21.1. General aspects of the Brazilian financial system
The Brazilian financial system is regulated, in the context of the activities related to the credit, capital, foreign exchange and monetary markets, essentially, by the following acts:
(i) the Federal Constitution of 1988;
(ii) Law No. 4,131, of September 3, 1962;
(iii) Law No. 4,595, of December 31, 1964;
(iv) Law No. 6,385, of December 7, 1976;
(v) Resolutions of the National Monetary Council;
(vi) Circulars and circular letters from the Central Bank of Brazil; and
(vii) Rules issued by the Brazilian Securities Commission.
Without prejudice to other laws and regulations, Law No. 4,595 (“Banking law”), is considered the main normative source of the financial system, which was designed exactly with the purpose of regulating the financial system and defining the composition of its present structure.
Federal Law No. 4,595 considers as financial institutions the private and public entities that, on a principal or ancillary basis, collect, intermediate or invest financial resources for their own account or for third parties, in domestic or foreign currency, likewise act as custodians of assets belonging to third parties. In light of this broad definition, certain activities that are somehow related to, but do not actually constitute, strict banking activities (e.g., capital markets transactions) have been deemed activities carried out by financial institutions in Brazil. Thus, the Brazilian Financial System encompasses banking activities, as well as other activities which are contemplated under this definition.
Nowadays, the national financial system, under the referred law, consists of the following entities: National Monetary Council (“CMN”), Central Bank of Brazil (“Bank” or “Central Bank”), Bank of Brazil S.A. (“Bank of Brazil “), National Bank for Economic and Social Development – BNDES (“BNDES”) and other public or private financial institutions.
Although the Banking Law does not regulate specifically these entities, the following entities are considered as forming the financial system: the Brazilian Securities and Exchange Commission (“CVM”); the Superintendence of Private Insurance (“SUSEP”); the National Superintendence of Pension Plans (“Previc”); the National Private Insurance Council (“CNSP”); and the National Council for Pension Plans (“CNPC”).
It is possible to identify, within the Brazilian regulatory environment, a trend to improve regulatory efficiency, based on the growing sophistication of supervision models and tools, in addition to the increasing adherence to international standards of compliance such as the ones established in the Basel Principles.
21.1.1. The National Monetary Council
The CMN, created under the Law No. 4,595, is the highest deliberative body of the National Financial System, and among its main functions, under article 3, includes acting as a regulator of the Brazilian currency issuance and its circulation in the country and overseas, maintaining the stability of the balance of payments and coordinating the policies in the economic and financial context in Brazil.
CMN is also the authority to rule and legislate over the limits and amounts involved in the provision of banking services and financial transactions, among other activities related.
The CMN today is composed of:
(a) the Minister of Finances, as Chairman;
(b) the Minister of Planning, Development and Management; and
(c) the Chairman of the Central Bank of Brazil.
In addition to the Technical Commission of Money and Credit, created under the Law No. 9.069 as an advisory commission of CMN, there are also 7 other commissions that assist CMN in relation to the following matters: rules for the organization of the Brazilian financial system; the stock and exchange markets; rural credit; industrial credit; housing credit, sanitation and urban infrastructure; public indebtedness; and monetary and exchange control policies.
21.1.2. The Central Bank of Brazil
The Central Bank is responsible for the implementation and enforcement of the regulations and guidelines set forth by the CMN. The main goal of Central Bank is to promote the stability and purchasing power of the Brazilian currency, as well as to strengthen the local monetary system and supervise the conduct of financial institutions.
The Central Bank is also competent to grant the licenses to the financial institutions operate and to supervise the financial market, which also comprises the following:
(i) licensing and authorization (i.e., entry into the market of a supervised entity);
(ii) supervision of the activities of public and private financial institutions, involving risk monitoring and risk control;
(iii) approval of any merger, acquisition or change in the corporate control of financial institutions, as well as certain other changes in such institutions;
(iv) sanctioning or imposition of penalties in case of non-compliance with the applicable rules, fraud, bad management or other types of wrongdoing;
(v) management of the national payments’ system and establishment of a monetary policy as well as the interest rate and the control of the granting of loans;
(vi) crisis management;
(vii) publishing foreign currency exchange rates;
(viii) monitoring and registering foreign capital flows and cross border transactions out of/from Brazil; and
(ix) supervising financial transactions together with the Council for Financial Activities Control (“COAF”) for purposes of antimony laundering.
Moreover, the Central Bank is responsible for the issuance of the hard currency, according to the limitations imposed by CMN, as well as to conduct the transactions related to buying or selling federal government bonds in view of the control of the national monetary policy, and exercising a permanent vigilance on the companies that interfere in any way in the financial and capital markets, among its many other functions, as provided by Law No. 4,595.
