Corruption by Design – The Forgotten R$19 Billion

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The Car Wash Investigations are sexy. After all, they tell the story of Brazil and Petrobras’ parallel rise and fall, from Petrobras’ discovery of pre-salt oil, which made it one of the world’s most capitalized companies, to massive waste and corruption, which have rendered the company among the world’s most indebted. The Zealot (Zelotes) Investigations are not sexy, and many will indeed ask, ‘what the heck are these?’ Well, while everyone has been aghast at the Car Wash and impeachment, a congressional inquiry has been crawling forward on the biggest tax fraud scheme in Brazilian history. Unfortunately, Brazil’s legislative investigative committees are dominated by government majorities, rendering them less likely to take decisive action.

The Forgotten $19 Billion

An estimated R$19 billion ($US 5 billion) loss to the Brazilian state was perpetrated by a group of crooks in an obscure extra-judicial agency called the CARF – the Administrative Council of Fiscal Appeals. The CARF is the final court of appeal within the Ministry of Finance (Fazenda) for tax disputes – basically a tax court run by a combination of career officials and partisan hacks. It has a 90-year history, and corruption in the CARF has probably been around for just as long. In the current scandal, dozens of large corporations  (link – scroll to the end) are being investigated for paying kickbacks to CARF councilors in return for tax credits in the hundreds or billions of reais.

Flawed Institutional Design

The CARF suffers from the same problem as Petrobras. Corruption by design – institutional design.

You would think that an institution responsible for deciding over R$600 billion in tax disputes would be impervious to corruption. Yet the CARF maintains an anachronistic design – 113 councilors appointed by the Minister of Finance, 113 by national organizations with economic affiliations, such as unions and associations. Moreover, the 113 councilors from national organizations that issue decisions on million-dollar tax cases must serve three-year terms with no remuneration.

Petrobras’ Perverse Political Appointments

Corruption in CARF is, in essence, a result of an institutional design that privileges political appointments – much the same as Petrobras. In the case of Petrobras, key political parties nominated the heads of all major commercial and procurement positions. In this way, the Partido Progressista (PP) nominated the now-indicted Director of Petrobras Supplies, Roberto Paulo Costa, who President Lula da Silva then appointed. The PMDB party nominated Nestor Cerveró, the architect of the fraud-ridden purchase of the US$1.3 billion dollar Pasadena Refinery. Cerveró, of course, has been sentenced to 15 years in prison. The list of partisan hacks appointed to Petrobras goes on. Not to belabor the phrase, but… it’s the party system, stupid. Political appointments in Brazil’s rent-seeking party system are fraught with risk.

Political trafficking in state assets over the past few years has led to thievery so unfathomably expensive that it would have left most modern developed nations susceptible to civil uprisings.

 

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