Centrais Elétricas Brasileiras S.A: Bribes Billed as Nuclear Plant Costs

The Centrais Elétricas Brasileiras S.A FCPA case brought a $2.5 million civil penalty over allegations that inflated nuclear-plant contracts and sham invoices funded bribes. The SEC alleged that construction companies paid approximately $9 million to officers of the company’s nuclear subsidiary, using inflated project spending to help fund the scheme. For someone who knew the work, approved the invoices or questioned the costs, the alleged scheme left a trail inside the business.

The company, known as Eletrobras, settled the SEC’s FCPA enforcement action on December 26, 2018. The SEC’s order describes an alleged scheme running from approximately 2009 through 2015. It connects decisions at the Eletronuclear subsidiary to the parent’s books and accounting controls. The alleged problem reached from who could bid on the nuclear project to what shareholders were told their company had spent on it.

What the Eletrobras SEC Order Covered

The Eletrobras SEC order addressed the Foreign Corrupt Practices Act’s books and records and internal accounting controls rules. The first issue was how the company recorded payments tied to allegedly inflated contracts. The second was how its approval and accounting systems allowed those payments through.

At the time of the order, Eletrobras was a Rio de Janeiro power generation, transmission and distribution company whose registered shares traded on the New York Stock Exchange. The Brazilian federal government held a 51% stake. Its nuclear subsidiary, Eletronuclear, was more than 99% owned by Eletrobras, and the parent consolidated its operations’ financial reporting.

That structure matters to the person working at a plant or subsidiary. A contractor’s invoice could begin as a local project expense and end up in the financial statements of the publicly traded parent. The SEC alleged that this was precisely what happened: payments containing money for bribes entered the accounts as money spent to acquire and improve assets.

Nuclear Plant Contracts That Funded the Alleged Bribes

The project was UTN Angra III, a nuclear power plant. According to the SEC order, Eletronuclear began renegotiating and executing its civil construction contract in 2009, when the contract was valued at approximately $4.6 billion. In 2014, it executed another contract for electromechanical assembly services valued at approximately $1.1 billion.

These were different parts of the same nuclear construction project, with contractors billing for construction, goods and services. The alleged bribery mechanism depended on the relationship between the agreed price, the work behind an invoice and the officials who could authorize it. That is where a project employee’s knowledge becomes more useful than a headline about a construction budget.

The SEC alleged that former Eletronuclear officers influenced prequalification, budgeting and procurement in favor of construction companies participating in a bid-rigging scheme. They allegedly authorized unnecessary contractors and inflated project costs. Construction companies then used overcharges and sham invoices to help fund payments to officials.

The order also alleged that construction executives agreed to pay 2% of the contract value to officials associated with two major Brazilian political parties. Payments to the former Eletronuclear president and other officers were described separately. The alleged bargain connected control over the project to a share of the money flowing through it.

The SEC traced that arrangement down to repeated bills from a contractor:

The invoices matter because they turn the alleged payment channel into transactions that can be compared with approvals and work performed. We would want to understand what each bill claimed to buy, who approved it and what the project actually received. Those are questions a person inside construction, procurement or accounts payable may be able to answer from direct experience.

An Ethics Code That Stopped at the Parent

Eletrobras’s original ethics code did not cover its subsidiaries. The SEC said the company adopted that code in 2005, but confined it to the holding company and made no mention of subsidiaries or special purpose entities. That left the policy short of the operating businesses whose results the parent consolidated.

The company approved a code of conduct for subsidiaries in 2010, prohibiting support for political parties or campaigns and requiring supplier selection based on qualifications, quality, cost and timeliness. Yet the SEC alleged that employees ignored or circumvented the controls meant to put those principles into practice, including a requirement that payments match the work performed. The order also described weaknesses that allowed subsidiary employees to bypass prohibitions on direct payments to subcontractors and to pay upfront costs for work not performed.

From 2009 through 2015, Eletrobras disclosed material weaknesses in its annual reports concerning its control environment, risk assessments and accounting for property, plant and equipment. The SEC alleged that weaknesses in checking purchases and payments helped the scheme continue undetected.

We put more weight on whether an approval rule actually governed a payment than on how strongly an ethics code condemned corruption. The distinction is the difference between a policy someone can point to and a payment someone can stop.

How Inflated Costs Reached the Parent’s Books

The SEC alleged that Eletronuclear recorded inflated contract prices and sham invoices as legitimate expenses for goods and services, then consolidated those amounts into Eletrobras. In the order’s account, the payments appeared to acquire or improve assets even though a percentage funded bribes. The alleged overpayment therefore traveled with the project cost into the parent’s accounts.

A 2022 analysis in the Journal of Forensic and Investigative Accounting, How to Avoid Inadvertently Violating the Foreign Corrupt Business Practices Act Abroad, explains why the Foreign Corrupt Practices Act’s accounting provisions matter independently: companies can face accounting liability even when all the elements of an anti-bribery violation cannot be proven. For an insider reading this case, that makes the invoice description, approval history and accounting entry worth attention in their own right.

The same contract-kickback mechanism appears in the SEC’s separate action against Petrobras. In its Petrobras order, the SEC alleged that construction and supply companies overcharged the company and used the overpayments for bribes. Petrobras allegedly recorded all the contractor payments as money spent to acquire and improve assets.

The Petrobras order also described executives giving a contractor cartel inside information, manipulating bidding and approving contracts that did not conform to procurement rules. Comparing the bid, the award and the payment can reveal connections that a review of the ledger alone would miss.

What Project and Finance Insiders Can Recognize

In Eletrobras’s case, the alleged scheme touched contractor selection, work measurement, invoice approval and the accounts. Those functions give different employees different views of the same transaction. A procurement employee may know why an unnecessary contractor entered the project. A project specialist may know whether the work on a bill was performed.

For finance and accounting staff, the connection may be between that bill and the authority used to pay it. The order’s allegations about direct subcontractor payments and upfront costs make the approval history particularly useful. We look at the payment together with the contract terms and the work it was supposed to cover.

The parent’s view matters too. Ownership and consolidation records explain where a subsidiary’s numbers went, while audit findings and management responses explain what the company had already been told about its controls. In this case, the SEC linked the allegedly false project costs to consolidated books and linked the payment failures to weaknesses disclosed over successive annual reports.

That is why we start with what you know about the transaction. A missing service, an approval that bypassed the usual authority or a warning that never changed the payment process gives the investigation a concrete question to answer. Your knowledge can explain the difference between what the paperwork says and what happened in the business.

The Civil Resolution and the Whistleblower’s Interest

The SEC’s civil order required Eletrobras to pay the penalty to the Commission for transfer to the U.S. Treasury and to stop breaking the law’s bookkeeping and accounting-control rules. We see a basic problem with a civil penalty smaller than the alleged bribes paid to subsidiary officers. The SEC whistleblower program can pay eligible whistleblowers a combined 10% to 30% of qualifying amounts the government collects in a successful action.

You Know What the Project Actually Received

If you saw project invoices that did not match the work or payments that bypassed controls, speak with our whistleblower experts. We build the case around your knowledge of the project and bring in FCPA whistleblower lawyers who understand construction payments and accounting controls. We stay beside you from the first call as we build your strongest SEC whistleblower case.