Under article 13 of the referred law, the duties and services of competency of the Central Bank, when not performed by it directly, may be contracted preferably with the Bank of Brazil, except if otherwise authorized by CMN. The Central Bank may enter into transactions with financial institutions, although it is not permitted to enter into any transactions with public or private legal entities, except as provided expressly by law.
According to the Central Bank’s bylaws, it is managed by a board of offices composed of nine members, all appointed by the President.
With regard to its resources, the funding is made through financial transactions and other investments made with its own funds, foreign exchange transactions, purchase and sale of gold or other foreign currency transactions and those which may be obtained through fines and interest, as determined by law.
21.1.3. The Brazilian Securities Exchange Commission (CVM)
CVM was created by Federal Law No. 6,385 of 1976, as an independent agency with powers to regulate and supervise activities related to public-reporting companies, as well as those in connection with public offers of securities in the Brazilian stock exchange and over-the-counter markets, including investment funds.
CVM has among its objectives:
(i) the assurance of the proper functioning of the stock exchange and over-the-counter markets;
(ii) the protection of all securities holders against fraudulent issues and illegal actions performed by company managers, controlling shareholders or fund managers;
(iii) the prevention of any kind of fraud or manipulation that may give rise to artificial price formation in the stock market;
(iv) the assurance of public access to all relevant information about the securities traded and the issuing companies;
(v) the insurance that all Market participants adopt fair trading practices;
(vi) the stimulation of the formation of savings and their investment in securities; and
(vii) the promotion of the expansion and efficiency of the securities market and the capitalization of Brazilian publicly held companies.
21.1.4. Bank of Brazil
Under Law No. 4,595, the Bank of Brazil, under CMN’s supervision, and as an instrument of execution of the credit and financial policy of the federal government, is responsible for entering into transactions for the necessary payments for the execution of the Brazilian federal budget and collect any revenues from federal funds, in the capacity of Financial Agent of the National Treasury, and, as main executor of banking services to the Federal Government, collect any funds of the federal entities, except as expressly authorized by CMN and under the Central Bank’s proposal.
Furthermore is responsible to make available credit to finance the industrial and rural activities, the import and exports, as well as finance other economic activities where the banking network is not so present, among its many other activities, as provided in article 19 of the referred law.
The President of the Bank of Brazil shall be appointed by the President of Brazil, after approval by the Senate, and must be a person of unblemished reputation and remarkable ability, as also required of the elected directors.
21.1.5. The National Bank of Economic and Social Development – BNDES
BNDES, founded in 1952, has as its primary function the implementation of investment policies of the federal government, aiming to improve the economic and social development of the country, strengthen the national business sector, to reduce regional imbalances, among other purposes.
In accordance with Law No. 1,628/52, Law No. 2,973/56 and Law No. 4,595/64, it is deemed as a state-owned financial institution with legal personality under private law, and with its own capital stock, under the Ministry of Planning, Development and Management.
BNDES has two subsidiaries:
(i) BNDESPAR, whose main objective is to promote the capitalization of domestic companies through the acquisition of equity interest, and contribute to the strengthening of the capital market through the increase of the offering of securities and democratization of companies capital ownership, and
(ii) FINAME (Special Agency for Industrial Financing), whose purpose is to finance the production and commerce of machinery and equipment to domestic companies.
21.1.6. Public Financial Institutions
Public financial institutions, according to Law No. 4,595, are supporting entities in the execution of the Brazilian federal government credit policy. CMN is the authority responsible for the regulation of the activities, capacity and operating mode of these entities, in accordance with the first paragraph of article 22, of the referred law.
Law No. 4,595, in its article 24, sets forth that to nonfederal public financial institutions will also apply the same regulations applicable to private financial institutions.
21.1.7. Private Financial Institutions
Private financial institutions, with the exception of credit unions, must be incorporated as corporations, in which all of its capital stock with voting rights shall be represented by nominative shares.
Under article 26 and 27 of the Banking Law, any public or privately held financial institution must contribute its initial capital stock with cash. However, subsequent inflow of capital injections of financial institutions, not paid up, will only be allowed if destined to incorporate any reserves or by revaluation of part of the fixed assets, as determined by CMN and by the National Economy Counsel, respectively.
Under article 30 of the Banking Law, private financial institutions, except for investment institutions, may only participate in the capital of other duly authorized institutions if expressly approved by the Central Bank and with due cause; with the exception of subscription guarantees, as established by the CMN.
21.2. General rules of financial institutions
In accordance with article 17 of Law No. 4,595, it shall be deemed as a financial institution any legal entity, public or private, that has as main or ancillary activity the collection, intermediation or application of its own or third parties funds, in national or foreign currency, as well as custody of third parties properties, including individuals who, permanently, undertake any of these activities.
Financial institutions may operate in Brazil only upon prior approval of the Central Bank or, if foreign companies, upon approval by presidential decree.
