Rebuilding trust through asset recovery in Brazil

Corruption scandals have had a deep impact on Brazil’s society, economy and politics in recent years. Large-scale operations like Lava Jato (Operation Car Wash) have revealed how politicians and high-level civil servants awarded millions of dollars worth of public contracts to certain companies in return for bribes. Furthermore, political parties, electoral campaigns and thousands of political candidates have received non-registered funds from anonymous donors. All this has undermined confidence in democracy – which has reached the lowest levels in Brazil’s history – causing huge social damage and creating room for populism and extremism.

But there is a silver lining. Due to recent institutional developments, Brazil has been able to prosecute and sanction some of these corruption cases, bringing back large sums of money, both as confiscated assets and as fines paid. These funds need to be adequately managed and fairly disposed. How can that be achieved?

When it comes to designing principles and standards for the management and the disposition of returned assets, both the social damage done and the involvement of high-level actors in corruption should be considered.

Transparency International (TI) Brazil has long been advocating for the social destination of parts of funds and assets recovered in corruption cases. The rationale here is that the largest portions of returned funds should indeed return to affected government agencies – provided they can demonstrate that oversight and control mechanisms have improved and that persons involved in corruption cases are no longer in power. However, a certain portion of the funds should be used to work towards two goals: (a) to prevent corruption and (b) to provide access to basic rights previously impeded by (state) corruption.

Let’s look at a concrete example. In June 2017, JBS, a large Brazilian meatpacker, reached a leniency agreement with federal prosecutors, admitting crimes involving federal funds. As a result, JBS must pay the equivalent of US$ 2.7 billion within 25 years, via annual disbursements. The majority of this total, US$ 2.1 billion, will return to government agencies affected, such as state-owned banks, whereas the remaining US$ 600 million should be used for planning and executing social projects aimed at compensating for the social damage that corruption practices have caused.

Six months after the leniency agreement, JBS, federal prosecutors and TI Brazil signed a Memorandum of Understanding (MoU) announcing that TI would offer recommendations on the management and disposition of the US$ 600 million compensation funds.

After the phase of research, meetings and interviews, TI Brazil handed over the report “Governance of Compensation Funds in Corruptions Cases – A Guide of Good Practices to Promote the Compensation of Social Damages” to the federal prosecutor’s task force in May this year.

The 120-page document recommended three key principles for the management of the anti-corruption fund that was to be created after JBS’ payments: co-management; sustainability; and good governance.

• Co-management: The company should allow civil society representatives to participate in the management of the fund as well as strategic decisions on the disposition of the resources. These representatives should be allowed on the board and should have equal voting powers. With time, as more funds would accumulate – remember, the US$600million fund is to be formed after 25 years, with annual disbursements –, civil society representatives should have the majority of the seats at the board. In a third and last phase, the company should withdraw from the board and the management of the fund, leaving a relevant legacy to Brazilian society.
• Sustainability: Financial tools to make large funds sustainable (and occasionally even perennial) already exist. Endowments, for instance, are a good strategy: by saving parts of the annual payments, an endowment can generate revenue in the future, via interests. As funding development activities is always challenging, having such long term resources – possibly even ad infinitum – could be a huge gain.
• Good governance: Once the compensation fund for social damage is a public-interest enterprise, the governance should follow the best practices in terms of transparency, civic participation, accountability, and compliance protocols. The use of tools for measuring impact, monitoring and learning is also crucial. While the company and civil society manage the fund, the state, via the prosecutors’ office and the Judiciary, oversees the whole process.

In terms of disposition, the strategy should focus on social accountability and access to basic rights. Grand corruption usually involves high-level officials, politicians, as well members of the economic elite, and captures policies to benefit these group sat the expenses of a more universal public policy.

Anti-corruption funds therefore need to:

(i) strengthen actors outside government; especially civil society groups and investigative journalism so they are able to hold governments accountable and

(ii) strengthen actors and processes that facilitate access to basic rights, such as education, health or sanitation. Here, the compensation fund may seek to identify which basic rights have been affected specifically by the corruption act unveiled and sanctioned.

In December 2017, the Global Forum on Asset Recovery (GFAR) developed and adopted ten principles for disposition and transfer of confiscated stolen assets. These are known as “the GFAR Principles” and they are an interesting move in the right direction: as grand corruption cases are increasingly being investigated in a variety of regions, it is crucial to start designing global principles and standards.

However, they need to be reviewed so as to incorporate lessons learned.

Experience teaches us that compensating for social damages caused by grand corruption is far more challenging that it might appear. Reaching an international consensus on standards for managing returned funds will increase transparency and improve the process of confiscation, as it will make the destination of recovered assets predictable.

Corruption has a painful impact on society and the lives of ordinary citizens — compensating for these damages will not only benefit them, but also the credibility of the fight for more integrity and stronger democratic institutions. The right management and disposition of returned assets is a vital step in that direction.

*Fabiano Angélico is a senior consultant at Transparência Internacional - Brasil