Big doesn’t always mean safe: Petrobras corruption scandal

January 01, 1970 by Mark Dunn

In 2008 Petrobras, the Brazilian state oil company, was named the leading ethical oil and gas company in the world by Covalence.  Alongside global brands it seemed inconceivable that only six months later the police would begin investigating the company for widespread corruption involving politics, bribery and money laundering.

Financial impact
The fact that the investigation continues more than five years later and encompasses much more now than it did in 2009, means that this is the biggest corruption scandal in Brazilian history.  The allegations that the company faces are currently only allegations, but the reputational damage has already been done.

On the first Monday in 2016 Moody's Investor Service downgraded Petrobras' debt rating for the second time in a year.  It would be inaccurate to suggest that this is a direct consequence of the scandals surrounding the company – the depressed global oil price is a further factor – but there is no doubt that it is an indirect contributor to the downgrading.

Scandal encompasses a wide range of companies
It is not only Petrobras that has been implicated in this scandal.  Amongst other companies that have been linked with the ongoing saga are Maersk, Rolls-Royce, Samsung, Skanska, Toshiba and others.

Perhaps it is tempting for large companies that are dealing with other large companies to believe that the size of the company alone is enough to provide some kind of reassurance and therefore a comprehensive level of due diligence is not needed.  In reality nothing is further from the truth.

On the same day that Petrobras was being downgraded by Moody's, the US Environmental Protection Agency (EPA) opened an action against Volkswagen in a federal court in Detroit, Michigan.  A global brand valued at $31 billion last year could be made bankrupt by the emissions scandals that have engulfed the company since last September.

Big company, big risk
It is not as if these are the only examples of large company corruption.  In the past decade alone companies as large as Tyco, Enron, Tesco, Global Crossing, and WorldCom have all been embroiled in corporate scandal.  Meanwhile allegations of corruption continue to plague football's governing body FIFA and the Union Cycliste Internationale is only starting to rebuild the sport of cycling's reputation after the Lance Armstrong scandal.

Five practical steps for business
In light of an increasingly complex global business environment, companies of all sizes should look to implement the following actions into a comprehensive due diligence plan:

  1. Do not assume large means safe: conduct as thorough due diligence on large companies as smaller ones
  2. Do not alter terms to reflect company size: companies that are committed to an ethical supply chain will offer the same contractual terms to all companies. Being offered longer payment terms may be a sign of a company's poor financial health
  3. Beware of reputational damage by association: suppliers to companies that are rocked by scandal can also be affected. Regularly check current news on customers and suppliers to ensure any issues are flagged early
  4. Follow the person as well as the company: take time to really understand the management of a company. Check if the senior management have previously been directors of other companies and ensure they do not appear on watchlists

Store information and sources: keep an active audit trail of information that can be simply logged and exported. Demonstrating a commitment to real due diligence can protect a business if the worst happens

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