Norges Bank has decided to place Petroleo Brasileiro SA (Petrobras) under observation because of the risk of severe corruption. Petrobras is one of the largest state owned petroleum TNCs in Latin America and one that is deeply embedded in corruption investigations (here and here (including the write off of over $2 billion in bribe payments)) that reached all the way to the office of the President of the Republic (here). The decision is based on the recommendation submitted by the Council on Ethics for the Government Pension Fund Global.
The decision stands in stark contrast to the 7 January 2016 decision by Norges Bank to exclude the Chinese company ZTE Corporation, one of the world’s five largest producers of telecommunications equipment and network solutions, based on an assessment of the risk of severe corruption (my observations here).
The decision stands in stark contrast to the 7 January 2016 decision by Norges Bank to exclude the Chinese company ZTE Corporation, one of the world’s five largest producers of telecommunications equipment and network solutions, based on an assessment of the risk of severe corruption (my observations here).
The two decisions together may help begin to make coherent whatever rules may be emerging about the obligations of the Pension Fund Global in matters of corruption under internationalized standards that it invokes. Especially important may be emerging rules for determining when corruption may trigger greater use of shareholder rights and when it triggers a decision to exclude form investment. To the extent that these decisions do not add clarity, they ill serve the developing international consensus on the corporate responsibility to avoid corruption and the consequential obligation of investors to police the conduct of the enterprises in which they invest.
Please find the Council’s recommendation here.
Please find the Council on Ethics Recommendation here.
The Council of Ethics opinion and Norges Bank decision, along with some observations, follow.
Corruption has become an important element of both national and transnational governance. It is particularly complicated because coherence among all of the participants in global production chains are necessary in order to ensure that the production chain itself remains free of corruption. But that, in turns, requires both coherence in approach to corruption (how does it manifest) and a willingness to privatize corruption enforcement across border. Alternatively, and less efficiently, dominant states might seek to project their own anti-corruption regimes outward through their control (to the extent of such control in any case) of apex enterprises in production chains. Alternatively, dominant states, and their investment instruments (like the Norwegian Pension Fund Global) might seek to project an internationalized conception of anti-corruption law and standards outward. In either case, projection of anti-corruption standards may be done directly, through law, or indirectly through the encouragement of societally (privatized) mechanisms for corruption control through markets critical to the functioning of relevant production chains.
The Norwegian Pension Fund Global has sought to do a little of both (discussed broadly here). It has developed and sought to apply to (outbound though not necessarily to domestic) activity an internalized set of norms that are treated as law-like. These rules form the core of the normative framework for extraterritorial application of Norwegian public policy and state power. But the application of these norms are effectuated through private markets, and specifically through the investment decisions, and shareholder activity policies, of its largest investor in private markets, the Norwegian Pension Fund Global. Under its operating rules, the Pension Fund Global, after review of individual investment decisions, determine that an object of investment has breached its rules of investment. In that case it may determine either to exclude the enterprise form its investment universe (and thus use market pressure to induce changes in behavior in conformity with its rules), or it may choose to place the enterprise "under observation" (and thus use its shareholder power to induce behavior changes from the inside).
Petrobras represented the second opportunity for the Ethics Council and Norges Bank to speak to the issue of corruption and to further refine an articulation of a set of principles under which a financial institution (or even an institutional investor) might comply with its responsibility to respect human rights (Guiding Principles for Business and Human Rights) as applied through its investor code of ethics (the Pension Find Global's Ethical Guidelines). It is emerging that, at least under the OECD's framework Guidelines for Multinational Enterprises, financial institutions assume at least some minimal level of responsibility for the human rights detrimental conduct of clients (Should Financial Institutions Have Obligations to Manage the Human Rights Impacts of their Clients?: "Final Statement Friends of the Earth Europe and Friends of the Earth Netherlands/Milieudefensie - Rabobank"). And corruption has been identified as falling within that responsibility both within international soft law and under the Penison Fund Global's Ethical Guidelines.
But the application of those responsibilities to specific instances has not yet produced a coherent jurisprudence. Much less has it started to develop a set of decisions that might provide guidance to enterprises about the standards applied by Ethics Council and Bank to issues of corruption that could result in no action, in observation status, or in exclusion from investment. In the most recent case, on 7 January 2016, the Norges Bank decided to exclude the Chinese company ZTE Corporation, one of the world’s five largest producers of telecommunications equipment and network solutions, from the investment universe of the GPFG. The company is excluded based on an assessment of the risk of severe corruption (see here). But in the Petrobras decision, the Council and the Bank chose observation rather than exclusion.
What accounts for the difference. At one level one might ask whether the difference is based on unconscious presumptions about the amenability to corruption, and to correction, inherent in Chinese companies (little prospect for correction) against Brazilian companies (better prospects). But this would be a jurisprudence of prejudice rather than of law and hardly to be tolerated by a state institution. On the other hand, it might well indicate a difference in the sort of relations between investors and state owned enterprises that itself might infomr decisions about the utility of exercising shareholder power. One understands better the value of shareholder power in Petrobras than perhaps in ZTE Corp. and that might have played into the decision. For Chinese SOEs and related entities that may be an important consideration as they seek financing from investors ever more deeply tied to global standards of assessment of investment propriety grounded in consensus norms that these companies might otherwise reject.
Perhaps it was the level of information available to the Ethics Council and the level of cooperation afforded. Petrobras appeared more willing to engage the Ethics Council, and in any case more information was available to Council and Bank about a very public scandal touching on a crown jewel of Brazilian state enterprises. In contrast ZTE Corp. did little to help its own case, and its corruption appeared far more systemic. But that is to some extent conjecture. Still, an indication of cooperation might provide a sufficient basis to chose observation rather than exclusion if only for practical reasons--the enterprise would be easier to monitor and its progress easier to assess than with an enterprise that appeared unwilling to cooperate even against a state sector investor shareholder. Yet Petrobras is not Siemens, and the level of cooperation might be understood as hardly satisfactory. It would do the Ethics Council well to develop better and more evenly applied standards for measuring cooperation and the consequences for choosing among remedies and approaches when confronted with a significant breach of its Ethics Guidelines.
Petrobras represented the second opportunity for the Ethics Council and Norges Bank to speak to the issue of corruption and to further refine an articulation of a set of principles under which a financial institution (or even an institutional investor) might comply with its responsibility to respect human rights (Guiding Principles for Business and Human Rights) as applied through its investor code of ethics (the Pension Find Global's Ethical Guidelines). It is emerging that, at least under the OECD's framework Guidelines for Multinational Enterprises, financial institutions assume at least some minimal level of responsibility for the human rights detrimental conduct of clients (Should Financial Institutions Have Obligations to Manage the Human Rights Impacts of their Clients?: "Final Statement Friends of the Earth Europe and Friends of the Earth Netherlands/Milieudefensie - Rabobank"). And corruption has been identified as falling within that responsibility both within international soft law and under the Penison Fund Global's Ethical Guidelines.
But the application of those responsibilities to specific instances has not yet produced a coherent jurisprudence. Much less has it started to develop a set of decisions that might provide guidance to enterprises about the standards applied by Ethics Council and Bank to issues of corruption that could result in no action, in observation status, or in exclusion from investment. In the most recent case, on 7 January 2016, the Norges Bank decided to exclude the Chinese company ZTE Corporation, one of the world’s five largest producers of telecommunications equipment and network solutions, from the investment universe of the GPFG. The company is excluded based on an assessment of the risk of severe corruption (see here). But in the Petrobras decision, the Council and the Bank chose observation rather than exclusion.
