (2015, April 22). Reuters. Retrieved from www.reuters.com/article/brazil-petrobras-conviction/former-petrobras executive-costa-convicted-in-corruption-case-idUSL1N0XJ1TB20150422 Fuentes, E. (2016). Understanding the Petrobras Scandal. Retrieved from Washington, DC: www.coha.org/wp-content/uploads/2016/04/Understanding-the-Petrobras-scandal. pdf Gardiner, J. A. (2002). Defining Corruption. In A. J. Heidenheimer & M. Johnston (Eds.), Political Corruption: Concepts & Contexts (Third ed., pp. 25–40). New Brunswick, NJ: Transaction Publishers.

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Geddes, B., & Ribeiro Neto, A. (1992). Institutional Sources of Corruption in Brazil. Third World Quarterly, 13(4), 641–661. Greenwald, G., Demori, L., & Reed, B. (2019, June 9). How and Why The Intercept Is Reporting on a Vast Trove of Materials About Brazil’s Car Wash and Justice Minister Sérgio Moro. The Intercept. Retrieved from https://theintercept.com/2019/06/09/ brazil-archive-operation-car-wash/ Harris, B., & Schipani, A. (2019, November 13). Lula’s return to political fray set to deepen Brazil’s divisions. Financial Times. Retrieved from www.ft.com/ content/7adb59a2-049a-11ea-a984-fbbacad9e7dd Heidenheimer, A. J. (1974). Definitions, Concepts and Criteria. In J. A. Gardiner & D. J. Olson (Eds.), Theft of the City (pp. 16–23). Ontario, Canada: Indiana University Press. Juan, J., & de Ulloa, A. (2011 [1749]). Noticias secretas de América. Charleston, SC: Nabu Press. Justi, A., & Dionísio, B. (2016, March 3). Justiça Federal Condena Marcelo Odebrecht Em Açao Da Lava Jato. G1. Retrieved from http://g1.globo.com/pr/parana/ noticia/2016/03/justica-federal-condena-marcelo-odebrecht-em-acao-da-lava-jato.html Kurer, O. (2005). Corruption: An Alternative Approach to Its Definition and Measure ment. Political Studies, 53, 222–239. Leahy, J. (2014, October 15). Petrobras Scandal Adds Fuel to Brazil’s Fiery Election Campaign. Financial Times. Retrieved from https://next.ft.com/content/5e722910 5434-11e4-b2ea-00144feab7de Leahy, J., & Schipani, A. (2018, September 17). Jair Bolsonaro Draws in Brazil Populists Despite Contradictions. Financial Times. Retrieved from www.ft.com/content/ d7df60cc-b7c4-11e8-bbc3-ccd7de085ffe Londoño, E., & Darlington, S. (2018, April 4). Lula, Brazil’s Ex-President, Can Be Jailed, Court Rules. New York Times. Retrieved from www.nytimes.com/2018/04/04/ world/americas/brazil-lula-corruption-prison.html Long, W. R. (1988, April 26). Peril for Democracy: Brazil Reels Under Tales of Corrup tion. Los Angeles Times. Retrieved from http://articles.latimes.com/1988-04-26/news/ mn-1595_1_corruption-scandal McFarlane, A. (1996). Political Corruption and Reform in Bourbon Spanish America. In W. Little & E. Posada-Carbó (Eds.), Political Corruption in Europe and Latin America (pp. 41–63). New York, NY: St. Martin’s Press, Inc. Mella, R., & Gorriti, G. (2016, March 30). How Brazil’s Odebrecht Laundered Bribe Money. Analysis. Retrieved from www.insightcrime.org/news/analysis/how-brazil odebrecht-laundered-bribe-money/ Michel Temer, Brazil’s Unpopular President, Avoids Corruption Trial. (2017, October 26). Guardian. Retrieved from www.theguardian.com/world/2017/oct/26/michel temer-brazils-unpopular-president-avoids-corruption-trial Michener, G., & Pereira, C. (2016). A Great Leap Forward for Democracy and the Rule of Law? Brazil’s Mensalão Trial. Journal of Latin American Studies, 48(3), 477–507. Morris, S. D., & Blake, C. H. (2009). Introduction: Political and Analytical Challenges of Corruption in Latin America. In C. H. Blake & S. D. Morris (Eds.), Corruption & Democracy in Latin America (pp. 1–22). Pittsburgh, PA: University of Pittsburgh Press. Mungiu-Pippidi, A. (2015). The Quest for Good Governance. Cambridge, UK: Cam bridge University Press. Nota fiscal confirma que doleiro pagou R$250 mil em Range Rover para ex-director da Petrobrás. (2014). Estadão. Retrieved from https://politica.estadao.com.br/blogs/

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fausto-macedo/nota-fiscal-confirma-que-doleiro-pagou-r-250-mil-em-land-rover-para-ex diretor-da-petrobras/ Odebrecht Bribed Across Latin America. (2016, December 23). Deutsche Welle. Retrieved from www.dw.com/en/odebrecht-bribed-across-latin-america/a-36887600 Parreira, M. (2016). The “Car Wash” Crisis. School of International & Public Affairs at Columbia University. Unpublished Work. Pearson, S., & Magalhaes, L. (2018, November 1). Brazil’s New Leader Picks Anti corruption Judge as Justice Minister. Wall Street Journal. Retrieved from https://on.wsj. com/2yP8YZm Pereira, C., Power, T. J., & Raile, E. D. (2011). Presidentialism, Coalitions, and Account ability. In T. J. Power & M. M. Taylor (Eds.), Corruption & Democracy in Brazil: The Struggle for Accountability. Notre Dame, Indiana: University of Notre Dame. Pérez-Liñán, A. (2007). Presidential Impeachment and the New Political Instability in Latin America. Cambridge, MA: Cambridge University Press. Petrobras Reaches Settlement With SEC for Misleading Investors. (2018). [Press release]. Retrieved from www.sec.gov/news/press-release/2018-215 Phillips, D. (2017, March 30). Eduardo Cunha, Who Led Impeachment Drive Against Rival in Brazil, Gets a 15-Year Jail Term. New York Times. Retrieved from www. nytimes.com/2017/03/30/world/americas/eduardo-cunha-brazil-sentenced-prison.html Pressly, L. (2018, April 22). The Largest Foreign Bribery Case in History. BBC News. Retrieved from www.bbc.com/news/business-43825294 Resultado da eleição é o mais apertado já visto no Brasil. (2014, October 26). Folha de S. Paulo. Retrieved from www1.folha.uol.com.br/poder/2014/10/1538782-resultado-da eleicao-e-o-mais-apertado-ja-visto-no-brasil.shtml Romano, G. (2019, December 13). Datafolha: 81% dos brasileiros acreditam que Lava Jato deve continuar. Veja. Retrieved from https://veja.abril.com.br/politica/datafolha-81 dos-brasileiros-acreditam-que-lava-jato-deve-continuar/ Romero, S. (2012, August 4). Leader’s Torture in the ’70s Stirs Ghosts in Brazil. New York Times. Retrieved from www.nytimes.com/2012/08/05/world/americas/president rousseffs-decades-old-torture-detailed.html?pagewanted=all Rose-Ackerman, S. (2018). Corruption & Purity. Daedalus: Journal of the American Academy of Arts & Sciences, 147(3), 98–110. Rothstein, B. (2011). The Quality of Government. Chicago, IL.: The University of Chicago Press. Schipani, A. (2019, December 18). Maersk offices raided in Brazil over Petrobras bribe probe. Financial Times. Retrieved from www.ft.com/content/b7329332-21d9-11ea b8a1-584213ee7b2b Scott, J. C. (1972). Comparative Political Corruption. Englewood Cliffs, NJ: PrenticeHall. Segal, D. (2015, August 7). Petrobras Oil Scandal Leaves Brazilians Lamenting a Lost Dream. New York Times. Retrieved from www.nytimes.com/2015/08/09/business/ international/effects-of-petrobras-scandal-leave-brazilians-lamenting-a-lost-dream. html?_r=0 Sérgio Moro: Herói Anticorrupção Ou Incendiário? (2016, March 18). BBC News. Retrieved from www.bbc.com/portuguese/noticias/2016/03/160317_sergio_moro_ru Shiel, F., & Chavkin, S. (2019, June 25). Bribery Division: What is Odebrecht? Who is Involved? International Consortium of Investigative Journalists (ICIJ). Retrieved from www.icij.org/investigations/bribery-division/bribery-division-what-is-odebrecht-who is-involved/

