Sembcorp Marine (SGX: S51) shares dropped significantly last week as news came through of a corruption inquiry into Sembcorp's Brazilian subsidiary. As we noted at the time the idea that there might be corruption in a government supply contract in Latin America might not be the biggest surprise ever to hit capitalism or stock markets. As it has turned out that seems to be the market reaction as well. Sembcorp shares have regained their losses and that's not because the market price level as a whole has risen that much. Rather, because on mature consideration this worry about corruption in Brazil is not wholly material to any valuation of Sembcorp as a whole.
This might not have been true, obviously. Uncovering some new and unexpected corruption could have - in these days of significant fines and bans from bidding if found guilty - had a significant effect upon Sembcorp as a whole. But as the company has revealed, this all goes back to Operation Car Wash. That's where near the entirety of the Brazilian state was involved in an orgy of corruption surrounding the revenues of the state oil company, Petrobras with valuable assists from Odebrecht. At least one Brazilian President went to jail over this and estimates of total funds lifted range from $2 billion (USD) to $14 billion.
Sembcorp Marine share price from SGX
Given that connection to Operation Car Wash we might assume that there's little risk. Partly on the basis that as Sembcorp has said, this is more an investigation into what happened rather than a hunt for the guilty so as to punish. But we can also be slightly more realistic. The whole system was grossly corrupt back then. Bids to supply Petrobras were routinely inflated, the extra money then being shared out among the conspirators. Some of the money then became the major fuel for the Brazilian political system. “Everyone was at it” isn't a great defense in criminal law but it is something that we already knew. Near no one doing business in Brazil at that time - doing business with the government at least - was likely to not be involved at least at some level. So this becomes - as with our original comment - something which isn't a great surprise. Yes, obviously, corruption is bad, But given that we knew Sembcorp was doing business in Brazil at the time then to some extent we already knew that there would be problems like this lurking in the background.
