Thomaz Favaro, Control Risks.

Thomaz Favaro is the Sao Paulo-based lead analyst for Brazil at Control Risks, the global political, integrity and security consultancy.

The final unfolding in 2016 of the “Car Wash” corruption probe into Brazil’s Petrobras will capture the attention of all of Latin America. The sheer scale of the Petrobras investigation—unprecedented in the region—in many ways reflects the strength and independence of Brazilian law enforcement agencies. But it is also the largest in a wave of corruption cases across Latin America with far-reaching implications.

The investigation, which began in 2014, is expected to reach its final phase in 2016, with the sentencing and imprisonment of several senior business executives and high-ranking politicians. At issue: a bid-rigging cartel that allegedly operated for more than a decade to divert resources totaling US$2 billion from the state-owned enterprise with the collusion of public officials and Petrobras managers. The scandal is feeding into broad popular discontent with President Dilma Rousseff.

Crossing the continent

As ever, Brazil plays an outsize role in Latin America. But it is not alone.

In Panama, the investigation into large-scale embezzlement from the government’s National Help Program implicated several aides of former president Ricardo Martinelli (2009-14); Martinelli himself could be indicted in 2016.

Guatemala’s political elite was put in the spotlight after a UN body set up in 2006 to strengthen the judiciary and tackle impunity uncovered a customs fraud syndicate. Investigations by the International Commission Against Impunity in Guatemala allege that the criminal network operated with the support of high-ranking government officials.

The scandal triggered mass street protests that forced President Otto Pérez Molina to resign.

In neighboring Honduras, President Juan Orlando Hernández faced mass demonstrations following allegations that the ruling National Party misappropriated state funds to finance its 2013 presidential election campaign. In Mexico, too, corruption scandals have forced the government to speed up efforts to strengthen the national anti-corruption framework.

From one country to the next, the drivers of anti-corruption efforts differ significantly—from independent domestic law enforcement agencies to international bodies, from government-led probes to investigative media. But one element is consistent: as we move into 2016, the trend of stricter law enforcement is evident everywhere and is set to intensify.

Socioeconomic improvements over the past two decades have moved the region into a transitional period in which new and emerging middle classes are demanding higher standards of government transparency, accountability and corporate governance.

This trend is also evident in other parts of the developing world, but most Latin Americans live in democracies where civil society groups can actively force their elected representatives to react.

Brazil’s Clean Record Law, for example, was passed in 2010 after a petition demanding such legislation received 1.5 million signatures, underlining growing popular anger at widespread corruption. The Clean Record Law bans politicians from running for public office for eight years if they have been convicted of a serious crime or if they face pending criminal charges. As regional economies slow down or fall into recession, the middle classes will be increasingly less likely to ignore allegations of syphoning of state funds, influence-peddling or anti-competitive behavior.

Short-term pain, long-term gain

Evolving anti-corruption campaigns are having significant knock-on effects. Basic policymaking has become challenging in Brazil, as well as in countries such as Mexico and Chile.

In each of these, aggressive corruption prosecutions are hobbling the strong government needed to address harder economic times and maintain stability in the business environment. The political class as a whole is becoming discredited, facilitating the rise of outsiders such as former comedian Jimmy Morales, recently elected as Pérez Molina’s successor in Guatemala, and making governments more immediately sensitive and anxious to be responsive to public anger, with some unpredictable outcomes for the private sector.

In several countries, there has been increased scrutiny placed on contracts signed between governments and private firms, particularly for major public works. In Mexico, President Enrique Peña Nieto was forced under public pressure to cancel a contract for the construction of a high-speed rail project because of perceptions of a cozy relationship between the president and one of the companies in the winning consortium. Back in Brazil, a political stalemate prompted by the fallout from Car Wash is provoking a harmful tug-of-war between government and Congress over austerity measures and potential tax or oil and gas sector reform, all of which fuels uncertainty for investors.

The spate of investigations brings short-term challenges but long-term benefits for the region, conquering a sense of impunity at the highest levels, even if overall improvement is uneven. Addressing the low-level corruption that remains endemic across much of Latin America’s bureaucracy and state institutions will also require significant commitment to far-reaching administrative reforms, of which there has been little sign to date—chiefly because such initiatives bring little immediate political reward and face deep institutional resistance. Yet progress has been fueled by both cultural and institutional changes, and is unlikely to be reversed altogether.

Upcoming events:

Join Control Risks at our 4th Annual Latin America Ethics Summit in São Paulo, Brazil on June 8-9. Geert Aalbers, Senior Managing Director & Head of Brazil, Control Risks will be moderating the keynote Operation Car Wash: Cleaning Up the Bribery Mess in Brazil featuring Luiz Navarro, Former Minister of State, Office Comptroller General of Brazil (CGU) Current member, Public Ethics Commission of the Presidency of the Republic. Click here to find out more.

About Control Risks

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