Petrobras, Brazil’s state oil company, has agreed to pay $2.95 billion to settle a class action suit brought by investors in the United States. Large investors led by the Universities Superannuation Scheme, a UK pension fund, said their holdings in Petrobras were adversely affected by the high-profile bribery investigation. This investigation, known as ‘Operation Car Wash’, looked into a bribery scheme in which politicians and former Petrobras directors took bribes in return for awarding billions of dollars in contracts. The investors’ lawyer Jeremy Lieberman said the settlement was the largest ever involving a foreign securities issuer in the United States. Although Petrobras agreed to the class action settlement, it denied liability for the losses and said that it was also a victim of the actions of individual executives.
A class action is where an individual represents a group in a court claim. Class actions by investors against a company in which they have holdings have become increasingly common in the past 18 months. Shareholders appear more willing than ever to bring a lawsuit against a company for alleged corporate wrongdoing, such as a failure of its anti-bribery or anti-money laundering process or its ethical checks on suppliers. Class action settlements can often cost companies more money than enforcement actions by government regulators. This may not even be the last class action settlement Petrobras has to pay, as investors outside the United States are also planning to use European legislation to claim some of their losses from the corruption scandal. There is also a pending claim by Petrobras' auditor, PricewaterhouseCoopers Auditores Independentes.
More class actions should be expected by investors against companies involved in bribery and corruption investigations in future, because scandals often have a significant impact on a company’s share price. Operation Car Wash investigation has contributed to a dramatic fall in Petrobras' share price. Having peaked at more than $72 in May 2008, it fell to under $3 in January 2016, recovering slightly in the last two years. In December 2015 Moody's downgraded Petrobras' rating, noting that its corruption investigations "create management distractions that may hinder efforts to improve the company's financial profile", not to mention the "risk of significant losses due to fines". The decision by Moody’s could deprive Petrobras of other business and investment opportunities.
The class action has had a greater financial impact on Petrobras than the sum of the settlement alone. The company has faced the cost of three years of litigation and the distraction this posed to its business operations. The distraction was particularly inconvenient because it hung over the company’s announcement of a five-year plan to reduce its debt and refocus its core business. Petrobras clearly recognises this impact; it said in a statement that the settlement "puts an end to the uncertainties, burdens, and costs of protracted litigation." Alexandra Wrage, president of the business compliance group TRACE International, said these wider risks demonstrate why companies need strong anti-bribery and corruption programmes. "When companies are assessing the cost of their compliance programs, they should look at their total exposure and not just the narrow cost of fines," she said. And it’s not just investors that have a voice—and a powerful, financial impact—when companies fall short on ABC compliance. Consumers increasingly expect brands and companies to meet high standards when it comes to corruption, forced labour and environmental sustainability—and when they fall short, consumers show their displeasure with their wallets.
1) Do not assume large means safe: be as thorough in your due diligence on large companies as with 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
5) 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
1) Check out more posts on anti-bribery and corruption on our blog.
2) Get tips for establishing an effective compliance programme in our eBook on the ISO 37001 Anti-Bribery Management System.
3) Explore how LexisNexis due diligence and monitoring technology can help you address risk more effectively.