Carpenter’s book portends today’s lesson for the compliance practitioner

I recently received a review copy of the book The Fifth Letter by fellow University of Michigan grad Vivian L. Carpenter. It is a rollicking good read which touches on areas of constitutional law, inalienable rights in the US, the complexities of racial relations in the South up to this day, an all-knowing/all seeing cabal which runs things from behind the scenes all wrapped up in the politics of modern day Washington DC. As a lawyer I greatly enjoyed the scenes that occurred in, around and about the US Supreme Court, the Senate’s advise and consent process for Supreme Court nominees and even a civics lesson in amending the Constitution. As a maven of thrillers I enjoyed the non-stop ride lead by the all-knowing/all-seeing cabal (who I like to call the Omnipotent ‘they’) who the protagonist, Katherine Ross, must face down and defeat. If you enjoy any of this, I would suggest you check out The Fifth Letter on Amazon.com or at your local bookstore. It is one of those rare books that is a great read, a roller coaster of a good ride and one from which you will learn quite a bit, all wrapped up into one book.

I thought about how well Carpenter tied all these seemingly disparate events, strands and concepts together in her work of fiction as I was reading a recent article in the Financial Times (FT) about the ever-increasing scope of the Petrobras corruption investigation in Brazil. In an article entitled “Petrobras scandal turns spotlight on Odebrecht” Joe Leahy, John Paul Rathbone and Andres Schipani reported on the arrest of Marcelo Odebrecht in the wake of the ongoing Brazilian corruption investigation dubbed “Operation Car Wash”.

The reporters noted that the investigation has shifted “in the latest sign of how Brazilian business and politics is being reconfigured by the Petrobras scandal, Mr Odebrecht is being held without bail in a sparse cell in the southern city of Curitiba. There, the billionaire member of a class that traditionally considers itself above the law, reportedly has to sleep on a concrete bunk and share a communal shower.” They quoted Professor Sérgio Lazzarini of São Paulo’s Insper business university who said, ““We are in a kind of different story now,” It [the investigation] is changing the perspective of many businessmen.”

Odebrecht is “president and chief executive of Odebrecht — the Brazilian multinational that is Latin America’s largest construction company but also, because it is privately held, one of the world’s biggest companies that most people have never heard of.” “With $41bn in revenues, 181,000 employees and businesses that include building football stadiums and nuclear submarines, his company operates in 23 countries, from Angola to the UK and most of Latin America.” Moreover, it “almost acted as the corporate handmaiden of Brazilian foreign policy, managing complex infrastructure projects in strategic locations that had caught the eye of former president Luiz Inácio Lula da Silva.”

This confluence of public influence for private benefit, a hallmark of Carpenter’s novel, is also present in the Odebrecht investigation as former President da Silva is “being investigated on separate allegations that he improperly used his connections to help Odebrecht win international contracts. Mr Lula da Silva and Odebrecht vehemently deny any wrongdoing. The yearlong probe, now aided by the Swiss attorney-general’s office and Portuguese and Latin American prosecutors, promises to illuminate the shadier side of Latin American business practices.”

As a company Odebrecht is privately held yet has $61bn in assets, which the article notes are largely held in joint venture (JV) with Petrobras. In 2014 the company had sales of $41bn but only profits of $210MM. The company says that it is due to its “razor thin margins” but it seems to me the money could be running out to others with profits that slim on such revenues. Unfortunately for the company, the arrest of its President has led to concerns from financial analysts. The article noted, “Moody’s, the rating agency, has warned the case could jeopardise some of Odebrecht’s $34bn backlog of construction contracts, including $3bn of Colombian projects.” Luis Fernando Andrade, head of Colombia’s infrastructure agency, said, “[If] proven guilty in Brazil, that could generate inabilities [for the company] in Colombia.”

Odebrecht is well known as an international construction company, with a particularly strong reputation for the “ability to operate successfully and manage relationships in countries with “significant levels of political risk”, as it noted in a recent bond prospectus. That includes building Tripoli’s airport — until work was disrupted by the 2011 Libyan military intervention — and Panama, where Odebrecht won $8.5bn of projects under former President Ricardo Martinelli, who is currently being investigated for corruption. A 2.8km viaduct built around Panama City’s old town for $782m had a cost per kilometre surpassed in the US only by Boston’s infamous “big dig”, according to official US statistics cited by local environmentalists.”

Such kudos would seem to indicate that the company plays in a very high-risk market. When you have high-risk, it is incumbent that you manage that risk appropriately. With the well-known proclivity for corruption in the international construction business perhaps the imbroglio that the company now finds itself is not too surprising. Yet the article noted “Many say that even if Mr Odebrecht proves his innocence, the scandal marks a watershed for Brazil’s construction companies, much like the partial humbling of banks after the global financial crisis.”

The article also details the trail of alleged money payments made by the company to Petrobras officials. It shows payment through known money laundering havens on its way to the bank accounts of Petrobras officials in Switzerland. The officials alleged to have received these monies are Renato Duque, Pedro Barusco and Paulo Roberto Costa. It is further alleged that some of this money was passed onto officials from Brazilian political parties.

I think Carpenter’s book portends today’s lesson for the compliance practitioner; which is re-emphasized by the FT article. For any US or UK company which has been doing business in Brazil for at least the last 10 years, you need to look very hard at who you did business with and how you did business with them. You need to see if there were any suspicious payments that could tie your company to not only Petrobras but also other Brazilian companies caught up in this scandal. You can be certain if the Brazilian prosecutors turn up evidence of involvement by a US company, they will turn it over to US prosecutors. You definitely want to a head off any letter from the Securities and Exchange Commission (SEC) about your accounting provisions or any raids by the Federal Bureau of Investigation (FBI) or Department of Justice (DOJ) looking for evidence of corrupt payments.

You can purchase a copy of the book The Fifth Letter on amazon.com by clicking here.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2015