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EFS Release - Eletrobrás debentures
PETROBRAS AND PRIMARY SURPLUS:  One cannot fix decades of accounting fraud without saying who made the fraud

by Édison Freitas de Siqueira

Since October 2008 there are lawsuits under course concerning the improper inclusion of PETROBRÁS in the revenue of the Federal Union (juridical name for the Brazilian Government). This lawsuits run in secrecy of justice, under the number 34066/2008 at the TSE - Superior Electoral Court, and under the number 027.703/2008-5 at the TCU - Court of Federal Accounts, both sponsored by the legal adviser of the Joint Parliamentary Front for Taxpayers’ Rights in the Brazilian Congress and Professor Dr. Édison Freitas de Siqueira.

These lawsuits aim to investigate and unveil the reasons why, illegally, the Federal Government and its political agents have included PETROBRAS Group's turnover in the calculation of the primary surplus of the Federative Republic of Brazil, as well as other private businesses, allocating these numbers as if they were its own revenues.

Only the amounts received by the Federal Government through the distribution of corporate profits may be included in its own budget allocations.

On June 29th, 2009, certainly in response to these complaints, it was the first time the Federal Union purged the revenues and sales of the Group PETROBRÁS (with retroaction to 2001) from its estimates of primary surplus published in the Brazilian Government’s tax data. As a result, immediately, the primary surplus targets for 2009 were reduced from 3.8% to 2.5% of the Brazilian GDP.

The reason for this change of conduct is due to the fact that the Group PETROBRÁS is a private company, ruled - exclusively – by the Act of Public Corporations, fact that makes it possible for PETROBRÁS to trade its own shares in stock exchanges in several countries.

The Group PETROBRÁS is the twelfth largest oil company in the world according to Petroleum Intelligence Weekly (PIW) and the fourth most respected private company in the world according to the Reputation Institute. Petrobras is also considered the best oil company in the world in terms of sustainability, social responsibility (CSR) and corporate governance in accordance to the evaluation agency Management & Excellence (M & E) in Madrid. Petrobrás is formed by a conglomerate of subsidiaries and holding companies and subsidiaries with foreign and national companies, some of them based in offshore tax heavens. PETROBRAS operates more efficiently in fewer countries than, for example, Shell, that operates in more countries with less efficiency.

The PETROBRÁS Group of companies has thousands of partners in Brazil and around the world, including those with voting shares. Among these partners one can find the Federal Union, next to the BNDES (Brazilian National Development Bank), BNDESPAR (BNDES`investment funds) and customers from North American groups like the Citigroup and JP Morgan Chase. All of the above mentioned partners together compose the group of shareholders that controls the management of the company, because they hold most of the voting shares.

Therefore, the Federal Union could never have used the revenue, billing, or accounting information from a company of which it is minority or majority shareholder, to fill and mask its own financial statements for tax collection and primary surplus.

These data, which should be 100% transparent, is made public for to policy makers and the Brazilian people and, especially in this season of "witch hunt" to market players, such as the World Bank, Stock Exchanges, Agencies and Investment Risk Assessment around the globe. These irregularities, when actually exposed to the world, lead to uncertainty and instability .

The only value and/or information that the Federal Government - the Brazilian government – could have used or can use to calculate its own numbers, are the dividends that were received as distribution of profits or expenses from the implementation of investments in these companies, as a partner.

One can not confuse the revenue or expenditure of a private company with the revenue or expenditure of the Federal Union, simply because this is an accounting fraud that leads to the distortion of data, then to be considered untruthful, causing serious damage to the international audience and those who assess the results of the Brazilian government economics and management .

In the political sector the situation is more serious. To disclose revenues or expenses of a private company as income of the Federal Union is clearly fraudulent, specially when we are talking about the super Groups PETROBRÁS and ELETROBRÁS (which has not paid its dividends for over 20 years), and when this is done without any comparison or verification of the objective distribution of profits and due provision to these companies' thousands of other partners.

