House Arrest for Brazil Executives Seen as Blow to Graft Probe

House Arrest for Brazil Executives Seen as Blow to Graft Probe

By David Biller Anna Edgerton / Bloomberg

4:05 PM BRT
April 29, 2015

A decision by Brazil’s Supreme Court to free executives accused of involvement in a kickback scheme at state-run oil producer Petroleo Brasileiro SA is likely to slow down the investigation into the country’s biggest corruption scandal ever, analysts say.

A subcommittee of the court voted Tuesday to allow nine executives to be transferred from prison to house arrest and be monitored with ankle bracelets. That will hurt prosecutors’ ability to obtain plea bargains, according to David Fleischer, an emeritus professor of political science at the University of Brasilia. The executives have been in jail since late last year.

“These guys are all upper-class, wealthy guys, CEOs and CFOs of these large construction companies,” Fleischer said by phone. “To stick them into these very spartan prison cells with very spartan prison food is a big change. Most of them can’t resist, and break down and begin their plea bargaining to get their prison term reduced. That’s what’s been compromised.”

The corruption investigation, dubbed Carwash because of money laundering operations run out of a gas station, identified a cartel of construction companies that allegedly colluded to overcharge Petrobras for project contracts. The companies allegedly funneled part of the largesse to political parties including President Dilma Rousseff’s Workers’ Party and allies.

Prosecutors have relied on plea bargains to shed light on the kickback scheme’s structure. The near-daily revelations have roiled a population inured to impunity, with more than a million protesters taking to the streets.

Most of the companies have denied wrongdoing, while several executives have turned state’s witness.

Preventive Prison

Supreme Court Justice Teori Zavascki, the author of Tuesday’s decision, said neither the indication of criminal activity nor the possibility a defendant may flee is sufficient to justify preventive prison, according to the court’s statement.

Admitted participants in the corruption scheme, such as former Petrobras refining director Paulo Roberto Costa and money launderer Alberto Youssef, have been central to the investigation as they cooperate with police in return for a lighter sentence. Costa will serve two years of house arrest, and Youssef will serve at least three years in prison, according to a decision last week from Sergio Moro, the federal judge overseeing the case.

Remain Distant

The executives released by Tuesday’s decision include UTC Engenharia SA President Ricardo Ribeiro Pessoa and OAS SA President Jose Aldemario Pinheiro Filho. They must remain distant from both direction and administration of the companies being investigated, according to a Supreme Court statement.

OAS has denied allegations it formed part of a cartel, or paid bribes to Petrobras and politicians. UTC doesn’t and has never formed part of any cartel, the company said in an e-mailed statement.

Release of the executives “is a setback for prosecutors, absolutely,” Christopher Garman, head of Latin America at political risk consultant Eurasia Group, said by phone. “One of the instruments of pressure has been removed, but it wasn’t the sole basis by which the executives had incentives to start talking.”

The corruption scheme at Petrobras cost the company 6.2 billion reais ($2.1 billion), according to its 2014 earnings statement released last week. The report follows a five-month struggle to quantify the kickbacks in a way that was acceptable to external auditors.