What accounts for the difference. At one level one might ask whether the difference is based on unconscious presumptions about the amenability to corruption, and to correction, inherent in Chinese companies (little prospect for correction) against Brazilian companies (better prospects). But this would be a jurisprudence of prejudice rather than of law and hardly to be tolerated by a state institution. On the other hand, it might well indicate a difference in the sort of relations between investors and state owned enterprises that itself might infomr decisions about the utility of exercising shareholder power. One understands better the value of shareholder power in Petrobras than perhaps in ZTE Corp. and that might have played into the decision. For Chinese SOEs and related entities that may be an important consideration as they seek financing from investors ever more deeply tied to global standards of assessment of investment propriety grounded in consensus norms that these companies might otherwise reject.
Perhaps it was the level of information available to the Ethics Council and the level of cooperation afforded. Petrobras appeared more willing to engage the Ethics Council, and in any case more information was available to Council and Bank about a very public scandal touching on a crown jewel of Brazilian state enterprises. In contrast ZTE Corp. did little to help its own case, and its corruption appeared far more systemic. But that is to some extent conjecture. Still, an indication of cooperation might provide a sufficient basis to chose observation rather than exclusion if only for practical reasons--the enterprise would be easier to monitor and its progress easier to assess than with an enterprise that appeared unwilling to cooperate even against a state sector investor shareholder. Yet Petrobras is not Siemens, and the level of cooperation might be understood as hardly satisfactory. It would do the Ethics Council well to develop better and more evenly applied standards for measuring cooperation and the consequences for choosing among remedies and approaches when confronted with a significant breach of its Ethics Guidelines.
__________
Recommendation 21 December 2015 to place Petroleo Brasileiro SA under observation
The Council on Ethics recommends putting Petroleo Brasileiro SA (Petrobras) under observation due to the risk of gross corruption. Senior executives of the company and its most important suppliers have apparently for a decade organised a system of paying large bribes to top politicians, political parties and civil servants. Several of the company’s senior executives also received large kickbacks. Three former employees have already been convicted of such offences. The case is still being investigated in Brazil. The US authorities have also started to investigate allegations of corruption. The Council does not believe that the company has sufficiently proved it is effectively implementing its internal anti-corruption procedures. The fact that the Council nonetheless advises putting Petrobras under observation and not excluding it is because the company’s anti-corruption procedures are recently established. In addition, the extensive investigation in Brazil, the negative attention that the company has received both in Brazil and internationally and Brazil’s new anti-corruption legislation all reduce the risk of corruption reoccurring.
The investigations have not been concluded. The Council will carefully monitor developments in the case over the coming year and reassess the matter in 2016. Should further cases of gross corruption be revealed in Petrobras’ operations in the future and the company cannot satisfy that the anti-corruption programme is being complied with and effectively improved, the condition for exclusion may be met.
Please find the Council’s recommendation here.
__________
COUNCIL ON ETHICS
THE GOVERNMENT PENSION FIND GLOBAL
UNOFFICIAL ENGLISH TRANSLATION
To Norges Bank
21 December 2015
21 December 2015
Petroleo Brasileiro SA
1
Summary
The Council on Ethics recommends putting Petroleo Brasileiro SA (Petrobras) under observation due to the risk of gross corruption.1 Senior executives of the company and its most important suppliers have apparently for a decade organised a system of paying large bribes to top politicians, political parties and civil servants. Several of the company's senior executives also received large kickbacks. Three former employees have already been convicted of such offences. The case is still being investigated in Brazil. The US authorities have also started to investigate allegations of corruption. The Council does not believe that the company has sufficiently proved it is effectively implementing its internal anti-corruption procedures. The fact that the Council nonetheless advises putting Petrobras under observation and not excluding it is because the company's anti-corruption procedures are recently established. In addition, the extensive investigation in Brazil, the negative attention that the company has received both in Brazil and internationally and Brazil's new anti-corruption legislation all reduce the risk of corruption reoccurring.
In brief about Petrobras
Petrobras is the largest listed company in Latin America and engages in activities relating to the production and refining of oil and gas. Petrobras was founded in 1953 as a state-owned oil company that had a monopoly on all oil activity in Brazil. In 1997, new legislation allowed competition in all parts of Brazil's oil and gas industry.
What the Council has considered
The Council has considered whether there is an unacceptable risk of Petrobras being responsible for gross corruption according to the section 3 subsection 3 letter d) of the Guidelines for Observation and Exclusion of Companies from the Government Pension Fund Global.
The Council has assessed whether there is an unacceptable risk of Petrobras having committed acts of gross corruption and of Petrobras being involved in corresponding acts in the future.
The Council's investigations and assessment
The Council has commissioned two studies by consultants of the allegations of corruption made by the press in this case. The Council was in contact with Petrobras several times in 2014 and 2015. The company has provided information on the case and also commented on a draft recommendation. Petrobras is linked to Brazil's most extensive corruption case ever. Senior executives of the company and its most important suppliers are accused of organising a system of paying large bribes to top politicians, political parties and civil servants over a period of 10 years. The senior executives also received kickbacks. Based on the extensive investigation in Brazil, which has so far resulted in a number of charges, indictments and legal rulings that convict former senior executives of paying and receiving bribes as part of the operations, it appears that Petrobras may be responsible for acts that must be considered as gross corruption. Based on the available information, it also appears that the corruption has existed in the company for many years. The company's largest suppliers had for a long time participated in a cartel whose members were awarded specific contracts pursuant to an agreement. These contracts were over-invoiced and around 3 per cent of the contract sum was paid as bribes to civil servants and as kickbacks to Petrobras employees. The suppliers paid the bribes either directly to the recipient or via agents. Through these activities, both internal and external tender rules,
among other things, were deliberately circumvented. The total amount paid as bribes probably equals several billion US dollars.
1
Summary
The Council on Ethics recommends putting Petroleo Brasileiro SA (Petrobras) under observation due to the risk of gross corruption.1 Senior executives of the company and its most important suppliers have apparently for a decade organised a system of paying large bribes to top politicians, political parties and civil servants. Several of the company's senior executives also received large kickbacks. Three former employees have already been convicted of such offences. The case is still being investigated in Brazil. The US authorities have also started to investigate allegations of corruption. The Council does not believe that the company has sufficiently proved it is effectively implementing its internal anti-corruption procedures. The fact that the Council nonetheless advises putting Petrobras under observation and not excluding it is because the company's anti-corruption procedures are recently established. In addition, the extensive investigation in Brazil, the negative attention that the company has received both in Brazil and internationally and Brazil's new anti-corruption legislation all reduce the risk of corruption reoccurring.
[1 The company has Issuer ID 136114.]
In brief about Petrobras
Petrobras is the largest listed company in Latin America and engages in activities relating to the production and refining of oil and gas. Petrobras was founded in 1953 as a state-owned oil company that had a monopoly on all oil activity in Brazil. In 1997, new legislation allowed competition in all parts of Brazil's oil and gas industry.
What the Council has considered
The Council has considered whether there is an unacceptable risk of Petrobras being responsible for gross corruption according to the section 3 subsection 3 letter d) of the Guidelines for Observation and Exclusion of Companies from the Government Pension Fund Global.
