Brazil Police Investigate Panama Bank

SÃO PAULO—Brazil’s authorities are investigating a Panamanian financial institution that allegedly worked with “Panama Papers” law firm Mossack Fonseca  & Co. to set up offshore accounts for Brazilian clients, in an operation that is an offshoot of the Car Wash corruption probe.

Police and prosecutors said Thursday during a press conference that police have detained for questioning seven people in São Paulo state linked with the financial institution, FPB Bank Inc.

According to prosecutors, there is evidence that services provided by FPB and Mossack Fonseca, the Panama City-based law firm whose client records were exposed as part of the so-called Panama Papers leak, were used by clients in Brazil to hide money coming from bribes paid in a bid-rigging scheme at state oil company Petróleo Brasileiro SA, or Petrobras.

Earlier this year, Mossack Fonseca was the victim of a massive leak of documents detailing its business of setting up corporate entities in tax havens around the world. The law firm has said the leak was illegal and denied any wrongdoing in setting up the offshore companies.

FPB has been offering certain banking services in Brazil without authorization from the Brazilian central bank, prosecutors said, and allegedly managed accounts containing funds from undeclared sources and without declaring the existence of the accounts to banking authorities.

“A clandestine bank opens a huge gap for money laundering. While money transfers via authorized banks happen in daylight, a clandestine bank operation took place in the shadows,” said Deltan Dallagnol, a prosecutor, who is one of the coordinators of Operation Car Wash.

Brazilian authorities suspect FPB employees in Brazil used Mossack Fonseca to open offshore companies for its clients, prosecutors said.

Representatives for FPB and Mossack Fonseca couldn’t be reached for comment.

There is evidence that offshore accounts set up by Mossack were used to hide resources diverted from Petrobras, said Igor Romário de Paula, a regional federal police chief, during the press conference.

Thursday’s operation was the latest in a sweeping investigation into allegations of corrupt bidding practices in Brazil. Operation Car Wash, as the widespread investigation is known, started at Petrobras, then spread to other state companies.

Write to Rogerio Jelmayer at rogerio.jelmayer[a]wsj.com