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Smith, M., Valle, S., & Blake, S. (2017, June 8). No One Has Ever Made a Corruption Machine Like This One. Bloomberg Businessweek. Retrieved from www.bloomberg.com/ news/features/2017-06-08/no-one-has-ever-made-a-corruption-machine-like-this-one Smith, M., Valle, S., & Schmidt, B. (2015, May 8, 2015). The Betrayal of Brazil. Bloomberg. Retrieved from www.bloomberg.com/news/features/2015-05-08/brazil-s massive-corruption-scandal-has-bitterness-replacing-hope Stauffer, C., & Parra-Bernal, G. (2016, March 22). Odebrecht Cooperates With Brazil Probe After Bribe Scheme Exposed. Reuters. Retrieved from www.reuters.com/article/ us-brazil-corruption-idUSKCN0WO17F Taylor, M. M. (2016, March 5). Police detained Brazil’s ex-president on Friday. Here’s what you need to know. Washington Post. Retrieved from www.washingtonpost.com/ news/monkey-cage/wp/2016/03/05/police-detained-brazils-ex-president-on-friday heres-what-you-need-to-know/ Taylor, M. M., & Buranelli, V. C. (2007). Ending up in Pizza: Accountability as a Problem of Institutional Arrangement in Brazil. Latin American Politics and Society, 49(1), 59–87. Watts, J. (2013, June 21). Brazil Erupts in Protest: More Than a Million on the Streets. Guardian. Retrieved from www.theguardian.com/world/2013/jun/21/brazil-police crowds-rio-protest Watts, J. (2017, June 1). Operation Car Wash: Is This the Biggest Corruption Scandal in History? Guardian. Retrieved from www.theguardian.com/world/2017/jun/01/brazil operation-car-wash-is-this-the-biggest-corruption-scandal-in-history Weyland, K. (1993). The Rise and Fall of President Collor and Its Impact on Brazilian Democracy. Journal of International Studies and World Affairs, 35(1), 1–37. Retrieved from www.jstor.org/stable/pdf/166101.pdf?refreqid=excelsior%3Afefe7f630aa570899 bb71f 20e5284851 What is Brazil’s ‘Mensalão?’. (2013, November 18). The Economist. Retrieved from www.economist.com/blogs/economist-explains/2013/11/economist-explains-14

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Lava Jato in perspective Albert Fishlow

Introduction Lava Jato is hardly over. More than five years after it first began in March 2014, when the federal police first imprisoned the doleiro, or black-market dealer, Alberto Youssef, by following the money trail from a car wash in Curitiba, Parana, the Operation is still very active (Segal, 2015). That chance event of discovering the car wash corruption scheme—based on evidence that had been gathered on money flows—initiated an array of arrests and convictions involving political leaders, including former Presidents Luiz Inácio Lula da Silva and Michel Temer, former ministers, and extending to sena tors, congressmen, governors, mayors, etc. (Anderson, 2018). Leaders of state-owned firms were soon included. The private sector hardly proved intact. Major construction firms, like Odebrecht, were caught, as well as banks, manufacturers, and operators within the service sector. Although the case began to emerge more clearly by the time of the presidential election in October 2014, members of the political class were not yet fully implicated. In that election, Dilma Rousseff was narrowly elected to a second presidential term.1 Rousseff’s later impeachment in 2016, despite being related to fiscal maneuvering, did not fall entirely out of the scope of Lava Jato (Watts, 2016). Operation Lava Jato, while discussed over this volume from a number of points of view, principally takes off in this chapter on the side of political economy rather than judicially. Almost inevitably, juridical questions insert themselves, especially as the crisis dramatically widens. This can hardly be avoided. The first section of this chapter sets the stage. It analyzes the special political and economic conditions emerging over the course of Lula’s two terms. Concur rent with Lula’s presidency, the commodity boom began to take shape. Brazil was able to substantially increase its international reserves as the terms of trade shifted in Brazil’s favor (The World Bank, 2018a). This meant that real income in the country could rise considerably, while production expanded gradually. Estimates of real income rose as exchange rates became stronger (The World Bank, 2017a, 2018b). Indeed, this became a special problem for Rousseff, as price indexes such as oil were prevented from rising, and required attention that she avoided (Prada & Boadle, 2012).

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Rapid recovery from the international financial crisis of 2007–2008, by growing public sector deficits, allowed Brazil to rapidly alleviate much of the decline, topped off by the boom year of 2010 (Ferrari Filho, 2011). By that time, petroleum export prices rose, further enabling little attention to declining gains in domestic industrial productivity. Brazil was able to look forward to international acclaim, for the World Cup of 2014 and the Olympics of 2016. Both events were promoted as signals of national accomplishment, despite major protests in 2013 that began due to the rise of transportation costs but soon also opposed the direction of public funds to stadiums rather than health and education (Watts, 2014; Winter & Teixeira, 2014). Both sporting events wound up with large increases in expenditure for construction (Leahy, 2016; Winter & Teixeira, 2014). Much of the problem with larger public deficits was hidden, at municipal, state, and federal levels. The next section explores the decline in domestic economic performance just as Rousseff’s second term started in 2015 and her progressive inability to develop a program that would work. She always over-estimated the speed of recovery and under-estimated the negative effects of trying to expand the economy. Meanwhile, a flow of court cases began to come out of the Lava Jato probe, limiting her ability to deal with her vice president, Michel Temer,2 as well as the leader of the House, Eduardo Cunha (Watts, 2016).3 Her control began to dissolve, leading to impeachment. Temer assumed the presidency, gradually beginning to introduce sounder results (Taylor, 2016). He became deeply implicated in Lava Jato and his popularity was one of the lowest in recent history (Lima, 2019).4 Simultaneously came a seemingly unending accumulation of Lava Jato charges. The consequence was a continuous rise in the prestige of Sérgio Moro. He was personally popular for his direction of much of Lava Jato. Especially important was the judicial decision that resulted in Lula being jailed and made ineligible to run for the presidency in 2018 (Londoño & Darlington, 2018b). I deal next with the presidential campaign of 2018. In a complete surprise, Jair Bolsonaro, a little-known member of the House of Representatives, won. Earlier, the governor of Sao Paulo, Geraldo Alckmin, had been viewed as the leading centrist candidate. But he failed to emphasize what Brazilians increasingly were looking for—they wanted someone new, unconnected with the continuing economic recession, not a member of the Brazilian Social Democracy Party (Partido da Social Democracia Brasileira, or PSDB) or the Workers’ Party (PT), who could reduce the increasing violence (Londoño & Darlington, 2018a). Bolsonaro’s cabinet contains many past military leaders, and some strong conservative proponents (Stargardter, Boadle, & Brito, 2018). These signal the influence of a US-based Brazilian “philosopher” with astrological interests, Olavo de Carvalho.5 De Carvalho goes along with Bolsonaro’s sons as a decisive determinant of what Bolsonaro thinks and does (Duarte, 2019; Schipani, 2019). At the same time, Paulo Guedes, as Economic Minister, and Sérgio Moro, as Justice Minister, are there to provide the technical knowledge that Bolsonaro lacks.

Lava Jato in perspective 19 Up to this point, a final evaluation has not been made. Brazil will recover from the return to recession experienced in the first half of 2019, as internal con fidence seems to have been increasing, but there remains a major problem of high indebtedness, and restrictions upon the federal deficit (IMF, 2019). The consequence of required limits for federal expenditure has a negative effect upon the outlays for education, health, and other areas. Equally, as of this writing, Congress is not fully satisfied with Moro, and has failed to accept entirely his favored legislation for altering and strengthening the criminal judicial system.6 Lula has been released from jail and is operating as leader once more of the PT.7 Finally, there is good reason to move on from Lava Jato and to come to grips with the political, economic, and social challenges that will not be resolved immediately.

Setting the stage The emerging strength of the judicial system is perhaps the most important factor underlying the evolution of Lava Jato after 2014.8 The Supreme Court undertook major changes in the years after the Constitu tion of 1988 was ratified (Lorenzen, 2017). Previously, the Supreme Court had allowed considerable delay in reaching decisions. This allowed suspects to delay and even avoid final sentencing. In these circumstances, the judicial system had modest power to effect desired outcomes. Evidence of this altered state of affairs for governmental corruption cases can especially be traced back to the so-called Mensalão episode. This was a corrup tion scheme where leaders of the Workers’ Party and coalition parties accepted large clandestine monthly payments in exchange for their support of Lula’s legislative agenda (Michener & Pereira, 2016; The Economist, 2013). Public perception of Lula fell to its lowest level ever in 2005, as the press gave the matter considerable attention (“Brazil’s Lula Popularity Still High,” 2007). The Brazilian media outlet Veja first described such transfers some time before the matter was acknowledged more generally.9 Roberto Jefferson, a Congressman, afforded details of the scheme and names, for the federal police to follow up on. Three committees within Congress took up the matter, holding extensive hearings. As a first result, Jose Dirceu, Lula’s chief of staff and a hopeful successor, was banned by Congressional vote, as was Jefferson (“Can Brazil’s Lula Survive Corruption Charges and a Struggling Economy?,” 2006; Wheatley, 2005). Three investigatory committees conducted on-going hearings, concluding by naming a number of members guilty. In 2007, the case moved to the Supreme Court where actions against dozens of people began to be evaluated (“Supreme Court Concludes That the Goal of the Mensalão Was to Buy Votes,” 2012). What turned out to happen were subtle, but important, changes in rules followed by the court. It was not a simple matter of revenge from the right against the left-wing Lula. Careful accumula tion of evidence occurred. Cooperation among the relevant authorities developed

