Highlights of Brazil

Noronha Advogados

21.1 General Features

Law n. 4.595 of 31 December 1964, also known as the Brazilian Banking Law, and its amendments, were enacted in order to regulate the whole of the Brazilian financial system, and is responsible for its present structure.

In accordance with its Article 17, any "public or private legal entities which have as their primary or accessory activity the assessment, intermediation or application of financial resources of their own or of third parties, in Brazilian or foreign currency, as well as the custody of third parties' properties" are considered to be financial institutions.

Additionally, the Banking Law establishes that individuals who regularly or occasionally perform any of the above-mentioned activities shall be treated as financial institutions.

Pursuant to the Banking Law, the Brazilian financial system is composed of:

(a) the National Monetary Council ("Conselho Monetário Nacional");
(b) BACEN ("Banco Central do Brasil");
(c) the Bank of Brazil S.A. ("Banco do Brasil S.A.");
(d) the National Bank of Economic and Social Development ("Banco Nacional do Desenvolvimento Econômico e Social" - BNDES); and
(e) other public and private financial institutions.

21.1.1 The National Monetary Council

The National Monetary Council, created by Law n. 4.595/64, replaced and abolished the former Council of the Superintendence of Currency and Credit ("Conselho da Superintendência da Moeda e do Crédito").

The objective of the National Monetary Council is to establish Brazilian Monetary and credit policies aimed at the economic and social development of Brazil. In accordance with Article 3 of the Banking Law, the National Monetary Council policy has as its functions:

(a) to adapt the volume of resources of payments to the real necessities of the national economy and its respective development process;
(b) to regulate the internal volume of the Brazilian currency by means of preventing or correcting outbreaks of inflation or deflation of an internal or external origin, as well as preventing or correcting economic depressions and any other unsteadiness;
(c) to regulate the value of the Brazilian currency overseas and the equilibrium in the Brazilian balance of payments, aiming at the best use of resources in foreign currencies;
(d) to orientate the application of public or private financial institutions' resources, in order to help create favourable conditions for national economic development;
(e) to help improve institutions and financial institutions, aiming at the efficiency of the payments system and at the mobilization of resources;
(f) to protect the liquidity and solvency of financial institutions; and
(g) to co-ordinate monetary, credit, budgetary and tax policies and public internal and foreign debt.

The National Monetary Council is the controller of the Brazilian currency, thus being responsible for the authorisation of the issuance of paper money and for the determination of its characteristics. It also establishes norms and guidelines concerning exchange policy, approves monetary budgets, regulates credit operations in all their forms, and is responsible for regulating financial institutions as regards to their constitution, functioning and liquidation.

In addition to the above, the National Monetary Council also issues rules and legislation concerning interest rates, discounts, commissions and charges for banking services and operations, as well as exchange operations and swaps, fixing limits, fees, terms and other conditions. Law n. 9.069 of 29 June 1995 created the so-called Technical Commission of Money and Credit, which is an advisory commission of the National Monetary Council.

The Technical Commission of Money and Credit is responsible for issuing declarations relating to the activity of the National Monetary Council, as well as proposing regulations concerning specific matters such as the issuance of Brazilian currency.

The National Monetary Council, in accordance with Article 8 of Law n. 9.069/95, is composed of:

(a) the Minister of the Economy, who is its Chairman;
(b) the Minister of Planning and Budget; and
(c) the Chairman of the Central Bank of Brazil.

The National Monetary Council is assisted by seven Consulting Commissions, which address: the rules and organisation of the Brazilian financial system; the securities market and the futures market; rural credit; industrial credit; housing credit, sanitation and urban infrastructure; public debt; and monetary and exchange policies.

21.1.2. The Central Bank of Brazil

The Central Bank of Brazil has as its objective the performance and the enforcement of legal norms and rules issued by the National Monetary Council.

