Lula, Moro and the Top Managers – „Operation Car Wash“ and the Fight Against Corruption in Brazil

By Elizangela Valarini und Markus Pohlmann

Despite the fanfare of the Rio Olympics had subsided, Brazil is no longer politically calm. Sérgio Moro, a fededal judge, detonated a political tinderbox when he lashed out against Luiz Inácio Lula da Silva, a former president, and political corruption in the Workers’ Party (PT) Lula had helped found.

"Car wash"
Source: Pixabay

Not only have the accusations against two-term ex-President Lula, the impeachment against his successor Dilma Roussef, the arrest of the President of the Parliament, Eduardo Cunha (PMDB) and current proceedings against 279 politicians robbed the Brazilians of their sleep, the multitude of corruption scandals in the economy keeps them in suspense. Since the “Operação LAVA JATO” (“Operation Car Wash”) started in July 2013, politics, business and the judiciary have been in great turmoil. Having ensnared the construction industry and Petrobrás, the state-run oil company, the spectre of corruption is threatening to envelop the rest of energy industry and even the construction of nuclear power plants. For example, Otavio Marquez Azevedo, head of the Brazilian multinational conglomerate Andrade Gutierrez, who was arrested for corruption, had only enjoyed a five-day release for his co-operation before he had to face charges in another court that accused his company of bribery in the bidding process for the construction contract of nuclear power plants in Rio de Janeiro.

What’s going on in Brazil? And what is behind these scandals?

In any case, we are currently witnessing a turning point in the tolerance of corruption in Brazil. Whereas legal condemnations, if ever occurred, was precious little and were only pronounced with the exclusion of the general public, they come fast and furious, hit hard and are well publicized.
Anyone who is curious enough and has a bit of free time can easily follow some of the trials on Youtube. Punishment is substantial. For example, Marcello Odebrecht, a descendant from a German immigrant family, received a sentence of 19.4 years by a ruling of the first instance for bribery, cartel training and money laundering. Sérgio Moro, the judge presiding over the case, has carried out the proceedings quickly and along clear lines.

But what do car wash systems have to do with all that? The name Operação LAVA JATO ( “Operation Car Wash”) has two meanings in this context. First, the comprehensive corruption scheme was unearthed by the initial suspicion of money laundering that was linked to a chain of gas stations and car wash systems. Hence, the code name LAVA JATO. Secondly, LAVA JATO has a symbolic meaning, as lavar means ‘to clean up’ in the Portuguese language. Thus, the aim was to use the LAVA JATO investigations to clean up the messy corruption cases swiftly and decisively. At present, bribery payments of US$1.9 billion have been discovered, of which about 825 million have been retrieved. 113 suspects have been arrested, and 15 top managers and entrepreneurs were given an average sentence of 15 years. A total of 43 criminal prosecutions against 212 individuals, and 7 corruption charges against 16 major construction companies and 38 individuals are being processed. These accusations are directed against the top management of the largest private construction companies and the state-owned oil company Petrobrás. Their presidents, managers and employees face charges of corruption (Article 33, Section 4, CP), money laundering with document forgery (Article 1, caput, inciso V, da Lei nº 9.613 / 1998), as well as for the formation of a criminal organization, specifically of a cartel (Article 2º da Lei nº 12.850 / 2013).

The cartel

The history of this cartel dates back to 1997, when the managers of 9 – later increasing to 16 – construction companies began to meet on a regular basis to plot to cartelize the market for building projects which were of interest among them. Once a company had decided to acquire a particular project, all others were forbidden from bidding for the same project or they would have to submit a higher bid to the PETROBRÁS construction project. “The efficiency of this group rose since 2003/2004 with the new CEO of Petrobrás,” testified Augusto Ribeiro de Mendonça Neto before the court. The cartel had not only helped participating companies become more competitive while bidding for Petrobrás contracts, and vis-a-vis both international and other domestic competitors who were not part of the secret “club”, it also enabled them to increase the tender prices of their projects through overpricing bids and hereby helped determine the profit of their companies by inflating the value of the construction projects.

A system of bribery and corruption

The rationale behind this modus operandi was not just the greed of managers and entrepreneurs. Rather, it points us to the systematic nature of corrupt practices. The control of the market with the help of a large state-owned enterprise, which often acts like a quasi public authority in Brazil, and the regular “greasing” of relations with political parties, constituted an interlocked system of bribery and corruption. Like a tithe, a certain percentage of the order had to be handed over to the Petrobras managers and laundered beforehand. Anyone who was acceded into the exclusive club had contributed to it, and all the others were left out. According to previous court trials, the participating managers and entrepreneurs had not acted purely for personal gains, but also took care of their companies’ interest and thus indirectly served their own careers. The unwritten rules of the system were very well known within the club and were fully accepted by its members. This is not only a case of corporate crime but also closely relates to “structural corruption”: a firmly established system with informally acknowledged unwritten rules, governed by an inner circle of high-ranking managers, entrepreneurs, politicians who benefitted from these rules. Compared to the the situation in Germany, which has also seen lots of cartels, this cartel formation distinguishes itself by its close relationship with political corruption, a feature rarely seen in Germany. The fact that this cartel was discovered and smashed reflects a remarkable turnaround in the approach to corruption in Brazil, and we can only hope that it will outlive the current political turmoil without losing momentum. In any case, Brazil’s top managers, entrepreneurs and politicians have to brace themselves for a strong headwind, as a younger generation of  judges such as Sérgio Moro no longer idly stand by, but take firm actions. That’s what they’ve learned from lessons in the USA and Italy. The presently still fresh glimmer of hope in an economically troubled Brazil is that this anti-corruption campaign may eventually lead to less corruption and a more independent judiciary – even though there are already signs of a political counter-attack.


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