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to produce carefully constructed cases that even the skilled defense attorneys could not challenge. Suddenly, the Supreme Court had begun to assert itself on criminal matters. The completed case came to the Supreme Court for final sentencing in 2012 (“Brazil Mensalao Trial: Ex-Lula Aide Dirceu Sentenced,” 2012). Lula, who had left the presidency at the end of 2010 and had been awarded very high public opinion ratings in the final months, tried to influence the judicial process.10 He failed. For the first time, “the most daring and outrageous corrup tion scheme and embezzlement of public funds ever seen in Brazil” was dealt with on a substantive basis.11 Procedural gains had occurred when the Supreme Court was led by Justice Joaquim Barbosa, who retired soon afterward.12 For his actions, he was widely lauded. Polling at the time showed that most thought of the defendants as guilty, but only a few were confident that sentences would be imposed (Ellis, 2012). Barbosa’s contribution was remembered. Some in the Brazilian public saw him as a potential presidential candidate for the election in 2018. After joining the Brazilian Socialist Party (PSB), and briefly indicating an interest, he soon changed his mind and demurred from a political career (Darlington, 2018; Marcello, 2018). Change was not limited to the judiciary. The Public Prosecutor’s Office had an evolving identity. An office that had begun as a general ombudsman before 1988 widened its range considerably with the new constitution (Sadek, 2009). Within many of the states, the role of this institution was given greater weight. An expanding corps of prosecutors focused upon various topics of growing importance: the environment, consumer rights, public services, and the rights of vulnerable groups. Equally, the Federal Police professionalized over this interval (Cano, 2006). This gradually developed into an effective arm, working, at times, in conjunc tion with the Public Prosecutor. Only over time, as cooperative efforts produced greater and better results, was the desired degree of shared information achieved. That process was induced by Mensalão, but also benefited from the positive results achieved from that process. When Lava Jato later erupted, the judicial system was in a stronger position to handle the massive undertaking (Madruga & Feldens, 2016). Beyond this evolution in judicial readiness, much also occurred in the eco nomic sphere. When Lula first took office, he decided upon continuation of previous economic policy. While many analysts expected high inflation and repudiation of the Real Plan under Lula’s government,13 they were soon proven wrong. The Central Bank was headed by Henrique Meirelles, a banker himself, and a Congressman from the Brazilian Social Democracy Party (PSDB). The Treasury Minister was Antonio Palocci, a close ally of Lula’s, who supported continuation of restraint put in place by the Cardoso administration.14 A combination of high interest rates and a government surplus worked. Lula, instead, focused the PT upon expansion of the social policies directed against poverty. While Cardoso had begun these efforts, Lula combined—under the

Lava Jato in perspective 21 program known as Bolsa Familia—transfers of money, education, and medical services as the central focus of the PT (Cirkovic, 2019; Wetzel, 2013).15 As Brazilian growth gradually elevated, two unique elements grew in relevance. One was the commodity boom raising demand for soy, orange juice, beef, and other agricultural products. China began to enter the international market with much increased demand for imports (Lyons & Kiernan, 2015). Improved terms of trade meant greater domestic income than production. Moreover, after years of prior research and investment, Petrobras had been able to find large oil depos its off-shore (“A Big Oil Discovery,” 2008). These deposits were sufficient not only to fully supply Brazilian demand, but also feed exports (“A Big Oil Discovery,” 2008). World oil prices began to soar with global growth accelerating—this was a source of additional gain (“2011 Brent Crude Oil Averages Over $100 per Barrel in 2011,” 2012). Large sums of money travelled internationally, allowing Brazil to build up foreign reserves prior to the financial shock beginning in the US in the fall of 2007, and extending worldwide in 2008 and 2009. Brazil managed to avoid a major recession, like the other BRICS, recovering growth to more than 7 percent in the final year of Lula’s second term (The World Bank, 2010). The future looked exceedingly bright. Another factor of relevance to Lava Jato was all the construction activity needed for the Olympics in 2012 and the World Cup in 2014. Those inter national events marked Brazil’s arrival, just as they had done for countries like Japan, South Korea, and China. Middle income status was now achieved. It was only a matter of time for a still more active foreign policy. Managing both events was technically a difficult matter. Rio was partially remade for the Olympics,16 and new soccer stadiums were erected throughout Brazil. Construction companies made huge profits.

Economic recession After Dilma Rousseff’s first election in 2010, she committed herself to a new strategy of economic development to enable the Brazilian economy to grow at high rates into the future. Rising prices of petroleum were sustained until a peak around 2011 (“2011 Brent Crude Oil Averages Over $100 per Barrel in 2011,” 2012). This further encouraged bountiful expectations. There had already been the economic plan set forth in the mid-2000s, increasing govern ment investment, with foreign and private sector participation through a Program of Accelerated Growth. Rousseff had been responsible for its imple mentation. Now a revised, larger plan known as PAC, was put forward (SECOM, 2010; Zissis, 2010). Rousseff promised even more adjustments in her first days. She sought greater resources for residential construction through Minha Casa and Minha Vida (Arsenault, 2016). She also expanded Bolsa Familia, assured an increase in wages, implemented a new program reducing taxes, and granted subsidies to the lagging industrial sectors.

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Her program thus assumed average growth at a relatively high rate into the future. There was even a new overall macro-economic strategy over which she was going to preside. Where Lula had been conciliatory, she accepted little criti cism. After all, she had studied economics. Rousseff’s economic model substituted for the plan put in place in 1999, after the devaluation of the real under Cardoso. The earlier effort accepted the prin ciples of a variable exchange rate, Central Bank commitment to inflation targeting, and a fiscal primary surplus. Enacted through the 2000 Fiscal Responsibility Law, this policy was accepted and continued through the first term of Lula. Then deviations began at the margins, but were hidden by the commodity boom and an active response by Brazilian Development Bank (BNDES) financing. Gov ernment expenditure was embraced, rather than acceptance of lesser growth. That was the Keynesian way. In practical terms, the approach preferred under Rousseff’s watch meant a sharp reduction in interest rates by the Central Bank, designed to stimulate investment. Exchange rates were intended to be quasi-fixed, rather than to con tinue their appreciation. Other types of controls were introduced, going beyond what had occurred before. Inflows of capital were controlled to prevent appreci ation of the exchange rate. Inflation rates were controlled. In the midst of efforts to stimulate demand, preparation for the Olympics and the World Cup were additional needs. However, growth rates did not respond. In 2011, expansion was only 2.7 percent, (revised upward to 4.0 percent in 2015); 2012, 1.9 percent; 2013, 3.0 percent; and 2014, 0.5 percent (The World Bank, 2010). Brazilians were progressively disenchanted. In June 2013, there were large public marches in opposition to Rousseff throughout the country because of increases in prices of transport in São Paulo and inadequate social services generally (Benson, 2013); she promised to respond to demands for improve ments, but few real changes ultimately occurred. Yet, despite all this, Rousseff was narrowly re-elected president for a second term. She defeated her center-right rival Aécio Neves.17 Two reasons are typic ally deemed important to explain this political outcome. One is the large gain of workers with low and moderate income. This is con sistent with the extension of Bolsa Familia18 coverage and the rise of real gains in minimum wages (OECD, 2018). Workers moved into the lower middle class and benefited from the availability of credit at lower interest rates. This is also reflected in decline of unemployment rates to less than 5 percent as well as the gain in Gini coefficients measuring income distribution (The World Bank, 2017b, 2019). These developments were quite consistent with the PT’s initial pledge. The extent of the improvement—an advance of tens of million into the lower middle class. Second is the degree of regionalization in voting. Put simply, the North voted for Rousseff, and the South for Neves (“Brazil’s Presidential Election: A Riven Country,” 2014). This division corresponded to the historic differences in income and educational attainment in the two geographic areas. But this sub stantial difference was also true in 2010 and 2018.

Lava Jato in perspective 23 A subtler explanation accepts these differences, but goes somewhat deeper. In particular, it stresses the belated rise in popular support for Rousseff as 2014 drew nearer. Additionally, the PT was able to better heal its internal differences, even as she also emphasized her willingness to accept slower expansion to help counter the disequilibrium that had developed previously. Rousseff’s Finance Minister Guido Mantega would go. Finally, the rising challenge from Lava Jato was just beginning and was limited to the case of Petrobras alone. Only toward the end of 2014 did the initial findings from Curitiba begin to receive attention, but were insufficient to impact voters in the face of the presidential elections.

