When Brazil won the bid to host the world’s largest soccer event, the FIFA World Cup, in 2007, Brazilian officials proposed a vision of modernity, prosperity and efficiency for the tournament. The South American nation famous for winning the tournament more times than any other country would also be stepping out onto a global stage, spotlighting its economic vitality as an emerging market.
Seven years later, the reality appears to have fallen far short of that vision. Reports from the government’s fiscal auditor released last week to the Associated Press reveal systemic wastefulness in spending of taxpayer funds, rampant political corruption and astronomical costs.
The audits indicate that construction and infrastructure projects tied to the World Cup may have become a vehicle for corrupt payments to political officials, fraudulent business practices, and other financial crimes, extending throughout the public and private sector.
Report reveals suspected fraud and abuse in World Cup preparations
The Brazilian Federal Court of Accounts, known as the Tribunal de Contas da União in Portuguese, is the main fiscal watchdog of the country. The agency gave the Associated Press a 140-page report on the costs of the World Cup, including data on excessive spending, fraudulent billing and campaign contributions. The audit found $275 million in suspected price gouging and another $500 million in suspect spending. It was also found that $2.3 million worth of materials were listed repeatedly on bills.
While officials bidding for the cup originally said that funding would also come from the private sector, taxpayer funds have paid for the costs of building the world’s second most expensive arena in Brasilia. The initial estimate for the arena tripled to a total of $900 million dollars. The report alleges one third of that cost stems from inflated pricing by contractors.
The Brasilia Stadium, which won’t host a local team after the tournament, is just one of the 12 stadiums that have been funded by public money. According to the report, the cost of building or repairing the arenas has quadrupled since the first FIFA document estimating costs.
The total cost of the World Cup is $11.5 billion – short $4 billion from the estimated cost of the 2016 Olympics, which will be hosted in Rio de Janeiro, Brazil. Within the budgets for both events, $8 billion was earmarked for infrastructure projects. New transportation systems, housing projects, airports and terminals were planned to build up support for the events. However, many of the projects have been postponed until after the World Cup, or canceled entirely. FIFA says it has not seen a more delayed World Cup in four decades.
Political Campaign Financing
However, someone appears to be benefiting from the World Cup construction projects. Andrade Gutierrez is a construction company that won the bid for building four arenas in 2010. This came shortly after the company increased its political campaign contributions to political candidates 500-fold in the municipalities where the arenas would be built. With Via Engenharia, a top engineering firm in Brazil, Andrade Gutierrez would form the construction conglomerate that dominated most of the building for the World Cup. Andrade Gutierrez contributed $37.1 million to campaigns.
Corporate donations are the lifeblood of campaign funding in Brazil. In the last presidential elections, both Brazilian president Dilma Rousseff and her challenger received roughly 98 percent of their funding from corporations, according to an analysis by Transparency International. Contributions from companies are all thrown into the same pool of funds for each political party, obscuring the benefactor.
Cristina Spera of the Ethos Institute of Business and Social Responsibility says that a major development has been congress’ proposal to bar corporations from contributing to political campaigns. It was voted on last month, though the implementation will be delayed until after this year’s congressional elections.
Spera said the new push to bar corporate donations stems from companies themselves.
“Elections are becoming too expensive for companies,” Spera said. “They can’t afford to pay for campaigns like this anymore.”
Odebrecht, the country’s top builder, won bids to construct four arenas, after contributing $11.6 million to political campaigns in 2010. The company also won a contract to manage Rio de Janeiro’s Maracanã stadium for the next 35 years.
President Rousseff’s election campaign in 2010 focused on taking a stand against corruption. Transparency International’s Corruption Perceptions Index, which ranks 177 countries in corruption, gave a score Brazil of 42, placing it in the range of “somewhat corrupt” countries.
Public-sector corruption remains high-profile issue in Brazil
In a survey conducted by Transparency International, political parties and congress were deemed to be the most corrupt groups in Brazil. The facts support that sentiment. Forty percent of the members of federal congress have criminal cases pending against them, according to a watchdog group called Focus on Congress.
