Brazil suspends leniency deals with companies in corruption probe

SAO PAULO (Reuters) - Brazil's new Minister of Transparency and Oversight said he was suspending negotiations of leniency agreements sought by engineering and construction companies caught up in a massive corruption investigation.

The minister, Fabiano Silveira, said in a Globo News television interview aired on Tuesday that interim President Michel Temer's government wants prosecutors and the federal audit court to be part of the negotiations.

That would require the new government to sponsor legislation that would have to pass Congress before talks can resume.

Thirty-one contractors, including Brazil's largest builders, have been banned from signing new contracts with state-run Petrobras (PETR4.SA) since late 2014 due to accusations they colluded to overcharge the oil company and used the extra funds to bribe politicians.

About half of those, including Latin America's largest engineering conglomerate Odebrecht, were known to be negotiating leniency agreements with the federal government, a measure permitted under Brazil's anti-corruption law.

The agreements would allow companies to bid for new government contracts as long as they admitted wrongdoing, collaborated with investigators and paid a fine.

Companies that do not ink deals risk the same fate as Mendes Junior Engenharia (MEND5.SA), which was banned on April 28 from public tenders for at least two years, the first builder to be punished by the government.

Suspended President Dilma Rousseff, whom the Senate last week voted to put on trial on charges of breaking budget laws, last year proposed a measure to speed up the leniency deals. Her government argued the deals were needed to avoid further damage to an economy already deep in recession.

But prosecutors who discovered the graft scheme at Petroleo Brasileiro SA, as Petrobras is formally known, criticized the scheme. They argued that without their participation in the negotiations, the government would let companies off too easily and give them no incentive to avoid committing crimes.

"The more legitimate actors that participate in this process, the better. This offers more security for the prevention and prosecution of the offence," Silveira said.

Temer folded the comptroller general's office, which was negotiating leniency deals, into a new Transparency and Oversight ministry, which went into action on Tuesday with federal police in an anti-fraud operation in Santa Catarina state.

The ministry said in its first press release on Tuesday that four people were arrested and document seized in the investigation of graft in municipal sanitation contracts.

(Reporting by Caroline Stauffer and Anthony Boadle; Editing by Richard Chang)