The Crime-State Nexus

How Petrolao Has Exposed Brazil as a Captured Democracy

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Remembering 2013: A demonstrator is shot by rubber bullets as riot police charge after clashes erupted during a protest against corruption and price hikes in Rio de Janeiro, Brazil.
The Crime-State Nexus : How Petrolao Has Exposed Brazil as a Captured Democracy - Matthew Brandeburg

Abstract

Brazil has been badly shaken, economically and politically, by the ongoing investigation into a nearly USD 1 billion corruption scheme involving state oil company Petrobras, many of Brazil’s largest construction firms, and Brazil’s leading politicians – including both former and current presidents. This article will look at the extent of the criminal organization run by political actors in Brazil to determine the country’s qualification as a captured state. With Brazil’s efforts to consolidate its democratic institutions since its return to civilian rule in 1985, this article will also examine how this level of criminal organization is impacted by the state’s democratic norms, and how the state has come to exploit these norms over time. This distinction is critical to the development of a new terminology to describe Brazil’s unique circumstances – those of a captured democracy.

A series of major scandals in recent years has exposed widespread corruption among Brazil’s political and business elite. The Mensalao case, which came to light in 2004, revealed vote-buying by prominent members of Brazil’s ruling party, the Partido Trabalhista (PT). A former president of the Chamber of Deputies, the chief of staff of then-President Luiz Inacio Lula da Silva, and 24 other current and former public officials were convicted of engaging in corruption between 2012 and 2013.1 More recently, an investigation centering on Brazil’s state oil company, Petrobras, has exposed racketeering, bribery, and money laundering activities by dozens of Brazilian politicians and some of the country’s largest construction firms. The investigation into the Petrolao scandal has increasingly demonstrated collusion at the highest levels of Brazilian government in a corruption scheme totaling more than BRL2 2.1 billion (USD3 900 million).4 Thus, despite its democratic consolidation, Brazil appears to serve as an example of a modern “captured state,” or a state in which criminal interests have purchased and entrenched political influence through corruption.5 This paper will test Brazil against the definition of a captured state by analyzing the extent of the criminalization of Brazil’s top-level institutions — including its branches of government and largest state-owned enterprises — to determine if the Petrolao scandal has exposed the freely elected state as being run by a criminal network, thus trapping itself in a unique form of captured state: a captured democracy. 

The Importance of Brazil and Its Style of State Capture

Brazil serves as a particularly important subject of analysis for both its role in the Western (and global) economy and its status as a democratic nation of 200 million people — the fifth largest in the world. Brazil’s economic influence has increased in recent decades, leading to its inclusion in the collection of influential developing countries known as BRICs.6 As the seventh largest economy in the world, Brazil is responsible for over USD 242 billion in annual exports and a roughly equal value for imports.7 This volume puts Brazil in the top twenty states by share of global trade, thus highlighting its crucial role as a strategic trading partner of the West.8 As criminal capture risks undermining a state’s economic efficiency, an examination of state criminalization should be the concern of all countries, especially of the West, so that such an economic linchpin does not risk faltering. Additionally, the presence of high-level criminal influence poses a risk to domestic and hemispheric security through its potential to fuel violent actors involved in illicit trade. Furthermore, as a democratic nation, Brazil serves as an even more curious model because the predominant example of captured states tends to be autocratic governments with low levels of civil liberties.9 Brazil is often seen as the contrary. According to Freedom House, who publishes an annual report on the subject, Brazil’s democracy is characterized by high levels of press freedom, political rights, and civil liberties.10 

While the average citizen may have high levels of “freedoms,” in reality Brazil’s political system may share more commonalities with autocracies than pluralistic democracies. Autocracies typically provide examples of patronage and influence peddling, important characteristics for evaluating the criminalization or capture of a state. A classic example of this is Russia and its oligarchy-run11 “kleptocracy,” where some of the highest government offices are allegedly bought and sold.12 For comparison, starting in 2004, a system for buying and selling political offices or votes in Brazil was uncovered during the Mensalao case. Mensalao, deriving from the Portuguese portmanteau for a large monthly stipend, was the colloquial name given to the prosecution of 26 top government officials for vote-buying schemes. The officials were charged with “bribery, money laundering, misuse of public funds, and conspiracy.” José Dirceu, chief of staff to President Luiz Inacio Lula da Silva (Lula), was among those convicted, though Lula himself avoided implication. Though the scandal broke in 2004, the trials did not reach a final conclusion until 2013, nearly a decade later, highlighting the lengths those accused of corruption could go to avoid sentencing.13 