Additionally, the Central Bank of Brazil has the following exclusive functions:

(a) to issue paper currency and coins under the conditions and within the limits authorised by the National Monetary Council;
(b) to perform any services relating to the money supply;
(c) to determine the amount of compulsory deposits of financial institutions within the legal limits;
(d) to receive compulsory payments and voluntary deposits of financial institutions;
(e) to effect rediscounting and loan transactions with financial banking institutions;
(f) to exercise control over all forms of credit;
(g) to control foreign capital;
(h) to act as custodian of the gold and foreign currency official reserves, and of special drawing rights (SDRs) and with the latter to carry out all the operations provided for in the Convention of Incorporation of the International Monetary Fund;
(i) to inspect financial institutions and apply penalties;
(j) to authorize financial institutions: to operate in Brazil; to establish or relocate their head offices or premises, including abroad; to be reorganised, consolidated, merged or expropriated; to carry out exchange and real credit transactions and the regular saving of federal, state or municipal bonds, shares, debentures, mortgage bills and other credit instruments or securities; to extend the periods granted for operations; and to amend their by-laws;
(k) to establish conditions for the investiture and exercise of any administrative position in private financial institutions, and also for the exercise of any position on advisory, audit or similar bodies, pursuant to the rules issued by the National Monetary Council;
(l) to carry out transactions of purchase and sale of federal government bonds, as an instrument of the monetary policy;
(m) to require the head offices of financial institutions to register the record of firms which have dealt with their branches for more than one year.

Other functions of the Central Bank of Brazil are:

(i) to communicate, on behalf of the Federal Government, with foreign and international financial institutions;
(ii) to promote, as an agent of the Federal Government, co-operation in domestic or foreign loan transactions, as well as being able to undertake such transactions itself;
(iii) to provide for the smooth functioning of the exchange market, the relative stability of exchange rates and the equilibrium of the balance of payments, and for this purpose to buy or sell gold and foreign currency, as well as to effect credit transactions abroad, including those referring to special drawing rights, and to separate the financial and commercial exchange markets;
(iv) to effect the purchase and sale of securities of private and public joint stock companies and State companies;
(v) to issue its own bills, in accordance with conditions established by the National Monetary Council;
(vi) to regulate the performance of cheque and other paper clearance services;
(vii) to exercise payment vigilance in the financial and capital markets over companies which directly or indirectly interfere in such markets, and also over the operational forms or procedures used by such companies; and
(viii) to provide the services of its Secretary's Office, under the control of the National Monetary Council.

In accordance with the law in force, the Central Bank of Brazil may only transact with public and private financial institutions. It is, therefore, precluded from conducting operations of any nature with other public or private legal entities, unless expressly permitted by law.
Law n. 4.595/64, Article 13, determines that the duties and services with the competency of the Central Bank of Brazil may be contracted with the Bank of Brazil ("Banco do Brasil S.A."), or alternatively with other financial institutions, provided that such contracts are duly authorized by the National Monetary Council.

21.1.3. "Banco do Brasil S.A." (Bank of Brazil)

Before the enacting of Law n. 4.595/64, the Bank of Brazil used to function as the Central Bank besides operating as a private bank. The Bank of Brazil is today a commercial bank, although it is also engaged in activities which are not common to commercial banks as an instrument for the administration of financial and credit policies of the Federal Government.
In accordance with the law presently in force Bank of Brazil is responsible for the following:

(a) as a Financial Agent of the National Treasury, it may: (i) receive for the credit of the National Treasury proceeds from the collection of federal revenue taxes and from federal credit operations through advances of budget revenue, or any other funds, within legally authorized limits; (ii) effect payments and provisions required for the implementation of the General Budget of Brazil and supplementary laws in accordance with instruction given to it by the Ministry of Finance; (iii) grant surety ship, securities and other guarantees as expressly authorized by law; (iv) acquire and finance inventories of exportable production; (v) execute the policy of minimum prices for agricultural products; (vi) act as paying agent and receiving agent abroad; (vii) execute the service of the consolidated public debt;
(b) as the principal executor of banking services to the Federal Government, including its government agencies, receive on deposit, exclusively, the available funds of any federal entity, including agencies of all the civil and military ministries, social security institutions and other government agencies, commissions, departments, entities under special administrative system and any individuals or legal entities responsible for advanced payments, as expressly authorized by the National Monetary Council pursuant to a proposal of the Central Bank of Brazil;
(c) Execute cheque and other paper clearing services;
(d) collect the voluntary deposits of financial institutions, maintaining the respective accounts;
(e) exclusively receive the deposits relating to the subscription in cash of the capital of legal entities;
(f) on its own account and on account of the Central Bank of Brazil, purchase and sell foreign currency, under conditions established by the National Monetary Council;
(g) be in charge of receipts or payments or other services of interest to the Central Bank of Brazil;
(h) finance the purchase and installation of small and medium sized rural properties, pursuant to the pertinent legislation;
(i) finance industrial and rural activities; and
(j) propagate and orientate credit, including commercial activities, supplementing the activities of the banking network in the financing of economic activities, complying with credit requirements of the different regions of the country, as well as in the financing of imports and exports.

