Bond vigilantes - are back in the saddle and riding high again
How PwC got tangled in a fight between ATO and the boys from Brazil
Controversial Brazilian meat processing client JBS brought the Australia Big Four accounting firm the wrong kind of attention.
It was dark in Brasilia but the guard on the gate recognised the number plates and waved Joesley Batista’s car through. Brazilian president Michel Temer was waiting for him in the basement, underneath the garage of the Jaburu Palace in the country’s capital.
Batista, the executive chairman of meat processing group JBS SA, had a late-night meeting with Temer. He would detail the bribes he was paying to derail a corruption investigation, and ask the president’s advice about another problem area.
What Temer didn’t know, as this March 2017 meeting played out, was that Batista had a tiny digital recorder hidden under his collar.
When it surfaced two months later, the recording would blow up Brazil’s government. The revelations were extraordinary.
Joesley Batista and his brother Wesley confessed to bribing 1829 politicians and officials. And as details emerged of how far they’d gone to buy influence, the shock waves would be felt around the world.
What’s perhaps just as extraordinary is the way that PwC Australia was unwittingly caught up in this saga. We know of their role only because of an Australian court case that has shone a light on the lengths to which accountants will go to protect their work from official scrutiny.
As Brazil’s Operation Car Wash became the largest corruption inquiry in history, PwC Australia was working lawfully to save the Batista empire a lot of tax.
The company’s role would have remained secret – except that the Batistas’ JBS Australia became ground zero in a historic legal fight between the Australian Tax Office and PwC: the commissioner versus the boys from Brazil.
It’s a power struggle at a level rarely seen in Australia, not just between tax commissioner Chris Jordan and JBS’s tax advisor, but a wider rivalry between accountants and big legal firms over who gets to keep their clients’ commercial secrets.
In March 2017, even as Batista was meeting with Temer, Jordan was in Sydney preparing a speech for the Tax Institute. His message was clear: the Tax Office was going after Big Four accountants, “to take on taxpayers and their advisers who are not transparent, unco-operative, or who engage in aggressive game-playing and egregious behaviour”.
It was part of a series of escalating threats by senior ATO officers, ostensibly against each of the Big Four firms. But in reality the Tax Office was on a collision course with PwC.
The court case that resulted wrapped up in March this year, when Federal Court judge Justice Mark Moshinsky handed down a judgment that has seen both sides claim partial victory in the clash over whether accounting advice can be covered by professional legal privilege. It’s yet to be seen how Moshinsky’s ruling will work in practice.
Remarkably, the JBS corruption saga exploded just as legal and accounting bodies backed by the Big Four firms were lobbying the Australian government to stall proposed anti-money-laundering laws.
How does a major accounting firm handle a client with governance issues? How did they not see their client’s looming problems? Court papers, documents and corporate filings chart the history of what began as PwC’s excellent South American adventure, and how it went wrong.
PwC goes to Sao Paolo
Most of PwC’s international tax work goes under the radar. But in November 2014, The Australian Financial Review revealed the remarkable deals that PwC Luxembourg had engineered for Australian companies – including AMP, Macquarie Group, Lend Lease, Goodman Group and the Future Fund — to sidestep tax in Europe.
The revelations were part of the International Consortium of Investigative Journalists’ LuxLeaks project. PwC Australia brushed it off – this was a matter for PwC Luxembourg to comment on, not Australia, it said. But on December 9, as the ICIJ published more LuxLeaks files, PwC Australia quietly began work to move ownership of Australia’s biggest meat processing group to Luxembourg. The client was JBS.
The Batistas ran Brazil’s biggest beef processing company when they exploded on to the international scene in 2007, first floating JBS SA in Brazil, then immediately buying Swift & Co in the US, which also owned Australian Meat Holdings here.
Overnight, the Batistas were the largest meat processors not just in Brazil but in the US and Australia as well. They have since spent another $2.05 billion buying more food companies here, including Primo Smallgoods($1.45 billion), pork processor Rivalea ($175 million) and salmon farmer Huon ($425 million).
In early 2014, PwC made a pitch to JBS. They proposed to lead a global reorganisation that they claimed in later emails could lawfully save JBS $250 million in US tax and potentially $70 million a year in Australian taxes.
