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Former director of Brazil's state-run Petrobras oil company Paulo Roberto Costa is escorted by police after a congressional committee that is investigating allegations of corruption over the company's purchase of a refinery in Pasadena, Texas, in Brasilia September 17, 2014.Ueslei Marcelino/Reuters

When Brazilian police raided the Rio de Janeiro home of Paulo Roberto Costa, a senior bureaucrat, back in March, they found a remarkable cache.

He had $380,000 in Brazilian currency, $181,000 in U.S. currency, €11,000 ($14,000 U.S.), a $120,000 SUV – and his diary, in which he had scrawled a quotation from the renowned humorist Millor Fernandes: "Rooting out corruption is the ultimate goal of those who have not yet come to power."

Mr. Costa, now under house arrest, is at the centre of a still-unfolding corruption scandal that implicates a great many people who had come to power. The scale of the case – known by its police code name, Lava Jato, or The Carwash – may yet dwarf anything previously known in Brazil, a country that has seen its fair share of graft cases.

Investigators say Mr. Costa was one key player in a scam worth at least $5-billion (Canadian). They say that in his position as a director of the national oil and gas company, Petroleo Brasileiro SA (Petrobras), he siphoned off millions of dollars into his own pocket and into the coffers of members of the governing Workers' Party and its allies in Congress. And so the scandal has emerged as a key factor in the political fortunes of President Dilma Rousseff, as she fights a fierce campaign for re-election.

"This may hit a lot of important people, in the end: That's what the party is scared of," said David Fleischer, an expert on transparency with the University of Brasilia. "We don't even know how big this may be, by the time all the names are named."

Mr. Costa faces charges of money laundering and corruption. According to an indictment seen by The Globe and Mail, he allegedly ran a classic cash-for-favours operation. A business owner wishing to sell a product or service to Petrobras approached a friendly politician, aligned with government. That politician sent the business owner to Mr. Costa, who agreed to make sure the business got a contract, at an inflated value, with the excess to be divvied up between Mr. Costa himself and the politicians, the indictment alleged.

Police and the prosecutors declined to speak with The Globe and Mail about this case, citing the ongoing investigation. The latest in a series of lawyers for Mr. Costa was unavailable to comment. He has reportedly made a full confession as part of a deal with prosecutors.

His partner in this was Alberto Youssef, a convicted criminal who is what's called a doleiro in Portuguese – a money-mover, in essence. Mr. Youssef, according to allegations in the indictment, ran a stable of shell companies that contracted and subcontracted with Petrobras, in the process of moving kickbacks out of the country and facilitating their deposit into the bank accounts of politicians from the Workers' Party and its partners. He is also co-operating with police.

The mechanics of such a scam are not new to Brazilians, said Sergio Lazzarini, a professor at a Sao Paulo business school called Insper. But this story has shocked people both for the scale of the money involved, and because it involves Petrobras, the largest company in the country, known internationally for its expertise in deep-water drilling. "It's a very symbolic company, and a source of pride, especially with the new offshore oil fields," he said. Petrobras reported a net profit last year of $10-billion (U.S.).

It was Mr. Youseff who was the subject of the initial police investigation into money laundering. Police apparently were initially focused on drug dealing, and almost by accident stumbled upon the Petrobras activities and other political connections for which profit had to be laundered; Mr. Youssef allegedly ran similar operations bilking a number of different branches of the government, including the Ministry of Health. He led investigators to Mr. Costa, for whom he bought the souped-up Range Rover, and Mr. Costa's willingness to name names has made him "the most important witness in Brazilian criminal history," as the media here like to call him.

An engineer, Mr. Costa had been with Petrobras since 1978 – but in 2004, was elevated to the level of director of the fuel supply department, allegedly in a deal in which a politician who knew he would co-operate in scams insisted on his appointment, in exchange for co-operation with government. Such deals are common here, in the fractured parliament, which after last Sunday's election contains a record 28 parties. In 2008, Mr. Costa became director for refineries, a department now under heavy scrutiny.

The Lava Jato scam is now the subject of two separate congressional inquiries. Petrobras, once a flagship, is now one of the most heavily indebted listed companies in the world (the state controls 64 per cent), with slumping production figures.

Mr. Costa agreed to co-operate with police in exchange for leniency – he is under house arrest (in a luxury condo, according to Brazilian media) until his trial, will have other indictments dropped and will face a reduced sentence (probably day-release jail time) if convicted. Mr. Costa's family members – who, according to the indictment, were allegedly caught by police carting bags of cash and documents related to the case out of his office when they heard of the raid on his home – will get the same deal. Mr. Youssef, previously found guilty of money-laundering, is awaiting trial in jail but will also face a reduced sentence if convicted, in exchange for his co-operation.

Veja magazine reports that Mr. Costa has so far named six senators, 25 members of Congress, one minister and three governors in his depositions. And the list is not limited to politicians: Many of the biggest names in Brazilian business are also implicated, as well as transnational firms such as Glencore and Transfigura. Mr. Costa has allegedly told police that the construction giant Oderbrecht, for example, paid him $23-million in bribes in just two years.

Under a law passed by Ms. Rousseff's government last year, a company whose executives are found to have corrupted public officials can see their senior executives jailed, and be fined up to 20 per cent of revenue.

One part of the scandal involves a refinery in Pasadena, Tex., for which Petrobras paid $1.25-billion – about $800-million more than its actual value, an investigation by the public accounts watchdog found. Mr. Costa has allegedly told police that his take on that deal, alone, was $636,000. Investigators are also looking at the contracts for construction of a refinery near Abreu e Lima in northeastern Brazil. From an original budget of $2.5-billion, the cost of the much-delayed, 230,000 barrels-a-day refinery soared to $20-billion, making it among the most expensive ever built. The scope of the Lava Jato scam remains unknown, and police say they are looking at Petrobras investments across Brazil and as far away as Japan.

Mr. Costa has so far agreed to give back $32-million – more than the total recovered from all previous corruption cases combined, since a law allowing state asset recovery was adopted in 2004.

All of this has undermined Ms. Rousseff's re-election bid because it involves politicians from her party and their main partners in the governing coalition – but also because she personally had an oversight role at Petrobras during the peak period of the scam. She was Minister of Mines and Energy, and chair of the board of Petrobras. Her party has said she brought in new executives who purged those who were suspected of corruption, including Mr. Costa. During the first round of the election campaign, her opponents hammered Ms. Rousseff with allegations of complicity, or, at best, failure to check the corruption.

She won a first-round presidential vote on Oct. 6, but faces a tough re-election battle against Aecio Neves, a centre-right candidate who is heavily favoured by the business community.

"There's no indication Dilma personally is corrupt – but it indicates a lack of management skills," said Prof. Lazzarini. "Before her [oversight], Petrobras was improving governance, with more external board members, less direct government interference: They could have pursued that. When Dilma came, there was more intervention, and that attracts more corruption."

Prof. Fleischer said the details of the Lava Jato case make clear that the politicians and bureaucrats involved believed they had impunity, but one encouraging outcome of the revelations from Mr. Costa is the unhindered zeal with which the federal police and prosecutors are investigating those who wield power. It may serve as some level of deterrent, he said. "If you're going to do something like this in the future you're going to have to be very cautious and very careful – and cover your footprints."

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