P-51 brazil platform
In terms of highlighting the potential consequences of corruption, Petrobras, Brazil’s flagship oil and gas company, is doing a grand job.

An on-going investigation into a kick-back scheme at the company has so far resulted in: the treasurer of the ruling Workers’ Party being charged with corruption, the imprisoning of two former Petrobras executives, more than 40 top politicians being put under investigation and 35 Petrobras executives being arrested. Most recently, the company was forced to write-down its accounts for overvalued assets by nearly $17bn.

All because state prosecutors allege over the last decade top officials from Petrobras have been operating a kickback scheme on a number of contracts worth $4bn or more, generating illicit cash that was allegedly funnelled back to government.

The scandal has rocked Brazil, with people taking to the streets in protest, and is expected to have wider ramifications for the oil and gas sector.

Heidi Vella-Starr: As someone with extensive experience investigating corruption were you surprised when the Petrobras scandal broke?

Toby Duthie: I don’t think we were surprised there was corruption with Petrobras, necessarily. It is the scale of the corruption that is quite surprising. I think everyone knows Brazil, especially in certain sectors, is very prone to corruption. But I think the alleged scale of the corruption – between $10bn and $20bn, according to reports – going for 10 years; which, if that is only 50% true, is quite amazing. And that is from someone like me who is quite jaded; who has been doing this for 15 years.

HVS: What do you think will be the long term ramifications of the scandal for Petrobras and the wider oil and gas industry?

TD: I think it is pretty big, actually. What is unusual here is the Brazilian government is very actively prosecuting. And they are already cooperating a lot with overseas prosecutors – the Americans, the British, Germany and various others. What I think will happen is more and more prosecutions will come out of this.

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The majority of the companies are Brazilian and the alleged corruption was actually controlled by Brazilian engineering companies. But, a lot of those companies will be in joint venture with non-Brazilian companies. What usually happens in these scandals when they blow up is, as a company seeks to defend itself, they end up cooperating with the authorities and pulling in their business partners and competitors. Inevitably foreign companies will get pulled into it and get prosecuted.

Then they’ll be the follow-on civil litigation, which, again, has already started where Petrobras or the government of Brazil will seek to get civil compensation on the basis it has been defrauded. And then you’ll get the shareholder action by either the people who have invested in the companies that have been colluding with Petrobras, on the basis that they were inflating their share prices through this process. What you are going to see is a lot of litigation and a lot of corporate and individual prosecutions on a very large scale.

HVS: So it could be a disaster for Brazil’s oil and gas industry?

TD: I think that is a really good question. What could stop it would be a political decision. Where do you stop? Because it is such a big deal and if you look at what Petrobras represents as part of the Brazilian economy, it’s a bit like with our [UK] banks; you reach a point at which you actually need to stop prosecuting them because the impact it is going to have on the economy is greater than the benefit of prosecuting or remediating these companies. Potentially, Brazilians could say it is not in our interest to prosecute all these companies that employ thousands and thousands of perfectly honest and decent people. The cost overall could be too great.

HVS: Brazil’s current president Dilma Rousseff was head of Petrobras for seven years when much of the alleged corruption was taking place – do you think she knew about it?

TD: It’s a good question. She did seven years at Petrobras [in all]. I really don’t know, but the point is if she didn’t know, why didn’t she know? It will be interesting to see how this unravels because it is obviously still relatively early days but given the size and length of time that this has been going on for one would have to say if she didn’t know why didn’t she know?

HVS: What countries in Latin America pose the biggest corruption risk?

TD: Brazil definitely. It always been known to be very high risk, from everything from tax to employment. In specific to oil, the other big one is Mexico, partly because of the size of the oil and gas business, but also partly because Pemex historically has had lots of corruption issues. I would say that is another market where companies need to be very vigilant.

Ecuador, Colombia and Argentina have all got challenges but slightly less because the size of the industry is not as great. Colombia is quite interesting because it is one of the few countries in Latin America which seems to be very proactively pursing an anti-corruption agenda and I think it has got its corruption risks under the best control relative to the Latin American oil and gas producers, but you need to be careful in any of these countries.

HVS: How does Forensic Risk Alliance establish a corruption train when it is conducting an investigation?

"Potentially, Brazilians could say it is not in our interest to prosecute all these companies that employ thousands and thousands of perfectly honest and decent people"

TD: We do a lot of analysing on the financial side – so payment flows, who approved the contract, how the contracts were structured in order to facilitate kickbacks. What was the value of the kickbacks? What was the value of the fraud or the corruption scheme to the relevant parties? How much have [these kickbacks] actually cost the companies? We pull all the relevant data, everything from the financial accounting data through to the emails between key players as they become identified. We paint the factual picture which typically helps companies and their lawyers defend themselves against regulatory prosecution.

HVS: What are the main types of corruption you encounter?

TD: I think there are two big types of corruption. There is the corruption to win big contracts. For example, the former head of Halliburton, Jack Stanley, was involved in a very big bribery scandal to do with a Nigerian oil services contract and he ended up going to prison on the basis that … even if he didn’t know, he should have known.

The other type of corruption we see a lot, especially in oil and gas, is operational corruption where someone needs to get a particular widget or drill bit through customs and a customs officer is looking to effectively extort the company to get a bribe. That kind of operational corruption is much harder for senior management to get wind of because it is not hugely valuable. It is obviously not clearly transparent to senior management.

HVS: How can companies mitigate corruption?

TD: I think one of the key things is having really strong training of individuals. But I also think it is having very, very strong financial and compliance controls so that even if someone is attempting to pay a kickback your accounting and your compliance and legal people are sufficiently vigilant so it gets picked up before it happens.

I think it is possible, because if you are a large company operating in higher risk areas you are able to analyse your business based on risk. So if I were an oil services company operating in Brazil I would be immediately reviewing all the contracts I have with Petrobras to see if any payments or any use of agents or use of sub-contractors or partners might expose me to some sort of risk. What I’d be looking to do on that basis is indentify all the higher risk transactions, contracts, that I am working on and then put in place tight controls to make sure all the business dealings related to those contracts were transparent.

I think the key thing is you need to be prepared to walk away from certain business transactions if there is no alternative to being corrupt, or if you are struggling to find it possible to operate in a sufficiently transparent and clear way.

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