If this is done in a political campaign, it couls be considered as serious electoral crime, and constitutes fraud against the budget of the Federal Union and attacks on the patrimony of the Federative Republic of Brazil, for obvious responsibility crimes.

The World Bank on its most important annual assessment report on the compliance with norms and standards called ROSC (Reports on the Observance of Standards and Codes), since 2005 has been drawing attention to the fact that in Brazil there are no (within the Brazilian Courts of Law and the overseeing entities) specialists in the complex domestic and international securities and financial markets. These specialists could give "fair, transparent and without conflict of interest" support to the CVM (Brazilian securities and exchange commission), the Banco do Brasil, the Central Bank of Brazil, the BNDES (National Development Bank), the BNDESPAR (BNDES`investment funds), the PREVI (pension fund for the employees of Bank of Brazil) the FUNCEF and PETROS (both pension funds for state controlled companies), some of the entities that have already been used as reference to justify the decisions of the Judiciary. However, such agencies, entities and companies have conflicts of interest or and no impartiality, because their directors and chairmen are appointed by the same people and authorities to appoint the directors and chairman of companies that the Brazilian Courts of Law –should - systematically - judge in an impartial way. Never, therefore, there will be impartiality and freedom from “conflict of interest” on a report by the CVM on, for example, the groups PETROBRÁS, ELETROBRAS, BANCO DO BRASIL, PETROS, FUNCEF, PREVI or OI-BRASILTELECOM, because of the above mentioned conflict of interests.

Such cases, like PETROBRÁS being used as public revenue, deserve greater specialization of the Brazilian Courts. Up to now it was not measured the damage already caused, nor there has been the calculation for the liability or compensation for the fraud on the official Brazilian Government statistics of fiscal data.

In countries that headquarter stock exchanges of greater credibility and, where accounting practices as shown here, are punishable by imprisonment of more than one hundred years. In these countries many Brazilians can be sued or are being investigated, by the Courts in the U.S.A, the SEC, the PCAOB and the FBI, for the simple fact of being on the board of such companies and businesses within the territory of the U.S.A..

The lack of knowledge in the complex issues of the growing securities market and the lack of experts to work exclusively for for the Brazilian Courts of Law, open space for the occurrence and institutional covering of all types of white-collar crime, against the securities markets and national and international financial sectors, and against the shareholders and the markets of the global economy. In this same global economy the Brazilian Government and its public companies obtain funds for leveraging its growth. The circumstances described here become even more worrying when we realize that this misconduct eventually contaminates other private companies, investment banks and agents who do not have as partner the Federal Government, but they are undervalued because they belong to an environment where legal certainty and transparency are blemished.

It was a very important change on the data from the primary surplus, budget and expenditure of the Federal Government, which from now on will NOT include the information from a private company of the stature of Petrobrás. However the greatest concern is the government assertion that this progress is due to the fact the Government has only now discovered that the PETROBRÁS GROUP is a private company owned by private equities.

Certainly, after solved the issue of the PETROBRÁS parliamentary investigation commission there should occur advances, or retroactions, to other companies in the same situation. Other companies should be included in this policy for the the same conduct. This other major business groups of which the Brazilian government is also a partner, at least by now, are not viewed with the same eyes of lawful solution.

Indeed, the fact that private companies are used for the benefit of political plans, governmental and/or non-governmental, attacks the credibility of Brazilian companies and the entire securities market around them.

The opening of a refinery of PETROBRAS announced as the work of the Brazilian federal government’s investments shows a clear conflict of interests, and disrespect to other partners of these companies and of the national and international laws.

Propaganda and inaugurations of refineries and oil fields, or donations to NGOs should be better supervised by the staff from the national and international regulation and supervision of financial and securities markets. In addition, the Courts of Justice and the General Attorneys of Brazil, as long as the CVM does not effectively oversees, should monitor such actions, for the reason that CVM`S directors have been appointed and kept at their jobs, and fired by the same people who appoint the chairmen and directors of the Group PETROBRÁS, fact that shows total conflict of interests.

Translation: Luciano Medina Martins – journalist (IFJ BR10789)

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