Exclusive: Brazil prosecutors seek leniency talks with BRF in food fraud probe

By Ana Mano

PONTA GROSSA, Brazil (Reuters) - Brazilian federal prosecutors probing whether chicken processor BRF SA <BRFS3.SA> and certain laboratories colluded to cheat on food safety tests are seeking cooperation from the firms in return for more lenient penalties, a federal prosecutor told Reuters in an interview.

Prosecutors had found "grave irregularities" and would demand that the companies carry out a root-and-branch restructure as part of any leniency deal, federal prosecutor Lyana Helena Joppert Kalluf said last week.

Police raids of three testing laboratories owned by Mérieux NutriSciences Brasil and used by BRF had turned up data showing a "systematically" high number of false positives for the salmonella pathogen, according to court documents seen by Reuters that were previously sealed.

That raises questions over the methodology used by the labs, with the level of false positives deemed "unacceptable" by Ministry of Agriculture experts, the documents showed.

The ministry declined to comment. BRF said by telephone it could not comment on any potential leniency talks. In a previous statement, the company said it was cooperating with the police and was fully compliant with Brazilian and international norms.

Mérieux, controlled by France's Institut Mérieux, a holding company that also owns diagnostics firm Biomérieux <BIOX.PA>, said in an email it had not had access to the ministry's opinion as expressed in the court filing.

"Based on our internal tracking systems that compile test data going back years, there is no evidence to support claims of a high rate of false positives in salmonella tests" carried out in its Brazilian food labs, it said.

Mérieux has previously said there was no evidence of wrongdoing by its laboratories.

BRF shares added to earlier losses after the Reuters report and were down 3.3 percent at 20.91 reais in late afternoon trading.

BRF, the world's biggest chicken exporter, and five Mérieux laboratories in Brazil accredited by the ministry are being investigated by police over accusations that they falsified test results.

The probe stemmed from another in which BRF and other meatpackers were accused of bribing government health inspectors to evade food quality and safety checks.

The scandals sent BRF's shares plunging and prompted several export markets to temporarily close their doors to Brazil.

Repairing BRF's reputation is the No. 1 challenge ahead for the company's recently named chief executive, Pedro Parente.

Kalluf said she and her colleagues were seeking leniency talks with BRF and Mérieux, an instrument widely used during Brazil's so-called Car Wash corruption probes with which authorities can advance and conceivably widen an investigation through cooperation.

Speaking in her office in Ponta Grossa, Parana state, Kalluf said that leniency talks tend to be complex and demand collaborative testimony from the parties involved - which she said had yet to be forthcoming in this case.

"We've identified grave irregularities in terms of public health," she said. "What we want first and foremost is that this is the object of a corporate restructuring."

Kalluf said no one had been charged in connection with the probe.

In securities filings, BRF has said the investigations "may result in penalties, fines and sanctions from governmental authorities or other forms of liability."

A successful leniency negotiation requires a commitment from the signing companies to tackle the root of the misconduct. They also normally entail financial compensation for damages, Kalluf said.

The next milestone in the case will be the release in late September of a full report detailing the key findings of the probe after the March police raids, she said.

The companies may become keener on entering leniency talks once that report is released, Kalluf said, adding that the criminal investigation will continue regardless of whether they do engage in talks.

"We will not stop the criminal probe to discuss leniencies. If a company engages in leniency discussions, this will be evaluated separately."

(Reporting By Ana Mano; Editing by Christian Plumb and Rosalba O'Brien)