The two-day lawyer
According to Moshinsky’s judgment, PwC Australia partners Glenn Russell and Neil Fuller flew to Sao Paolo in late May to meet with JBS execs, together with PwC partners from the US and Brazil.
Shortly afterwards, Russell testified, he asked JBS whether it would like PwC’s Australian work to be provided as legal advice. JBS thought this was a terrific idea.
The problem was that Russell wasn’t actually a lawyer at the time, although he was studying to become one. But that was a minor hiccup. Russell was admitted as a solicitor in Queensland on July 14 and two days later JBS signed on with PwC.
JBS Australia would pay $862 an hour for legal advice from Russell, this lawyer of two days standing. But the big money would go to two non-lawyers. Fuller’s rate was $1460 an hour, while the rate for a senior manager, Theo Donovan, was $1142 an hour.
Russell struggled to explain why non-legal people who were merely assisting him were paid so much more in the provision of legal advice.
“That rate is purely a product of what spat out of a system, so I never really particularly thought about that,” he testified in 2021.
In contrast, PwC seemed to have thought quite a lot about the legal professional privilege that its legal advice carried – which meant the ATO could not demand access to it.
“Glenn I have included you in order to claim privilege,” was one PwC internal email in February 2015, cited in Justice Moshinsky’s judgment.
In August 2015, when JBS was trying to slash PwC’s fee to $US7.2 million, PwC US partner John Kulich noted, “I think it’s going to play out where AU will engage directly with JBS (due to legal privilege) … ”
What Russell and Fuller didn’t know, during their meetings in Sao Paolo in May 2014, was that the Batista brothers were simultaneously setting up a very different deal: a massive, illegal effort to swing Brazil’s federal election. To Russell and Fuller’s eventual surprise, it turned out the JBS empire was built on a network of corruption.
Cheap finance
In a 2020 plea deal, the US Department of Justice detailed how executives of the Batistas’ holding company, J&F Investimentos, funnelled $US179 million to offshore accounts they set up for senior politicians in Brazil to get cheap finance from a state bank that paid for JBS’s investments in Australia and in the US.
In the lead-up to Brazil’s election in October 2014, according to the DOJ, politicians that the Batistas had been bribing instructed them to funnel $US148.7 million in the offshore accounts back into Brazil to support politicians’ campaigns.
Much of the money reached candidates through dozens of local law firms (unaffiliated to PwC Australia) that provided false invoices to J&F for services not provided – a novel approach to legal privilege, in a timing sense – just as PwC was making its own legal professional privilege pitch.
And it would have never come to light, but for an obscure police operation in March 2014, which saw the arrest of 17 black-market money dealers in Brasília. The targets were laundering money out of a petrol station, which inspired the code name for the investigation: Operação Lava Jato (Operation Car Wash) – but it was too minor an investigation for anyone to notice.
Yet elsewhere, red lights were flashing over PwC’s new client. Between January 2015 and May 2016, Deutsche Bank Trust Company Americas filed nine suspicious activity reports (SARs) citing unusual wire transfers involving JBS, together with media reports of police investigations.
The SARs, which were part of a leak of reports filed to the US Treasury’s Financial Crimes Enforcement Network obtained by BuzzFeed and the ICIJ, show that Deutsche emailed JBS: “Our research indicated that JBS SA is currently under investigation for bribery, racketeering, corruption, fraud and collusion involving officials by the Federal Prosecutor.” Could JBS provide an update?
“Can you please let me know the specific case you are referring to? I have no info that JBS SA is under investigation,” JBS responded.
Australian law firms and accountants remain exempt from key anti-money-laundering measures. So, even if PwC had come across something untoward at JBS (and there’s no suggestion of illegality in Australia) it had no obligation to report it.
But the SARs show that by 2015 probity questions were being raised about JBS by journalists, Brazil regulators and banks like Deutsche. And that’s before Operation Car Wash metastasised into a monster corruption investigation across Brazilian society, which included six police investigations that targeted JBS, J&F Investimentos and the Batistas.