Lava Jato Lava Jato began as an unremarkable event in March of 2014 with the capture of Alberto Youssef, someone who had gone from being a small time criminal to someone willing to participate in much more lucrative undertakings (Segal, 2015). After his arrest, Youssef was made to face Sérgio Moro, a federal judge in Curitiba; it was not the first time to two had met. Years earlier, Youssef had provided a full confession, or delação premiada, to Moro in the context of another case (Phillips, 2015). But, facing new and serious charges, Youssef again confessed. Another person who shared valuable information with the authorities was Paulo Roberto Costa, a previous director of Petrobras (Reuters, 2015). With these confessions, the case quickly escalated. Still further Lava Jato-related arrests were completed in late 2019. Many cases have been accumulated in the Operation’s five-year duration. Many had some tie to illegal money transfers to politicians and political parties. This process can be disaggregated into three components. First came what was known as “Petrolão,” as the number of persons engaged in illegal activities linked to Petrobras began to soar. What had been the leading Latin American company in the oil business, as measured by the value of its assets, took on a range of losses as the firm’s books were re-audited as the extent of corruption became clearer. Only in 2018, with Petrobras assets reduced by sale of refineries and drilling rights, has a leaner firm been able to return to profitability. The value of shares was much reduced initially, and interest rates on needed borrowed funds increased considerably. By now, recovery has occurred in both (Nogueira & Alper, 2018). A second component of Lava Jato was the extension of inquiries to large con struction companies, whose business—as noted previously—had rapidly increased with the need to prepare for the World Cup and the Olympic games. Odebrecht was the largest firm whose illegal activities extended to many other countries.19 The president of the firm provided an ample confession in lieu of continued imprisonment, and only now has finally been released (Magalhaes & Pearson, 2017). Third, the process of investigation extended internationally because holdings of illegal payments were suitably arranged abroad in an attempt to hide them. Eventual willingness of Swiss banks to open their supposedly secure accounts

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was new (Farge & Hughes Neghaiwi, 2019; Moro, 2018). Lava Jato seems to have brought international financial operations under greater scrutiny. Corruption was no longer a domestic matter. The reason why Sérgio Moro is tightly linked to Lava Jato becomes clear from the overwhelming number of cases he oversaw while in Curitiba. Equally or more impressive still are the monetary values involved in the Lava Jato cases. Something like three to four billion reais are expected to be returned, with Petrobras receiving the most (Schipani, 2018). All told, the total amount that will be recovered is of historic proportions for Brazil. There is a relatively recent poll by Datafolha indicating that more than 80 percent of the Brazilian public wants Lava Jato to continue.20 That support, one presumes, was one reason why Bolsonaro won. The rise of the judiciary and descent of the executive and the congress was evident. Moro had achieved great popularity, and retains a higher popularity rating than the president (Faria, 2019). Moro’s stature has been weakened by recent leaked messages and by the reversal of earlier Supreme Court practices leading to Lula’s release from jail (Fishman, Moro Martins, Demori, de Santi, & Greenwald, 2019; Trevisani & Forero, 2019).21 Also, Moro does not have an ability to get along with the Con gress; he managed only to get a trimmed down reform of the criminal system (Bullock, 2019).22 In some circles, his relationship with Bolsonaro is not regarded as entirely positive. However, these circumstances did not prevent Moro’s selection as one of the 50 most significant—positively—personalities of the last decade by the Finan cial Times (“Fifty People Who Shaped the Decade,” 2019). He will remain important in the years to come.

Bringing political economy up to date The 2014 presidential elections is referenced several times in this chapter. Here it is worth noting that Rousseff’s presidency in 2014 was barely won owing to significant public doubts about her capacity to change her political style and her economic convictions. After she won, she appointed a new Finance Minister, Joaquim Levy, and pledged a rapid economic recovery (Haynes & Prada, 2014). Despite his attempt to free up the economy by accepting the previously hidden price inflation, and his attempt to impose more effective budgetary rules, he stayed less than a year, and Brazil’s growth declined. Rousseff also had allowed Vice President Temer in 2015 to manage cooperation with Congress. This, too, did not work (Goy & Boadle, 2015). More over, differences between Rousseff and the leader of the House of Representatives, Eduardo Cunha, grew. That turned out to give the impeachment inquiry underway a strong push toward passage (Paraguassu & Boadle, 2015; Watts, 2015). The proffered reason for Rousseff’s removal was willingness to use improper accounting to hide her rising fiscal deficit as the economy’s pace further fell in 2016. Few would have regarded this accounting maneuver with much concern, had economic growth prospered.

Lava Jato in perspective 25 Temer, who had taken over temporarily in May 2016, became the next presi dent after a final Senate vote of 61–20, formally impeaching President Rousseff, at the end of August 2016 (Romero, 2016). He had already started in May with a new, smaller cabinet consisting only of men, with a smaller inside group drawn from his past. Economic policy was substantially delegated to Finance Minister Henrique Meirelles and Central Bank President Ilan Goldfajn. On their agenda was a return to realistic fiscal policy, reform of the pension system that had been responsible for larger deficits, coping with accumulated debt, alleviating mount ing unemployment, and above all else, providing a solid basis for continuing economic expansion (Gallas, 2017). This was a Herculean task, all to be accomplished by the end of 2018, when a new president would be chosen. Some progress was made. Temer came close to pension reform, but at the end failed. Temer’s own involvement in a corruption scandal involving JBS SA, the largest meat processing company in the world, was a notable complication. JBS was under investigation for payments to many politicians throughout the country. There was a May 2017 meeting at the presidential palace. Wire-tapping occurred and was publicized the next day by the Brazilian press. It dealt with payments to be made to Eduardo Cunha for silence (Watts, 2017). Immediately, there began public demonstra tions asking for Temer’s impeachment (Watts, 2017). In September, Congress refused to go along with Temer’s impeachment, despite two attempts by the General Public Prosecutor (Prengaman & Savarese, 2017). Meanwhile, JBS confessed to its extensive illegal involvement and pay ments to many throughout the country. J&F Investimentos, the controlling shareholder of JBS, agreed to pay a 10.3 billion reais fine over a 25-year period (Brito & Bautzer, 2017; Cassin, 2017). With virtually no public support, little more could be accomplished during Temer’s last year in office. Although he initially sought nomination for a full term, his popularity was in single digits (Paraguassu & Boadle, 2018). In 2019, after his term, he encountered temporary imprisonment before being released. (Londoño & Casado, 2019) As of this writing, the court case against Temer, and others, continues. The 2018 campaign for the presidency conveyed the magnitude of Brazilian frustration. Lula, not yet imprisoned, but barely so, took an early lead among various others. The mayor of São Paulo, João Doria, was a candidate, but, early on, yielded to Governor Geraldo Alckmin. When Lula went to jail, Alckmin was regarded as the favorite among the centrist candidates (Paraguassu & Brito, 2018; Rapoza, 2018). Perennial hopefuls like Ciro Gomes and Marina Silva ran, with Fernando Haddad replacing Lula. Jair Bolsonaro, a retired military captain, also campaigned. The surprise was Bolsonaro’s early degree of support. He emphasized the contributions of the dictatorship and strongly defended its illegal practices of killings, torture and confinement (Boadle, 2019; Londoño, Darlington, & Casado, 2019). He openly committed to a large military component in his reduced

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cabinet (Reeves, 2018). He had been elected federal deputy—with changing political parties—for seven terms (Reeves, 2018). Yet his contributions to legis lation were virtually nil. He benefited from considerable evangelical support (Polimédio, 2018). What also contributed to Bolsonaro winning the presidential election was a failed attempt at his assassination (Phillips, 2018). Beyond the considerable attention, the bodily injury resulting from that attempt rationalized his absence from the candidate debates prior to the election. Few of his supporters knew his policy positions. His steadfast stand was against rising urban violence—a serious problem—and for a return to past military success. Brazil voted for Bolsonaro in the final round against Haddad. The result, unlike 2014, was never in doubt. Then came the principal appointments to deal with needed reforms: Paulo Guedes, as Minister of Economy, and Sérgio Moro, as Minister of Justice. Bolsonaro would handle all the rest, with the considerable help of his sons.

Post-2020 Brazilian development: will Bolsonaro save the day? In the first year of the government, matters moved much slower than anticipated, and economic results did not fully correspond to hopes for change. One fundamental alteration is evident. Bolsonaro has yielded, not always happily, to Congress. Bolsonaro has retreated from his former political party, and is still in the process of forming a new one (Paraguassu, Boadle, & Spring, 2019). His Foreign Minister seems to have limited capability, and Brazil’s international position appears diminished. As of this writing, the trade agreement between the Mercosur bloc (consisting of Argentina, Brazil, Paraguay, and Uruguay) and the European Union has passed (Darlington, 2019; Londoño & Casado, 2019). Revision of the Social Security System did pass, followed by a reduction of the deficit (Savarese & Biller, 2019). The difficulty is the absence of much immediate gain. Some already predict the need for further deficit reductions, within the next five years or so, to cope with the continuing sharp rise of the elderly, and a low birth rate. Another change—that involves the complicated revenue system—has been left for next year. Involving the very basis of the federal system, it is a difficult and much postponed, reform. That has been the case for more than 20 years. What is likely to occur—as in the past—is another increase of state and local debt to the Union. With no revision of the underlying rules governing state and municipal capability, the problem will simply recur, as it has regularly done in the past.