The Council has assessed whether there is an unacceptable risk of Petrobras having committed acts of gross corruption and of Petrobras being involved in corresponding acts in the future.
The Council's investigations and assessment
The Council has commissioned two studies by consultants of the allegations of corruption made by the press in this case. The Council was in contact with Petrobras several times in 2014 and 2015. The company has provided information on the case and also commented on a draft recommendation. Petrobras is linked to Brazil's most extensive corruption case ever. Senior executives of the company and its most important suppliers are accused of organising a system of paying large bribes to top politicians, political parties and civil servants over a period of 10 years. The senior executives also received kickbacks. Based on the extensive investigation in Brazil, which has so far resulted in a number of charges, indictments and legal rulings that convict former senior executives of paying and receiving bribes as part of the operations, it appears that Petrobras may be responsible for acts that must be considered as gross corruption. Based on the available information, it also appears that the corruption has existed in the company for many years. The company's largest suppliers had for a long time participated in a cartel whose members were awarded specific contracts pursuant to an agreement. These contracts were over-invoiced and around 3 per cent of the contract sum was paid as bribes to civil servants and as kickbacks to Petrobras employees. The suppliers paid the bribes either directly to the recipient or via agents. Through these activities, both internal and external tender rules,
among other things, were deliberately circumvented. The total amount paid as bribes probably equals several billion US dollars.
The Petrobras investigation is ongoing. According to Brazil's prosecuting authority, 35 indictments have been preferred against 173 individuals in the case.
In its communication with the Council and in press releases, Petrobras has alleged it is a victim of criminal offences committed by individuals, and refers to the fact that it has the legal position of an aggrieved party in the corruption case in Brazil. Among other things, funds that former employees have received as kickbacks have been returned to the company. However, witness statements in several of the court cases that have been held allege that corruption was an integral part of Petrobras' tender processes. It also appears that the senior management's taking of bribes was a key part of the corruption that took place in Petrobras for many years.
Based on that which is now known about the case in Brazil, the Council believes that in any case former internal systems must have failed and that defects in the internal controls probably allowed the extensive corruption to take place for so many years. The Council finds that the company had not defined and organised its anti-corruption procedures properly until 2013. If such procedures existed, it is clear that they did not effectively reveal and prevent extensive corruption, thus allowing corruption to flourish freely. The scope of this indicates that the rest of the management should have known what was going on.
Petrobras operates in many countries where there is a high risk of corruption. Both the oil and gas industry and building and construction industry, which also affect a large part of the company's operations, expose the company to considerable risk. In the Council's opinion, this places a special requirement on the company to have in place robust systems and implement anti-corruption measures. The number of corruption allegations against current and former company employees strengthens this requirement further. It is the company that bears the burden of proving that it works in a targeted and efficient fashion to prevent corruption.
The Council has placed emphasis on the fact that a relatively new anti-corruption programme was launched in 2013. Several key parts were not introduced until 2014. The company provides information on the main elements of this system, which on the whole is the same information as that available on the company's website. The system apparently contains the elements that such systems are expected to have. However, it seems clear that the implementation of this system is in a start-up phase and there is little publicly available information on how the system is implemented in practice throughout the organisation. The Council has the impression that the anti-corruption programme has been introduced first in Brazil but has only to a limited extent been implemented outside the country.
In its assessment, the Council places emphasis on how the company communicates the importance of anti-corruption work both internally and externally. The company has made radical changes to its board and group management after extensive corruption in the company was revealed in 2014. This may in itself signal a new direction. At the same time, the company underlines both in public and to the Council that it is a victim of some individual employees' actions. In light of the extremely comprehensive acts of corruption involving leading Petrobras employees, this gives the impression that the company is denying any liability
The Council assumes that the high level of attention that the case has received both in Brazil and internationally will probably force the company to take additional steps in the right direction. Reference is made to the fact that Brazilian authorities passed new legislation in 2013 and 2015 which stipulates clearer requirements as to the ways in which companies handle and prevent corruption. The Petrobras case is also a clear signal to the Brazilian people and the rest of the world that there is both an ability and willingness to investigate, prosecute and convict people of acts of corruption in Brazil. In this case, it appears that no one will be left alone – neither senior executives, top politicians nor civil servants. Based on the above, the Council believes that Petrobras has a responsibility for the gross corruption that has taken place in connection with its activities. During the past few years, the company has taken steps to establish an anti-corruption system that reflects international norms and best practice. However, the Council doubts whether these measures will be sufficiently effective and therefore recommends putting Petrobras under observation.
The Council assumes that the high level of attention that the case has received both in Brazil and internationally will probably force the company to take additional steps in the right direction. Reference is made to the fact that Brazilian authorities passed new legislation in 2013 and 2015 which stipulates clearer requirements as to the ways in which companies handle and prevent corruption. The Petrobras case is also a clear signal to the Brazilian people and the rest of the world that there is both an ability and willingness to investigate, prosecute and convict people of acts of corruption in Brazil. In this case, it appears that no one will be left alone – neither senior executives, top politicians nor civil servants. Based on the above, the Council believes that Petrobras has a responsibility for the gross corruption that has taken place in connection with its activities. During the past few years, the company has taken steps to establish an anti-corruption system that reflects international norms and best practice. However, the Council doubts whether these measures will be sufficiently effective and therefore recommends putting Petrobras under observation.
The investigations have not been concluded. The Council will carefully monitor developments in the case over the coming year and reassess the matter in 2016. Should further cases of gross corruption be revealed in Petrobras' operations and the company cannot satisfy that the anti-corruption programme is being complied with and effectively improved, the condition for exclusion may be met.
Contents3
1 Introduction 21.1 What the Council has considered 22 The Council on Ethics' findings 3
1.2 Sources 32.1 Corruption allegations in Brazil involving Petrobras 33 Standards for corporate compliance and anti-corruption processes and controls 7
2.2 Other corruption allegations involving Petrobras 7
4 Information from the company 9
5 The Council on Ethics' assessment 11
6 Recommendation 13
a)
Gives or offers an advantage – or attempts to do so – so as to unduly influence:
i)
a public servant in the execution of public duties or in decisions which may bring
the company an advantage, or
ii)
a person in the private sector who takes decisions or has influence on decisions
which may bring the company an advantage,
b)
demands or receives bribes,
and
c)
the corrupt acts mentioned in letters a and b are carried out in a systematic or
comprehensive manner.
2) In its assessment, the Council also places emphasis on whether the company has
implemented effective anti-corruption procedures that are organised in a way that enables it
to prevent, detect and respond to corruption.
In light of this, the Council has considered whether there is an unacceptable risk that
Petrobras is involved in gross corruption and may be involved in similar acts in the future.
In assessing whether this case involves gross corruption, the Council has particularly
emphasised the provisional results of the wide-ranging corruption investigation in Brazil. This
includes judicial decisions linked to the case. As for the assessment of the risk that Petrobras
may again be involved in similar acts, the Council has emphasised the company's reactions to
the corruption allegations, the countries and industries that the company operates in, and the
steps that the company has taken to prevent, detect and respond to corruption.
1.2
Sources
The information obtained relating to corruption allegations stems from the international press
and judicial decisions involving former Petrobras top executives, among others, which were
handed down in April and July 2015 by the Federal Court of Curitiba, Brazil. The Council has
also commissioned consultants to review the information that has been published regarding
corruption allegations in the press.
