Latest: Corruption and Money Laundering.

The cost of corruption.

Lázaro Báez was arrested in April of this year after Federal Judge Sebastián Casanello ruled that he was a flight risk. Báez, pictured shortly after his arrest, has since been indicted on money-laundering charges and remains in custody as part of the investigation into the so-called “K money-trail.”

Graft scandals — both in Argentina and the wider region — have cast a shadow over the government’s plans. But will they hold off investment?

The explosion of corruption scandals in Argentina, Brazil and even Chile, involving the upper echelons of the political establishment and emblematic businesses, has raised fresh questions about the interaction of the private and public sectors a time when the three governments in the region are actively seeking foreign investment to boost their economies.

And while the Finance Ministry has announced that there have been promises worth more than US$53 billion for the period 2016-2019 from both local and international sources, structural issues that date back decades mean that Argentina ranks poorly on transparency and anti-bribery indices, potentially slowing the inflows.

The Mauricio Macri administration has staked its political future on an economic revival. In a context in which structural corruption has been joined by major scandals, the question is now if that investment will be affected.

Most experts agree that while some companies will take advantage of potential opportunities to win business using corrupt practices, the majority of investors are looking to avoid the “risk” of being asked for a bribe or a kickback. Put another way, more corruption means less investment.

However, there isn’t a complete consensus on how to tackle corruption, nor how much it truly costs in development nor economic terms. In a bid to turn around the country’s reputation, the government has moved forward on a series of legislative measures aimed at boosting its anti-bribery credentials. These have included the inclusion of whistleblower protections for individuals who report on acts of corruption. The motivations for such legislation seems to come from a combination of interests from both the public and private sectors.

A REGION ROCKED

BY SCANDAL

In recent months, corruption scandals have engulfed Brazilian politics. Dilma Rousseff was ostensibly impeached on charges of altering public financial records, though many of her accusers are now facing much more serious criminal corruption charges, including former speaker Eduardo Cunha. The still ongoing Petrobras corruption scandal, in particular, has enraged Brazilians and sparked public anger, with hundreds of lawmakers and key business officials named in investigations.

More locally, former president Cristina Fernández de Kirchner appeared in court just this Monday as part of a probe into determining whether public works contracts awarded during her administration were subject to corrupt practices.

The former president, who has maintained that the accusations are politically motivated and has denied wrongdoing, was summoned and questioned by Federal Judge Julián Ercolini, who has also called a host of Kirchnerite figures before him as part of his investigation.

Additionally, Fernández de Kirchner faces questioning over the Hotesur holding company through which she allegedly received kickbacks from Báez. There is a third case known as Los Sauces, involving alleged irregular rent payments. She has also been indicted in the so-called “dollar futures” probe.

As a result of her appearance in court, prosecutors have now requested that an investigation into alterations made to the financing of the contract for the US$ 3-billion dollar contract to tunnel the Sarmiento train line in Buenos Aires City and Greater Buenos Aires. One of the members of the consortium that will carry out the project is construction firm IECSA, in which Ángelo Calcaterra — the cousin of president Mauricio Macri — has a controlling stake.

The scandals do not only extend to those now in opposition on the continent, with the president facing allegations related to the “Panama Papers” documents. Macri himself is under investigation in a bid to determine if he “maliciously” withheld information in his sworn statements and affidavits as a public official that he was a director of a firm registered in the Bahamas. The president has also denied any wrongdoing.

Such accusations against serving presidents and their predecessors are by no means unique in the region.

The Petrobras investigation in Brazil — known as Operation Car Wash or Lava Jato — has already claimed high-profile figures such as Cunha and former president Luis Inácio Lula da Silva, who is facing charges over alleged kickbacks and corruption.

In Chile, meanwhile, members of President Michelle Bachelet’s family have been accused of wrongdoing while ex-president Sebastián Piñera has been cited by the Argentine courts over bribery cases involving LAN airlines. Two-time presidential candidate and former rising star, Marco Enríquez-Ominami, is also facing graft accusations concerning campaign financing and tax breaches.

GLOBAL AND LOCAL

PERCEPTIONS

It all makes for pretty dim reading for the continent at large. Most recent surveys on the global perceptions of corruption would tend to agree.

In 2016, for example, Transparency International ranked Brazil 76th in its Corruption Perceptions Index report, with Argentina placing 107th. Chile and Uruguay fared considerably better, cracking into the top 25 in terms of of the countries with less perceived corruption.

Those findings were more or less consistent with the 2016 Ernst & Young Global Fraud Survey, which found that 66 percent of Argentine “senior decision-makers” said that they believed that the bribery or corruption was widespread.

No less than 90 percent of Brazilians surveyed felt that corruption was rampant.

Such perceptions naturally do not bode well for efforts to attract and sustain foreign funds.

Responding to written questions from the Herald, the president of anti-bribery organisation TRACE International, Alexandra Wrage, explained how graft can impact on a firm’s desire to do business in one place or another.