Final words But these modifications are hardly enough to return Brazil to higher rates of sus tainable economic growth. More is needed: higher and sustainable rates of domestic savings and investment; openness to trade; effective central banking; commitment

Lava Jato in perspective 27 to educational reform; and perhaps a few others. Free enterprise is not enough. Public sector surpluses are needed to permit longer term sentiments to remain positive. Getting the right mix, and the right personnel, will yield high returns. Politically, one thing is sure—having an excess of 30 different political parties does not work.23 These have furthered individual prominence and have hindered development of meaningful and alternative platforms. Reducing the number of municipalities, as some have proposed, may help, but not as much as imposing controls over the number of parties. Effective federalism, as success fully applied elsewhere, requires political coherence. There have been changes in judicial procedure, but needed for resolving the accumulated load of criminal cases from Lava Jato remains. Otherwise, all the branches of government will remain unable to move on. There is no reason to be trapped by the past. Lava Jato has had a highly positive effect. But it should not be the principal task of the judicial branch much longer. Many politicians should now just be punished by fines and an inability to serve for many years. With these kinds of changes, the Brazilian future again looks bright.

Notes 1 For readers who are less familiar with Brazilian politics: Dilma Rousseff served as the country’s first female president from 2011 to 2016. Her career in public service began several years before this, in 1986, when she worked as finance secretary for the city of Porto Alegre. Years later, in 2003, she was named minister of mines and energy by then-president Luiz Inácio Lula da Silva. Rousseff also served as Chief of Staff for president da Silva between 2005 and 2010. For more information see the fol lowing three sources: (1) Simon Romero. “Leader’s Torture in the ’70s Stirs Ghosts in Brazil.” New York Times August 4, 2012, sec. Americas. (2) BBC. “Brazil Profile – Leaders.” Online, 2016. (August 10): BBC. https://bbc.in/2S1hTia. (3) CNN. “Dilma Rousseff Fast Facts”. Online, 2017. (December 12): CNN. https://cnn.it/2PJbyq7. 2 Michel Temer was for many years an influential member of the Brazilian Democratic Movement Party (or, in Portuguese, Partido do Movimento Democrático Brasileiro). Temer was elected in 1987 to the first of several terms in the federal Chamber of Deputies and even served as its speaker over the course of three non-consecutive terms between 1997 and 2010. Then, in January of 2011, he joined Rousseff’s admin istration as vice president. In April of 2016, Rousseff offered a speech in which she accused Temer of conspiring to remove her from the presidency. For more information see the following four sources: (1) Daniel Gallas. “Michel Temer: The Man Who Now Leads Brazil.” BBC News May 12. 2016, sec. Latin America. https://bbc. in/2PGkWLf. (2) Ernesto Londoño and Shasta Darlington. “Lula, Brazil’s Ex-President, Can Be Jailed, Court Rules.” New York Times, April 4, 2018, sec. Americas. https:// nyti.ms/2zJNH0V. (3) Reuters. “Facing Impeachment Vote in Brazil, Dilma Rousseff Accuses Vice President of Conspiracy.” New York Times April 13. 2016, sec. Americas. https://nyti.ms/2J7b76r. (4) Kate Samuelson. “Five Things to Know About Brazil’s New President, Michel Temer.” Time September 1. 2016, sec. World: Brazil. https:// ti.me/2c7OUpg. 3 Eduardo Cunha is a socially conservative Brazilian politician who was speaker of the lower house of Congress from February 2015 to May 2016. Before being arrested on corruption charges, when he was an active member of the Brazilian Democratic Movement Party (or, in Portuguese, Partido do Movimento Democrático Brasileiro), Cunha was known for his aggressive political tactics and ability to negotiate backroom

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8 9 10 11 12

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Albert Fishlow deals. For more information see the following three sources: (1) Joe Leahy. “Expelled Brazilian Politician Threatens Exposé of Colleagues.” Financial Times September 13. 2016, sec. Americas politics & policy. https://on.ft.com/2OrQF65. (2) Samantha Pearson and Rossi Carina. “Brazil’s Former House Speaker Arrested in Petrobras Probe.” Financial Times October 19. 2016, sec. Americas politics & policy. https:// on.ft.com/2ex0Elu. (3) Dom Phillips. “Eduardo Cunha, Who Led Impeachment Drive against Rival in Brazil, Gets a 15-Year Jail Term.” New York Times March 30. 2017, sec. Americas. https://nyti.ms/2mUmw1L. A survey conducted by Ibope in April of 2018 showed that Michel Temer’s approval rating was in the single digits (O Globo, 2018). An article in The Atlantic describes Olavo de Carvalho as, “The 72-year-old is the architect of Brazilian President Jair Bolsonaro’s far-right vision.” “A self-educated philosopher,” the article continues, “who never completed high school, Olavo has formed a new generation of conservative leaders in Brazil…” (Duarte, 2019). For more information about Minister Moro’s anti-crime package see the Rose-Ackerman and De Mattos chapter in this volume. Former President Lula was released from jail on November 8, 2019. Lula had been incarcerated in 2018, in order to begin serving his eight-year sentence for graft and money laundering, but Brazil’s Supreme Court ruled on November 7, 2019 that defendants cannot be imprisoned until all their appeals have been used (Trevisani & Forero, 2019). For additional information about the evolution of Brazil’s system of accountability, see Aranha’s chapter in this volume. In writing about Mensalão, Michener, and Pereira (2016) contend that, “especially the magazine Veja and the newspaper Folha de São Paulo, are often credited with breaking scandals.” On this subject, an article in the New York Times reports on claims that Lula, “put pressure on a high court judge to delay a trial over a vote-buying scandal involving high-ranking members of the governing Workers Party [Mensalão]” (Romero, 2012). The quote belongs to then-Attorney General Roberto Gurgel (Watts, 2012). In 2003, Joaquim Barbosa was the first black judge to be appointed to the Supreme Court, an institution that he then headed in 2012. Barbosa retired from the Supreme Court in 2014, and his tenure is largely remembered for the role he played overseeing the Mensalão corruption trials. For more information see the following two sources: (1) BBC. “Brazilian Corruption Judge Joaquim Barbosa to Retire.” BBC News, May 29. 2014, sec. Latin America. https://bbc.in/2J7SHCB. (2) Darlington, Shasta. “From Janitor to Chief Justice: Could Joaquim Barbosa Be Brazil’s Next President?”. New York Times April 20. 2018, sec. Americas. https://nyti.ms/2J7eSst. The Real Plan was an ambitious macroeconomic stabilization program that began to be implemented in May 1993 (Afonso, Araújo, & Guelber Fajardo, 2016). On the one hand, Fernando Henrique Cardoso served as the President of Brazil from 1995 to 2003 (Winter, 2017). On the other hand, Antonio Palocci served as Finance Minister under former President Luiz Inácio Lula da Silva, and was Chief of Staff under former President Dilma Rouseff (Fonseca & Brito, 2017). Bolsa Família is Brazil’s famous conditional cash transfer program, which finds its roots in a social policy of the mid-1990s. Bolsa Família provides stipends to families that fall under a certain income threshold. Families that benefit from the program must guarantee that their children attend school and receive regular medical exams (Fried, 2011). For a closer look at the Rio Olympics, see Sanzovo and Ganley’s chapter in this volume. Running for the Workers’ Party, Dilma Rousseff won 51.6 percent of votes. Mean while, running for the Brazilian Social Democratic Party, Aecio Nevez won 48.4 percent (Phillips, 2014).

Lava Jato in perspective 29 18 Bolsa Família is Brazil’s famous conditional cash transfer program, which finds its roots in a social policy of the mid-1990s. Bolsa Família provides stipends to families that fall under a certain income threshold. Families that benefit from the program must guarantee that their children attend school and receive regular medical exams. For more information see: Fried, Brian J. (20110. Distributive Politics and Condi tional Cash Transfers: The Case of Brazil’s Bolsa Familia. World Development, 40(5), 1042–1053. 19 Corrupt practices involving Odebrecht have been found throughout twelve countries: Angola, Argentina, Brazil, Colombia, the Dominican Republic, Ecuador, Guatemala, Mexico, Mozambique, Panama, Peru, and Venezuela (Staff, 2016). Wahman’s chapter in this volume explores the international dimensions of Lava Jato. 20 Polling information was published by Romano (2019) in Veja. 21 Chapters 12 and 15 in this volume discuss the leaked messages in greater detail. 22 For further discussion of Moro’s proposed anti-corruption bill, see Chapter 14 by Bullock and Stephenson. 23 In a chapter that is included in this volume, Rose-Ackerman and De Mattos provide a closer look at Brazil’s fragmented party system.