The assessment of the company's compliance systems is based on information available on
the Petrobras website and written and oral communications between the Council and the
company. The Council has additionally garnered information about how Brazilian enterprises
are expected to implement and comply with national anti-corruption legislation.
2
The Council on Ethics' findings
2.1
Corruption allegations in Brazil involving Petrobras
In 2013, the Federal Police in Brazil became suspicious of payments from an agent, Alberto
Youseff, to Paolo Roberto Costa, director of Petrobras' Downstream Division from 2004 to
2012. The payments were discovered in connection with investigations into an extensive
money-laundering operation connected to one of the company's projects.
4
The investigation into Youseff and Costa initially concerned the Abreu et Lima refinery in
northeast Brazil. Petrobras originally budgeted total expenditures of USD 2.5 billion, but the
final sum at completion had risen to USD 20 billion. According to Credit Suisse, this is one of
the most expensive refineries ever constructed. The investigation revealed that large parts of
the company's funds, earmarked for the refinery, were transmitted between Costa and Youseff
before being "laundered" through a car-wash company and sent to a hidden account abroad.
7
Youseff and Costa have since admitted, both in police interviews and in court, that large sums
ear-marked for the company's projects were paid in bribes to public servants and as kickbacks
to Petrobras top management.
During the investigation in 2014, Youseff and Costa decided to cooperate with the public
prosecutor to earn shorter sentences. This initiated the disclosure of the most extensive
corruption case ever seen in Brazil. Costa and Youseff testified that a series of individuals and
companies had participated in a cartel and, based on an agreement, had been awarded certain
contracts. The contracts were overcharged and about 3 per cent of the contract value was paid
in bribes to public servants and in kickbacks to Petrobras employees.
8
The suppliers
distributed the bribes either directly to the recipient or via agents. Youseff's role was to make
sure that everyone received their share. Most of the bribes were apparently paid to politicians
and political parties, including the governing Workers Party (
Partido dos Trabalhadores,
PT).
9
According to a legally binding judgement against Costa in 2015, decisions on the awarding of
contracts and the determination of the prices of the contracts and size of the bribes took place
at physical meetings between top Petrobras executives, the senior management of suppliers
and politicians.
10
These activities were carried out in several Petrobras divisions.
11
In court, Costa testified that the cartel operations must also have existed even before he took
up his position in the company in 2004.
12
Pedro Barusco, a former chief engineer, has
admitted that he received kickbacks from suppliers who wanted to secure contracts with
Petrobras way back in the 1990s.
13
Both Costa and Youseff have also explained that the
Petrobras management knew what was going on, including that large sums were paid to
public servants right up until 2012. Costa testified, in part, that he never had the authority to
award contract awards by himself, but that Petrobras had extensive procedures for the tender
processes, accreditation of contacts and payments. He testified that the contract manager,
7
Financial Times, 10 August 2014,
http://www.ft.com/intl/cms/s/0/6d00da0c-1c7c-11e4-98d8-
00144feabdc0.html?siteedition=intl#axzz3IfH1NmGQ
. Because the money was laundered through the car-
wash company, the investigation came to be known as
Operation Car Wash
, or
Lava Jato
in Portuguese.
8
This first became known in the press, i.a. the Financial Times, 10 August 2014,
http://www.ft.com/cms/s/0/6d00da0c-1c7c-11e4-98d8-00144feabdc0.html#axzz3IfH1NmGQ
. Costa here
refers to the agreement as a "3 percent political adjustment". This was repeated in court testimonies in two
subsequent criminal trials against Robert Costa, amongst others, including the judgements of 22 April 2015
and 20 July 2015, both pronounced by the Federal Court of Curitiba.
9
The court decisions of 22 April 2015 and 20 July 2015, both pronounced by the Federal Court of Curitiba.
10
Judgement of 20 July 2015 in the Federal Court of Curitiba,
http://www.prpr.mpf.mp.br/pdfs/2015-1/lava-jato-
1/sentenca_camargo%20e%20correa%20e%20utc.pdf
, section 282.
11
Judgement of 22 April 2015, pronounced by the Federal Court of Curitiba, sections 295-298. The divisions
involved are the Downstream Division headed by Costa, the Services Division headed by Renato Duque, and
the International Division headed by Nestor Cerveró. Costa, Duque and Cerveró have now all been convicted
in Brazil of corruption and other financial irregularities in connection with the Petrobras case.
12
Judgement of 20 July 2015 pronounced by the Federal Court of Curitiba.
13
The Globe and Mail, 13 March 2015,
http://www.theglobeandmail.com/news/world/brazils-petrobras-scandal-
widens-to-include-57-politicians/article23462484/
.
5
division directors and legal department were involved before a contract was finally approved
by the board of directors and awarded to a given supplier.
14
As certain of the public officials named by Costa and Youseff as recipients of the bribes are
under special jurisdiction and subject to the Supreme Court of Brazil's purview, the court
would not permit their names to be released in the judicial questioning.
15
However, it is
known that the Supreme Court has initiated investigations into more than 50 top politicians
and civil servants in connection with the Petrobras case, including a former president, two
former chiefs of staff, two governors, one former minister and 34 members of Congress
representing five political parties, almost all of whom are members of the present coalition
government. Some of these individuals have allegedly already been indicted.
16
The investigation into the case is ongoing. So far, 11 former top executives of Petrobras have
been indicted in the case. In addition to Costa, Nestor Cerveró, former head of Petrobras'
International Division, has been convicted of corruption and other financial irregularities
connected with the case.
17
Renato Duque, former head of Petrobras' Services Division, and
João Vaccari Neto, treasurer of the Workers Party, were arrested in March this year, charged
with corruption and other financial irregularities. The public prosecutor stated that he believed
the authorities had evidence that Duque had requested "donations" from the company's
suppliers, whilst Vaccari Neto had taken part in meetings with Duque and his senior manager,
Pedro Barusco, to discuss bribes which could be disbursed through electoral campaign funds.
The same day that Duque and Vaccari Neto were arrested, Barusco was charged with
corruption in connection with the case. He had already admitted to receiving USD 97 million
in kickbacks in connection with contracts awarded by Petrobras, and has agreed to refund the
entire sum.
18
The most recent arrest in the case that the Council is aware of was that of Jorge
Zelada in July 2015. Zelada replaced Cerveró in 2008 as director of Petrobras' International
Division. He is now charged with corruption.
19
In addition, three former managers of the
company’s Services Division and three individuals holding other management positions in the
company are allegedly also indicted in the case.
20
14
This is derived from the judgement against Costa and Youseff and others as pronounced on 20 July 2015 by
the Federal Court of Curitiba,
http://www.prpr.mpf.mp.br/pdfs/2015-1/lava-jato-
1/sentenca_camargo%20e%20correa%20e%20utc.pdf
, section 282. Costa and Youseff were in April 2015
convicted in connection with the Petrobras case, though this was for money laundering, see the judgement of
22 April 2015, pronounced by the Federal Court of Curitiba.
15
Judgement of 22 April 2015, pronounced by the Federal Court of Curitiba, section 60.
16
See The Guardian, 7 March 2015,
http://www.theguardian.com/world/2015/mar/07/brazilian-court-approves-
investigation-into-politicians-in-petrobras-scandal
, and
http://www.theglobeandmail.com/news/world/brazils-
petrobras-scandal-widens-to-include-57-politicians/article23462484/
.