The limits to privilege
In contrast, in Australia politicians were cultivating JBS. In 2015, Wesley Batista made it to the front page of the The Australian Financial Review in a photo shoot with then resources minister Josh Frydenberg in Darwin. So Frydenberg had some familiarity with JBS when as treasurer he gave the Foreign Investment Review Board approval for them to buy salmon farmer Huon for $425 million last year.
Over two years, AFR Weekend has repeatedly put extensive questions to PwC about its work for JBS, to which it has not responded, with one exception.
In July 2020, AFR Weekend asked PwC’s CEO Tom Seymour, who was previously Asia Pacific Americas tax leader, and who worked in Brisbane with Russell, if he was involved in the JBS restructure. A PwC spokeswoman said Seymour “did not work on these client matters”.
PwC was now working on an international IPO for JBS’s operations outside of Brazil, seemingly unaware of the disaster that was unfolding.
On August 5, 2016, JBS Foods International DAC of Ireland filed a prospectus with the US Securities and Exchange Commission (SEC) and the countdown to the IPO began, as the PwC restructure took shape.
A month later police were at the Batista addresses again with search warrants, detaining Wesley for questioning over alleged bribes to witnesses in Operation Car Wash.
At the same time in Sydney, the Tax Office was looking closely at other PwC clients. Deputy Commissioner Mark Konza stormed out of a briefing at PwC’s offices, calling their latest scheme (which involved a different team to JBS’s advisors) to sidestep Australia’s new Multinational Anti-Avoidance Law (MAAL) “a blatant attempt to undermine the will of parliament”.
Konza ordered an immediate audit of their client (which was not JBS) as soon as he returned to his office. He was still fuming about an unnamed “major accounting firm” when he spoke to the Financial Review days later.
Two years later, PwC confirmed to the Financial Review that it was the firm that drew Konza’s ire.
It marked a new low point between the Tax Office and PwC. But it would get worse over the next four years, as public criticism by Commissioner Jordan and senior tax officers escalated, but the focus would shift from the MAAL to legal privilege claims.
From this point in 2016 the two narrative arcs – PwC’s controversial client and PwC’s fight with the Tax Office – began to intermesh.
The accountants kept tinkering with the JBS IPO. The Irish parent company was turned into a British company. Then the prospectus was withdrawn and replaced by a new one, this time with a Dutch parent company, JBS Foods International BV.
“Excellent news,” Russell emailed his American colleagues on October 6, before giving a gentle reminder: “As a generally [sic] rule JBS like to have Australian tax advice prepared as a legal service so that the work is covered by Legal Professional Privilege in Australia.”
A fateful decision
But there was no clear water for the Batistas to get the IPO away. As the number of investigations targeting them grew, on February 19, 2017. the brothers made a fateful decision. “I will not be accused of breaking JBS, we have to change the course of this story,” Joesley told his lawyer.
JBS’s legal director Francisco de Assis called a prosecutor three days later to say the brothers wanted a plea deal. But what could they offer investigators?
Joesley arranged a secret meeting with President Temer on March 7 to discuss the Batistas’ legal problems – and bought himself a tape recorder.
Joesley told Temer he was already bribing two judges and a prosecutor, while Temer appeared to encourage Batista to continue paying bribes to Eduardo Cunha to keep his silence, and agreed that former congressman Rodrigo Rocha Loures would be Temer’s go-between with Batista.
Later, Joesley taped a meeting with Senator Aécio Neves, the president of the Brazilian Social Democracy Party, in a São Paulo hotel, when Neves asked Batista for $US600,000.
There was also film of congressman Loures catching a taxi with a suitcase stuffed with $US150,000 that had been passed to him by J&F director Ricardo Saud.
On March 17, police swooped on JBS again, charging the company with bribing food inspectors to approve exports of rotten meat. Joesley shrugged it off during a four-hour meeting with “Mr Suitcase”, Ricardo Saud, where they laughed at how they would avoid prison and emerge as the heroes of the corruption saga. In hindsight, taping this conversation was a really bad idea.
The initial tape with President Temer caused a sensation when it was revealed by newspaper O Globo on May 17, 2017. JBS’s share price tanked, along with the rest of the market, and the currency went into a spin.
“I’m scared of being murdered,” de Assis confided to another JBS lawyer, Renata de Araújo, in a WhatsApp message the night before. “I sent my family away to New York.”
