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Photographer: Nadia Sussman/Bloomberg Photographer: Nadia Sussman/Bloomberg

In the shadow of Brazil’s once-mighty oil giant, another state-run behemoth is trying to get ahead of the nation’s biggest-ever corruption scandal to avoid the fallout that has already crippled more than a dozen companies.

A team of lawyers and specialists hired by Centrais Eletricas Brasileiras SA, known as Eletrobras, started reviewing Latin America’s biggest electric utility in June to determine whether it has had any losses from graft, according to a regulatory filing. Since then, the internal probe has swelled to involve more than 100 investigators, $15 billion of investments, 10 subsidiaries and three of Brazil’s biggest power projects, said a person with direct knowledge of the matter.

Until Eletrobras can put a price tag on the cost of possible corruption at the company, its auditor, KPMG LLP, is refusing to sign off on its 2014 financial report, as required by the U.S. Securities and Exchange Commission, said the person, who asked not to be identified speaking about a private matter. The inquiry at Eletrobras -- and other offshoots like it that are just getting started -- threaten to add years more to the 21-month-old scandal that began at the state-run oil producer known as Petrobras. The larger federal investigation has already helped tip Brazil into its worst recession in a quarter century and paralyzed the nation’s political institutions.

Economic Impact

“I can’t imagine the chaos a scandal involving Eletrobras would cause in the country’s economy,” said Pedro Paulo Silveira, chief economist at brokerage TOV Corretora in Sao Paulo. “It would be huge.”

As the kickback scheme at Petrobras has exploded publicly and received almost daily coverage in every major newspaper, the saga playing out at its counterpart in the electric sector has unfolded largely out of the international spotlight. Piecing together interviews with four officials directly involved in the case and regulatory filings, financial statements and court documents show the allegations against it are also serious.

Two builders who admitted to paying bribes to win lucrative contracts at Petrobras have alleged corruption at Eletrobras projects. At least one federal investigation involving alleged wrongdoing at an Eletrobras project is underway, two shareholder lawsuits have been filed in the U.S. and a top former executive has been arrested.

Joint-Venture Review

Eletrobras’s press office declined to comment on the internal probe, the police investigation or make executives available to comment for this article. Chief Financial Officer Armando Casado said at an event with investors earlier this year that KPMG is asking Eletrobras for a list of contract processes, as well as a review of joint ventures and bidding processes.

For many on the long list of Brazilian companies whose executives have been accused of wrongdoing, the spreading investigation known as Carwash has been devastating. It has helped erase more than $23 billion of market value this year from Petrobras, which at its peak was the world’s fifth-largest company. Grupo BTG Pactual SA faced a liquidity crunch after Andre Esteves, the investment bank’s billionaire founder, was arrested on Nov. 25 on allegations he tried to interfere with the testimony of a former Petrobras executive. He has denied the accusations. OAS SA, Grupo Schahin and Galvao Engenharia SA are among companies that filed for bankruptcy protection after being locked out of credit markets or losing business because of Carwash allegations. Brazil’s currency, the real, has tumbled 34 percent this year.

Widening Scandal

Petrobras was the “thread that when you pull it, it keeps unraveling until you realize that Brazil as a whole is rotten,” said Walter Maierovitch, a former judge and columnist at O Globo newspaper.

Eletrobras, on the other hand, hasn’t been as hard hit. The company’s preferred shares surged 44 percent in the 12 months through Monday as investors take advantage of a dividend yield that’s forecast to be twice the average of Brazil’s 98 most-traded stocks. The common shares were down about 1 percent, compared with a 13 percent drop for the Ibovespa index. Petrobras has plunged 32 percent.

“There are always a lot of rumors regarding corruption at Eletrobras, but the graft probe has not hit the company yet because the other investigations became bigger than expected,” said Filipe Borges, an analyst at brokerage Solidez Corretora. If the speculation turns out to be true, “there’s a lot of room for it to decline.”

Concrete Allegations

While a project controlled by an Eletrobras unit was mentioned in passing by a jailed Petrobras executive in the beginning phases of the scandal, it wasn’t until March of this year -- 12 months after the oil-industry case exploded -- that concrete allegations were lobbed against Eletrobras.

On that March morning in a conference room of a federal building in southern Brazil, construction executive Dalton Avancini sat down in front of a microphone and recounted a tale of allegedly crooked politicians, contract fixing and million-dollar bribes, according to a person with direct knowledge of the testimony.

Avancini, who was chief executive officer of builder Camargo Correa SA when he was arrested in November 2014, alleged graft at two Eletrobras projects: the Angra III nuclear power plant near a Rio de Janeiro bay popular with Brazil’s elite and the Belo Monte hydrodam deep in the Amazon jungle. Costs for the latter project have surged to more than 30 billion reais ($7.5 billion) from 19 billion reais when the project was licensed in 2010. Camargo Correa was a builder on both works.

Sealed Investigations

Within weeks, Eletrobras’s own team of lawyers reached out to judicial authorities, wanting to cooperate and gain access to the testimony and other documents in the case, the company said in a regulatory filing. They were told the investigations were sealed. They have asked twice more since then and were denied each time.

A few months later, a second construction executive also began testifying after reaching a plea bargain: Ricardo Pessoa, the owner of UTC who was arrested in November and has admitted to acts of corruption. In testimony released by the Supreme Court this month and obtained by Bloomberg, Pessoa also made claims of bribery at Angra III.

Both executives, through their lawyers, declined to comment.

The testimonies led to the July arrest of the former head of Eletrobras’s nuclear-power unit, Eletronuclear. Federal police alleged in a July 28 press conference that Othon Luiz Pinheiro da Silva -- who took a leave of absence as CEO in April -- allegedly accepted bribes in exchange for awarding contracts to at least two builders. Pinheiro da Silva has denied any wrongdoing.

Slashing Investments

As the accusations in the federal investigations piled up, Eletrobras’s own lawyers realized they couldn’t keep up, said the person familiar with the internal probe. Having watched the havoc the investigation had caused at Petrobras -- forcing the Rio de Janeiro-based oil producer to replace its CEO and slash billions of dollars in investments -- Eletrobras wanted to get to the bottom of the allegations before federal officials did. So in June, weeks before Pinheiro da Silva’s arrest, it hired Hogan Lovells, a well-known British-American law firm. Brazilian firm WFaria Advogados was contracted to assist.

While there are many reasons why Eletrobras wants to get ahead of any scandal -- including the SEC’s demands to complete its financial statements -- two chief reasons are this: Completing its internal investigation could help it avoid large fines and will also make it easier to do damage control for its corporate image, reducing the fallout, said the person with direct knowledge of the utility’s strategy.

International Norms

“Following Petrobras, efforts to combat financial crime are more in line with international norms,” said Alessandra Gonsales, a partner at WFaria. She declined to provide specifics on the internal probe. Hogan Lovells didn’t respond to requests for comment.

Eletrobras’s team of internal and outside lawyers has already interviewed more than 100 executives, seized hundreds of computers and scrutinized over 2,000 pages of contracts, invoices and internal memos, according to the person with direct knowledge. While it was the Petrobras investigation that led federal prosecutors to Eletrobras in the first place, the sheer size of the oil-industry crisis is also providing cover for the utility -- and buying it time.

“The Petrobras case is already too big,” said Modesto Carvalhosa, a law professor at Sao Paulo University. “It diverts the focus.”