The Central Bank also imposes certain operational rules applicable to financial institutions, including on the following aspects: (i) the period during which branches may remain open to the public; (ii) operational limits for certain financing transactions; (iii) formalities in the recording of financial transactions; and (iv) requirements for opening new branches.
Moreover, Brazilian financial institutions are subject to the Basel Convention rules, incorporated into the Brazilian regulation under various CMN Resolutions. More recently, the Central Bank has issued the procedures and timeline for the regulation and compliance with Basel III, with deadline for compliance in Brazil varying between 2019 and 2022, depending on the rule.
21.2.1. Incorporation, authorization to operate and other conditions
Resolution No. 4,122, dated as of August 2, 2012, establishes the requirements for incorporation, authorization for operating, cancellation authorization, change of control, corporate reorganizations and conditions for the exercise of high management positions in financial institutions and other institutions authorized to operate by the Central Bank.
The opening of a financial institution process starts with the presentation of the certain documents to the Central Bank, including: (i) draft of purposes statement; (ii) executive summary of the business plan; (iii) identification of the members of the institution’s controlling group and the qualified shareholders of the institution; (iv) identification of individuals and legal entities, part of the economic group of which the institution will be part and that can influence the business in any form; (v) demonstration of knowledge about the business and the segment that it intends to operate; and (vi) identification of the origin of the funds to be invested.
After receiving the proper documentation, the Central Bank shall call the future shareholders for a technical interview, although a second interview may be required for resubmission of adjustments to the proposal.
With the favorable opinion of the Central Bank, within 60 days, interested parties shall: (i) publish the statement of purpose of the parties which are not part of the controlling group of the institution; (ii) submit a business plan, including financial, marketing and operational plans; (iii) present the draft constitutional documents; (iv) present a statement of financial and economic capacity; and (v) demonstrate the absence of restrictions that may affect the reputation of the controllers and holders of qualified equity, at the Central Bank discretion.
Within 180 days, the interested parties should also: (i) formalize its constitutional documents; (ii) implement the organizational structure, including the structure of corporate governance, management of business, risks and internal controls, provision of electronic systems and labor force, purchase of equipment and the adoption of other necessary measures to the activities of the institution; and (iii) submit a request to perform the inspection of the implemented organizational structure, which must occur in the period of 90 days, from the request to the Central Bank.
Upon confirmation of the adequacy of the organizational structure of the institution, the authorization of the institution will be granted by the Central Bank within 90 days of submission of the following supporting documents: (i) amendment to the by-laws or articles of association in order to update the corporate capital in relation to the amount established in the business plan; (ii) proof of origin of the funds; and (iii) election of officers and directors and other management members of the institution.
With respect to the transfer of control and corporate reorganization of the financial institutions, a prior of authorization of the Central Bank shall be necessary for any change, direct or indirect, in the controlling group, which includes any change of the people who exercise the effective management of the institution management business, according to article 13, of the Resolution No. 4,122.
It shall result in the cancellation of the authorization to operate as a financial institution when the financial institution loses its defining characteristics due to the dissolution of the company or change in its corporate purpose. In case of cancellation request, it shall be mandatory the publication of a statement of purpose for such cancellation, as well as a resolution passed in the general shareholders meeting and the related formal request to the Central Bank.
Additionally, the Central Bank may also cancel the operating license of the institution if confirmed any of the following events: (i) lack of continuous execution of the essential operations; (ii) operational inactivity; (iii) non location of the address provided; (iv) unjustified interruption, for more than 4 months, of remittance of the statements required by applicable regulations; and (v) non compliance of the business plan.
In addition to the established in Resolution No. 4,122, additional information regarding the incorporation, authorization to operate, change of control and corporate reorganization and cancellation of the authorization are set forth in Circular No. 3,649, of March 11, 2013, from the Central Bank.
Pursuant to CMN’s Resolution No. 2,099, as amended from time to time, the authorizations from the Central Bank to the financial institutions are subject to the maintenance by the financial institutions, at any time, of the minimum capital required, as set forth in these regulations.
21.3 Types of Financial Institutions
21.3.1 Multiple Banks
The multiple banks are regulated by the CMN Resolution No. 2,099, of August 17, 1994. These private or public financial institutions are incorporated as corporations, and shall have a minimum of two different business lines, including at least a commercial or an investment business line, in addition to any of the other business lines below indicated as freely elected by the bank:
(b) investment and/or development,;
(c) real estate credit;
(d) credit, financing and investment; and
The main purpose of a multiple bank is to allow a single financial institution to be able to maintain different types of activities and business lines, thereby increasing significantly the administrative efficiency of banking conglomerates.
In fact, most banks in Brazil are allowed to function as multiple banks, in contrast to the past, when a permit for each type of business line was requested.
