Brazil, Widening the Hunt for Corruption, Finds It Under Every Rock

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The nationwide ‘Car Wash’ case has encouraged local prosecutors to dig into hundreds of bribery scandals, paralyzing cities around the country

RIBEIRÃO PRETO, Brazil—This affluent city in Brazil’s southeastern highlands, famous for its agribusiness, artisanal ales and annual book fair, is usually a tranquil place. Yet in recent months Ribeirão Preto has been rocked by a $65 million alleged bribery and kickback racket at City Hall.

It is one of hundreds of such scandals coming to light in Brazil. A three-year-old nationwide corruption probe, dubbed Car Wash, is inspiring a frenzy of similar operations by local prosecutors and police, who are uncovering a staggering degree of corruption and sparking turmoil across the country.

Dárcy Vera, a former cotton picker and maid who swept to victory in 2008 as Ribeirão’s first female mayor, was jailed in December for allegedly masterminding the scheme. She denied wrongdoing and was later released pending a judge’s ruling on formal charges of corruption, embezzlement and criminal conspiracy.

In the weeks that followed her arrest, tales of dawn police raids, briefcases stuffed with cash and the mysterious suicide of a local businessman in his shower engulfed this Boston-size city. The mayor’s post went unfilled for nearly two weeks—everyone in Ms. Vera’s line of succession was either also in jail, under investigation or refused to take the job.

Duarte Nogueira, who was sworn in as Ribeirão’s new mayor in January, promised voters a return to normality. But he, too, is now facing suspicion. After construction giant Odebrecht pleaded guilty in the U.S., Brazil and Switzerland to bribing officials in 12 countries in exchange for contracts, a former executive testified the firm made a campaign contribution to Mr. Nogueira. The new mayor says all donations he received were legal and has denied any wrongdoing.

“We’ve never seen such chaos,” says Gláucia Berenice, a 51-year-old evangelical missionary and one of the few Ribeirão city councilors from Ms. Vera’s administration who authorities say isn’t under investigation.

For the past three years, Brazil has been gripped by the Car Wash probe, so called because it began as an investigation into money laundering at a gas station. It soon uncovered a scheme to skim an estimated $13 billion from inflated contracts at state-run oil company Petrobras. It has landed swaths of the business and political elite behind bars, implicated more than 20 foreign firms and helped topple President Dilma Rousseff last year, though she hasn’t been personally accused in the scheme.

It has thrown Brazil’s political class into turmoil and deepened the country’s worst recession on record, which has seen the economy contract two years in a row. At the same time, there is a possible silver lining if the Car Wash investigation can strengthen the rule of law—a key step toward consolidating one of the world’s largest democracies.

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Similar scandals are now unfolding at state and local governments across Brazil, where a surge of anticorruption investigations has landed hundreds of elected officials in jail, from Rio de Janeiro to the far corners of the Amazon rain forest. In the jungle-covered state of Rondônia, on the border with Bolivia, prosecutors have been investigating an alleged scheme to defraud the city’s prison service.

“The Car Wash Operation has laid everything in Brazil bare, making it clearer than ever that corruption here is both chronic and endemic,” says Gustavo Justino de Oliveira, lawyer and professor of administrative law at the University of São Paulo.

Corruption isn’t just more evident in Brazil. There is also more of it, says Christopher Garman at Eurasia Group, the consultancy. “Over the past 15 years with the commodity boom, the volumes of investment that policy makers had at their disposal increased tremendously and so the opportunities for corruption grew as well,” he says.

Brazilian judges handed out as many as 500 convictions involving hundreds of mayors across Brazil in 2016 for misconduct in office, largely related to corruption, according to an estimate from Claudio Ferraz, a professor of economics at Rio’s PUC University, using government data. That compares with 25 such convictions in 2000.

Every day, new details of corruption probes emerge, paralyzing local governments struggling to deal with severe fiscal crises in the midst of the recession.

In Rio de Janeiro last month, an electoral court ordered the state’s governor, Luiz Fernando Pezão, to step down, accusing him of trading government contracts for campaign financing, casting further uncertainty over the debt-ridden tourist hot spot. He has denied wrongdoing and plans to appeal.

More than 600 miles southwest in Piên, a town of around 12,000 people, police accused former Mayor Gilberto Dranka of hiring the gunman who killed his successor, Loir Dreveck, a week before Christmas. Mr. Dranka, who police found hiding in the attic of his mansion, allegedly ordered the killing of the town’s mayor-elect after Mr. Dreveck refused to let him appoint friends and contacts to the new government. Mr. Dranka has denied wrongdoing. His lawyers say he hid because he thought the officers were burglars.

“If they can discover, investigate and punish such a grandiose corruption scheme at the federal level, why can’t we do the same for smaller cases?” says Marcelo Magalhães, one of the police officers investigating the scandal in Piên.

Polls show that most people in Brazil applaud the scope and depth of the anticorruption purge, seeing it as a historic turning point in a country where the rich and powerful rarely paid for their crimes. The bigger question, though, is whether the zealousness of Brazil’s crime-fighting authorities will be accompanied by politicians tackling the root causes of corruption.

Analysts point to the example of the 1990s in Italy, when the “Clean Hands” anticorruption operation—used as a model for Brazil’s Car Wash probe—led mostly to a prolonged political crisis and years of infighting between the judiciary and the government.

With its fragmented web of 35 mostly weak parties and an electoral system that allows voters to pick individuals rather than parties, Brazilian politics has long relied on the exchange of jobs, favors and bribes to function, says Barry Ames, author of the book “The Deadlock of Democracy in Brazil.”