“As a general matter, well-governed companies know that the cost of doing business will be higher in markets with systemic corruption,” Wrage said. “A corrupt business environment typically includes high levels of bureaucracy, limited access to information, shifting bid requirements and outright bribe demands, all of which introduce delay and risk while reducing profit margin and predictability.”

“Absent a very promising long-term market or access to natural resources not readily available in more transparent markets, investors will put countries into the ‘too much risk for too little return’ category,” Wrage added.

Her organisation’s opinion of Argentina is damning, with the country placing 133rd overall in the TRACE 2014 rankings, after Ukraine and before the Russian Federation, in terms of risk of bribery.

The OECD has found that one in five cases of transnational bribery are linked to the extractive sector, and it has produced specific guidelines given the high prevalence of wrongdoing and which also has a significant negative impact on the development of local economies.

According to Finance Ministry records, about 25 percent of pledged investment since Macri took office relates to natural resources, particularly mining and quarries — the largest recipient by sector, with US$13.7 billion pledged. Manufacturing takes second place with a total of US$11.7 billion in pledges.

MOVING FORWARD

As part of the government’s campaign to promote investment and in line with its publicly declared ambition to — at the very least — adopt the standards of the OECD (Organization of Economic Cooperation and Development), last month a bill was submitted to Congress that essentially means that businesses can be held criminally liable for corruption and which encourages them to prevent questionable practices.

According to Fernando Basch, a partner in the Governance Latam consultancy firm and a member of the Universidad de San Andrés’ Anti-Corruption Centre, the onus will now be on companies to demonstrate any improper behaviour by its employees bypassed stringent internal controls.

The bill, sent to Congress in connection with a visit by the OECD anti-corruption unit, has been written to ensure that businesses both prevent corruption but also cooperate with investigators when it finds suspicions of wrongdoing.

“Latin American countries are adopting regulatory frameworks that are bringing these cases to light. The scandals in Brazil, such as the Petrolão (the aforementioned Petrobras investigation), occurs because of the existence of a whistleblower. And that whistleblower existed because previously there was a Mensalão (vote-buying corruption case from 2005), there were several convictions for prominent politicians,” Basch said.

“That demonstrated that the criminal system was able to achieve a certain level of effectiveness. In that situation, whistleblowers become more effective because it becomes a credible threat.”

The Ernst & Young report also noted that “although 86 percent of our Brazilian respondents confirmed they have a whistleblower hotline, only 32 percent felt that it has become easier in the past three years for employees to report their concerns. If channels are not supported by clear guidance or support from top-level management, employees may be deterred from reporting.” Other deterrents include loyalty to co-workers and the company itself.

For Basch, the push for the change to the system has not derived solely from the administration but also from the demands of multinationals themselves.

“Corruption is a shortcut for companies to break the rules of competition to get what they are looking for, so these OECD frameworks arise in order to make the playing-field even. Consider that the first transnational anti-bribery legislation, the Foreign Corrupt Services Act, dates from 1977. The immediate response from the private sector was that they were going to miss out on business, that the Europeans were going to win contracts all over the world. The discussion that ended up happening 20 years later was the OCDE framework, to level the playing-field.”

That discussion, it would appear, is going forward here, with heavy fines expected for companies that fail to prevent corruption — provided of course that the bill makes it through Congress.

NO IMPLEMENTATION,

FEW CONVICTIONS

However, for Germán Emanuele — director of the Justice unit at the Poder Ciudadano NGO — the problem is not so much the existing legal framework but rather the lack of implementation and the handful of corruption convictions in Argentina in the last two decades.

While recognizing the value of the new legislation to target companies, Emanuele told the Herald that the “issue is not the norms, but that they are not implemented structurally. Those responsible are never found or convicted.

“That is because of at least 20 years of weakening of the institutions, of oversight bodies, where the Judiciary is not meeting its obligations, of the multiple changes to the Magistrates Council and its consequences, as well as political representation over the Judiciary.”

For Emanuele the lack of progress in the courts cannot be explained by a system that is overburdened by countless complaints and that resources aren’t able to keep up.

“That is a bit of a myth. The courts receive more funds than Chile but the courts there sometimes make progress in half the time or faster,” he said.

Wrage added that the problem goes beyond the legal system. “Having an independent media, robust civil society and a streamlined bureaucracy are all strongly linked to lower levels of corruption,” she said. “E-procurement is a great example of the last point. If people can bid and be assessed for contracts without any human interaction, the opportunity for bribery plummets. That may be a sad statement about human nature, but it does seem to work.”

While the arrival of the dollars to Argentina is by no means contingent exclusively on the anti-bribery legislation, it now remains to be seen how exactly the government, Congress, the courts and the private sector can articulate the complicated process of greater enforcement and vigilance — considering the need for fresh funds and the extractive slant to the pledges of capital so far.

There are those who predict nonetheless that the fireworks are not over.

“If that law is approved, and it is implemented effectively, there will be more of these corruption scandals,” said Basch.

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@tbrockenshire