21.1.4. The National Bank of Economic and Social Development

The National Bank of Economic and Social Development ("Banco Nacional do Desenvolvimento Econômico e Social" - BNDES) is considered by Law n. 4.595/64 as a public financial institution whose primary objective is the execution of Federal Government Investment Policies. BNDES has two subsidiaries: the BNDESPAR, which objective is the development of the stock market, and FINAME (Special Agency for Industrial Financing), considered a credit facility form, which resources arising from BNDES are used in order to provide financing for purchases by Brazilian firms of Brazilian-made machinery and equipment of domestic content. The government also has a series of smaller programs designed to assist small and medium sized businesses export.

21.1.5. Public Financial Institutions

Law n. 4.595/64 defines public financial institutions as auxiliary bodies in the execution of the Brazilian Federal Government credit policy. As previously mentioned, the National Bank of Economic and Social Development is the main instrument for executing the Federal Government Investment Policy. The first paragraph of Article 22 of the Banking Law establishes that the National Monetary Council is responsible for regulating public financial institutions.

Notwithstanding the above, the Banking Law (Article 24) determines that the non-federal public financial institutions are subject to the same rules concerning private financial institutions.

21.1.6. Private Financial Institutions

In general, private financial institutions may only be constituted as stock companies.

The initial capital of private financial institutions shall be fully paid up in Brazilian currency. Subsequent capital increases of financial institutions may also be made by means of the incorporation of reserves or of accumulated profits within the limits established by the National Monetary Council.

At least fifty percent of the initial capital and subsequent increases in the capital of financial institutions authorized to function by the Central Bank of Brazil shall be paid in upon subscription. The remaining amount shall be fully paid up within one year counting from the date in which the subscription occurred or counting from the approval of the increase of the capital by the Central Bank of Brazil.

Private financial institutions (with the exception of investment institutions), will only be able to participate in the capital of other companies when an authorization is duly issued by the Central Bank of Brazil; however, this authorization will not be necessary in the event such private financial institutions grant subscription guarantees, provided that such grants comply with the general requirements established by the National Monetary Council.

In general financial institutions may engage in the following activities:

(a) participation in loans and financing operations;
(b) receiving deposits of any nature;
(c) share, obligations and other security acquisition for capital market sale;
(d) transfer of loans obtained abroad;
(e) execution of guarantees;
(f) distribution and placement of any issue of securities and bonds;
(g) operating in the Stock and Commodities Exchange;
(h) issue and/or registration of shares or obligations;
(i) participation in exchange operations;
(j) opening and maintaining accounts; and
(k) participation in gold operations.

In the event of any kind of participation of a foreign financial institution in the capital of a private financial institution, it is necessary, according to Circular n. 3317/06, to complete an application to the Central Bank of Brazil providing the following information: (i) the amount of foreign participation; (ii) the importance of such participation for the Brazilian economy; (iii) the description of the operations practiced by the foreign institution; (iv) the importance of such participation for the foreign institution; (v) the rating of the foreign institution and its economic group; (vi) the indication of any other financial institution, in the event of any bond with the foreign financial institution; (vii) the indication of the supervisory agency of the foreign institution abroad; and (viii) any additional information that may be requested by the Central Bank of Brazil.

21.2. General Rules Concerning Financial Institutions

Article 18 of Law n. 4.595/64 establishes that financial institutions shall only operate in Brazil upon previous authorization of BACEN or, if foreign, by the enactment of a Presidential Decree.

