The Brazilian government is launching a massive probe into 18 different companies to examine allegations of corruption. While such probes frequently sweep up local companies, this probe includes at least two major international firms, Siemens AG (NYSE:SI) (FRA:SIE) (France) and Alstom SA(EPA:ALO) (Germany). The probe centers around allegations of price fixing for construction projects and the upkeep of metro and train networks.

Brazil flag

Brazil’s Justice Minister is investigating allegations that the 18 companies fixed prices on at least 15 different projects with a total value of $4 billion dollars. At least 109 different employees are being investigated. The projects were spread across the country, including the states of Rio de Janeiro, Minas Gerais , Sao Paulo,and Rio Grande do Sul and the Federal capital district.

Both Siemens AG (NYSE:SI) (FRA:SIE) and Alstom SA (EPA:ALO) have denied the allegations and stated that they take corruption very seriously. Both companies have promised to cooperate with authorities. Canadian based Bombardier has also been under investigation in the probe.

Allegations of corruption serious

The Brazilian government claims that the companies used several different strategies, including prearrangements of offers in the bidding process and bribes given to government officials in order to secure contracts.

It also appears that the companies colluded to insure that particular companies won contracts in the bidding process. Allegedly, the companies formed a cartel and only one company at a time would bid on a project to ensure that they received the contract. This allowed the bidding company to inflate prices and overcharge the government.

If these allegations are found to be true, the ramifications will be serious. The Brazilian government may have lost tens of millions of dollars and will be looking to recoup those losses. The government will also likely look to discourage companies from engaging in such activities in the future by levying heavy fines.

Corruption a serious problem for Brazil

Home to over 200 million people and with a nominal GDP of approximately $2.7 trillion dollars, Brazil is South America’s largest economy. Brazil has become a regional powerhouse in Latin America but its growth has not come without setbacks.

Still, corruption charges are frequent in spite of President Dilma Rousseff’s strong statements and efforts to combat the issue. Brazil’s complex regulatory environment creates numerous opportunities for companies to bribe government officials. Brazil’s federal system also offers local politicians and bureaucrats a considerable amount of money over spending, which also creates opportunities for bribery.

The government is working towards reform and transparency. Still, progress has remained slow and in the meantime corruption is likely to remain a major issue.