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Nogueira, M., & Alper, A. (2018). Petrobras’ Profit Jumps on Asset Sales, Higher Oil Prices. Reuters. Retrieved from www.reuters.com/article/us-petrobras-results/asset-sales oil-prices-drive-petrobras-profit-to-5-year-high-idUSKBN1I91HR O Globo. (2018, April 5). Ibope divulga nova pesquisa sobre a popularidade de Michel Temer. O Globo. Retrieved from http://g1.globo.com/jornal-nacional/noticia/2018/04/ ibope-divulga-nova-pesquisa-sobre-popularidade-de-michel-temer.html OECD. (2018). Real Minimum Wages—Brazil. Retrieved from https://stats.oecd.org/ Index.aspx?DataSetCode=RMW#. Paraguassu, L., & Boadle, A. (2015, December 2). Brazil’s Congress Opens Impeach ment Proceedings Against President Reuters. Retrieved from www.reuters.com/article/ us-brazil-corruption-rousseff/impeachment-proceedings-opened-against-brazils president-idUSKBN0TL2XN20151203 Paraguassu, L., & Boadle, A. (2018, April 5). Brazil President’s Popularity Mired at Low in Election Year: Poll. Reuters. Retrieved from www.reuters.com/article/us-brazil politics-poll/brazil-presidents-popularity-mired-at-lows-in-election-year-poll-idUSKC N1HC1RL Paraguassu, L., Boadle, A., & Spring, J. (2019, November 12). Brazil’s Bolsonaro to Quit Divided PSL Party, Found New One. Reuters. Retrieved from www.reuters.com/ article/us-brazil-politics/brazils-bolsonaro-to-quit-divided-psl-party-found-new one-idUSKBN1XM2NV Paraguassu, L., & Brito, R. (2018). Brazil’s Alckmin Firms Presidential Bid With Cen trist Support. Reuters. Retrieved from www.reuters.com/article/us-brazil-politics/ brazils-alckmin-firms-presidential-bid-with-centrist-support-idUSKBN1KA2L7 Phillips, D. (2014, October 26). Dilma Rousseff is Reelected President of Brazil in Bit terly Fought Runoff. Washington Post. Retrieved from www.washingtonpost.com/ world/dilma-rousseff-is-narrowly-reelected-president-of-brazil-in-bitterly-fought-runof f/2014/10/26/4dddf804-5d67-11e4-8b9e-2ccdac31a031_story.html Phillips, D. (2015, December 23). Brazil’s new hero is a nerdy judge who is tough on official corruption. Washington Post. Retrieved from https://wapo.st/2AHENo2 Phillips, D. (2018, September 7). Jair Bolsonaro: Brazil Presidential Frontrunner Stabbed at Campaign Rally. Guardian. Retrieved from www.theguardian.com/world/2018/ sep/06/brazil-jair-bolsonaro-far-right-presidential-candidate-stabbed Polimédio, C. (2018, January 24). The Rise of the Brazilian Evangelicals. The Atlantic. Retrieved from www.theatlantic.com/international/archive/2018/01/the-evangelical takeover-of-brazilian-politics/551423/ Prada, P., & Boadle, A. (2012, December 18). Analysis: Rousseff Price Controls Fail to Stoke Brazil Investment. Reuters. Retrieved from www.reuters.com/article/us-brazil economy-investment/analysis-rousseff-price-controls-fail-to-stoke-brazil-investment idUSBRE8BH10N20121218 Prengaman, P., & Savarese, M. (2017). Brazil’s Top Prosecutor Accuses Temer of Obstructing Justice. AP News. Retrieved from https://apnews.com/d7142c30 02f3418cb55262d8257e3138/Brazil’s-top-prosecutor-accuses-Temer-of-obstructing justice Rapoza, K. (2018, August 9). In Brazil, Market Predicts Bolsonaro V. Alckmin. Forbes. Retrieved from www.forbes.com/sites/kenrapoza/2018/08/09/in-brazil-market-predicts bolsonaro-vs-alckmin/#240736cb40ee Reeves, P. (2018). Dictatorship Was a ‘Very Good’ Period, Says Brazil’s Aspiring President. NPR. Retrieved from www.npr.org/2018/07/30/631952886/dictatorship-was-a-very good-period-says-brazil-s-aspiring-president

Lava Jato in perspective 33 Reuters. (2015, April 22). Former Petrobras Executive Costa Convicted in Corruption Case. Reuters. Retrieved from www.reuters.com/article/brazil-petrobras-conviction/ former-petrobras-executive-costa-convicted-in-corruption-case-idUSL1N0XJ1TB2015 0422 Romano, G. (2019, December 13). Datafolha: 81% dos brasileiros acreditam que Lava Jato deve continuar. Veja. Retrieved from https://veja.abril.com.br/politica/datafolha 81-dos-brasileiros-acreditam-que-lava-jato-deve-continuar/ Romero, S. (2012, May 30). Brazil’s Political Class Jolted by Claim That Ex-Leader Pressed a High Court Judge. New York Times. Retrieved from www.nytimes. com/2012/05/31/world/americas/brazil-is-jolted-by-claim-that-da-silva-pressured judge.html Romero, S. (2016, August 31). Dilma Rousseff Is Ousted as Brazil’s President in Impeachment Vote. New York Times. Retrieved from www.nytimes.com/2016/09/01/ world/americas/brazil-dilma-rousseff-impeached-removed-president.html Sadek, M. T. (2009). The Public Prosecutor’s Office and Legal Change in Brazil. Institute of Development Studies Bulletin, 32(1). doi:https://doi.org/10.1111/j.1759-5436.2001. mp32001008.x Savarese, M., & Biller, D. (2019, October 22). Brazil Congress Passes Landmark Over haul of Pension System. AP News. Retrieved from https://apnews.com/0c60f 2b8ecb64 8e1a0c4677292e82042 Schipani, A. (2018, September 28). Petrobras in $853m Settlement of Bribery Case that Rocked Brazil. Financial Times. Retrieved from www.ft.com/content/686db098-c252 11e8-95b1-d36dfef1b89a Schipani, A. (2019, August 21). Brazil’s Game of Thrones: The Tensions Within Jair Bolsonaro’s Inner Circle. Financial Times. Retrieved from www.ft.com/content/ f27794f6-aa15-11e9-984c-fac8325aaa04 SECOM. (2010, March 30). Brazil Announces Phase Two of the Growth Acceleration Plan Retrieved from www.worldbank.org/en/webarchives/archive?url=httpzzxxweb. worldbank.org/archive/website01601/WEB/BRAZIL_A.HTM Segal, D. (2015, August 7). Petrobras Oil Scandal Leaves Brazilians Lamenting a Lost Dream. New York Times. Retrieved from www.nytimes.com/2015/08/09/business/international/ effects-of-petrobras-scandal-leave-brazilians-lamenting-a-lost-dream.html?_r=0 Staff. (2016, December 23). Odebrecht bribed across Latin America. Deutsche Welle. Retrieved from www.dw.com/en/odebrecht-bribed-across-latin-america/a-36887600 Stargardter, G., Boadle, A., & Brito, R. (2018, November 28). Brazilian President-Elect Adds Fifth Military Man to Cabinet. Reuters. Retrieved from www.reuters.com/article/ us-brazil-politics-appointment/brazilian-president-elect-adds-fifth-military-man-to-cabinet idUSKCN1NV22H Supreme Court Concludes That the Goal of the Mensalão Was to Buy Votes. (2012, February 10). Folha de S. Paulo. Retrieved from www1.folha.uol.com.br/internacional/ en/brazil/2012/10/1162633-supreme-court-concludes-that-the-goal-of-the-mensalao was-to-buy-votes.shtml Taylor, M. M. (2016). Brazil’s Challenging Distractions. Retrieved from www.cfr.org/ blog/brazils-challenging-distractions The Economist. (2013, November 18). What is Brazil’s ‘Mensalão’? The Economist. Retrieved from www.economist.com/blogs/economist-explains/2013/11/economist-explains-14 The World Bank. (2010). GDP Growth (Annual %)—Brazil Retrieved from: https:// data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?end=2018&locations=BR&st art=2009