17
The judgement against Nestor Cerveró was pronounced in the middle of August 2015. Cerveró was sentenced
to more than 12 years and three months’ imprisonment for paying bribes of USD 5 million to the leader of the
Lower House in Congress.
18
The Wall Street Journal, 16 March 2015,
http://www.wsj.com/articles/former-petrobras-executive-arrested-
again-brazil-police-1426513758
. The article also reports that public authorities in Monaco have frozen USD
23.8 million belonging to Duque on suspicion that the money constitutes bribes received in connection with the
case. Barusco has stated, in part, that the Workers Party received approx. USD 200 million in bribes relating to
contracts with Petrobras suppliers, see CNBC, 17 March 2015,
http://www.cnbc.com/2015/03/17/cial-charged-
in-petrobras-bribery-case.html.
19
The Wall Street Journal, 2 July 2015,
http://www.wsj.com/articles/brazil-federal-police-arrest-another-former-
petrobras-executive-1435838298
.
20
These are Venina Velosa da Fonseca, Francisco Pais, Luiz Alberto Gaspar Domingues, Omar Antônio
Kristocheck Filho, Luís Carlos Queiroz de Oliveira and Ricardo Luís Ferreira Pinto Távora, O Globo, 19
6
Furthermore, three former chief executives of Camargo Correa, among Brazil's largest
building and construction companies and one of Petrobras' key suppliers, were convicted of
corruption and other financial offences in connection with the case.
21
They were found guilty
of overcharging Petrobras and paying bribes to public officials and Petrobras' top
management. In court, it was acknowledged that Camargo had paid USD 15.6 million in
bribes in connection with two contracts alone. Camargo's representatives explained in court
that the cartel activities and corruption were considered "the rules of the game" and that they
were a prerequisite for landing a contract with Petrobras. They also explained that they
believed the bribes they paid to politicians would bring an advantage to Camargo in
connection with other public-sector bidding processes.
22
In another instance,
Marcelo Odebrecht was recently arrested.
23
He is the managing director
of
Odebrecht SA, the largest building and construction company in Brazil and perhaps
Petrobras' largest supplier. Subsequently, the Swiss police and prosecution service have also
opened an investigation into Odebrecht and additionally frozen some USD 400 million in
assets which are believed to stem directly from the Petrobras case.
24
According to the public prosecution service in Brazil, 173 individuals have to date been
charged with corruption and other financial crimes in connection with the case.
25
Additionally, multiple international companies that were suppliers to Petrobras are under
investigation in connection with the case.
26
Petrobras itself has estimated its losses due to
corruption at USD 2 billion. The public prosecution service in Brazil estimates that the actual
losses are much higher.
27
The case is being investigated in Brazil by the Federal Police and Prosecution Service
(
Ministério Público Federa
l
)
, by the Auditor General (
Controladoria-Geral da União
)
and by
the Federal Accounts Tribunal. In addition, Petrobras is according to several press articles
being investigated for corruption by the US Department of Justice and Securities and
Exchange Commission. Certain shareholders have also sued Petrobras in a New York court,
October 2015,
http://oglobo.globo.com/brasil/relatorio-da-cpi-da-petrobras-indicia-pessoas-sem-nome-
17825544
.
21
They are Dalton dos Santos Avancini, former CEO of Camargo Correa, João Ricardo Auler, chairman of the
board of Camargo Correa, and Eduardo Hermelino Leite, former manager of Camargo Correa.
22
Judgement of 20 July 2015 by the Federal Court of Curitiba,
http://www.prpr.mpf.mp.br/pdfs/2015-1/lava-
jato-1/sentenca_camargo%20e%20correa%20e%20utc.pdf
. The judgement is mentioned in i.a. Folha, 21 July
2015,
http://www1.folha.uol.com.br/internacional/en/brazil/2015/07/1658368-petrobras-scandal-judge-
condemns-former-executives-of-construction-company-camargo-correa-to-prison.shtml
.
23
Reuters, 24 June 2015,
http://www.reuters.com/article/2015/06/24/us-brazil-petrobras-scandal-
idUSKBN0P424320150624
24
Reuters, 24 June 2015,
http://www.reuters.com/article/2015/06/24/us-brazil-petrobras-scandal-
idUSKBN0P424320150624,
and The Wall Street Journal, 22 July 2015,
http://www.wsj.com/articles/swiss-
authorities-open-investigation-into-brazils-odebrecht-1437605540
. It follows from the WSJ article that Swiss
investigators have uncovered over 300 accounts in more than 30 Swiss banks where illegal funds in connection
with the Petrobras case were held.
25
This is according to the website of the Public Prosecution in Brazil (MPF),
http://lavajato.mpf.mp.br/atuacao-
na-1a-instancia/resultados/a-lava-jato-em-numeros.
26
Financial Times, 15 February 2015,
http://www.ft.com/intl/cms/s/0/96152e80-b3ca-11e4-a6c1-
00144feab7de.html
.
27
Financial Times, 2 July 2015,
http://www.ft.com/intl/cms/s/0/3c937964-20d7-11e5-aa5a-
398b2169cf79.html#axzz3kUSYdgpF.
7
demanding compensation for financial loss. Petrobras filed for dismissal of the case, arguing
that the company is the victim. The company's plea was dismissed by a judge in July 2015.
28
2.2
Other corruption allegations involving Petrobras
In addition to the above-mentioned corruption allegations involving Petrobras, allegations of
overcharging and illegal payments in connection with several of the company's overseas
projects have been lodged. In a statement by the Auditor General of Brazil, it is noted that
many of the company's overseas projects are under investigation.
29
According to a press
article, a Brazilian senator is alleged to have received USD 1 million in kickbacks relating to
the acquisition of a US refinery.
30
The allegations which are known regarding the company's
overseas business are not as well documented as the corruption allegations referred to by the
Council above. The Council has not given substantial weight to the allegations regarding
overseas business in this recommendation and they will therefore not be described in further
detail.
31
32
3
Standards for corporate compliance and anti-corruption
processes and controls
Based on international standards for corporate compliance and anti-corruption, certain general
principles can be derived regarding the actions that a company should take in order to
establish and implement an effective anti-corruption programme. The efficient
implementation of anti-corruption procedures is relevant for an assessment of the degree to
which a company is capable of preventing any involvement in corruption.
Guidelines for the adoption and integration of internal anti-corruption efforts may be found in
the UN's anti-corruption portal TRACK (
Tools and Resources for Anti-Corruption
Knowledge
) and Global Compact:
A guide for anti-corruption risk-assessment
(2013) and the
OECD’s
Good Practice Guidance on Internal Controls, Ethics and Compliance
(2010).
Transparency International (TI) has in its
Business Principles for Countering Bribery
compiled a list of many general recommendations for an effective compliance system.
The key requirements in international standards for corporate compliance and anti-corruption
systems relevant to this case are that the company conducts a comprehensive assessment of
28
See i.a. Bloomberg, 10 July 2015,
http://www.bloomberg.com/news/articles/2015-07-10/petrobras-judge-
allows-lawsuit-while-dismissing-some-claims
. According to this report the case will be heard in a New York
court in February 2016.
29
Bloomberg, 21 October 2014, referring to the Court’s decision,
http://www.bloomberg.com/news/articles/2014-10-21/brazil-fixated-as-human-bomb-revelations-rock-
elections
.
