Uncertainty over final outcome of Lava Jato likely to delay leniency agreements with Brazil's top construction firms

President Michel Temer delivers a statement on 18 May 2017 in Brasília, Brazil. The statements follow the release of a recording of Temer allegedly condoning bribery payments to Eduardo Cunha, the former president of the Chamber of Deputies. Cunha was involved in the Lava Jato corruption scandal and sentenced to 15 years in prison.

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Brazil's Lava Jato anti-corruption investigation will enter its fourth year in March. According to top public federal prosecutor Deltan Dallagnol, 2018 represents "a turning point for the investigation" that has rocked Brazil's political establishment and undermined the country's top construction companies.

Although Lava Jato is not likely to end this year, it will face its strongest headwinds yet. Over the past year there has been a significant pushback from major political actors, including the federal government, Congress, and top politicians seeking to derail the investigation.

During its first two years, the investigation progressed rapidly. So far, a total of 416 people have been formally charged and 144 have already been sentenced. The list of people investigated includes the most powerful politicians in the country. Lava Jato has also reached hundreds of executives of dozens of companies operating, most of them Brazilian across a number of sectors including oil, gas, shipping, and infrastructure; with the construction sector featuring heavily. In the construction sector, a number of chief executive officers and top executives have been convicted and imprisoned.

The investigation has pursued members of all the major political parties. The first half of 2017 saw President Michel Temer twice being charged for corruption and criminal association, although he managed to survive these charges after the Lower House, which by the constitution has the last say on whether to impeach the president, rejected calls for a criminal trial against him. However, as part of the investigation, former president Luiz Inácio Lula da Silva was convicted of bribery and money laundering and sentenced to 12 years in prison. Despite the far-ranging nature of the investigation, by mid-2017 there were clear signs that the probe was faltering.

When assessing where the investigation stood at the end of 2017, it becomes clear that the Supreme Court has been very slow in considering the cases of senior politicians occupying high posts in the Temer administration and in issuing final rulings on appeals from earlier convictions. Six top politicians, most of them serving ministers, have been charged as part of Lava Jato but thus far none of them has been sentenced.

Significantly, the Supreme Court is now backtracking on its decision to send people straight to prison after a higher court upheld their conviction in the first judicial trial. Imprisonment after being sentenced in the first instance has proved a powerful tool to force the accused to co-operate or admit guilt; previously, the convicted would remain free for years until the very last possible appeal. It is likely that the court will revert to previous practice, inflicting a major blow to Lava Jato and potentially sparing former president Lula from jail.

The Supreme Court itself is divided over the handling of Lava Jato, with each justice at times adopting dissenting views on the matter. There is no consistency regarding whether to imprison or grant parole to those who have their convictions upheld by higher courts. This does not mean that the court is actively undermining the investigation, but it creates confusion and slows down the whole process.

Another factor slowing momentum for Lava Jato was the removal of Rodrigo Janot as prosecutor general last September. Janot was pivotal in pushing Lava Jato forward. He was replaced by Raquel Dodge – who was appointed directly by President Temer – right when he was called to contest corruption allegations.

Intentionally or not, under Dodge, bargain deals and leniency agreements have slowed down markedly. Janot was heavily criticised by politicians and some members of the Supreme Court for alleged errors and mainly seeking the media spotlight. To avoid similar criticisms, Dodge decided to review some of the deals and changed some of the prosecutors involved in the operation.

Federal government undermining Lava Jato

The federal government itself has been working behind the scenes to undermine Lava Jato wherever possible. This has involved ministers, civil servants, and government allies in Congress lobbying and discussing possible legislation to restrict the prosecutor's power to investigate politicians.

In other instances, agencies directly controlled by the government, such as the Ministry of Transparency, have questioned the Prosecutor General Office's alleged soft approach towards leniency deals with companies that have accepted wrongdoing. One case in point is that of construction company Andrade Gutierrez, which had initially agreed to pay BRL1 billion (USD310 million) on a deal clinched with prosecutors. However, in October 2017, the government called on the fine to be increased to BRL40 billion, effectively putting the company out of business, ending any possible leniency agreement.

This is being compounded by the Federal Police pushing to have the right to negotiate bargain deals too. At the moment, only the Prosecutor General Office can do it. The police (whose director-general was also replaced by Temer in November 2017) argues that this would strength their hand in investigations. The Supreme Court already reached a majority allowing the Federal Police to negotiate deals – but the final decision has been postponed as one of the justices asked to review the case.

Outlook and implications

The confrontation between the judiciary and the federal government over Lava Jato is delaying the completion of new leniency deals and jeopardising previous agreements reached between companies involved with Lava Jato and federal prosecutors. Leniency deals help companies to clear their names and move forward with their business operations. In several cases, a leniency deal is the only way for a company to survive, especially after having undertaken a major restructuring. For the construction sector in particular, leniency deals are critical, as such agreements would allow construction companies to start contracting with the state again.

Competing interests of federal agencies other than the Prosecutor General Office compounds the situation. For example, last year, the Federal Audit Court (TCU) tried to recall the leniency deals that three companies – Odebrecht, Andrade Gutierrez, and Camargo Correa – had signed with the Prosecutor General Office. The TCU, which has the power to oversee and block any contract signed between the state and private companies, challenged the fines, arguing they fall short of the compensation owed to the state.

Furthermore, the increasing likelihood that the Federal Police also will be allowed to conduct their own bargain deals raises the number of actors as well as the risk that agreements reached with the Prosecutor General Office would not be honoured by other federal agencies. This and the fact that Lava Jato would remain a central theme of the upcoming October presidential election pose significant threats to the legal and regulatory environments for companies seeking to leave Lava Jato behind and start afresh.