The operations performed by multiple banks are subject to the same regulations applicable to each institution with its corresponding business line, not being permitted the issuance of debentures.
21.3.2. Commercial Banks
Commercial banks are private or public financial institutions, incorporated as corporations, which must carry in its name the term “banco”.
The main purpose of commercial banks is to provide funds to finance, in the short and medium term, trade, industry, service providers, individuals and third parties in general.
The activities which commercial banks may perform are, among others, the following:
(i) proceed in the discounting of credit instruments;
(ii) opening of credit and finance transactions;
(iii) provide guarantees;
(iv) custody of assets;
(v) perform all forms of collections and payments;
(vi) collect deposits for the Employee’s Dismissal Fund (Fundo de Garantia por Tempo de Serviço – “FGTS”);
(vii) enter into foreign exchange operations, duly authorized by the Central Bank;
(viii) holding checking and investment accounts;
(ix) receiving cash deposits;
(x) receiving and processing payments of public utility and private entity bills; and
(xi) collecting drafts and other credit instruments.
Additionally, the collection of demand deposits, freely transferable, is a typical activity of a commercial bank, which may also receive time deposits.
21.3.3. Saving Banks
Saving banks are banks, mostly state-owned institutions, which play a similar role to that of commercial banks, since they receive savings deposits from the public.
Caixa Econômica Federal (CEF) is currently the major savings bank and one of the largest financial institutions in Brazil. Most of the loans under the Federal Housing Credit Program are extended by CEF. It also manages the funds of the National Unemployment Compensation Fund (FGTS) and the Social Integration Program (PIS/PASEP), as well as domestic lotteries.
21.3.4. Investment Banks
According to CMN’s Resolution No. 2,624, of July 29, 1999, investment banks are private financial institutions, incorporated as stock companies and must contain in their names the term “investment bank” (“banco de investimento”).
Its primary objective is to enter into temporary equity related, financing transactions of the productive activity for the provision of fixed and working capital and the administration of third party funds.
In addition to its inherent activities, investment banks may also perform the following:
(i) buying and selling, on its own or third parties account, precious metals in the physical market, and any securities, in the financial and capital markets;
(ii) operate on stock and exchange markets, and in organized OTC markets, on its own or third parties account;
(iii) operate in all lending modalities for financing fixed capital and working capital;
(iv) participate in the process of issuing, resale for subscription and distribution of securities;
(v) enter into foreign exchange transactions upon specific authorization from the Central Bank;
(vi) coordinate the reorganization and restructuring processes of companies and conglomerates, financial or not, by providing advisory services, equity interest and/or granting of financing or loans; and
(vii) enter into other transactions authorized by the Central Bank.
Investment banks may maintain account, without interest, and not operated by check, in relation to third-party funds: (i) received for investment in securities and other financial assets and/or operational modalities available in the financial and stock markets, relating to the management of such investments; and (ii) linked to its credit transactions or related to the rendering of services.
21.3.5. Development Banks
Under article 1 of CMN’s Resolution No. 394, of November 3, 1976, development banks are non-federal public financial institutions, incorporated as a corporation, with its head-offices in the capital of the state in which the corporate control is held. It is required to include in its name the term “development bank” (“banco de desenvolvimento”), followed by the name of the Brazilian State where its head-office is located.
Pursuant to article 4 of the referred Resolution, the main purpose of a development bank is to contribute with suitable and timely finance programs, in medium and long term, that aims to support the economic and social development of the state of its head-office, benefiting, primarily, the private business.
Some of the functions engaged by the development banks are increasing the capacity of the economy’s production and improving its productivity, investing in projects related to rural production, developing technological production and the sponsorship of programs to companies of technical assistance in the area, among other activities.
Development banks raise funds through time deposits, foreign loans, loans or contributions from the public federal, state or municipal sector, issuance or endorsement of securities in the market. On the other hand, its lending operations are focused on loans and financing to the private sector.
21.3.6. Credit, Financing and Investment Companies
Under the Ordinance No. 309, of 1959, from the Ministry of Finance, credit, financing and investment companies must be created as private financial institutions, incorporated as corporations, whose main purpose is financing the purchase of assets, services and working capital, according to the provisions of Resolution No. 1,092, of February 20, 1986.
The “financeiras”, as popular known, must contain in their name the term “credit, financing and investment” (“crédito, financiamento e investimento”).
Many of the “financeiras”, not part of banks, belongs to economic groups and operate as the financial arm of industrial or commercial groups, such as department stores and car assemblers, which holds its own “financeiras”, focusing its financing transactions for the trading of its own products.
21.3.7. Real Estate Credit Companies
According to Law No. 4,380, of August 21, 1964, and the CMN’s Resolution No. 2,735, of June 28, 2000, as amended, a real estate credit company is a financial institution, which must include in its name the term “real state credit” (“crédito imobiliário”), and it is incorporated as a corporation, specialized in real estate financing. Its purpose is providing financing to housing construction, credit facility to buy or perform its own construction and the financing of fixed capital to constructing companies, producers and distributors companies of construction material.