While the Mensalao case emphasized vote-buying and only resulted in the sentencing of a small number of officials, a more systematic corruption racket has recently been exposed which shows not only continued vote-buying, but a web of kickback schemes and political offices for sale that is exposing hundreds of politicians and threatening to engulf the entire polity of elected officials. This scandal, known as Petrolao, has further exposed a Brazilian state operating much more along the lines of a kleptocracy than a pluralistic democracy. 

The Petrolao Scandal

On 17 March 2014, Brazil’s Federal Police conducted a series of arrests that marked the beginning of a corruption scandal that has uncovered links between executives at the state oil company, Petróleo Brasileiro (Petrobras), to a kickback scheme worth billions of dollars. The bribes were in exchange for inflating major contracts awarded to many of Brazil’s largest construction companies. Some of these funds were allegedly channeled to President Dilma Rousseff’s PT and its allies in the ruling coalition. This scandal, referred to as Petrolao, is the largest in the country’s history and has prompted widespread protests and public scrutiny over Brazil’s “culture of impunity,” which, as exemplified by the extraordinary delays in bringing the Mensalao case to trial, shields unethical actors from responsibility. Brazilian President Dilma Rousseff (Dilma) – who previously served as the chairwoman of the Petrobras Board of Directors during the years under investigation as part of Petrolao – has so far not been formally implicated. However, the investigation has devastated her government’s credibility and implicated those closest to her. To date, over 18 rounds of arrests have been conducted, over which former presidents Lula14 and Fernando Collor de Mello (Collor)15 have also been accused of corruption tied to the petrolao scandal (Collor was formally charged on 21 August 2015).16 Furthermore, even after his conviction in 2013 for being a key member of the Mensalao scheme, Jose Dirceu has also been accused of being “instrumental” to the Petrolao case, demonstrating the direct and ongoing connection between the political scandals.17 

The Formation of a Criminal Network

Over the past year, the Brazilian state has begun to look less like the victim of a corrupt few, and instead like the victim of a well-organized network nearly resembling a criminal enterprise. Organized criminal network are groups which have their own hierarchy, and share fundamental characteristics such clearly defined roles, language, and continuity.18 The Petrolao scandal has exposed a network influencing Brazil’s political system that exemplifies these very characteristics. 

Relying on the established hierarchy of the corporate and political structures of the companies and political parties involved, communications were directed from the executives through a chain of command, hinging on two middle men: Alberto Youssef, an actor outside of the structure but crucial for money laundering operations at Petrobras-affiliated gas stations, and Paulo Roberto Costa, former Petrobras Director of Supply and Refining. According to testimony, all communications would go from these two middle men to either former President Collor, who would allegedly use his commanding role in the Senate to direct politicians or sell positions, or Eduardo Cunha, the speaker of Brazil’s lower house of Congress, who would allegedly do the same for the Chamber of Deputies. Cunha, who is next in line for the presidency should the vice president and Dilma be impeached, was also charged with Petrolao-related corruption at the same time as Collor.19 

Apart from the hierarchies and defined roles within the criminal network, the corruption scheme also had its own language. “Pixuleco” is one example of the unique vocabulary that the criminals employed to refer to their operations, and was used either to describe the three-percent cut taken during the money laundering process which was redistributed to the political orchestrators of the operation, or to describe the one-percent cut taken from contract kickbacks with Petrobras. This word has come to be used not only for subsequent Petrolao investigation names,20 but has also developed its own pop-culture applications.21 

Finally, the role of continuity emphasizes the degree of influence wielded by the network. It should be noted that the “culture of impunity,” where cases face a series of appeals and legal loopholes which could makes trials last for years if they ever come to a close, has combined with a system where even those sentenced, such as José Dirceu, can still orchestrate criminal behavior, ensuring continuity of operations in the process. 