30
Houston Chronicle, 9 November 2015,
Scandal in Brazil snares refinery
,
http://www.pressreader.com/usa/houston-chronicle/20151109/281505045101952/TextView.
31
The allegations concerning kick-backs in relation to the refinery in the US are amongst others mentioned in an
article published in Washington Times, 21 March 2014,
http://www.washingtontimes.com/news/2014/mar/21/scandal-involving-refinery-hits-brazils-
petrobras/#ixzz3IkJYe000
and in Bloomberg, 18 June 2015,
http://www.bloomberg.com/news/articles/2014-
06-18/brazil-energy-giant-buys-1-24-billion-of-pain-in-texas
.
32
The corruption allegations in Argentina are amongst others mentioned in a Bloomberg article, 21 October
2014,
http://www.bloomberg.com/news/articles/2014-10-21/brazil-fixated-as-human-bomb-revelations-rock-
elections
.
8
corruption risks in its business operations, that the company has zero tolerance for corruption,
that all employees are equipped with tools to avoid becoming involved in corruption, and that
relevant processes and procedures are continuously developed and improved.
A thorough survey and assessment of the corruption risk in a company are a prerequisite for
establishing and implementing robust anti-corruption systems. Key risk factors that need
consideration are the size of the company, local and regional factors, the sectors in which the
company operates and prior experience. A minimum requirement is that the company has
sound preventive procedures in the fields where it is most exposed to risk. In large
corporations, the risk survey and assessment of measures should be repeated regularly, and
especially exposed parts of the business should be monitored continuously. One key part of
the risk survey also involves a review of the company's internal processes and procedures and
training of employees, as well as an assessment of third parties (
compliance due diligence
). It
is also important that the company has a unified procedure for reporting breaches of its
guidelines, and the sanctions against persons who break the rules must be visible.
However, the most important issues are that anti-corruption processes and procedures are
integrated into all aspects of the company’s operations and culture, are organised adequately
and are monitored, refined and constantly upgraded and made more efficient. The
implementation of anti-corruption processes and procedures should be constantly improved
based on among other things internal experience and external factors such as new legislation
and best practice standards.
33
Petrobras is listed in Brazil and also, among other locations, in the USA.
Corporations are not subject to corporate criminal responsibility in Brazil except in cases of
breaches of environmental law. A range of measures have, however, been implemented to
create better transparency, Brazil has ratified a number of international anti-corruption
33
The UN anti-corruption portal TRACK (
Tools and Resources for Anti-Corruption Knowledge
) is available at
http://www.track.unodc.org/Pages/home.aspx
, the Global Compact:
A guide for anti-corruption risk-
assessment
(2013) is available at
https://www.unglobalcompact.org/resources/411
, and the OECD’s
Good
Practice Guidance on Internal Controls, Ethics and Compliance
(2010) is available at
http://www.oecd.org/investment/anti-bribery/anti-briberyconvention/44884389.pdf
. Transparency
International’s recommendations were launched in 2003, first revised in 2009 and most recently revised in
2013. The recommendations are available at
http://www.transparency.org/whatwedo/publication/business_principles_for_countering_bribery
. Furthermore,
general anti-corruption principles are given in
The OECD Guidelines for Multinational Enterprises
,
http://www.oecd.org/daf/inv/mne/48004323.pdf
. The
UK Bribery Act
and
Foreign Corrupt Practices Act
(FCPA)
have also been normative for international standards with regard to corporate anti-corruption efforts.
In 2011, the UK Ministry of Justice published guidance on how companies should act to avoid criminal
liability under the UK Bribery Act. The guidance is available at
http://www.justice.gov.uk/downloads/legislation/bribery-act-2010-guidance.pdf
. In 2012, the US Department
of Justice (DoJ) and US Securities and Exchange Commission (SEC) published a guide to how companies
should act to avoid criminal liability under the FCPA, called
A Resource Guide to the U.S. Foreign Corrupt
Practices Act
, available at
http://www.justice.gov/criminal/fraud/fcpa/guide.pdf.
This guide also refers to other
relevant guidelines, e.g.
Business Ethics: A Manual for Managing a Responsible Business Enterprise in
Emerging Market Economies,
published by the Department of Commerce, International Trade Administration,
available at
http://ita.doc.gov/goodgovernance/business_ethics/manual.asp.
Other relevant sources of
international anti-corruption standards are The United Nations Global Compact (
The Ten Principles
), the Asia-
Pacific Economic Council (
Anti-Corruption Code of Conduct for Business
), the International Chamber of
Commerce (
ICC Rules on Combating Corruption
), the World Bank (
Integrity Compliance Guidelines
), and
The World Economic Forum (
Partnering Against Corruption-Principles for Countering Bribery
).
9
conventions
34
and new national legislation was adopted to combat corruption in 2013.
According to this, companies are, for the first time, held civilly and administratively
accountable for any corruption-related conduct by their representatives. The new law, the
Clean Company Act
, entered into force in 2014.
35
In a March 2015 amendment to the
Clean Company Act
, and other international legislators in
this field, the Brazilian authorities set out specific requirements for corporate anti-corruption
policies and procedures. In assessing a relevant civil or administrative reaction, the authorities
may among other things give weight to whether a company has an independent compliance
organisation with responsibility for anti-corruption, a genuine "
tone from the top
", written
guidelines and procedures which are binding for executives and employees, effective and
targeted training and communication, periodic risk assessments and audits, compliance due
diligence of third parties, specific compliance policies and procedures for public
procurements and M&A processes, internal controls and procedures for reporting and an
adequate response to violations, as well as to how the compliance programme is continuously
monitored and improved.
36
This Act by and large converges with the requirements as to the
prevention of and response to corruption set out in the US Foreign Corrupt Practices Act
(FCPA) and UK Bribery Act.
As a result of its activities, Petrobras is also directly subject to the US FCPA and UK Bribery
Act, under which a corporation may be held criminally liable for corruption. The US
Department of Justice and UK Ministry of Justice have issued clear recommendations
regarding the preventive measures that a company should implement in order not to be held
liable or in order to receive reduced sentences under the FCPA. The US standards are further
defined by US sanctioning procedures and in deferred prosecution agreements between
judicial authorities and a number of companies over the past 10 years.
4
Information from the company
Between October 2014 and December 2015, the Council on Ethics engaged in a dialogue with
Petrobras in writing and via telephone conferences. Petrobras was asked to comment on the
corruption allegations, to explain in detail its corporate compliance management systems and
anti-corruption processes and controls and to describe how these are implemented in its
overall business in order to effectively prevent, detect and respond to corruption. Petrobras
has also commented on a draft recommendation to put it under observation.
In its dialogue with the Council, Petrobras states that it is a victim. It refers to its position as a
victim in the corruption investigations in Brazil and
in criminal trials against former top
executives. I
t has therefore requested and also been given
compensation for economic losses.
The company furthermore refers to the fact that it is several former employees and company
suppliers, and not the company itself, that are subject to corruption investigations in Brazil.
34
These include, for example, the
OECD Anti-Bribery Convention
(implemented by Decreto No. 3.678/2000)
and the
United Nations Convention Against Corruption
(implemented by Decreto No. 5.687/2006).
35
The Brazilian Anti-corruption Act is included in
Lei No. 12.846/13
. Important anti-corruption provisions have
also been incorporated in the Penal Code (Código Penal), including active and passive corruption and bribery
in international business, cf. article 319.