21.3.8. Credit Cooperatives
According to Law No. 5,764, of December 16, 1971, and Resolution No. 4,434, of August 5, 2015, credit cooperative is an autonomous association of persons united voluntarily, with its own form and legal nature, civil, non-profit organization established to provide services to their members, whose name shall not contain the term “bank” (“banco”).
The purpose of a credit cooperative is to provide financial services in a simpler and beneficial form to its members, providing access to credit and other financial products (deposits, investments, loans, financing, collection accounts, insurance, etc.).
21.3.9. Stock Brokerage Companies
A Stock brokerage company, according to Resolution CMN’s No. 1655, of October 26, 1989, shall be incorporated either as a corporation or as a limited liability company,
acting in the financial and capital markets, intermediating trading in securities between investors and borrowers.
Under Laws No. 4,728/65 and No. 6,385/76, brokerage firms are authorized to deal at the Brazilian Stock Exchange with listed securities and other negotiable instruments.
In this sense, its activities includes intermediating public offers of securities, as well as buying and selling it in the stock market and managing its business lines and custody. Likewise, it can intermediate exchange transactions, operate on the stock and exchange markets on its own and others account, according to the regulations issued by CVM and the Central Bank in their respective areas of competence, provide intermediation and advisory services or technical assistance, in transactions and activities in the financial and capital markets, and engage in other activities expressly authorized, jointly, by the Central Bank and the CVM.
The establishment and operation of a brokerage company shall depend on the Central Bank’s authorization.
The approval of Central Bank shall also be necessary for performing any changes in the structure of the company, either in the corporate scope or its facilities, as well as any transfer of the control of the company.
21.3.10. Exchange Brokerage Companies
Under Resolution CMN No. 1,770, of November 1990, exchange brokerage companies shall be incorporated either as corporations or as limited liability companies, and the name shall expressly include the term “exchange brokerage” (“corretora de câmbio”).
The essential purpose of an exchange brokerage company is to intermediate foreign exchange transactions and enter into transactions in the exchange market.
The exchange brokers are subject to the same authorizations from the Central Bank in relation to the distribution of securities, pursuant to article 13, of Resolution CMN No. 1,770, such as performing any changes in the structure of the company, either in the corporate scope or in its facilities.
21.3.11. Securities Distribution Companies
The securities distribution companies are also subject to Laws No. 4,728/65 and No. 6,385/76. Their business is similar to that of brokerage firms, and according to the Joint Decision of CVM and CMN No. 17/2009, issued on 2 March 2009, the securities distribution companies are able to directly deal at the stock exchange.
According to CMN’s Resolution No. 1,120, of April 4, 1986, as amended by Resolution No. 1,653, of October 26, 1989, such companies must include in their name the term “distribution of securities ” and they shall be incorporated as a corporation or as a limited liability company.
The distributors have as main business underwriting securities for repurchase or distribution, acting as intermediaries in the placement of public offerings and distribution of securities in the market, following, among others, buying and selling it in the stock market and managing its business lines and custody.
The securities distributors must have an authorization from CVM to perform its activities in the capital market. Finally, it shall depend on the Central Bank’s approval to perform any changes in the structure of the company, either in the corporate scope or in its facilities, and any change of control.
According to Resolution No. 2,626, of July 29,1999, it is not permitted to enter into loan agreements by a securities distribution company with individuals e legal entities, financial or otherwise, except as authorized otherwise by law.
21.3.12. Mortgage Companies
Under CMN’s Resolutions No. 2,122, of November 30, 1994, and No. 3,425, of December 21, 2006, supplemented by CVM Instruction No. 455/07, mortgage companies shall be incorporated as corporation, and must include in their names the term “mortgage company” (“companhia hipotecária”).
Mortgage companies may contribute with funds to the purchase, construction, reform or commerce of residential or commercial real properties and urban lots,
as well as manage real property investment funds and transfer funds for the financing of the construction or acquisition of residential or commercial real properties, among other activities as established by law.
21.4. Foreign Financial Institutions
A foreign financial institution may have presence in Brazil by means of any of the following:
(i) a representative office;
(ii) a branch organized in Brazil; and
(iii) a subsidiary organized in Brazil, whether as a corporation (“sociedade por ações”) or a limited liability company (“sociedade empresária limitada”), as the case may be.
Notwithstanding the above, most financial institutions, such as banks and leasing companies, may not be organized as limited liability companies.
21.4.1. Branch of Foreign Entity
Establishing a branch of a foreign financial institution is a bureaucratic and cumbersome process, as it requires the Brazilian President’s authorization by decree, issued on a reciprocal basis, just like the organization of a subsidiary. In addition, the organization of a branch is generally not recommended due to tax and immigration requirements and implications.