The Degree of State Capture

While it can be argued then that a criminal network organized to a consequential degree has operated across state owned enterprises and government offices, to what degree has this network “consumed” the government itself? While over fifty people have been arrested to date, hundreds more are suspected of participating in the scheme.22 The political parties involved cross all party lines. Beyond Lula and Dilma’s PT, the Progressive Party (PP) – the fourth largest party in the lower house and fifth largest in the upper Senate – has been accused of being the largest recipient of Petrolao funding.23 The Partido do Movimento Democrático Brasileiro (PMDB), the largest party in both houses (and the party of Collor and Cunha), has also been heavily implicated in Petrolao.24 Further exemplifying the network’s reach, the scandal itself has gone beyond the borders of Brazil, allegedly involving multi-billion dollar contracts across Latin America and the United States.25 The supposed fraudulent peddling of contracts abroad for Petrobras and Odebrect, among other companies, has even allegedly been tied to Lula, raising the probability of investigations not only into his involvement in Petrolao, but possible violations of the United States’ Foreign Corrupt Practices Act (FCPA).26 

Finally, while the extent and magnitude of Petrolao’s criminal network are significant, it is still worth examining the role of the judiciary, the government’s policy efforts to combat Petrolao, and the electoral role of the citizenry before a pronouncement can be made on the effective state capture of Brazil. Though concerns were raised in 2014 after the Supreme Court absolved Collor of the corruption charges that led to his impeachment from the presidency in 1992,27 Brazil still has shown a degree of independent judiciary during the investigations into Petrolao, suggesting the state is not fully operated by a criminal network, or at least not by one with full impunity.28 Judges encouraging the investigation, such as Sergio Moro, have become celebrities in Brazil and have been prided on their swift and decisive action.29 Furthermore, though it took nearly a decade, those found to be involved in Mensalao were eventually sentenced without room for further appeal. These steps are critical to preventing institutionalized state racketeering since they prevent “the source of the threat and the protector against that threat” from being the same law enforcer.30 

Despite efforts to strengthen these frameworks, lax enforcement has undercut most efforts to date and remains a major obstacle to reducing graft. The government itself has signaled to foreign countries that, despite the extent of politicians involved, it is willing to enact reforms to mitigate the crisis and prevent future ones. Brazil’s government has sought to tackle corruption with a series of new measures. The country is a signatory to the Organization for Economic Cooperation and Development (OECD) Anti-Bribery Convention and is a founding member of the Open Government Partnership, an intergovernmental group aimed at enhancing transparency. In a direct response to Petrolao, Dilma has initiated new laws that would criminalize the use of slush funds in political campaigns and add “teeth” to anti-bribery statutes.31 

What is most curious about the extent of state capture so far in Brazil is its ability to permeate political parties, ignoring oppositional politics and seemingly exploiting the democratic system of Brazil itself. As allegations of vote buying persist, the conclusion that the criminal organization behind Petrolao desires to exploit rather than subvert the democratic institutions of Brazil, combined with Brazil’s outwardly high levels of press and political freedoms, imply that Brazil does not fit the mold of many authoritarian countries often affixed with the label of a captured state. For this reason, one could argue that Brazil is a new type of captured state, one that is perpetuated by the fractured nature of its parliamentary institutions and overwrought bureaucracies. A more appropriate terminology to describe Brazil’s unique situation is that of a captured democracy, a term emphasizing not only the type of institutions which are captured, but that Brazil has not seen a complete decay or reversal of its political institutions, as evidenced above by its persistent judicial branch of government.