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The World Bank. (2017a). Adjusted Net National Income per Capita (Annual % Growth)—Brazil Retrieved from https://data.worldbank.org/indicator/NY.ADJ.NNTY. PC.KD.ZG?end=2017&locations=BR&start=2001 The World Bank. (2017b). GINI Index (World Bank Estimate)—Brazil. Retrieved from https://data.worldbank.org/indicator/SI.POV.GINI?end=2017&locations=BR&start=2009 The World Bank. (2018a). Current Account Balance (% of GDP)—Brazil. Retrieved from: https://data.worldbank.org/indicator/BN.CAB.XOKA.GD.ZS?end=2018&locati ons=BR&start=2008 The World Bank. (2018b). Real Effective Exchange Rate Index—Brazil. Retrieved from: https://data.worldbank.org/indicator/PX.REX.REER?end=2018&locations=BR&start= 2002 The World Bank. (2019). Unemployment, Total (% of Total Labor Force) (Modeled ILO Estimate)—Brazil. Retrieved from: https://data.worldbank.org/indicator/SL.UEM. TOTL.ZS?end=2019&locations=BR&start=2011 Trevisani, P., & Forero, J. (2019, November 8). Former Brazilian President ‘Lula’ da Silva Released From Jail; Decision Follows Supreme Court Ruling that Defendants Should Remain Free Until All Appeals are Heard. Wall Street Journal. Retrieved from www.wsj.com/articles/brazilian-judge-orders-release-of-former-president-lula-da silva-11573243399 Watts, J. (2012, August 2). Brazil’s ‘Corruption Trial of the Century’ Expected to Hurt Ruling Coalition. Guardian. Retrieved from www.theguardian.com/world/2012/ aug/02/brazil-corruption-trial-politicians Watts, J. (2014, June 12). Anti-World Cup Protests in Brazilian Cities Mark Countdown to Kick-Off. Guardian. Retrieved from www.theguardian.com/football/2014/jun/12/ anti-world-cup-protests-brazilian-cities-sao-paulo-rio-de-janeiro Watts, J. (2015, December 3). Brazil Opens Impeachment Proceedings Against President Dilma Rousseff. Guardian. Retrieved from www.theguardian.com/world/2015/dec/02/ brazil-dilma-rousseff-impeachment-proceedings Watts, J. (2016, August 31). Dilma Rousseff Impeachment: What You Need to Know— Guardian Briefing. The Guardian. Retrieved from www.theguardian.com/news/2016/ aug/31/dilma-rousseff-impeachment-brazil-what-you-need-to-know Watts, J. (2017, May 17). Brazil: Explosive Recordings Implicate President Michel Temer in Bribery. Guardian. Retrieved from www.theguardian.com/world/2017/ may/18/brazil-explosive-recordings-implicate-president-michel-temer-in-bribery Wetzel, D. (2013). Bolsa Família: Brazil’s Quiet Revolution. The World Bank (Opinion) (November 4). Retrieved from www.worldbank.org/en/news/opinion/2013/11/04/ bolsa-familia-Brazil-quiet-revolution Wheatley, J. (2005, September 14). Brazil Congressman in Corruption Scandal Expelled. Financial Times. Retrieved from www.ft.com/content/1b6dd516-2585-11da-98dc 00000e2511c8 Winter, B. (2017). We’ve Been Here Before: An Interview with Fernando Henrique Cardoso. Americas Quarterly, 11(3). Retrieved from www.americasquarterly.org/ content/weve-been-here-interview-fernando-henrique-cardoso Winter, B., & Teixeira, M. (2014, June 12). Brazil Police, Protesters Clash as World Cup Begins. Reuters. Retrieved from www.reuters.com/article/us-brazil-worldcup-protests/ brazil-police-protesters-clash-as-world-cup-begins-idUSKBN0EN1DD20140612 Zissis, C. (2010). Lula Unveils Major Infrastructure Investment Plan Americas Society/ Council of the Americas. Retrieved from www.as-coa.org/articles/lula-unveils-major infrastructure-investment-plan

3

Competing to be corrupt The multinational dynamics of public procurement bribery in Latin America Connor Wahrman

Introduction For companies seeking government contracts, bribery may be a tempting business strategy. Illicit payments to corruptible officials may facilitate market access in the future, and therefore provide a competitive edge against rival firms. However, public procurement corruption is not a victimless crime. An official who accepts bribes in exchange for public contracts betrays the public’s trust and wastes its collective resources. The result is lower-quality and higher-priced goods and services. At the same time, the bribe-paying firm steals market share from its competitors, who may be more qualified. This form of corruption is difficult to uncover; because both officials and firms benefit, neither has an incentive to inform on the other. Analyzing the behavior of a specific scandal-ridden multinational corporation (MNC) offers an opportunity to study corrupt business strategies. As MNCs have ample ability to choose the markets in which they do business, corrupt MNCs may choose to operate in more corrupt countries. A comparison of the corruptness of countries in which a scandal-ridden MNC operates, against the corruptness of countries with similar markets in which that firm could other wise have done business, may provide evidence that the MNC selected its markets based on their reputations for corruption. The following analysis uses the case of the Brazilian multinational construc tion firm Odebrecht to test this proposition. It compares the ten Latin American countries in which Odebrecht did business from 2001 through 2016, and which were subsequently implicated in the Lava Jato corruption investigation, against the nine other regional countries in which Odebrecht had no business presence. During this period, Odebrecht paid at least 788 million US$ in bribes to public officials in the firm’s home country of Brazil and the following ten foreign coun tries: Argentina, Colombia, the Dominican Republic, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, and Venezuela (“Stanford Law School: Foreign Corrupt Practices Act Clearinghouse,” n.d.). Most of these payments occurred between 2006, when Odebrecht developed its Division of Structured Operations to manage its bribe activities, and 2016, when the company divulged this information as part of a plea deal with the United States Department of

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Justice, in order to reduce its penalties for Foreign Corrupt Practices Act (FCPA) violations (“Stanford Law School: Foreign Corrupt Practices Act Clearinghouse,” n.d.). The Division of Structured Operations was at the heart of this bribe activity. In response to an increasingly complex web of payments to and from political actors throughout Latin America, Odebrecht innovated its management of these trans actions by effectively creating a, “bribes department” (“Stanford Law School: Foreign Corrupt Practices Act Clearinghouse,” n.d., p. 8). This department or divi sion stood apart from the rest of Odebrecht’s corporate structure, using private communications systems, unrecorded funds, and secret offshore entities to conceal its activities (“Stanford Law School: Foreign Corrupt Practices Act Clearinghouse,” n.d., p. 10). But the Division of Structured Operations did not operate in complete secrecy, as its leadership reported directly to senior Odebrecht executives (“Stanford Law School: Foreign Corrupt Practices Act Clearinghouse,” n.d., p. 1). Since the discovery of its illegal behavior, Odebrecht has engaged in extensive cooperation with relevant authorities and has given public statements of regret (Boadle, 2016). More than 70 executives, including jailed former CEO Marcelo Odebrecht, agreed to make plea statements, and the company began a process to overhaul its compliance and oversight processes. Additionally, in an unprecedented act, the company took out full-page advertisements in Brazil’s major newspapers to apologize for its corrupt behavior, referring to it as a “big mistake” (Boadle, 2016). This chapter’s analysis relies on cross-national data on public procurement corruption from the 2004–2005 Global Competitiveness Report (GCR). The 2004–2005 GCR contains the earliest measure of perceived corruption specifi cally for public procurement, measured before the 2006 development of Odebrecht’s Division of Structured Operations, as well as before all divulged incidents of bribery, except for in the Dominican Republic. This data source also reflects the perceptions of corporate executives towards the countries involved, which approximates Odebrecht’s own perspective. Statistical analysis finds evidence suggesting that the countries implicated in Lava Jato had reputations of being more corrupt than their Latin American neighbors during the relevant period. Furthermore, every country implicated had reputations for being as corrupt or more corrupt than Odebrecht’s home country of Brazil. These patterns may have had a substantial role in Odebrecht’s business decisions. In other words, a country’s perceived public procurement corruption, especially relative to that of Brazil, predicts whether or not Odebrecht chose to do business in that country. This finding suggests that, despite the aforementioned Marcelo Odebrecht claiming that “this is how Latin America works” (Alconada Mon, 2018), the company may have avoided countries in the region where its attempts at corruption would have been less likely to succeed.

Theories of corruption as a business strategy The modern consensus is that corruption—the exploitation of public office for private gain—distorts the structure of economic and political incentives that

Competing to be corrupt 37 guide and shape public–private interactions (Fisman & Golden, 2017, p. 3). If a firm sees that its competitors win contracts unfairly through bribe payments, the firm has to choose between paying bribes itself or losing out on business. Even if the firm prefers an environment where no one pays bribes, and it can win contracts on merit, expectations of others’ behavior can pressure it to pay bribes anyway (Fisman & Golden, 2017, p. 6). And the behavior of a firm that is already inclined to pursue a strategy involving corruption may depend even more on expectations of corruption. The safest place to engage in corrupt behavior, where impunity might be most expected, is one where corruption is widespread. At the societal level, the presence of exten sive corruption may inhibit efforts to reduce it: no individual wants to take action alone for fear of the consequences of deviating from established norms (Persson, Rothstein, & Teorell, 2013). For example, in Costa Rica, survey exper imentation suggests that increasing the perceived levels of societal corruption makes individuals more willing to engage in corruption themselves (Corbacho et al., 2016). In societies with entrenched systems of corruption, intermediaries often take on the role of coordinating between corruptible officials and private actors willing to pay bribes. Such intermediaries facilitate corruption by reducing information asymmetries between the two parties, and also have a psychological effect in minimizing the perceived moral costs of corruption (Drugov, Hammen, & Serra, 2014). Cultures of corruption appear to be self-reinforcing, as corruptible actors rationalize their behavior based on the environment around them. Such environments may therefore be more attractive for actors who believe that they can benefit from corrupt activity. There is evidence that private actors do take advantage of corruption when it offers tangible benefits or the potential for tangible benefits. Throughout the Egyptian Arab Spring, firms associated with members of various political fac tions saw their stock prices vary alongside the political fortunes of their respec tive factions, suggesting that investors valued firms based on their anticipated ability to collect illicit rents (Acemoglu, Hassan, & Tahoun, 2018). While these investors did not necessarily participate in any corrupt behavior themselves, they did take advantage of market opportunities made possible as result of a corrupt environment. In Italy, on the other hand, there is evidence that firms took advantage of opportunities for corruption made possible by former Prime Minister Silvio Berlusconi retaining control throughout his terms of the private media conglomerate Mediaset. Italian firms, especially those which stood to benefit from decreased regulation, changed how much they paid to advertise through Mediaset in accordance with shifting expectations of whether Berlusconi was likely to remain in power (DellaVigna, Durante, Knight & La Ferrara, 2016). Although there is no direct evidence of these firms receiving specific benefits as a result of their advertising expenditures, this case strengthens the argument that firms adapt their behavior to benefit from local corruption. Other research focuses on the behavior of multinational corporations investing abroad. This area of analysis is complicated, as MNC behavior in host countries may vary based on their innate tolerances for corruption. On the one hand, the

