The corruption scandal known as Lava Jato – or Car Wash, its police code name – began as a small-time money-laundering investigation in a southern Brazilian town three years ago, but has swelled to the point that it threatens the entire Brazilian political class. All five living former presidents and almost a third of cabinet ministers and the Senate have either been indicted or are under investigation in a mammoth scam that involved bribes for public works contracts and pro-business changes to legislation.
But the effects of this scandal are being felt far beyond Brazil. Prominent politicians in a half-dozen countries across Latin America are now under investigation for bribery allegations stemming from Lava Jato, including the current and two former presidents of Peru and Colombian President Juan Manuel Santos, who won the Nobel Peace Prize last year.
Huge infrastructure projects – highways, bridges, sanitation facilities and power plants – are frozen or have been scrapped as prosecutors probe bloated contracts and a web of kickbacks. The public-works contracts were held by Brazilian construction giants such as Odebrecht SA or OAS, which are at the heart of the Lava Jato investigations. Brazil's National Bank for Economic and Social Development was a key funder of many of the projects. Loans for 25 projects in nine countries totalling $7-billion (U.S.) are now frozen.
Seventy-seven Odebrecht executives, including chief executive officer Marcelo Odebrecht, who is serving a 19-year sentence, have provided detailed information to prosecutors on the company's long history of bribery. Last December, as part of an agreement with the U.S. Justice Department and Swiss and Brazilian prosecutors, Odebrecht agreed to pay a world record $3.5-billion fine after admitting it paid $788-million in bribes to win contracts in 12 countries.
Brazil's economy has been crippled by Lava Jato. Colombia and Peru, which have the region's two strongest economies, are also being hit hard. Peru's Economy Minister says the Lava Jato-related project freezes will trim between 0.5 and one percentage point off his country's economic growth this year.
Peru has banned Odebrecht from bidding on new contracts in the country and Colombia is considering a similar move. In all the affected countries, contracts held by Odebrecht or the other Brazilian firms are being reopened for new tenders – a process that has set the building of badly needed ports and subway systems back by years.
The shortage of critical transportation infrastructure – ports, highways, airports – and energy infrastructure such as hydroelectric plants and gas pipelines is a key bottleneck for growth across the region.
In addition to fines in the United States, Odebrecht is paying $189-million in penalties in the Dominican Republic and $59-million in Panama. Investigators say there are still years of work ahead to unravel the kickback network involving the other firms and warn that more projects could be affected.