Operation carwash was a widespread money-laundering scheme in a state owned enterprise in Brazil called Petrobras that was exposed in 2014. This scandal involved Petrobras top management and high-ranking officials from the Brazilian federal government.
A brief summary of the scandal:
Paulo Roberto Costa who was the chief of Petrobras refinery from 2004 to 2014 unfairly used his relationships with six of large construction firms in Brazil. These firms were awarded contracts from Costa’s division and they overvalued these contracts by 3%. Petrobras employees turned a blind eye when evaluating bids to these contracts. The overvaluation thus created excess capital for the company. The excel capital was siphoned off in three ways- the officials from construction company pocketed some amount of excess funds, and rewarded their partners inside Petrobras. Some of the funds were also diverted to ruling political parties in terms of gifts, donations etc. The total value of bribes involved in this scandal is approximated somewhere between 3Bn to 5.3Bn USD.
Contribution of company’s governance model into scandal:
Brazilian corporate laws allow concentrated ownership of firms. This is evident in state-owned enterprises as well, where lack of separation between ownership and control promotes low transparency, ineffective boards, collusion and lack of rights for minority shareholders. This leads to poor corporate governance.
The state-owned enterprises have boards which are prone to interference by government bodies and officials. This leads to further deterioration of company’s governance. Out of 10 board members, 7 are appointed by federal government. This led to a majority of Petrobras board members having ties with ruling party, and indulging into collusion.
Even post changes into corporate laws of Brazil, the changes in the codes promoting improved corporate governance model are voluntary and not mandatory for companies to implement.
The widespread corruption plagues the company as well, and this allowed company executives turning a blind eye to Costa’s unethical activities.
Contribution of country’s political culture into scandal
Corruption plagues the country as a whole. Brazil was colonized by Portuguese in early 1500s and slavery was widespread. This led to a rigid caste system where white elites were wealthy and dark-skinned slaves were impoverished. Even post-independence, the caste system remained deeply entrenched in the system. Brazilian elites used their wealth in form of bribes to government officials to entrench their power in society.
Ministers approach special courts that never prosecute them and are thus shielded from the system. This gives them courage and necessary cover to indulge in corruption.
State owned corporations allows executives to be appointed by ruling politicians who in turn reward these politicians with bribes.
Primary issues of corruption and unethical corporate behavior is reflective of sound regulatory frameworks in the country. These issues are not limited to Petrobras, but also other public and private corporations in Brazil.
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