21.4.2. Representative Office
The representation within Brazil of a financial institution or similar entity with headquarters located in a foreign country is regulated by CMN’s Resolution No. 2,592/99 and Central Bank’s Ruling (Circular) No. 2,943/99. Accordingly, such representation depends on the Central Bank’s previous authorization, which is granted on a discretionary basis, taking into consideration the national interests and international treaties. Such representation may only be performed by individuals or legal entities domiciled in Brazil. Also, representative offices may only perform marketing and promotional roles, and may not carry out any actual banking activity.
21.4.3. Foreign-Owned Bank Subsidiaries
All banks in Brazil must be organized as corporations, and at least 50 percent of the stated initial capital (in conformity with the applicable minimum capital requirements, depending on the type of institution) shall be paid in at the time of incorporation (as well as of any further capital increase). The balance shall be paid within one year and before any credit or guarantee transactions can commence.
21.4.4. General aspects
Article 52 of the Transitory Constitutional Provisions Act (Ato das Disposições Constitucionais Transitórias) of the Brazilian Federal Constitution of 1988 prohibits foreign financial institutions from opening new branches in Brazil and from increasing their equity interest in Brazilian financial institutions, except if authorized by international treaties providing for reciprocity, or in the event such transactions are recognized by the Brazilian government to be of Brazil’s best interest.
The federal government tends to treat most acquisitions of Brazilian financial institutions by foreign investors as acquisitions made in the best interest of the country and in view of that, it analyzes the controlling group. As a result, such institutions interested in receiving foreign equity interest may present a formal request to the Central Bank, which shall review and submit it for CMN’s approval, with the latter forwarding the request to the President of Brazil for final authorization by decree. Such process is ruled by Central Bank’s Ruling No. 3,317/2006.
The application procedure for obtaining the authorization is the same for the shareholder controllers of the financial institution that are resident in Brazil or foreign investors. However, the review process for foreign investors is more extensive, since, after approval by the Central Bank, the application will be submitted to CMN, and finally to the approval of the President, as mentioned above.
The documents and information that may be requested by the Central Bank to foreign applicants aiming to establish a financial institution in Brazil, includes the presentation of its bylaws, financial statements, among others. In addition, Circular No, 3,317, of March 29, 2006, also requires the presentation of the following: (i) the amount of foreign equity; (ii) the relevance of such venture to the Brazilian economy, including in relation to other countries; (iii) a description of the activities performed by the foreign institution; (iv) the importance of the project to the business of the company based abroad; (v) risk classification of the company located overseas and of the economic group; (vi) indication of any other financial institution that is connected to the foreign financial institution; (vii) indication of the foreign authority that supervises abroad the foreign company and the financial institution related, directly or indirectly, or is subordinated, if applicable; and (viii) any other relevant information to be presented.
21.5. Institutions equivalent to financial institutions
Despite the list of specific financial institutions of the national financial system, there are some entities that are deemed similar to financial institutions, such as the leasing companies.
21.5.1. Leasing Companies
The leasing companies have as main purpose the contracting of leasing transactions of assets, domestic or foreign, also known as “leasing”, or real estate asset – for the use of the lessee.
These companies shall be incorporated as a corporation and have in its name the term “lease”, under Resolution No. 2,309, of August 28, 1996.
Although not considered a financial institution, it is applied to leasing companies, as the case may be, the same operating conditions of financial institutions, as provided by Law No. 4,595, as amended, and subsequent resolutions issued by the CMN.
With respect to its taxation, a specific legislation is applied to the leasing company, as defined in Law No. 6,099, of September 12, 1974, as amended. Despite covering tax matters, the referred law defined the leasing transaction, as the legal transaction entered into between a legal entity, as lessor, and individual, as lessee, and which has as purpose the lease of assets purchased by the lessor, according to the characteristics specified by the lessee to its own use.
21.5.2. Leasing Transactions
Notwithstanding the specifically existence of the leasing companies, leasing transactions may also be performed by multiple banks with leasing business line and financial institutions that are authorized to perform leasing transactions with the seller of the asset or with a legal entity affiliated or interdependent, as indicated in the second paragraph of article 13, of Resolution No. 2,309 from Central Bank.
The operationalization of the lease must occur through the formal celebration of a lease agreement, by public or private instrument, containing the prerequisites required by the Central Bank, as stated in article 7, of Resolution No. 2,309, and article 5, of Law No. 6,099.
The lessee shall have the right to choose one of three alternatives at the end of the lease agreement: (i) renewal of the lease; (ii) return of the assets; or (iii) purchase of the asset.
However, if the purchase option is exercised before the minimum term established for each type of lease, the lease will be mischaracterized, being considered as a forward buy and sell operation.