36
Decree No. 8.420
, 18 March 2015, English version available at i.a.
http://www.merrillbrink.com/translation-
of-Brazil-decree-Clean-Company-Act-04062015.htm
.
10
Petrobras has launched an internal investigation into the corruption allegations in Brazil. Two
firms of attorneys have been assigned to this task. An independent committee, the
Special
Committee
, was appointed as a reporting channel between the attorneys and the company's
board of directors. The committee has a mandate to approve the method applied by the
independent investigators, to receive and analyse their reports, and to analyse, approve and
facilitate the recommendations issued by the attorneys. This committee has recently issued a
number of recommendations to improve the current compliance and anti-corruption policies
and procedures and several of these have already been implemented.
Further, the company's board initiated a new anti-corruption programme on 4 July 2013. The
company had certain anti-corruption policies and procedures in place prior to 2013 too.
According to the company, there was zero tolerance for corruption; as far back as in 1998, the
board approved a Code of Ethics which also applied to its subsidiaries; and channels existed
for reporting acts of corruption and other alleged misconduct in company operations.
Several of the existing anti-corruption policies and procedures were established after 2013.
The
Code of Conduct
sets out specific guidelines applying to board members, management
and all employees.
37
In addition, a new management position was created in 2015, the
Chief
Governance, Risk and Compliance Officer.
He has the overall responsibility for preventing
corruption in the company, and three subdivisions report directly to him:
Governance
,
Corporate Risk Management
and
Compliance
. The Compliance Department is responsible for
managing several compliance issues, including corruption risk, and has more than 200
employees.
It has been explained that, before the new anti-corruption procedures were implemented in
2014, the overall risk assessment consisted of a review of relevant legislation, a benchmarking
against corporate anti-corruption policies and procedures in the industry, and an assessment of
the risk in the sectors and countries in which Petrobras operates.
The Council has been further informed that Petrobras is developing programmes which are
intended to ensure that all employees receive anti-corruption training. In 2016, all employees
will receive training through a web-based training programme. A large number of among
others executives and managers in Brazil received classroom training in 2015. Petrobras will
further develop customized training programmes for employees in high-risk positions, such as
procurement and bidding areas, as well as HR.
Further, the company has outsourced the work of receiving and logging reports of misconduct
to an external contractor. In addition, there are internal reporting mechanisms, such as the
possibility to report to management. The Council has not received any information about the
number of alleged bribery and corruption cases reported so far. The General Ombudsman
Area is responsible for collecting reports and the Compliance Department is responsible for
investigating alleged misconduct. There is, however, a lack of information on how
investigations are conducted and sanctions are imposed.
There is also a lack of information about the cooperation between the Governance, Risk and
Compliance departments, and there is a lack of clarity regarding the organisation of the
Compliance Department and how this department cooperates with other relevant units and
committees, such as the General Ombudsman area and Internal Audit Department.
37
Available on the company’s website,
http://www.investidorpetrobras.com.br/en/corporate-
governance/governance-instruments/code-ethics
.
conventions
34
and new national legislation was adopted to combat corruption in 2013.
According to this, companies are, for the first time, held civilly and administratively
accountable for any corruption-related conduct by their representatives. The new law, the
Clean Company Act
, entered into force in 2014.
35
In a March 2015 amendment to the
Clean Company Act
, and other international legislators in
this field, the Brazilian authorities set out specific requirements for corporate anti-corruption
policies and procedures. In assessing a relevant civil or administrative reaction, the authorities
may among other things give weight to whether a company has an independent compliance
organisation with responsibility for anti-corruption, a genuine "
tone from the top
", written
guidelines and procedures which are binding for executives and employees, effective and
targeted training and communication, periodic risk assessments and audits, compliance due
diligence of third parties, specific compliance policies and procedures for public
procurements and M&A processes, internal controls and procedures for reporting and an
adequate response to violations, as well as to how the compliance programme is continuously
monitored and improved.
36
This Act by and large converges with the requirements as to the
prevention of and response to corruption set out in the US Foreign Corrupt Practices Act
(FCPA) and UK Bribery Act.
As a result of its activities, Petrobras is also directly subject to the US FCPA and UK Bribery
Act, under which a corporation may be held criminally liable for corruption. The US
Department of Justice and UK Ministry of Justice have issued clear recommendations
regarding the preventive measures that a company should implement in order not to be held
liable or in order to receive reduced sentences under the FCPA. The US standards are further
defined by US sanctioning procedures and in deferred prosecution agreements between
judicial authorities and a number of companies over the past 10 years.
4
Information from the company
Between October 2014 and December 2015, the Council on Ethics engaged in a dialogue with
Petrobras in writing and via telephone conferences. Petrobras was asked to comment on the
corruption allegations, to explain in detail its corporate compliance management systems and
anti-corruption processes and controls and to describe how these are implemented in its
overall business in order to effectively prevent, detect and respond to corruption. Petrobras
has also commented on a draft recommendation to put it under observation.
In its dialogue with the Council, Petrobras states that it is a victim. It refers to its position as a
victim in the corruption investigations in Brazil and
in criminal trials against former top
executives. I
t has therefore requested and also been given
compensation for economic losses.
The company furthermore refers to the fact that it is several former employees and company
suppliers, and not the company itself, that are subject to corruption investigations in Brazil.
34
These include, for example, the
OECD Anti-Bribery Convention
(implemented by Decreto No. 3.678/2000)
and the
United Nations Convention Against Corruption
(implemented by Decreto No. 5.687/2006).
35
The Brazilian Anti-corruption Act is included in
Lei No. 12.846/13
. Important anti-corruption provisions have
also been incorporated in the Penal Code (Código Penal), including active and passive corruption and bribery
in international business, cf. article 319.
36
Decree No. 8.420
, 18 March 2015, English version available at i.a.
http://www.merrillbrink.com/translation-
of-Brazil-decree-Clean-Company-Act-04062015.htm
.
10
Petrobras has launched an internal investigation into the corruption allegations in Brazil. Two
firms of attorneys have been assigned to this task. An independent committee, the
Special
Committee
, was appointed as a reporting channel between the attorneys and the company's
board of directors. The committee has a mandate to approve the method applied by the
independent investigators, to receive and analyse their reports, and to analyse, approve and
facilitate the recommendations issued by the attorneys. This committee has recently issued a
number of recommendations to improve the current compliance and anti-corruption policies
and procedures and several of these have already been implemented.
Further, the company's board initiated a new anti-corruption programme on 4 July 2013. The
company had certain anti-corruption policies and procedures in place prior to 2013 too.
According to the company, there was zero tolerance for corruption; as far back as in 1998, the
board approved a Code of Ethics which also applied to its subsidiaries; and channels existed
for reporting acts of corruption and other alleged misconduct in company operations.
Several of the existing anti-corruption policies and procedures were established after 2013.
The
Code of Conduct
sets out specific guidelines applying to board members, management
and all employees.
37
In addition, a new management position was created in 2015, the
Chief
Governance, Risk and Compliance Officer.
He has the overall responsibility for preventing
corruption in the company, and three subdivisions report directly to him:
Governance
,
Corporate Risk Management
and
Compliance
. The Compliance Department is responsible for
managing several compliance issues, including corruption risk, and has more than 200
employees.