Article 10 of the above-mentioned Law establishes the exclusive competence of BACEN to authorize financial institutions to operate in Brazil; to install or transfer their head offices or premises, including transfer abroad; to be reorganized, consolidated, merged or expropriated; to carry out exchange and real credit transactions and the regular saving of federal, state or municipal bonds, shares, debentures, mortgage bills and other credit instruments or securities; to extend the periods granted for operations; and to amend the by-laws of financial institutions.

On 28 November 2002 CMN enacted Resolution n. 3.040, which regulates the requirements and procedures for the incorporation, authorization, transfer of control and corporate reorganization of financial institutions in Brazil, as well as the cancellation of the authorization for such institutions.
With the enactment of Resolution CMN n. 3.040/02, new provisions were incorporated to the already existing rules with the objective of providing BACEN with more efficient means of evaluating the business objectives as well as the organizational and management structure of financial institutions in Brazil.

The main innovations introduced by Resolution CMN n. 3.040/02 regarding the incorporation and authorization of financial institutions in Brazil include: (i) preparation of a business plan by the financial institution in formation, which should contain, at least, details on the organizational structure proposed, specification of internal controls and the establishment of strategic objectives; (ii) the authorization of BACEN to access information on all the members of the controlling group and stockholders of the financial institution being incorporated, available at the Federal Revenue and any public or private data base; (iii) the financial capacity of the controlling shareholder or the controlling group, which should be compatible with the size, nature and objective of the business; and (iv) the definition of the standards of corporate governance to be observed, including the details of the incentive structure and the remuneration policy.

In relation to the authorization, during the first three years of operation a financial institution must demonstrate to BACEN that its operations are in compliance with the strategic objectives described in the business plan, by means of a Management Report attached to half-yearly financial statements.

This report shall be submitted to an independent auditor. If it is found that the operations are not in compliance with the strategic objectives described in the business plan, the financial institution must give explanations to BACEN.

With respect to the transfer of control and corporate reorganization of financial institutions, the rules regarding the incorporation of financial institutions must be observed. However, BACEN may lift certain conditions depending on the situation.

As for the corporate control structure, Resolution CMN n. 3.040/02 set out that direct ownership interests of financial institutions can only be held by: (i) individuals; (ii) financial institutions and other institutions that are authorized to operate by BACEN; and (iii) financial holding companies.
Regarding the cancellation of the authorization to operate a financial institution, it is worth mentioning that it has become mandatory to publish a statement of purpose for such cancellation. Furthermore, BACEN only grants this cancellation of authorization providing that all liabilities have been met.

The granting and validity of authorizations from BACEN are subject to the financial institution complying, at all times, with the minimum capital requirements established in Annexes II and IV of CMN's Resolution 2.099 of 17 August 1994, modified by Resolution n. 2.607/99, Resolution n. 2.692/00 and Resolution n. 3.334/05.

21.2.1. Bank Secrecy

Bank secrecy is understood as the obligation of a third party to keep the confidentiality of information that has been provided due to its duty. In this case, being the Bank's obligation to not reveal, without cause, the client's data.

According to the Constitution, article 5, subsection X and XII, the citizen is entitled to the right of privacy and intimacy, being included in this right the bank secrecy.

Additionally, Complementary Law n. 105 of 10 January 2001 regulates the secrecy of the operations carried out by financial institution, together with Decree n. 4.489 of 20 November 2002 and the Federal Revenue Instruction n. 802 of 27 December 2007.

For this reason, under the understanding of the legislation financial institutions, such as (i) banks of any type; (ii) securities distribution companies; (iii) exchange and assets brokerage companies; (iv) credit, financing and investment companies, (v) real estate credit companies; (vi) credit cooperatives; (vii) leasing companies; and (viii) stock brokerage companies are obligated to guarantee the client's secrecy.