The Batistas and their J&F holding company signed a plea deal with investigators on June 5, admitting to bribing 1829 people and agreeing to pay a fine of 10.3 billion reais ($5.4 billion) over 25 years.
Deputy Commissioner Mark Konza stormed out of a briefing at PwC’s offices.
Temer said he had been “naïve” during his meeting with Joesley but denied any wrongdoing. He said he had not encouraged paying bribes and claimed the recording had been doctored.
As for the suitcase of cash, Temer said Loures was tricked into this role because he was “good-natured”.
Arrested and charged
The Batistas’ problems were all over. After admitting to a lifetime of corruption, they were walking free. Then more tapes turned up.
The Batistas had until August 31, 2017 to detail all their illegal activity to prosecutors as part of the plea bargain. But in the rush to make the deadline, a Batista lawyer attached the wrong recording to an email – instead of the Temer tape, the lawyer sent Joesley’s March 17 discussion with Saud, where they appeared to suggest they had undisclosed relationships with three cabinet ministers and three senior judges.
“We are not aware of any illicit act committed by any of these authorities,” Joesley and Saud immediately said in a statement. “What we have said is not true, we sincerely apologise for this disrespectful and shameful act and reiterate our deepest respect to the ministers of the Federal Supreme Court, Attorney General of the Republic and to all members of the Public Ministry.”
Within days Joesley was arrested, as prosecutors applied to cancel the plea deal. He was charged with inducing his law firm to hire a prosecutor who, the new tape showed, provided advice while he was still on the government payroll.
When Wesley flew back into the country on September 13, he was arrested and charged with insider trading by selling JBS shares and shorting Brazil’s currency before the plea deal was announced.
With Joesley and Wesley both in prison and banned from management, their 84-year-old father Jose Batista Sobrinho was parachuted in as JBS CEO and vice chairman.
PwC and the IPO
Through all the scandal in Brazil, PwC kept beavering away on the IPO. On October 13, JBS called it quits, withdrawing the prospectus it had filed 10 months earlier. But behind the scenes JBS was still looking at an IPO and ASIC filings show that PwC kept working on it.
Coincidentally, at the same time the JBS scandal was unravelling, the Australia government was proposing to finally introduce the long-delayed Tranche 2 of Australia’s anti-money laundering laws, which would require accountants and lawyers to file reports if their clients were involved in suspicious transaction.
How PwC ended up in court
But accounting bodies helped defeat the move, arguing that it was already covered by industry codes of conduct, and that it would reduce the trust of clients and produce “onerous red tape”.
In late 2017, the ATO opened a review of JBS’s Australian companies.
In March 2018, Commissioner Jordan told a Senate hearing, “[I]t has become clear that our understanding of what advice is subject to legal professional privilege significantly differs from the position taken by some taxpayers and their advisers.
“We expect that these different views as to the scope of legal professional privilege will be tested shortly.”
In October 2018, Konza said the ATO was examining whether tax promoter penalties could be applied to Big Four accounting firms, and that claims of legal privilege had become critical to a number of corporate audits. He didn’t say which firms, but he referred back to his alarm over a September 2016 exchange with a “major accounting firm” – which was PwC.
“We want to see if tax promoter penalties apply in some cases,” he said. “Some of these companies are also claiming legal and professional privilege. We had one taxpayer who told us every single document we asked for was privileged.”
Jordan told the Tax Institute in May 2019, “It all comes back to fairness – are you using legal professional privilege because you have a genuine need, or as a way to cheat the system?”
By mid-2019, 24 large multinational companies represented by various Big Four firms had responded to ATO audits with blanket legal privilege claims – one in five large audit cases, Konza said. In one case 13,000 documents were withheld, in another case 19,000 documents.
The client who said no
Behind the scenes, the Tax Office’s desire for a test case was frustrated by companies buckling just as the ATO was heading for court. But the ATO came up against a PwC client that refused to roll over.
The JBS review had become a full audit in 2019. When the ATO issued notices to produce, PwC and JBS claimed privilege over 44,000 documents. In July 2020, the ATO filed a claim in Federal Court against PwC and three JBS companies, challenging their LPP claims.