In 2012, public corruption in Brazil was brought back into the spotlight when the former President, Luiz Inácio Lula da Silva, and members of his administration were investigated for their involvement in a bribery scheme orchestrated by the president’s political party. The mensalão scandal, which in Portuguese means monthly payoff, escalated when a whistleblower revealed that the Worker’s Party had paid a number of Congressional deputies around $12,000 every month in order to vote for legislation favored by the ruling party.
At the end of the trial, 25 out of 37 defendants involved were found guilty and three received prison sentences in a landmark decision by the Brazilian Supreme Court. In spite of this breach of trust, Lula was reelected in 2006.
Still the country is taking steps towards anti-corruption compliance within the public sector. According to Amarribo, the Brazilian branch of Transparency International, the federal auditor’s office fired nearly 4,000 employees from public service from 2003 to 2012 mostly due to corruption.
Tangle of regulators hinders anti-corruption efforts
Brazil has no shortage of regulatory agencies, but recent analyses show this actually hampers anti-corruption efforts. In order to hurry Brazil’s complex bureaucratic processes, bribes are often used by the private sector. The tangle of agencies who oversee the private sector have been historically weak at enforcing regulations.
A recent anti-bribery law in Brazil doesn’t address the problem of too many agencies, but it does hold companies, not just individuals, liable for corruption at home and abroad. Under the Brazil Clean Company Act (BCCA) enacted in January, a company can be barred from signing contracts with the government, cut off from state-owned financial institutions, and fined up to 20 percent of its gross revenues.
The law is still new, and procedures for enforcing it remain unclear. However, the threat of large fines and other liability is likely to push Brazilian companies with operations abroad, and third parties working with Brazilian companies, to heighten their anti-bribery compliance.
Watchdogs target corruption in government spending
Several agencies have been keeping an eye on the potential for corruption and fraud in government spending on World Cup-related projects. Since 2010, the government has used an electronic platform called the Transparency Portal (Portal da Transparência) which enables Brazilians to track how public money is being used in all federal government programs. Funds transferred between states and municipalities and procurement details are all available for public access.
The Ethos Institute followed suit by creating an initiative called The Clean Games Inside and Outside the Stadiums Project, to promote transparency and public access related to funds invested in the World Cup and Olympic Games. The project aimed to establish agreements for self-regulation among industries tied to World Cup and Olympics projects, and create local transparency indicators and transparency pacts.
The organization, which invested $3.1 million in the effort to oversee the games, will launch a final version of their transparency indicator report on May 22, 2014.
Suspicious proceeds from World Cup may heighten money laundering risks
When the anticipation and buzz around the World Cup subsides, compliance issues will remain for Brazilian institutions, regulatory agencies and law enforcement. The funds generated from suspected overpricing, corrupt payments to political officials, and other financial crimes will have to enter the legitimate financial system eventually, potentially raising money laundering risks for Brazilian institutions.
In recent years, Brazil has taken steps to augment its AML regulation and enforcement regimes. The Financial Action Task Force last evaluated Brazil in 2010, deeming Brazil “Compliant” with 3 and “Largely Compliant” with 21 of the FATF 40+9 Recommendations. It was partially compliant or non-compliant for three of six of the core recommendations. Brazil is a member of both the FATF and Grupo de Accion Financiera de Sudamerica (GAFISUD), a regional FATF-style group, and has developed a national strategy to combat money laundering called the National Strategy Against Corruption and Money Laundering (ENCCLA).
Within this plan, congress created a bill to amend the 1998 AML law to criminalize terrorist financing; however, terrorist financing cannot be prosecuted on its own. A system of Specialized Federal Courts have improved the prosecution of money laundering offenses.
The financial system seems to have a greater risk for money laundering in the foreign exchange and private banking sector, according to the 2010 FATF report. Money laundering strategy is in line with international requirements, but the number of prosecution actions, guilty sentences and convictions is relatively low compared to the size of the country.