According to the Complementary Law n. 105 the following information is protected under the bank secrecy right:

(a) on demand or on credit deposits, including in savings account;
(b) payments in cash or cheque;
(c) issuing of warrants or similar document;
(d) drawdown from on demand or on credit account, including savings account;
(e) loan agreements;
(f) discount of trade bills, commercial paper or similar titles;
(g) acquisition and selling of bonds;
(h) acquisition of foreign currency;
(i) investment funds;
(j) conversions of foreign currency into national currency;
(k) international transfers;
(l) operations related to gold or financial assets;
(m) credit card operations, and
(n) leasing operations.

Finally, any other operations, similar to the abovementioned that may be authorized by BACEN, CVM or other governmental agency are also protected by bank secrecy.

21.2.2 Breach of Bank Secrecy

The bank secrecy is not an absolute. It can suffer breach by the Judiciary or by the Parliamentary Inquiry Committee, if based on just cause , in this case not being understood as illegal practice.

According to article 4 of the Complementary Law n. 105, the breach of bank secrecy can be enacted when necessary for the assessment of any illegal act, in any phase of the inquiry or judicial proceedings, moreover, specifies the list of crimes in which the breach should specifically be enacted.

The information, granted to the Judiciary, shall carry the confidential characteristic due to the fact that only the parties will have access to the data and may only be used for the specific proceeding that originated the breach of bank secrecy.

Lastly, the breach of bank secrecy, without basis on the scenarios established in the Complementary Law n. 105, is considered a crime and subjects those responsible to prison, from one to four years and fine penalty, applying, in what it fits, the Criminal Code, without jeopardizing other appropriate sanctions.

21.3 Types of Financial Institutions

21.3.1 Multiple Banks

According to Resolution CMN n. 2.099/94, multiple banks are private or public financial institutions constituted as stock companies, which shall have at least two of the following business line, one of which must be either commercial or of investments:

(a) commercial;
(b) investment and/or development, the latter being exclusive for public banks;
(c) real estate credit;
(d) credit, financing and investment; and
(e) leasing.

21.3.2. Commercial Banks

Commercial banks are private or public financial institutions constituted as stock companies, which operate in the discounting of credit instruments, in exchange operations, in the opening of credits, in the custody of assets, in all types of collections and payments, in taking deposits for the Employee's Dismissal Fund (Fundo de Garantia por Tempo de Serviço, hereinafter referred to as "FGTS"), and in exchange operations duly authorized by BACEN. Those banks are regulated by Resolution CMN n. 3265/05.

21.3.3. Investment Banks

According to Resolution CMN n. 2.624/99, investment banks are private financial institutions constituted as stock companies, whose primary objective is to conduct investment or financing operations in medium and extended terms, aiming at the provision of capital for companies in the private sector, from their own resources, as well as by the collection, intermediation and application of third party resources.

The legislation requires that investment banks include in their names the term "investment bank" ("banco de investimento").

21.3.4. Development Banks

According to Resolution CMN n. 394/76, development bank is a non-federal public financial institution constituted as a stock company with head-offices in the capital of the state in which its share 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.

The primary objective of the development bank is to provide an adequate finance program and to assist projects which promote the economic and social development of the state in which it is located, favoring, especially, the private sector.

In order to comply with its objective, the development bank shall support regional or sectoral programs or projects which:

(a) increase the economy's production capacity, by means of the implementation, expansion or relocation of ventures;
(b) benefit productivity, by means of reorganization, rationalization or modernization of companies and formation of inventories of raw materials and final products or by means of the formation of integrated trade companies;
(c) contribute to the improvement of the local economic environment and local companies by means of the incorporation, merger, association, assumption of the share control and/or the liquidation or consolidation of assets or liabilities;
(d) improve rural production by means of investment in projects with a view to the formation of fixed or semi-fixed capital; and
(e) promote the incorporation and development of production technology, management improvement, the formation and improvement of technical staff, for this purpose being allowed to sponsor technical assistance programs through specialized companies and entities.

21.3.5. Credit, Financing and Investment Companies

Credit, financing and investment companies were originally regulated in 1959 as financial institutions constituted as stock companies, which have as their purpose the provision of finance for the acquisition of goods and services, as well as for the working capital (Resolution BACEN n. 1.092/86).

They are required to include in their name the term "credit, financing and investment" ("crédito, financiamento e investimento").

