Arrests of billionaire bank CEO Andre Esteves and top senator deepen Petrobras graft probe in Brazil

The arrest of billionaire bank CEO Andre Esteves sent the bank's listed shares into a dive.
The arrest of billionaire bank CEO Andre Esteves sent the bank's listed shares into a dive.PHOTO: REUTERS

SAO PAULO (REUTERS) - The chief executive of Brazil's biggest independent investment bank and the leading senator in the governing coalition have been arrested on suspicion of obstructing the country's most sweeping corruption investigation ever.

The detention of such prominent power brokers on orders from the Supreme Court raised the stakes dramatically in a bribery scandal that started with state-run oil company Petrobras and now threatens the heights of Brazilian banking and politics.

It has also reverberated outside Brazil and reached Singapore. Earlier this year, rig builders Sembcorp Marine and Keppel Corp denied making illegal payments after Brazilian media reports linked them to the Petrobras graft scandal.

The arrest in Brazil on Wednesday (Nov 25) of Mr Andre Esteves, the billionaire CEO and controlling shareholder of BTG Pactual and Brazil's most influential dealmaker, sent the bank's listed shares into a dive that wiped out a fifth of its market value and raised red flags at the central bank.

Brazil's Congress also ground to a halt with the arrest of ruling Workers' Party Senator Delcidio do Amaral, a veteran lawmaker who has run the economic affairs committee and who has been key to President Dilma Rousseff's unpopular austerity programme.

Brazil's currency fell as much as 2 per cent as the scandal threatened both the country's sixth-largest bank and the President's sputtering efforts to pass a new budget and avoid another credit ratings downgrade to junk.

Brazil's central bank said it was monitoring the arrest of Mr Esteves to see whether it would impact on operations at BTG Pactual and trigger regulatory action.

Banking analysts warned that BTG Pactual, the largest independent investment bank in Latin America, could struggle to navigate Brazil's worst recession in a quarter century without its wunderkind founder at the helm.

Clients withdrew funds equivalent to less than 1 per cent of assets under management at BTG Pactual, which was less than had initially been expected by some, said a source with knowledge of the bank's strategy.

The six-year-old BTG Pactual, which manages about 230 billion reais (S$85.8 billion), tapped less than 5 per cent of its about 40 billion reais in cash reserves to cover those redemptions, said the source, who requested anonymity because of the sensitivity of the issue.

The political gridlock that has obstructed economic policy this year is likely to worsen with the jailing of Mr Amaral, one of about 50 Brazilian politicians under investigation for their alleged roles in a vast kickback scandal at the oil giant known as Petroleo Brasileiro SA.

His arrest was the first ever for a sitting senator in Brazil, and it sent shockwaves through the capital.

Congress suspended its sessions as senators met to discuss how to handle the arrest. After a heated debate in which some government supporters defended Mr Amaral, the Senate voted 59-13 to uphold the top court's decision to order his arrest.

Supreme Court Justice Teori Zavascki said he authorised the arrest after prosecutors presented a taped conversation in which Mr Amaral tried to bribe Petrobras' former international director, Mr Nestor Cervero, out of taking a plea bargain that could implicate the senator and other politicians.

Prosecutors alleged that Mr Amaral conspired to help Mr Cervero flee the authorities. They also said the senator offered a monthly stipend to the former executive's family, financed by Mr Esteves, who had obtained a copy of a plea bargain based on Mr Cervero's testimony.

Mr Cervero received a 12-year sentence in August for corruption and money laundering in connection to bribes paid on two drillship contracts. Another defendant in the case testified that Mr Cervero had passed bribe money to Mr Amaral, skimmed from Petrobras' controversial 2006 purchase of a refinery in Pasadena, Texas.

Mr Amaral's lawyer, Mr Mauricio Silva Leite, dismissed the accusation that his client had obstructed the Petrobras investigation, saying it was based on the word of a convict. He also criticised the Supreme Court for ignoring the senator's immunity as an elected official.

BTG Pactual confirmed the arrest of its chief executive and said the bank was available to cooperate with the investigation. Mr Esteves' lawyer, Mr Antonio Carlos de Almeida Castro, told reporters that the banker "certainly" had not acted to obstruct the investigation.

The bank's listed units, a blend of shares in its investment banking and private equity divisions, tumbled as much as 39 per cent to an all-time low on the Sao Paulo stock exchange before paring losses to 21 per cent.

Court representatives said Mr Esteves had been arrested temporarily for five days, with a potential extension of five days. Mr Amaral was arrested for an indefinite period.

Mr Esteves, 47, has drawn on powerful connections in politics and global finance to steer BTG Pactual through turbulent times as Brazil's economy plunged into a sharp recession.

BTG Pactual's major deals with Petrobras have drawn the attention of investigators, including the bank's stake in Sete Brasil Participacoes, a supplier of oil-drilling platforms that has been swept up in the probe. BTG Pactual also bought half of Petrobras' Africa unit in 2013.

Last quarter, credit to oil and gas and infrastructure companies, which are the most impacted industries in the widening graft probe, accounted for about 16 per cent of BTG's loan book. That is the largest exposure among Brazil's listed traded banks, according to Thomson Reuters data.

Brazil's central bank said in a press statement that it was monitoring the arrest of Mr Esteves, adding that BTG Pactual has solid liquidity indicators and continues to operate normally.

The net worth of Mr Esteves was last estimated at US$2.2 billion (S$3.1 billion) by Forbes Magazine.