Corrosive Corruption

Aerial photo of Maracana Stadium in Rio De Janeiro (taken February 2015), where the opening and closing ceremonies of 2016 Olympic Games are held.
Aerial photo of Maracana Stadium in Rio De Janeiro (taken February 2015), where the opening and closing ceremonies of 2016 Olympic Games are held.

For the past two weeks, all eyes have been on Brazil. As the host of the 2016 Summer Olympic Games in Rio de Janeiro, the country has been plastered on the television screens of audiences worldwide. But behind the gymnastics and triathlons is a corruption scandal that has been difficult to ignore. The impeachment of the country’s president, allegations against the oil company Petrobras and accusations against dozens of politicians have hung like a dark cloud over the joy and excitement of the Games themselves.

Richard H. Girgenti, National and Americas Leader for KPMG LLP’s Forensic Advisory Services, recently spoke to Building magazine about Brazil’s corruption scandal and the immense impact that it has had on the country’s government, economy, construction industry and true readiness for the 2016 Summer Games.

Girgenti also discussed his book, The New Era of Regulatory Enforcement: A Comprehensive Guide for Raising the Bar to Manage Risk, co-authored with Timothy P. Hedley, KPMG’s Global Lead for Fraud Risk Management Services. In this book, Girgenti and Hedley explore what they see as a new regulatory and enforcement landscape, and offer a framework that allows companies to prevent, detect, and respond to corruption themselves.

Where does your knowledge and expertise on Brazil’s corruption scandal come from?

I served as a prosecutor in New York City for 17 years, four of which were spent heading up the criminal justice system in New York and overseeing state police, corrections and other law enforcement agencies. I’ve worked 40-plus years in law enforcement and in the private sector, working on issues that have to do with corruption.  I’ve also been working at KPGM for 22 years, heading up our U.S and Americas Forensic Practice. I work very closely with our forensic professionals in Brazil, which is our largest practice and economy in Latin America.

How has Brazil’s corruption scandal impacted its economy?

The effect of corruption on an economy is nothing less than corrosive. Instead of continuing the resurgence in the economy that Brazil began to experience in 2005 and 2006, it has experienced the worst recession that it has seen in more than two decades.

In 2015, Brazil’s economy contracted by nearly four per cent. In 2016, it contracted another two and a half per cent, according to the World Bank. Unemployment has been rising, wages have been falling, the Brazil real is at a 10-year low, the SMP has reduced Brazil’s credit rating from investment grade to junk, interest rates are high, inflation has surged, government debt has been growing and foreign direct investment in Brazil has dropped 12 per cent from 2014 and 2015.

It’s estimated that three to five percent of Brazil’s GDP is lost to corruption every year, and the most recent Petrobas scandal is thought to have accounted for at least one per cent or approximately $27 billion in GDP loss in 2015. And that’s not unique to Brazil — according to the international monetary fund, the cost of corruption worldwide on an annual basis is roughly two per cent of GDP or 1.5 to two trillion dollars.

Ultimately, corruption is corrosive on the economy, and in Brazil’s case, the promise that they had of being the new big economy along with China, Russia and India has been bashed. When you combine that with a good deal of political unrest, uncertainty with the impeachment of the president and the arrest and indictment of many government officials and business leaders, you see the prescription for the very bad situation that they’re currently experiencing.

To what extent has this corruption had an impact on the Olympics?

No part of a country’s economy or infrastructure is likely to be spared when you have pervasive corruption, and in Brazil’s case, the scandal has impacted the Olympics. All aspects of the preparation were slowed down and delayed. The cleaning of Guanabara Bay, for example, was never completed and there were massive fraud scandals related to the disposal of waste.

Petrobas, the largest company in Brazil, had great promise in the mid-2000s. It was a state-owned entity and was supposed to be able to grow and offer thousands of jobs. But Petrobas got caught up in the corruption scandal, too. Bribes were siphoned off to government officials who were on the board of Petrobas and who stood to gain from the corporation doing business with certain construction companies — many of the same companies that were doing work for the Olympic games.

The result was a slam to the industry, with major construction companies — like OAS and Galvao — going bankrupt, resulting in thousands of individuals losing their jobs. Many officials from these companies have also been indicted, convicted and sentenced, such as Marcelo Odebrecht, who was just sentenced to 19 years for bribery and money laundering within his construction company, Odebrecht.

All of this has had a major impact on that the construction industry, and those that were involved have paid a very heavy price for what went on for many years. The result was also a direct impact on the infrastructure of the Olympics.

What are some of the lessons that we can learn from Brazil’s corruption scandal?

There are a number of lessons. The first is that no matter how well-intentioned a political or economic development may be, efforts at economic growth across a country’s population will be stymied when corruption is endemic to the political system. That’s exactly what happened in Brazil.

A second lesson is that today, anti-bribery and corruption efforts are subject to global enforcement. There was a time when the U.S took the initiative to prosecute individuals and companies who bribed foreign government officials. At the OECD Anti-Bribery Convention, 37 nations signed up to pass similar types of anti-bribery and corruption laws, including Brazil. But today, we’re seeing little evidence or appetite for dealing with anti-corruption. An important component of global enforcement is global cooperation.

The final lesson is that while countries have become more vigilant in doing internal investigations, there’s also a need amongst business leaders and companies to better assess and evaluate their own efforts; including the risks that they face, the design and implementation of their own compliance programs and their effectiveness, the internal controls that they have, (which are designed to identify and avoid corruption), and the third parties with whom they do business.

It’s important to remember that in any type of corrupt environment, it’s not only your employees who could be involved in such activities, but the people with whom you do business: your third parties, your sales agents, your vendors, even people in your supply chain. It’s important to know who you do business with and to conduct effective due diligence. Companies need to be more proactive in their efforts.

Tell me about this concept of a “New Era” and your new book.

Over the years, Tim Hedley and I — who worked with a number of partners to put the book together — have noticed a series of events that have led to new regulations, new laws and a new regime of enforcement. The landscape has altered, and we felt that it would be helpful to connect the dots for our clients. We wanted to be able to give them some direction, to create a framework that they could use to manage their risks and to anticipate how to react when any type of misconduct was uncovered within their company.

What we did was look at very specific risks that companies might have, like anti-bribery and corruption, anti-money laundering, trade sanction, market abuse and manipulation and insider trading. We then created a framework to show companies how to prevent, detect and when necessary, respond to issues of misconduct. The key is to perform risk assessments, to have an effective client program in place, to build a culture of integrity within your organization and to evaluate the effectiveness of your compliance on an ongoing basis.

If companies have the right framework in place to manage risk and to design and develop compliance programs, they’re going to be much better suited and better positioned to deal with those emerging risks when and if they do occur.

The New Era of Regulatory Enforcement: A Comprehensive Guide for Raising the Bar to Manage Risk [McGraw-Hill Education, 2016] was published in May 2016. For more information, click here.

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