By Nei Schilling Zelmanovits, Machado Meyer

Although the effects of the 2008 crisis in Brazil have not been as significant as those seen in other countries, a number of legislative changes have taken place since then. After almost 7 years, it is worth examining some of these legislative changes.

Among many novelties, we decided to focus on 3 subjects: Basel III rules, anti-money laundering and suitability. Though apparently unrelated - they involve bank operations (Basle III), government and criminal authorities (anti-money laundering), and investors’ rights (suitability) - they clearly indicate that financial regulation is becoming more and more complex and, furthermore, that globalization is also taking place at the regulatory field.

Having said that, let us now discuss each of these topics.

BASEL III

The first change occurred with the introduction of the Basel Committee on Banking Supervision recommendations regarding the capital structure of financial institutions (commonly referred to as "Basel III"). This process began in 2013 (the starting point is being considered from the issuance of Resolutions Nos. 4,192, 4,193, 4,194, and 4,195 of the Central Bank of Brazil) and is scheduled for completion in 2019.

The Basel III rules were essentially a response of regulators to the 2008 banking crisis and, consistent with that purpose, mainly aimed to improve the quality of capital from financial institutions in order to make them more resilient to shocks and crises. Thus, among the various measures contained in Basel III, the following should be highlighted:

·       qualitative and quantitative increase in the capital of financial institutions;

·     diversification of risk coverage, incorporating trading activities, securitizations, off-balance sheet exposures, and derivatives;

·       introduction of a leverage ratio for the system and measures on minimum liquidity requirements; and

·       greater emphasis on oversight and transparency processes.

In general, there is a recognition that the regulation proposed in Basel III contributes to the soundness of the financial system1. The curious thing, however, is that the main bank insolvency events since then in Brazil have little or nothing in common with the aims pursued by the Basel III rules. Indeed, a retrospective analysis suggests that the banks facing problems since 2008 were almost entirely, medium-sized banks, often dependent on a single product (payroll loans, in most cases) and that, given the difficulty to obtain funding compatible with their assets, ended up becoming unviable2. In addition, mechanisms existing for a long time have proved to be sufficient not only to prevent, but also to solve some of the problems brought in the wake of the 2008 crisis3.

We shall return to this point later, but it is worth noting that any benefits from a stronger capital base - an undeniable gain brought by Basel III - should also be weighed with any problems (contraindications) that the rule introduces. Therefore, it has become commonplace the criticism according to which, in the current model, given the rising cost of capital due to more stringent regulations, banks inevitably will be forced to seek new economies of scale, thus increasing banking concentration. And due to this possibility, it is unclear what the effect will be on the cost of credit (which is considered unreasonably high in Brazil) and the respect to the interests of bank customers4.

From this point on, however, let us switch our focus a little and look at the second major change occurred in recent years.

MONEY LAUNDERING

The law >

Among them, we should stress the change that led to the extinguishment of the exhaustive list of previous crimes in effect hitherto5, thereby enabling money laundering to be characterized with respect to any criminal offense.

This modification, it must be acknowledged, is very welcome in order to cover certain offenses that, despite being considered minor (e.g. "Jogo do Bicho"6), helped in maintaining criminal structures of great power. However, in line with what is pointed out by several scholars, the legislative novelty introduces an enormous complexity in any criminal proceedings having as main purpose, henceforth, a property crime.

Thus, in all these cases, there will also be discussions on the allocation of assets, valuables and rights stemming from criminal activities, and their possible laundering and, let us face it, the legislator may have acted with excess rigor here.

Regardless of the position one may have in relation to this subject, there is, however, one aspect that makes the extension of the base of previous offenses rather disturbing: it is the understanding of the Federal Supreme Court that a mere eventual intent is admissible to characterize a money laundering offense7.

Note that the law imposes the same penalty on whom converts into licit assets or acquires, receives, exchanges, trades, gives or receives as guarantee, keeps on deposit, invests or transfers assets, rights and valuables resulting from a criminal offense. Now, financial institutions, precisely because they are an important link in the chain that can result in the conversion of lawful assets into unlawful must, according to the same law, adopt appropriate customer identification procedures, transaction records and internal controls. However, if their controls would prove to be deficient – and this may be something possible, given the huge number of previous offenses – or, worse, if they come to carry out transactions with persons involved in corruption charges (e.g. the "Lava Jato" case), should they suffer the penalties of the law?

That is, even if banks can demonstrate that they acted "without actually focusing on the outcome", could the simple fact of having "taken the risk" (which is, ultimately, what characterizes the eventual intent), due to control structures deemed deficient or even to having operated with clients considered suspicious, be sufficient to characterize a violation of their duties?

For now, let us leave these questions unanswered, to advance a little further, treating the third and final statutory modification, that is, suitability.

SUITABILITY

Suitability is the third pillar of the important changes introduced in the financial sector. Similarly to the other two, this also aligns with the changes made in the regulations of other jurisdictions, but we may say that, somehow, it also follows certain developments in the Brazilian regulatory environment itself.

From a historical point of view, the concern with suitability rules can be confused with the pursuit of protection for banking consumers. Without needing to go back to a very distant past, it should be noted that in mid-2001, Resolution No. 2,878 of the Central Bank of Brazil imposed various rules on financial institutions, applicable to the conclusion of transactions and provision of services to customers and the general public, remaining, however, silent as regards the suitability rules.