It has been explained that, before the new anti-corruption procedures were implemented in
2014, the overall risk assessment consisted of a review of relevant legislation, a benchmarking
against corporate anti-corruption policies and procedures in the industry, and an assessment of
the risk in the sectors and countries in which Petrobras operates.
The Council has been further informed that Petrobras is developing programmes which are
intended to ensure that all employees receive anti-corruption training. In 2016, all employees
will receive training through a web-based training programme. A large number of among
others executives and managers in Brazil received classroom training in 2015. Petrobras will
further develop customized training programmes for employees in high-risk positions, such as
procurement and bidding areas, as well as HR.
Further, the company has outsourced the work of receiving and logging reports of misconduct
to an external contractor. In addition, there are internal reporting mechanisms, such as the
possibility to report to management. The Council has not received any information about the
number of alleged bribery and corruption cases reported so far. The General Ombudsman
Area is responsible for collecting reports and the Compliance Department is responsible for
investigating alleged misconduct. There is, however, a lack of information on how
investigations are conducted and sanctions are imposed.
There is also a lack of information about the cooperation between the Governance, Risk and
Compliance departments, and there is a lack of clarity regarding the organisation of the
Compliance Department and how this department cooperates with other relevant units and
committees, such as the General Ombudsman area and Internal Audit Department.
37
Available on the company’s website,
http://www.investidorpetrobras.com.br/en/corporate-
governance/governance-instruments/code-ethics
.
11
Finally, it should be mentioned that the former CEO, Maria das Gracas Foster, and five other
leading executives, left the company in February 2015. At the same time, the company
employed a new CEO, CFO, Chief Investor Relations Officer, Exploration and Production
Officer, Engineering Officer, Technology Officer and Procurement Officer. The company has
also made major changes to the board of directors and the criteria governing the composition
of the board have been revised.
In addition to those former executives who have already admitted liability for corruption, two
company employees are allegedly currently being investigated for corruption.
5
The Council on Ethics' assessment
Based on the available documentation, the Council has considered Petrobras against the
corruption criteria in the Guidelines with a view to delivering an exclusion or observation
recommendation. Firstly, the Council has considered whether there is an unacceptable risk of
the company being involved in what would constitute an act of gross corruption under the
Guidelines, including whether the alleged corruption has been carried out in a systematic
and/or comprehensive manner.
Based on the extensive investigations in Brazil which have thus far resulted in a series of
charges and indictments and several judicial decisions where former top management have
been convicted of paying and receiving bribes directly related to Petrobras' business, it seems
that Petrobras has been involved in actions that qualify as gross corruption. In light of the
information available, it also seems that the corruption has persisted within the organisation
for many years. The company's largest suppliers had for a long time participated in a cartel
whose members were awarded specific contracts pursuant to an agreement. These contracts
were over-invoiced and around three per cent of the contract sum was paid as bribes to civil
servants and as kickbacks to Petrobras employees. The suppliers paid the bribes either directly
to the recipient or via agents. Through these activities, both internal and external tender rules,
among other things, were deliberately circumvented. The total amount paid as bribes probably
equals several billion US dollars.
In its communication with the Council and in press releases, Petrobras has alleged it is a
victim of criminal offences committed by individuals, and refers to the fact that it has the
legal position of an aggrieved party in the corruption case in Brazil. In witness statements in
several of the court cases that have been held allege that corruption was an integral part of
Petrobras' tender processes. It also appears that the senior management's taking of bribes was
a key part of the corruption that took place in Petrobras for many years. This was not about
one or two employees committing isolated offences. The Council finds that passive corruption
on this scale, like active corruption, is an impediment to social and economic development. It
creates discrimination, prevents social justice, distorts competition and hinders sustainable
economic development.
Based on that which is now known about the case in Brazil, the Council believes that in any
case and regardless of the criminal intent, former internal systems must have failed and that
defects in the internal controls probably allowed the extensive corruption to take place for so
many years. The Council finds that the company had not defined and organised its anti-
corruption procedures properly until 2013. If such procedures existed, it is clear that they did
not effectively reveal and prevent extensive corruption, thus allowing corruption to flourish
freely. The scope of this indicates that the rest of the management in any case should have
known what was going on.
12
This view is further supported by the fact that 11 former executives and mid-level managers
of three different departments within the company are directly involved in the case. In
addition, two employees are being investigated for corruption. Even further, the criminal
cartel consisted of several of Petrobras’ most important suppliers.
The Council has assessed whether there is an unacceptable risk of the company again begin
involved in comparable conduct.
Petrobras operates in many countries where there is a high risk of corruption. According to
Transparency International’s Corruption Perception Index, 2014, Angola and Nigeria are for
example representing high risk of corruption. Both the oil and gas industry and building and
construction industry, where large public contracts are the norm, expose the company to
considerable risk. In the Council's opinion, this places special requirements on the company to
have in place robust systems and implement anti-corruption measures. The number of
corruption allegations against current and former company employees strengthens this
requirement further. It is the company that bears the burden of proving that it works in a
targeted and efficient fashion to prevent corruption.
The Council has placed emphasis on the fact that a more-or-less entirely new anti-corruption
programme was launched in 2013. Several key parts were not introduced until 2014. The
company provides information on the main elements of this system, which on the whole is the
same information as that available on the company's website. The system apparently contains
the elements that such systems are expected to have. However, it seems clear that the
implementation of this system is in a start-up phase and there is little publicly available
information on how the system is in practice implemented throughout the organisation.
In its assessment, the Council places emphasis on how the company communicates the
importance of anti-corruption work both internally and externally. The company has made
radical changes to its board and group management after extensive corruption in the company
was revealed in 2014. This may in itself signal a new direction. At the same time, the
company underlines both in public and to the Council that it is a victim of some individual
employees' actions. In light of the extremely comprehensive acts of corruption involving
leading Petrobras employees, this gives the impression that the company is denying any
liability.
The Council assumes that the high level of attention that the case has received both in Brazil
and internationally will probably force the company to take additional steps in the right
direction. Reference is made to the fact that Brazilian authorities passed new legislation in
2013 and 2015 which stipulates clearer requirements as to the ways in which companies
handle and prevent corruption. The Petrobras case is also a clear signal to the Brazilian
people and the rest of the world that there is both an ability and willingness to investigate,
prosecute and convict people of acts of corruption in Brazil. In this case, it appears that no one
will be left alone – neither senior executives, top politicians nor civil servants. Based on the
above, the Council believes that Petrobras has a responsibility for the gross corruption that has
taken place in connection with its activities. During the past few years, the company has taken
steps to establish an anti-corruption system that reflects international norms and best practice.
However, the Council doubts whether these measures will be sufficiently effective and
therefore recommends putting Petrobras under observation.
The investigations have not been concluded. The Council will carefully monitor
developments in the case over the coming year and reassess the matter in 2016. Should further
13
cases of gross corruption be revealed in Petrobras' operations in the future and the company
cannot satisfy that the anti-corruption programme is being complied with and effectively
improved, the condition for exclusion may be met.
6
Recommendation
Due to the risk of corruption involving the company’s operations, the Council on Ethics
recommends putting Petroleo Brasileiro SA under observation.
***
Johan H. Andresen
Leder
Hans Chr. Bugge
Cecilie Hellestveit
Arthur Sletteberg
Guro Slettemark(sign.) (sign.) (sign.) (sign.) (sign.