Three fund managers and a national government said in SEC filings last week that Odebrecht’s corruption scandal has become a problem and a risk factor for them.
Brazil-based Odebrecht, an engineering and construction giant with world-wide reach, agreed late last year to settle bribery offenses by paying global criminal penalties of at least $2.6 billion.
Ten percent of that amount was earmarked for the United States, 80 percent for Brazil, and 10 percent for Switzerland.
But now the damage from Odebrecht’s crime and punishment is spreading.
As first flagged by FCPA Tracker, a fund manager said in an SEC filing Thursday that Odebrecht demonstrates the dangers in frontier markets of “shortfalls in corporate governance.”
The fund manager said:
The fallout from the [Odebrecht] scandal has been widespread. A number of governments across Latin America have announced investigations, fines, and, in some cases, outright bans on the construction firm’s operations in their countries. Several projects in Peru, Colombia, and Panama have been suspended or cancelled, hampering infrastructure investment and cement demand throughout the region. Our holdings Cementos Argos and CEMEX LatAm have minor exposure to Odebrecht-affiliated entities in Panama through their involvement in the construction of a second metro line in Panama City. . . .
There may also be wider implications for the Latin American banking sector, as banks exposed to entities affiliated with Odebrecht could suffer loan losses and will likely adopt a more cautious stance when lending to infrastructure concessionaires in the future.
Also on Thursday, another fund manager said in an SEC filing:
At the stock level, the Fund’s holding in Graña y Montero had a negative impact on performance as the Peruvian industrial company’s shares fell sharply after it became embroiled in a corruption scandal involving former project partner, Odebrecht, over construction contracts undertaken in Peru. Grana y Montero strenuously denied the allegations and launched an independently led internal investigation. The company has also moved to refresh its board, appointing a number of additional and highly regarded outside directors.
FCPA Tracker started following Graña y Montero in May this year.
A third manager said in an SEC filing Friday that Graña y Montero was one of its five worst performing stocks, and that Odebrecht was behind the problem.
Grana y Montero (Grana) is a Peruvian construction company. Grana and Odebrecht, a Brazilian construction company, were partners in several projects. Odebrecht is accused of bribing government officials to win projects. The press speculated that the management of Grana was aware of these bribes. Subsequent to April 30, 2017, we have completely liquidated our position in the company.
Then on Friday, FCPA Tracker flagged a disclosure by the government of Peru about Odebrecht. Peru issues registered debt and is required to file periodic reports with the SEC.
In Friday’s filing, the government of Peru said:
Peruvian authorities are currently conducting several high-profile corruption investigations relating to the activities of certain Brazilian companies in the construction sector, which have resulted in suspension or delay of important infrastructure projects, which were otherwise operational and permitted. . . . [T]he overall delay relating to such projects has nevertheless resulted in a drop in GDP growth and overall infrastructure investment.
The Government has made efforts to expedite the licensing of these stalled projects. For example, it requested that Odebrecht S.A. (“Odebrecht”), a prominent Brazilian construction company that was awarded the Obras de Trasvase de Proyecto Olmos contract and later found guilty of bribing Government officials, to sell its shares in the project.
In April this year, the DOJ reduced Odebrecht’s U.S. criminal penalty from $260 million to $93 million. The DOJ said Odebrecht’s ability to pay had been impaired because the company had lost big contracts in Peru, Colombia, and Panama.
In addition to Graña y Montero, four other companies have mentioned Odebrecht in disclosures about currently open FCPA-related investigations, according to FCPA Tracker.
Richard L. Cassin is the publisher and editor of the FCPA Blog.