Conclusion

Though Brazil continues to battle corruption at the highest levels, and though multi-billion dollar schemes have been perpetrated by a highly-organized operation with ties to leadership in its largest companies and political parties, Brazil does not appear to be a completely captured state. The foundations for a successful democratic state are there, should the remaining politicians sustain the political will to combat the Petrolao network. Furthermore, as mentioned previously, though these officials guilty of corruption have been elected in free and fair elections, the true extent of this corruption has only recently been exposed. Thus, there is a real chance that these politicians — and their network of corporate executives — will face consequences, from the ballot box to the court house. However, for the ballot box to lead to lasting change for Brazil, leading political parties would have to conduct their own in-house audits and reforms, which so far have not been sufficiently demonstrated. If these political parties are allowed to continue in current form, there is a real risk that Brazil will slide back into a corruption scandal in short order, as the fact that Petrolao quickly succeeded Mensalao has shown us. Lastly, the role of the judiciary cannot be minimized when evaluating the risk of state capture. The original harbinger of Brazil’s scandals, Mensalao, has finally seen its defendants sentenced after exhaustive rounds of appeal. The legal system, despite its lethargic efforts, has still managed to definitively jail the worst offenders, a positive sign for a country desperately needing a pronounced enforcement of rule of law. If President Dilma is deemed to have not taken part in the operation while at Petrobras or under the PT, then she serves as a powerful example that Brazil’s highest office is still a position which is not for sale. Therefore, despite the magnitude of corruption uncovered by Petrolao, Brazil still stands a chance of breaking its corruption cycles, maintaining its long-championed democratic institutions, and avoiding classification as a captured democracy.

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Calgaro, Fernanda. “Supremo absolve ex-presidente Collor por falta de provas.” UOL. 25 April 2014. http://noticias.uol.com.br/politica/ ultimas-noticias/2014/04/24/maioria-dos-ministros-do-stf-absolve-collor-por-falta-de-provas.htm. 

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Notes

1 H.J., „What is Brazil‘s ‚mensalão‘?“, The Economist, 18 November 2013, http:// www.economist.com/blogs/economist-explains/2013/11/economist-explains-14. 

2 Brazilian Real. 

3 United States Dollars, converted from time of opening of Lava Jato investigation, 17 March 2014. 

4 O Globo, “O Petrolão chegou de vez ao PT,” O Globo, 7 February 2015, http://oglobo.globo.com/opiniao 

5 Alina Mungiu, “Corruption: Diagnosis and Treatment,” in Journal of Democracy Vol. 17, No. 3, July 2006, Johns Hopkins University Press, pg. 94. 

6 Brazil, Russia, India, and China. 

7 2013 statistics. World Trade Organization, “Brazil: Country Profile,” http://stat. wto.org/CountryProfile/WSDBCountryPFView.aspx?Language=E&Country=BR. 

8 GlobalEDGE, “Brazil: Trade Statistics,” Michigan State University, http://globaledge.msu.edu/ countries/brazil/tradestats. 

9 Joel Hellman and Daniel Kaufmann, “Confronting the Challenge of State Capture in Transition Economies,” in Finance and Development Vol. 38, No. 3, September 2001, International Monetary Fund Press, http://www.imf.org/external/ pubs/ft/fandd/2001/09/hellman.htm. 

10 Freedom House, „Freedom In the World 2015,“ https://freedomhouse.org/report/freedom-world/ freedom-world-2015#.Vi-rmISWFIo.

11 Hellman and Kaufmann. 

12 Johan Engvall, „The State as Investment Market: A Framework for Interpreting the Post-Soviet State in Eurasia,” in Governance: An International Journal of Policy, Administration, and Institutions, Wiley Periodicals, Inc., pg. 5, 8-9. 

13 H.J., “What is Brazil‘s ‚mensalão‘?” 

14 Filipe Coutinho, „Exclusivo: Lula é suspeito de ter se beneficiado de petrolão, diz PF,“ Epoca, 11 September 2015, http:// epoca.globo.com/tempo/noticia/2015/09/ exclusivo-lula-e-suspeito-de-ter-se-beneficiado-do-petrolao-diz-pf.html. 

15 Vladimir Netto e Mariana Oliveira, „Investigação da Lava Jato aponta propina de R$ 26 milhões para Collor,“ O Globo, 5 August 2015, http://g1.globo.com/politica/operacao-lava-jato/noticia/2015/08/ investigacao-da-lava-jato-aponta-propina-de-r-26-milhoes-para-collor.html. 