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pervasiveness of local corruption in a given country can act as a restriction to market access for MNCs, leading to reduced foreign investment (CuervoCazurra, 2008). But at the same time, multinational corporations themselves contribute to the pervasiveness of local corruption. Across local markets in China, higher MNC concentration associates with higher rates of corrupt behav ior (Zhu, 2017, p. 96). And local conditions can incentivize MNCs to seek out opportunities to engage in corruption. For example, a survey experiment in Vietnam finds that removing restrictions on foreign entry to local markets reduces the incidence of bribe payments by foreign MNCs to provincial officials (Bai, Jayachandran, Malesky, & Olken, 2019). Since individual MNCs both respond and contribute to the pervasiveness of corruption in target markets, other research suggests that the characteristics of MNC origin countries also influence firm behavior abroad. Looking at foreign direct investment, there is evidence that greater differences in the level of cor ruption between two countries reduces the size of investment between them (Habib and Zurawicki, 2002, p. 303), especially if the host country is more corrupt than the home country (Godinez & Liu, 2015, p. 40). For example, the passing of the US Foreign Corrupt Practices Act in 1977 reduced business activ ity between the United States and countries perceived to be more corrupt (Hines, 1995, p. 19). But when the outcome of analysis shifts from investment to the incidence of corruption, econometric analysis shows that companies from more corrupt countries are themselves more likely to engage in corruption abroad, independent of the effect of the host country’s corruption level (Batzilis, 2015, p. 288). Together, these findings suggest that corrupt countries attract foreign investment from firms willing and able to engage in illicit behavior as result of themselves having corrupt origin environments. This illicit investment then crowds out MNCs from less corrupt countries (Hines, 1995, p. 20). Such a conclusion further suggests that MNCs from more corrupt countries might develop a competitive advantage when competing for specific contracts from officials susceptible to bribes. The presence of this market advantage could incentivize MNCs willing to pay bribes towards selecting foreign business opportunities where the facility for corruption would be most likely to pay off.

Choosing the proper measure Testing whether Odebrecht chose markets based on their propensities to be corrupt requires data that accurately measure public-procurement corruption. When studying corruption, it is important to rely on measures that are as reliable as possible, to avoid indicators capturing aggregated perceptions across business sectors and types of corruption (Andersson and Heywood, 2009, p. 756). Accordingly, this study uses a measure of corruption specific to the provision of public contracts, as published in the 2004–2005 Global Competitiveness Report (GCR). This measure, as part of the World Economic Forum’s 2004 Executive Opinion Survey, draws from confidential interviews with representative samples of business executives and entrepreneurs across 104 countries and indicates the

Competing to be corrupt 39 pervasiveness of irregular payments in public contracts (Blanke & Loades, 2004, p. 200). The GCR indicator ranks countries in response to the following statement: “In your industry, how commonly would you estimate that firms make undocu mented extra payments or bribes connected with public contracts (investment projects)?” The response scale ranges from 1 (very commonly) to 7 (very rarely), so that lower scores indicate more corrupt perceptions and higher scores indicate cleaner perceptions. While it is unknown whether Odebrecht specifically relied on GCR data in making its investment decisions, this measure reflects information available to the general business community when Odebrecht developed its in-house bribery coordination team, the Division of Structured Operations, to organize the transfer of funds from company accounts to government officials and their asso ciates (“Case Information: United States of America v. Odebrecht SA,” n.d.). Since only one recorded incidence of Odebrecht’s corruption predates the GCR indicator, the measure should reflect the perceptions of corruption surrounding investment projects throughout Latin America before the Division of Structured Operations’ own actions could influence such perceptions.

Statistical analysis of Odebrecht’s multinational choices Of the 18 Latin American countries in the analytic sample,1 nine (apart from Odebrecht’s home country, Brazil) had ongoing projects with the company before the public revelations of Operation Lava Jato (Odebrecht Group, 2014). Compar ing these nine countries against the eight countries in which Odebrecht did not do business reveals a substantial, but not statistically significant, difference in levels of perceived public procurement corruption (Figure 3.1). A Welch Two Sample ttest indicates that there is no significant difference between the mean corruption scores of the countries in which Odebrecht chose to do business and those in which the company did not choose to do business (p = 0.3688). There remains, however, suggestive evidence that corruption perceptions may have played a role here. Although some countries (Honduras, Paraguay, and Bolivia) in which Odebrecht did not do business had corrupt reputations, all but one of Odebrecht’s markets (Colombia) fall above the median score of the non-contracting countries. Additionally, every single one of the countries in which Odebrecht secured con tracts had perceptions of being more corrupt than the company’s home country of Brazil. In any event, the intended purpose of this chapter is not to conclude to what extent Odebrecht made decisions based on regional corruption reputations; instead, this chapter aims to assess the relative power of such corruption reputa tions in predicting Odebrecht’s choice of target markets. Indeed, an alternative explanation of Odebrecht’s choices is that the company did not only take corruption levels into account, but also considered the size of economic opportunity each country offered for investment projects across industries. To test this alternative hypothesis, the following analysis relies on the sum total of gross fixed capital formation (investment) through

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Figure 3.1 Odebrecht business by public procurement corruption.

the 2001–2016 period, calculated for each country-year as the product of GDP (in current US$) and investment as a percentage of GDP (World Economic Outlook Database, 2017). Figure 3.2 shows the distribution of investment across countries based on whether or not they did business with Odebrecht during the period of analysis. The median level of investment is significantly higher for countries in which Odebrecht did business, which a Welch Two Sample t-test confirms (p < 0.01). On average, countries with Odebrecht ties had larger investment markets than those that did not have Odebrecht ties, which suggests some level of selection based on this variable. Chile, however, is an outlier; the country’s market size is larger than the median for the distribution of countries that did business with Odebrecht, but the company did not have any business in Chile during the 2001–2016 period. This outlier status cannot be explained by the presence of a

Competing to be corrupt 41

Figure 3.2 Odebrecht business by gross capital formation across sample

national champion in the construction industry, as foreign investment accounts for the vast majority of Chile’s construction market (US International Trade Administration, 2018). Next, Costa Rica is roughly equivalent to Panama in terms of market size, but Odebrecht pursued business only in Panama. Since Panama had a substantially more corrupt reputation than Costa Rica, it is pos sible that any choice by Odebrecht between the two countries may have been on the basis of corruptibility. Plotting the variables of market size and perceived levels of corruption in two-dimensional space can help illuminate these cases (Figure 3.3). The coun tries in which Odebrecht chose to do business (with labels in black text) feature both large market size and worse reputations for public procurement corruption. Given the sample’s lack of correlation between these two variables; that is, larger markets are no more or less corrupt than smaller markets for the region as a

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Figure 3.3 Odebrecht business by public procurement corruption and gross capital formation

whole (Table 3.1), this visual evidence suggests that reputation for corruptibility, independent of investment market size, may have influenced Odebrecht’s choices of countries in which to do business. Table 3.1 Pearson’s correlation coefficient for independent variables Variable 1

Variable 2

Correlation coefficient

Corruption perception, 2004 Perception as more corrupt than Brazil, 2004

Natural log of investment, 2001–2016 Natural log of investment, 2001–2016

0.14 (–0.37, 0.58) –0.09 (˗0.54, 0.41)

Notes

Confidence interval (95%) in parentheses. N = 17. *, **, and *** indicate significance at the 10%,

5%, and 1% level respectively.

Competing to be corrupt 43 Logistic regression analysis assessing the independent effects of country-level investment size and perceived corruption, excluding Odebrecht’s origin country Brazil, provides further evidence of these independent effects (Table 3.2). Specify ing the regression model to assess perceived corruption as a continuous variable uncovers a negative but weak independent association between Odebrecht’s busi ness presence and cleaner country perceptions (p