Time passed and, in March 2009, Resolution No. 3,694 of the Central Bank of Brazil, repealed Resolution No. 2,878, but brought nothing new regarding this subject. It was only at the end of 2010 (therefore, about two years after the outbreak of the 2008 crisis), with the issuance of Resolution No. 3,919, that financial institutions were required to adopt procedures to ensure the suitability of products and services offered or recommended to the needs, interests and goals of their customers.

One may argue whether this change came as a reaction of the regulator to numerous cases of losses suffered in late 2008 by several investors who carried out transactions with currency derivatives, also called "toxic derivatives"8, or if, on the contrary, it followed (to some extent) certain initiatives in course since 2009 in the United States and other countries that were harshly affected by the crisis (in this sense, see, for example, the work entitled U.S. Treasury, Financial Regulatory Reform, the New Foundation: Rebuilding Financial Supervision and Regulation).

The truth, however, is that both things - internal events and external factors - may have influenced the change. Thus, if it is true that the "toxic derivatives" event was, in itself, quite disruptive to the financial system, it is nonetheless also true that it opened the way for greater transparency (particularly in derivative transactions9) and protection policies to more uniform and comprehensive customers10. And this is the most important point, because it shows that customer service and the concern with the stability of the financial system are not mutually excluding.

The three items covered in this article (Basel III, Money Laundering and Suitability) show that the evolution in banking regulations has followed, in general, trends seen in other countries, especially in more developed ones. In some cases, perhaps because of commitments existing for many years (typical case of Basel III, which runs from agreements in which Brazil, through the Central Bank, participates since the 70s11); in others, following best practices and/or more or less recent legislative trends (as seems to have occurred with the money laundering and suitability rules).

In all these changes, we can unquestionably see advances. The uniformity of rules (Basel III cases and rules on Money Laundering) and greater transparency in the relations within the banking environment (resulting from the suitability rules) offer advantages. However, one should not forget that there is a very delicate balance between the interests of the regulator (government), the banking system and investors and consumers and, therefore, we must also consider the challenges posed by these changes - which, as we have tried to demonstrate, are not few nor simple.

1. There are, however, some important criticisms, among which we may highlight those related to little or no improvement over the regulation of the so-called shadow banking (considered by some as having an important role in the gestation of the 2008 crisis) and rating agencies (which are likewise considered as having a share of responsibility in the crisis).

2. This was possibly the case of institutions such as Banco BMG, Banco Schahin, Banco Panamericano, Banco Cruzeiro do Sul, Banco BVA, and Banco Matone. It is true that some of these banks were accused of fraud, but regardless of the final outcome of the investigations, it is equally true that many of these institutions faced serious difficulties to maintain their operations in an environment devoid of funding at low cost.

3. For example, it is worth recalling that the FGC - Credit Guarantee Fund (Fundo Garantidor de Crédito), on several occasions, offered support for the operations of institutions facing difficulties (as a rule, funding was granted to them through the purchase of certain assets - such as, for example, in the case of Banco Cruzeiro do Sul), and on many others, made possible the absorption of banks by healthy institutions (such as, for example, in the case of Banco Panamericano and Banco Matone).

4. It is true that for some time, the Central Bank of Brazil has also shown concern with these issues, so much so that it introduced rules, such as those that introduced credit portability (Resolution No. 3,401) and also those forcing banks to adopt greater transparency in the fixing of bank fees, in order to make them comparable (Resolution No. 3,919).

5. The list originally included only crimes involving drug trafficking, terrorism, smuggling and arms trafficking, extortion by kidnapping, against the Government, the National Financial System, and committed by criminal organizations.

6. Jogo do Bicho (the "animal game") is an illegal gambling game in Brazil, prohibited by federal law since 1946.

7. This understanding was laid down during the trial of Criminal Action No. 470 (known as the "Mensalão" case).

8. Although the losses incurred by large corporations, such as Sadia and Aracruz, have been fairly reported in the media, foreign exchange derivative transactions occurred in virtually all segments of the economy, and even involved small businesses.

9. In Brazil, derivative transactions already had to be registered (either at CETIP or BM&FBovespa) way before 2008. However, after the 2008 crisis, and perhaps as a response to the problem of "toxic derivatives", the Derivatives Exposure Center was created, in order to allow banks to monitor the positions in derivatives held by their clients and investors in general with other market institutions.

10. See, in this respect, the Guide to Best Practices published by ANBIMA - Brazilian Association of Financial and Capital Markets.

11. The Basel Committee on Banking Supervision was established in 1975, and the first agreement on capital rules (called International Convergence of Capital Measurement and Capital Standards) was published in 1988, and implemented in Brazil in 1994, through Resolution No. 2,099 of the Central Bank of Brazil.

About the author

Nei is a partner in banking, finance, corporate and insurance law since 1995. He has expertise in banking and insurance regulatory matters, in administrative litigation on banking regulatory matters, as well as in banking including cross-border loans, syndicated transactions, debt capital markets, debt restructurings and derivatives. He is also experienced in M&A involving financial institutions and insurance companies, as well as investment funds. Nei is praised by several renowned publications such as IFLR, Chambers & Partners and The Legal 500. Clients heard by Chambers and Partners highlight him because "He is very experienced and super-knowledgeable about the legislation and the historical aspects of each law." They add: "He is assertive and responsive."

Received his Bachelor of Laws from Universidade de São Paulo.

Admitted to the Brazilian Bar (OAB). Member of the São Paulo Lawyers Association (AASP) and International Bar Association (IBA).

(Global Banking and Financial Policy Review - 2015/2016, p. 57-60)