16 Paulo Trevisani, “Brazil House Leader Charged With Graft in Petrobras Case,” Wall Street Journal, 21 August 2015, http://www.wsj.com/articles/ two-brazilian-lawmakers-charged-in-petrobras-case-1440106249. 

17 R7 Staff, “Lava Jato: ‘José Dirceu repetiu o esquema do mensalão’, diz MPF,” R7 Noticias, 3 August 2015, http://noticias.r7.com/brasil/lava-jato-jose-dirceu-repetiu-o-esquema-do-mensalao-diz-mpf-03082015. 

18 James Finckenauer, “Problems of Definition: What is Organized Crime?” in Trends in Organized Crime Vol. 8 No. 3, Spring 2005, pg. 65. 

19 David Segal, “Petrobras Oil Scandal Leaves Brazilians Lamenting a Lost Dream,” New York Times, 7 August 2015, http://www.nytimes. com/2015/08/09/business/international/ effects-of-petrobras-scandal-leave-brazilians-lamenting-a-lost-dream.html. 

20 R7 Staff, “Lava Jato.” 

21 Manuela Barem, “16 significados alternativos para ‘Pixuleco’, a nova fase da operação Lava-Jato,” Buzzfeed Brazil, 3 August 2015, http://www. buzzfeed.com/manuelabarem/16-significados-alternativos-para-pixuleco-a-nova-fase-da-op#.ki4jLzyg6. 

22 R7 Staff, “Lava Jato.” 

23 Kenneth Rapoza, “Brazil’s Progressive Party Biggest Recipients Of Oil Kickback Scheme,” Forbes, 7 March 2015, http://www.forbes. com/sites/kenrapoza/2015/03/07/ brazils-progressive-party-biggest-recipients-of-oil-kickback-scheme/. 

24 Thiago Bronzatto, “MP avança nas investigações sobre o PMDB no petrolão,” Epoca, 25 September 2015, http://epoca.globo.com/tempo/noticia/2015/09/ mp-avanca-nas-investigacoes-sobre-o-pmdb-no-petrolao.html. 

25 Rodrigo Orihuela, Juan Pablo Spinetto and Raymond Colitt, “Petrobras spending on Pasadena refinery snares Brazil finance minister in scandal,” Bloomberg News, 27 March 2014, http://fuelfix. com/blog/2014/03/27/petrobras-spending-on-pasadena-refinery-snares-brazil-finance-minister-in-controversary/. 

26 The Rio Times, “Lula and Cunha Investigated in Lava Jato Corruption Scandal,” Rio Times, 17 July 2015, http://riotimesonline.com/brazil-news/ rio-politics/lula-and-cunha-investigated-in-lava-jato-corruption-scandal/#sthash.chDvGWhc.dpuf. 

27 Fernanda Calgaro, “Supremo absolve ex-presidente Collor por falta de provas,” UOL, 25 April 2014, http://noticias.uol.com.br/politica/ultimas-noticias/2014/04/24/maioria-dos-ministros-do-stf-absolve-collor-por-falta-de-provas.htm. 

28 H.J., “What is Brazil’s ‘mensalão’?” 

29 Felipe Luchete, “Moro exerce ‘direito ao silêncio’ durante lançamento de livro em São Paulo,” Conjur, 14 May 2015, http://www.conjur.com. br/2015-mai-14/moro-exerce-direito-silencio-durante-lancamento-livro. 

30 Engvall, pg. 12. 

31 Bureau of Economic and Business Affairs, “2013 Investment Climate Statement,” United States Department of State, February 2013, http://www.state. gov/e/eb/rls/othr/ics/2013/204608.htm. 

Matthew Brandeburg is currently an M.A. Candidate in International Economics and International Relations, with concentrations in African Studies and Conflict Management, at the Johns Hopkins School of Advanced International Studies (SAIS). Matthew currently works for the Washington D.C.-based strategic advisory firm TD International, where he focuses on corporate advisory for emerging markets in Latin America and Africa. Before attending SAIS, Matthew worked in Seoul, South Korea, as a project developer for a local branch of the International Organization for Migration.