21.5.3. Types of leasing transactions
In accordance with articles 5 and 6, of CMN’s Resolution No. 2,309, there are, in general, domestic and international leasing operations, subdivided into two types: (i) financial leasing and (ii) operating lease.
126.96.36.199. Financial lease
The financial lease is characterized by transferring all business risks to the lessee. In this sense, it is considered that:
(i) the payments provided for in the lease and other amounts established in the agreement shall be sufficient for the lessor to recover the cost of the leased asset during the lease term, and still make a profit on the investment;
(ii) maintenance costs, technical assistance and other services related to the leased asset shall be paid by the lessee; and
(iii) the price for exercising the purchase option at the end of the agreement may be freely agreed, with the possibility of being the market value price of the asset.
Item I, from article 8 of Resolution No. 2,309, establishes a minimum term of 2 years to lease assets with a useful life not exceeding 5 years or a term of 3 years to lease other assets.
188.8.131.52. Operational lease
Operating leases are defined by the following characteristics:
(i) payments to be made by the lessee must include the cost of the lease of the assets and of the services required to make the asset available to the lessee, also the total value of payments can not exceed 90% of the price of the asset;
(ii) the lease term must be less than 75% of the useful life of the asset;
(iii) the price for exercising the purchase option should be the market value of the leased asset; and
(iv) in the lease the payment of the guaranteed residual value is not an option.
For this type of lease, only the leasing companies and banks with leasing business line may enter into such transaction, and the maintenance costs, technical assistance and services related to the operation of the asset may be agreed between the lessor and lessee.
The operating lease agreement must have a minimum period of 90 days, according to item II,of article 8 of Resolution No. 2,309.
21.5.4. International Lease
The international leasing transactions are those that include a foreign party, which may be either the lessor or the lessee.
Lease agreements entered into with an entity domiciled outside Brazil requires a registration with the Central Bank, according to the rules for the granting of the authorization enacted by CMN.
International leasing transactions are basically regulated by Law No. 6,099 and by Resolution No. 1,969, of September 30, 1992. The Resolution No. 2,309, which regulates the domestic leasing operations, is also supplementary applied to international leasing operations.
184.108.40.206. International financial lease
Under Resolution No. 3,844, of March 23, 2010, the international financial lease is the celebration, between foreign lessor and national lessee, in which its leased assets may be capital goods, movable assets and real estate assets, foreign-owned, new or used, always subject to the rules governing the importation.
If the payment term is superior to 360 days, it will be necessary the registration of the transaction with the Central Bank.
220.127.116.11. International operational lease
The international operational lease is the one celebrated between individuals or legal entities, with residence, domicile or headquarters in the country and individuals or legal entities, resident, domiciled or headquartered outside Brazil, and if the payment term is superior than 360 days, it shall be necessary the registration of the transaction with the Central Bank.
21.6. Correspondent Banks
Pursuant to CMN’s Resolution No. 3,954/2011, as amended, Brazilian financial institutions may contract companies or certain kinds of entrepreneurs, including both members and non-members of the National Financial System, to render the following services on their behalf:
(i) acceptance and routing of opening proposals for checking, time deposit and savings accounts;
(ii) receipt, payment and electronic transfers for purposes of implementing transactions related to checking accounts held by clients;
(iii) receipt and payments of any nature and other activities resulting from the service agreements entered into by the contracting financial institution with third parties;
(iv) execution of money orders;
(v) acceptance and routing of loan and leasing requests, as well as, other ancillary services for monitoring the transaction;
(vi) receipt and payment related to bills of exchange;
(vii) acceptance and routing of proposals for credit card issuance;
(viii) execution of exchange transactions; and
(ix) other control services, including data processing, of contracted transactions.
21.6.1. Correspondents for Foreign Exchange Transactions
CMN’s Resolution No. 3,954/2011, as amended, establishes that Brazilian financial institutions may also contract companies (financial institutions or not) or certain kinds of entrepreneurs, whether to carry on certain foreign exchange currency transactions, whose individual amount must be limited to the equivalent of USD 3,000, which shall render the following services on their behalf:
(i) carry out transactions for the purchase and sale of foreign currency in cash, checks or traveler checks, as well as, the recharge of foreign currency in prepaid cards;
(ii) carry out unilateral transfers from and to Brazil; and
(iii) receiving and routing of exchange transactions proposal.
For such purpose, the financial institution must enter into an agreement with the correspondent to render the services listed above and register the information of the correspondent as established by the Central Bank.
21.7. Bank secrecy
Bank secrecy is understood, generally, as the obligation of the financial institution, or other equivalent entities, to keep the confidentiality of any information that has been received or to be shared, due to its passive and active transactions and services, with its basic grounds as the right to privacy and private life, under article 5, section X, of the Federal Constitution.
