Petrobras Scandal – New York Times Article Highlights Sheer Scale of the Fraud

If you are interested in supple chain and / or political corruption, or just want to read a good and dramatic real-life story, we can recommend this lengthy New York Times article from last week. It lays out the story of the huge Petrobas corruption scandal in Brazil and beyond, that has had major political and business ramifications.

“The Petrobras scandal would read as pure tragedy were it not filled with a cast of Hollywood-ready characters and their lavish props. The latter include a huge inventory of gifts — Rolex watches, $3,000 bottles of wine, yachts, helicopters and prostitutes. There were also staggering sums of money, most of it flowing through a network of phantom corporations, some of it hand-delivered by an elderly gentleman who flew around the world with bricks of cash, shrink-wrapped and strapped beneath thigh-high socks and a Spanx-like vest”.

As the article explains, the basis of the fraud was an old-fashioned approach that is not unheard of in other supply chain circles. Officials in Petrobras – buyers and other senior executives - colluded with a cartel of supplying companies to overcharge for construction and service work. The cartel would decide which of its members would win the contract, then over-charge for the work. That “surplus” payment would then be shared by the cartel, the crooks within Petrobas, and political figures. This is where that political dimension comes in – Petrobas, while publicly traded, is 51 percent government-owned, and many Petrobras executives owe their jobs to those politicians.

As we say, it is a fairly “standard” fraud, but it is the scale of it here that is unusual. For example, one ex-employee involved promised to pay back his ill-gotten gains – all $100 million of them! The ruling Workers Party (an irony there, we might observe) is alleged to have taken over £200 million over the years from the scam.

The good news is that the judge and prosecutors seem to be taking this very seriously, unlike some previous corruption cases in Brazil and central / southern America more generally. The article gets into that subject, as well as much more about the background to this case, and the problems it has caused for various parties.

We might also consider what steps from a good procurement practice point of view might have been taken to counter the chances of such fraud? However, when you have collusion between buy-side and sell side, it is often hard to detect (think of the Sainsbury’s potatos example which went on for years). We would normally suggest that having multiple people involved on the buy-side in any major spend area helps mitigate the risk; but in this case, many people seem to have been in on the fraud, so that clearly did not help!

Perhaps some independent benchmarking and analysis of the prices being paid would have helped, as that would have highlighted the over-payments. But again, you need some straight and honest people to do that. That is part of the problem I many countries. When corruption is truly endemic, then it feeds on itself; being found out is less likely, so more people are tempted to commit fraud, and even basically honest folk start thinking, “well everyone else is doing it...” And so it goes, down a vicious spiral!

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First Voice

  1. DrGordy:

    Thanks for bring this to our attention Peter. I just wonder who many other countries could save a fortune by addressing bribery and corruption.

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