As Houston is still the epicenter of the Foreign Corrupt Practices Act (FCPA) enforcement world, it is probably not too surprising that the Petrobras scandal has reached the Lone Star state. This week there were two reports of Houston based companies with ties to the corruption scandal currently engulfing Brazil at this time. The first involves the Houston-based real estate company Hines and its Brazilian operations and the second an oil refinery in the Houston suburb Pasadena.

As reported in a Houston Chronicle article by Nancy Sarnoff, entitled “Hines involved in Brazil inquiry”, “Hines told the Chronicle Tuesday it is conducting an internal review of certain real estate transactions following a report that appeared over the summer alleging improper payments by Hines Brazil in relation to commissions for Petrobras office leases in Rio de Janeiro.” The leases in question were reported to be between 2004-2009.

Interestingly although the article reported that Hines “did not believe the company is currently under investigation by authorities”; the company “has reached out to the relevant authorities to share what we have learned to date”. One of the things the company has learned (and apparently reported) is that the head of Hines’ Brazilian operation has “resigned” from the company. Even more interestingly, apparently it was a Brazilian newspaper article in O Globo that triggered the internal investigation after they first reported the allegation in July.

Next for those who did not think the US government should be concerned the with the Petrobras scandal, are the allegations of bribery and corruption reported in the Houston Chronicle, in an article entitled “Scandal in Brazil Snares Refinery”, by Mihir Zaveri, Susan Carroll and Ben Tavener. They wrote about a refinery just outside Houston, in Pasadena, which has become a focal point in the ongoing Petrobras bribery and corruption scandal. If the allegations are correct, it would also appear that there is clear US jurisdiction for the enforcement of a FCPA violation.

The allegations involve the sale of the petrochemical refinery previously owned by a Belgium company called Astra Oil, who purchased the refinery in 2005 for $42.5 million in 2005. Rather amazingly, Astra Oil then sold the refinery to Petrobras, in a series of transactions beginning in 2006 for $1.2 billion. That is certainly one hefty return on investment. Unfortunately, it appears that Petrobras far overpaid for the purchase and part of this overpayment price was used as funds to pay bribes to corrupt Petrobras officials. The article stated “One former executive admitted being offered a $1.5 million bribe to allow the Pasadena deal to go through, records show, and Brazilian prosecutors are investigating whether politicians also received kickbacks from the purchase.”

The transaction in question has caused quite a stink in Brazil. The article quoted Marinus de Vries Marsico, who is a prosecutor at Brazil’s Federal Accounts court, for the following, “There were such flagrant, indefensible irregularities that it was easy to see what a catastrophic deal it was.” The article went on to note, “The revelations have seized the public’s attention…in Brazil. But the Texas refinery’s role in the scandal has gotten scant attention back in Pasadena.” I would add that it has gotten scant attention in the entire US.

The case offers an interesting look into how many of the bribes to Petrobras officials may have been funded. While there has been a clear pattern of overpayments for contracts and then some type of rebate to the corrupt officials based on the percentage over paid; the Pasadena refinery case offers another, perhaps more sophisticated scheme. In this case, one year after Astra Oil bought the Pasadena refinery for $42 million, Petrobras “did its own estimate of the refinery’s value and pegged it at $742 million.” It was on this inflated valuation that Petrobras officials made their offer and funded the transaction.

I think this revelation may well be quite significant as it shows how a culture of corruption can lead to systemic corruption and then the actual method of corruption. It also demonstrates yet another mechanism to create pots of money to pay bribes; the over-valuation of properties which can then be purchased at premiums with the selling company using the overvaluation to fund bribes back to the purchase. Finally, while the Securities and Exchange Commission (SEC) are known to be investigating Petrobras America Inc., a US listed company, it is not known whether the SEC investigation includes issues related to the Pasadena refinery.

These two ongoing investigations point up several lessons to be learned by the Chief Compliance Officer (CCO), compliance practitioner and greater compliance community. For the greater compliance community, it clearly demonstrates the role of an investigative press to point out allegations of bribery and corruption. Hines officials did not even begin their internal investigation until alerted by a Brazilian newspaper. When you have to read about allegations involving bribery and corruption of your own company, you might want to consider if the detect prong of your compliance program is sufficient. Of course, it also points up the entire discussion of whether a CCO or compliance practitioner should be concerned about what is reported in the press, even if it is the press outside the US. When allegations of corruption are made against your company or a company with which you are doing business, you are on notice and a response is certainly demanded.

For the CCO and compliance practitioner the Hines matter drives home yet again the need to take a look at your Brazilian operations to see if there are any problems. Hines is about as far away from the energy industry as you can get yet here it is in the middle of an internal bribery and corruption investigation around its Brazilian operations, with a Brazilian operations head who has “resigned”. The longer you go without doing some investigation, the worse it will become for your company. The Brazilian prosecutors have already announced the time for obtaining a leniency agreement is drawing near. If you have not even bothered to start looking yet, it will not be advantageous for either you or your company. I cannot think of a much better example of conscious avoidance than a US company doing business with Petrobras or even simply doing business in or with Brazilian entities about now.

Finally, the Pasadena refinery case provides yet another mechanism by which bribes are funded or pots of money generated to pay bribes. Indeed this scheme would appear to be quite sophisticated. If you sold anything to Petrobras what were your company’s return on investment? Was it exceedingly high? Obscenely so? If it was a ‘very good’ return on investment, it may be a red flag and require investigation from the compliance perspective.

If your company has done business with Petrobras or in Brazil over the past 10 years, I would suggest you look into the specifics of the transaction, sooner rather than later.

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