Justice Moshinsky’s judgment on March 25 offered something for both sides. He denied the ATO’s argument that multi-disciplinary partnerships (lawyers and accountants in the same firm) had no legal privilege, and instead reviewed 116 sample documents chosen by the two parties.
He ruled that only 42 per cent of the sample documents were privileged, and 5 per cent were partially privileged.
The ATO was upbeat that blanket claims of privilege had been overturned. “They’re pretty happy,” says one lawyer. “They did win the headline, people are substantially over-claiming legal privilege. It’s not the first prize, but the second prize isn’t bad.”
On the other hand, finding that almost half of the PwC documents were wholly or partly covered by privilege was better than none at all, argued the proponents of multi-disciplinary partnerships.
“If anyone doesn’t use this [structure] going forward then they’re stupid,” one lawyer commented.
But there are penalties for getting it wrong in some circumstances. Failure to comply with an order to produce documents, including falsely claiming legal privilege, is a criminal offence with strict liability – which is why PwC had insisted the ATO guarantee it would not recommend prosecution if they lost the case, which meant that neither the firm nor its personnel could be charged with falsely claiming privilege even if the case had blown up on them.
National interest
A lot of jockeying remains as the two sides extrapolate Moshinsky’s judgment on 116 documents across 44,000 documents.
“The ATO cannot and will not simply accept blanket claims for privilege,” deputy commissioner Rebeca Saint told AFR Weekend. “We will always require sufficient information to support privilege claims, no matter the business model of the advisory or law firm.”
Operation Car Wash wound down. Some of the 1829 people the Batistas identified as taking their bribes were convicted, but others saw judges drop their cases. Wesley and Joesley spent six months in jail awaiting trial before they were released on bail. The charges were dropped, as were charges against former president Temer.
In June 2020, Brazil’s courts lifted the ban on Joesley and Welsey managing JBS, concluding that with the COVID-19 pandemic it was in the national interest for them to return to running their meat empire. They have not returned to the JBS board (their father, now 89, is still CEO) but with soaring meat prices today the family is twice as rich as they were before the scandal.
“What happened down there was unfortunate,” JBS Australia chief Brent Eastwood (who is not mentioned in the Moshinsky judgment) told The Australian in June.
“It happened in Brazil many years ago. Today we have an independent board in Brazil.
“The people that were involved in that are not on the board in any way shape or form, and the governance structure that has been put in place since then has strengthened the organisation. Australia was not involved in anything. We have a very high degree of governance control.”
In the US, J&F was fined $US256 million ($399 million) over the bribery schemes and JBS has paid $US290 million to settle separate price fixing claims for its beef, chicken and pork operations.
Back in Brazil
Other investigations of the Batista brothers continue in Brazil, where in February the courts knocked back an attempt by J&F to renegotiate its 10.3 billion reais fine down to 3.6 billion.
President Temer, whose approval rating sank to 7 per cent, survived attempts to impeach him and charges against him over the Batista tape were dropped. His party was routed in the 2018 election, when populist candidate Jair Bolsonaro swept to power on an anti-corruption platform.
The legacy of Brazil’s corruption scandal is a president more extreme than Donald Trump, whose response to the COVID-19 crisis in 2020 proved disastrous.
Bolsonaro’s family lawyer also works for the Batistas and the brothers appear close to the president, who is facing an old opponent in the presidential election.
Former president Luiz Inacio Lula da Silva shrugged off claims by Joesley Batista that he received $US70 million in bribes from J&F. And last year, after the Supreme Federal Court overturned da Silva’s 2017 conviction for corruption and money laundering because of bias by the judge, all further cases were dropped.
Da Silva and Bolsonaro go head to head in the presidential election late this month.
The only certain winner is the Batistas.
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Neil ChenowethSenior writerNeil Chenoweth is an investigative reporter for The Australian Financial Review. He is based in Sydney and has won multiple Walkley Awards.Connect with Neil on Twitter. Email Neil at nchenoweth@afr.com.au
Jared Bernstein, a member of theWhite House’s Council of Economic Advisers, lamented that outcome. “This is a loophole that absolutely should be closed,” Mr. Bernstein told CNBC last September. “When you go up to Capitol Hill and you start negotiating on taxes, there are more lobbyists in this town on taxes than there are members of Congress.”