Under the Complementary Law No. 105, of January 10, 2001, it is considered as financial institutions under bank secrecy: (i) banks of any type; (ii) securities distribution companies; (iii) exchange and securities brokerage companies; (iv) credit, financing and investment companies, (v) real estate credit companies; (vi) credit cards administrators; (vii) leasing companies; (viii) OTC markets administrators; (ix) credit cooperatives; (x) loan and savings associations; (xi) stock and exchange brokerage markets; (xii) settlement and paying entities; (xiii) factoring companies; and (xiv) other entities that may perform similar transactions as it may be understood by CMN.
Such institutions and entities are obliged to ensure their customers total secrecy, except as otherwise authorized by law.
21.7.1. Breach of bank secrecy
Bank secrecy can be broken by order of the judiciary, as long as preserved its secrecy, or have its release ordered by request of the Parliamentary Commission of Inquiry (“CPI”), as long as previously approved, according to articles 3 and 4, of Complementary Law No. 105.
The referred complementary law also provides it shall not to be deemed a breach of confidentiality when the information exchange occurs as a result of: (i) exchange of data for know-your-customer-procedures purposes between financial institutions; (ii) consulting, by credit protection entities, of issuers of bounced checks or individuals in default; (iii) verification by the Brazilian Federal Revenue Office of the amounts paid by taxpayers; (iv) communication, to the competent authorities, of the practice of criminal or administrative offenses; (v) express consent of the persons involved; among other cases, as indicated in the law.
Sharing of information shall occur only for use in the specific procedure that led to the breach of bank secrecy.
The breach of bank secrecy, without basis on the hypothesis indicated in the Complementary Law n. 105, will be considered as crime, subject to imprisonment, from 1 to 4 years and fine penalty, to the offender, applying also the Criminal Code as applicable, without the application of other appropriate sanctions.
21.8. Crimes against the financial system
Law n. 7,492, of June 16, 1986, regulates the crimes against the Brazilian Financial System, deemed as the ones performed by financial institutions, as public or private entities, that have as its main or ancillary activities, cumulatively or not, the funding, intermediation or application of financial funds of third parties, in domestic or foreign currency, or the custody, issuance, distribution, negotiation, intermediation or management of securities. The referred law also deems as corresponding to financial institutions, subject to the law, the legal entities that fund or manage insurance, exchange transactions, consortium, capitalization or any type of savings or third party funds; and the individuals that perform such activities, though not regularly.
Under Law No. 7,492, it is considered as crimes against the Brazilian Financial System: (i) managing a financial institution in a fraudulently or recklessly manner; (ii) misleading or maintaining in error a partner, investor or authority as to the transaction or financial status, retaining information or providing false information;
(iii) operating a financial institution without the due authorization or with an authorization obtained through a false statement, including a securities distribution or exchange entity; (iv) performing an unauthorized foreign exchange transaction with the purpose of promoting unreported remittance of funds from Brazil; or promote for any reason and without legal authorization, the exit of national or foreign funds to a foreign country or maintain outside Brazil deposits unreported to the relevant federal authority; among other activities, pursuant to the referred law.
The controlling shareholders, officers and managers of a financial institution, are criminally liable for the crimes indicated in Law No. 7,492, as well as the interventionist, liquidator or the real estate manager, in the events of intervention, extrajudicial liquidation or bankruptcy, respectively. The undertaking of the crimes indicated are subject to detention and monetary fine.
21.8.1. “Money laundering”
Federal Law No. 9,613 of 1998 (“AML Act”), as amended by Law No. 12,683/2012, establishes a stricter penal regime for the crime of money laundering, broadening its scope and establishing additional sanctions on different parties who participate in money laundering schemes.
Law No. 12,683/2012 broadened the number of individuals and legal entities that are obliged to inform suspicious activities to the Council for the Control of Financial Activities (COAF). Some entities such as stock exchanges, commodities exchanges, derivative exchanges, banks, securities brokers and dealers, insurance companies and factoring companies shall pay special attention to suspicious transactions vis-à-vis money laundering rules and shall inform the COAF of transactions that violate money laundering laws.
The Circulares Nos. 3,461 and 3,462, of July 24, 2009, and the Carta-Circular No. 3,430, of February 11, 2010, were enacted by the Central Bank in order to enhance the Anti-Money Laundering and Terrorist Finance system in Brazil, in accordance with the recommendations of the Financial Action Task Force (FATF).
If money laundering is practiced outside Brazil, in specific cases, security measures on the assets and rights may be determined by a Brazilian judge, or the proceeds from the sale of the eventual assets can be divided proportionally between the requesting State and Brazil, subject to the rights of third parties in good faith.
Authors: Helen Naves and Luiza Maibashi
Trench, Rossi e Watanabe Advogados
em cooperação com Baker & McKenzie
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