“Pork barrel and patronage is what holds all this together,” he says.

Exasperated Brazilians have repeatedly taken to the streets by the millions in the past few years to protest the graft. Without deeper changes, frustrated voters could follow other countries in turning to outsider or populist candidates in the 2018 presidential election, says Carlos Melo, a political scientist at Brazil’s business school Insper.

Dr. Robert Rey, a reality TV personality and plastic surgeon to the stars, told Brazilian media in December he plans to run next year. Calls for the return of Brazil’s military dictatorship are growing.

“We need to be very careful going forward—you are not going to resolve all of this with a despot, not even an enlightened despot,” says Mr. Melo.

As one of the world’s most decentralized federations, Brazil allocates billions of dollars each year to its cities to spend on public services with little national oversight. Last year prosecutors worked with Brazil’s Comptroller General across 21 of Brazil’s 26 states, as well as in the capital Brasília, on 53 investigations into the misappropriation of such funds by local governments, up from 18 such operations across 14 states in 2013.

In Rio, investigators exposed fraud last year in the construction of the Deodoro Stadium built for the Olympics Games. In São Paulo, prosecutors said City Hall workers and local businessmen stole $2.5 million during the construction of a museum dedicated to the city’s workers.
“The [amount embezzled] in the Petrobras scandal is larger but we should be paying more attention to corruption at the municipal level—it has a bigger effect on Brazilian citizens, on the health care they receive and on children’s learning in schools,” said Mr. Ferraz, the PUC professor.

The scandal in the city of Ribeirão shows how the anticorruption probes are both shaking up local politics and causing chaos.

The city’s anticorruption sting, called Operation Parasite, got under way in April 2015 when Marcel Zanin Bombardi, one of the three prosecutors behind the probe, says he received an anonymous email from a local resident who raised suspicions about his neighbor’s flashy new car.

The tip led Mr. Zanin Bombardi and his colleagues to uncover what prosecutors allege was a fraudulent contract to charge City Hall for 700 state-of-the-art turnstiles at school gates, ostensibly to track attendance. He says the city’s 28 public schools, badly in need of basic supplies such as books, couldn’t accommodate that many turnstiles. Some 500 were never even installed.

Investigators eventually came across what they believe to be a citywide scheme in which several councilors allegedly colluded with contractors on a range of expenditures from sewage works to legal services. The conspiracy, which Mr. Zanin Bombardi estimates involved contracts totaling 203 million Brazilian reais ($65 million), was allegedly run by Ms. Vera, who demanded the councilors’ political support in return.

The Parasite scandal has gripped this city like one of Brazil’s far-fetched soap operas, shocking voters who believed Ms. Vera’s humble beginnings would set her apart from the country’s political elite. After picking cotton as a child, she worked as a maid and nanny, and eventually landed her dream job as a technician on a local radio station where she worked the night shift.

While her boss slept, Ms. Vera surreptitiously got on the airwaves to chat to listeners, building a fan base that would eventually launch her political career. Like Brazil’s former President Luiz Inácio Lula da Silva, who is on trial for allegedly masterminding the Petrobras corruption scheme, accusations he denies, Ms. Vera was seen as a champion of the poor and won re-election in 2012.

Since the middle of last year City Hall hasn’t transferred funds to Ribeirão’s Beneficência Portuguesa hospital, forcing it to take out a private bank loan in December for more than three million Brazilian reais. Even so, the hospital still doesn’t have enough money to pay doctors their salaries, said Ricardo Marques, the hospital’s administrator.

Meanwhile, Ribeirão’s elementary schools are facing lawsuits over accidents caused by dangerous levels of overcrowding, and the police force is so understaffed that many crimes now go undocumented, according to teachers and police officers in the city.

On Dec. 2 last year, federal police arrested Ms. Vera in a dawn raid on her home. The 49-year-old, known for her obsession for all things pink, is now presenting her defense. She has repeatedly stated her innocence.

After Ms. Vera’s deputy refused to take over and resigned a few days after her arrest, the job fell to the head of the city council. He had already been removed from office over bribery allegations and was later jailed. He also denies wrongdoing.

At that point, nine of Ribeirão’s 22 councilors were also under investigation, including everyone on the council’s board of directors except Ms. Berenice, the missionary. Other councilors fell under suspicion after being named in a letter by Marcelo Plastino, a local construction boss found shot dead in his shower a week before Ms. Vera’s arrest.

Haroldo Chaud, a police officer who investigated the case, said it was likely a suicide, although the gun wasn’t registered in Mr. Plastino’s name and his girlfriend, who was in their luxury apartment at the time, said she never heard the shot.

Taking the job would force Ms. Berenice to sign off on the city’s accounts, which, if proven fraudulent, might prevent her from holding public office in the future. So she pleaded with the courts in nearby São Paulo to send a judge to govern Ribeirão. They refused.

With no mayor to approve public servants’ salary payments or the 2017 budget, workers threatened a general strike and City Hall faced a race against time just to pay its own electricity bill. On Dec. 14, Ms. Berenice agreed to be sworn in for the final days of Ms. Vera’s mandate before Mr. Nogueira could take over on Jan. 1.

Smoking a cigarette in her wheelchair outside the Beneficência Portuguesa hospital in Ribeirão, Maria Luiza da Costa, a 52-year-old former cook, says she believes ordinary Brazilians also need to accept responsibility for their corrupt politicians. She lost her leg in 2009 when the city’s other cash-strapped hospital misdiagnosed an embolism as pneumonia. “Of course I blame the government, but we are the ones who put them there.”

07/03/2017 – The Wall Street Journal Online

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