PwC left in dark as JBS made corrupt payments
Executives of global meat giant JBS were secretly funnelling $US149 million in bribe payments to election candidates in Brazil’s federal election in 2014 at the time that the firm was negotiating with PwC to receive tax advice that was covered by legal professional privilege in Australia.
PwC had no knowledge of the corrupt payments while it spent much of 2014 pitching an international restructure to JBS in Sao Paolo, which it claimed could lawfully save the group $US250 million in US tax and up to $70 million in Australia.
“The Australian Taxation Office should not be able to obtain copies of it,” PwC Australia partner Glenn Russell told PwC Brazil partner Gustavo Carmona in an email on June 10, 2014, explaining the effect of legal privilege.
But PwC partners were shocked when it later emerged that coincidentally Joesley and Wesley Batista, the chairman and CEO of JBS SA, were using dozens of law firms in Brazil to disguise corrupt payments to local candidates, paying fictitious invoices to the firms.
The payments, through the Batistas’ family company, J&F Investimentos, are detailed in a US Department of Justice plea deal in 2020.
Justice Mark Moshinsky chronicled PwC’s unrelated negotiations with JBS in a Federal Court judgment where he found that less than half of PwC’s documents were covered by legal professional privilege. There has been no indication that JBS sought to use legal professional privilege in Australia to disguise any nefarious payments.
JBS contracted to receive legal advice from Mr Russell two days after he was registered as a solicitor in Queensland on July 14, 2014, Justice Moshinsky found.
There is no suggestion that either PwC or JBS Australia was involved in illegality. But the case is an embarrassment to PwC in light of the corruption scandal that subsequently enveloped JBS in Brazil.
The case raises questions about PwC’s due diligence procedure in selecting clients, as JBS became embroiled in Operation Car Wash, the world’s biggest corruption inquiry.
Between January 2015 and May 2016, Deutsche Bank Trust Company Americas filed nine Suspicious Activity Reports (SARs) citing unusual wire transfers involving JBS, together with media reports of police investigations.
The SARs were part of a leak of reports filed to the US Treasury’s Financial Crimes Enforcement Network and obtained by BuzzFeed and the International Consortium of Investigative Journalists. They show that Deutsche emailed JBS: “Our research indicated that JBS SA is currently under investigation for bribery, racketeering, corruption, fraud and collusion involving officials by the Federal Prosecutor.”
Financial crime expert Nathan Lynch, of Thomson Reuters, said: “It’s unlikely there would have been any suspicious matter reports (SMRs) in Australia, as the bribery allegations don’t involve any local subsidiaries. There’s no suggestion that bribes were paid to facilitate business here.”
The corruption saga culminated in 2017 with a $US3 billion fine for J&F Investimentos after Joesley Batista admitted bribing 1829 officials and wearing a wire while he discussed bribes with Brazil’s president. Throughout this time PwC continued to work on a plan to float JBS on the New York Stock Exchange.
While the JBS saga played out, accounting bodies and the Law Society lobbied vigorously against the introduction of Tranche 2 of Australia’s anti-money laundering legislation, which would require accountants and lawyers to report suspicious transactions.
“When the former government set out a plan for Tranche 2 in 2016, they basically packed up the document and buried it,” says Senator Deborah O’Neill, who helped write a recent Senate report on the legislation.
Mr Lynch said: “Due to the 16-year failure to pass Tranche 2 laws, the accounting firms in Australia are not required to report anything suspicious to AUSTRAC.
“This also means they don’t need to have a financial crime compliance program, they don’t need to train their staff, and they don’t need to do any screening on their customers.
“So the failure to move on Tranche 2 has really left Australian authorities with some huge blind spots when it comes to investigating the major global financial crime cases.”
“Australia is becoming a haven for white-collar crime and money laundering,” Senator O’Neill said. “We need to join the rest of the world, the rest of the developed economies, and implement Tranche 2 and pursue a beneficial ownership register.”
Mr Lynch said: “Last year’s Senate inquiry into AML found that we were, in fact, floundering somewhere alongside Haiti and Madagascar. It’s very hard for Australia to sell itself as a regional financial centre of excellence when we’ve fallen so far behind the rest of the world in this area.”
