Brazil's 'Other' Corruption Probe Moves Into Spotlight

06/22/2016 - 15h55

There is barely room to move in the office of Hebert Mesquita, a federal public prosecutor in Brasília.

Bulging police files teeter precariously on top of hundreds of legal documents spread out over the cramped first-floor cubicle, each detailing part of Brazil's ballooning tax evasion scandal, christened Operation Zelotes by police.

Overshadowed by breathtaking revelations of graft at state oil company Petrobras that have shaken Brazil's political establishment, the Zelotes probe is often simply dismissed as Brazil's "other corruption investigation".

However, after two years of digging, Mr Mesquita and fellow prosecutor Frederico Paiva believe they may have come across something even bigger.

Based on initial investigations, they now believe that more than 70 Brazilian companies, banks and multinationals participated in the Zelotes scheme, bribing officials over decades to reduce or waive tax payments, cheating the state out of at least R$19bn ($5.5bn).

"Look at each of these files - each one is a company, each one potentially a multimillion or multibillion corruption case," says Mr Mesquita, surveying the chaotic scene in front of him.

The pair's efforts are finally coming to fruition. In March, they charged Joseph Safra, Brazil's second-richest man and the world's wealthiest banker, over his alleged involvement in Zelotes.

In early May, the president of MMC Automotores, Mitsubishi Motors' distributor and assembler in Brazil, was sentenced to four years in jail over related allegations of bribing politicians to secure tax breaks. Meanwhile in May, police indicted the chief executives of steelmaker Gerdau, and Bradesco, Brazil's second-largest non-state bank.

Mr Mesquita also says he is confident he will soon have enough evidence to press charges against Guido Mantega, Brazil's longest serving finance minister who was detained for questioning over the scheme in May. Mr Mantega could not be reached for comment but has previously denied wrongdoing.

Mr Safra has also denied wrongdoing, as have executives at Bradesco and Gerdau as well as the companies themselves. MMC declined to comment.

Although Zelotes has attracted less attention than the Petrobras "Lava Jato" investigation - partly because few other high-profile politicians have been implicated - the tax probe could have graver consequences for business, analysts say.

Shares in both Bradesco and Gerdau dropped more than 7 per cent after their executives' indictment, raising fears about how investors might react if the men were convicted - a development that could affect financial statements and prompt investor lawsuits.

"The market is not paying attention to Zelotes because there are so many other things going on, but it is huge - it has the potential to attack the economic fabric of the country because we are talking about so many companies and such large values," says André Perfeito, chief economist at São Paulo broker Gradual Investimentos.

The Zelotes investigation began in April 2014 after a brown envelope arrived at the federal police headquarters in Brasília. Inside, an anonymous letter revealed how the scheme worked.

It accused councillors of the Administrative Council of Fiscal Resources (Carf) - a body within the finance ministry that rules on appeals over back taxes - of accepting bribes via third parties in exchange for ruling in companies' favour.

For Euro Bento Maciel Filho, a criminal lawyer in São Paulo, the scandal is a product of Brazil's complex and burdensome taxes as well as the high cost of doing business in the country.

Companies are not only forced to use Carf on a regular basis to interpret Brazil's mind-boggling legal intricacies, but the temptation to seek exemptions is particularly high given that taxation can often be the difference between making a profit or a loss in Brazil.

As such, Zelotes also shows how hard it is to reform the system given the vested interests involved, says Mr Bento Maciel Filho. "It is a case of creating difficulties in order to sell solutions - that is where corruption originates," he says.

Tax lawyers and academics say that similar graft schemes also operate at the state level. Jorge Abrahão, president of Brazil's Ethos Institute, says Zelotes and the Lava Jato investigation into bribery and kickbacks at Petrobras also point to the country's problematic division between public and private entities.

"In Brazil we have quite a promiscuous relationship between public and private, which has revealed itself in several ways such as through campaign financing," he says, referring to the slush funds involved in the Petrobras scandal.

However, both investigations are also proof of Brazil's progress, he says, citing the maturation of the judiciary and the public prosecution service.

Back in Brasília, though, Mr Mesquita has a less romantic view of his fellow officials. While he praises Sérgio Moro, the lower court judge leading the Lava Jato probe from the southern state of Paraná, he wishes Brasília's institutions would follow Mr Moro's example.

"In Brasília things are a little different... historically there have been few convictions for money laundering here," he says, adding that the country's power brokers still hold a tight grip over the capital city.

While more than 20 prosecutors are working on Lava Jato, he and Mr Paiva are the only ones assigned to Zelotes, he says, forcing them to work around the clock to get through the paperwork.

"We are taking on Brazil's richest business leaders and the country's best lawyers here," he says. "We can't afford to make even one mistake."

Copyright The Financial Times Limited 2016

(c) 2016 The Financial Times Limited