21.3.6. Real Estate Credit Companies

According to Resolution CMN n. 2.735/00, a real estate credit company is a financial institution constituted as stock company with the objective of providing financial support to real estate operations relating to the incorporation, construction, sale or acquisition of housing. Its name shall contain the phrase "real estate credit" ("crédito imobiliário").

21.3.7. Credit Cooperatives

According to Resolution BACEN n. 3.442/07 and amendments, credit cooperatives are financial institutions constituted as legal entities, with non-profit purpose, which consist of a group of individuals who engage in a certain profession or other common activities, with the objective of sharing credits and/or providing services with benefits for the associates.

It is important to note that credit cooperatives are prohibited from using in their name the term "bank" ("banco").

21.3.8. Stock Brokerage Companies

According to Laws nos. 4.728/65 and 6.385/76, and Resolution CMN n. 1.120/86 and amendments, stock brokerage companies, which shall be constituted either as stock companies or as private limited liability companies, are those institutions which have the following objectives, among others:

(a) to operate in locations or in systems maintained by stock exchanges;
(b) to subscribe, solely or by means of a consortium with other authorized companies, for the issuance of securities for resale;
(c) to intermediate public offers and distribution of securities in the market;
(d) to purchase and sell securities on its own or third party's account, in accordance with the legislation enacted by CVM and by BACEN;
(e) to administer securities portfolios and the custody of securities; and
(f) to subscribe, transfer and certify endorsements, share certificates, receipt and payment of redemptions, interest and other earnings relating to securities.

For the granting, by BACEN, of an authorization to operate, the company must be admitted as a member of a stock exchange and have the approval of CVM for the exercise of activities in the securities market.

The approval of CVM will also be necessary for the conducting of the following acts: relocation of the head-quarters; establishment, relocation or closure of branches or offices; alteration in the corporate capital; appointment of managers and other officials, fiscal counsels and members of other corporate bodies; foreign participation in the corporate capital; any other kind of alteration of its by-laws; and liquidation.

Additionally, CVM shall also be consulted in regard to any alienation in the control of the company, as well as in regard to any kind of change of its legal type, merger, incorporation and split.

21.3.9. Exchange Brokerage Companies

According to Resolution CMN n. 1.770/90 Exchange brokerage companies was to be constituted as legal entity, whose name shall expressly contain the term "exchange brokerage" ("corretora de câmbio").

The main objectives of an exchange brokerage company are to intermediate exchange operations and the negotiation of the respective bills of exchange (the latter being exclusively conducted by business individuals organized by official brokers of public funds and brokerage companies), the exchange company provided that is not a member of an exchange shall comply with all rules applying to exchange members companies.
It is important to notice that in 2006 with the Resolution CMN n. 3.356, exchange brokerage companies were allowed to operate in exchange operations for themselves.

21.3.10. Securities Distribution Companies

According to Resolution CMN n. 1.653/89, securities distribution company, whose name must contain the term "securities distribution" ("distribuidora de títulos e valores mobiliários") shall be constituted either as a stock company or as a limited liability company, with the following objectives, among others:

(a) to subscribe, solely or by means of a consortium with other authorized companies, or the issuance of securities for resale;
(b) to intermediate public offers and distribution of securities in the market;
(c) to purchase and sell securities on its own or a third party's account, in accordance with the legislation enacted by CVM and by BACEN;
(d) to administer securities portfolios and the custody of securities; and
(e) to subscribe, transfer and certify endorsements, share certificates, receipt and payment of redemption, interest and other earnings relating to securities.
In addition to the necessary authorization granted by BACEN for their functioning, securities distribution companies shall also apply for the issuance of a previous and express authorization before CVM.

CVM shall also be consulted with regard to any alienation in the control of the company, as well as with regard to any kind of transformation of its legal type, merger, incorporation and split.

21.3.11. Mortgage Companies

According to Law n. 6.404/76 and Resolutions CMN nos. 2.122/94 and 3.425/06, complemented by CVM Instruction n. 455/07, mortgage companies shall be constituted as "S.A" companies and must contain the term "mortgage company" ("companhia hipotecária") in their names.

Mortgage companies have the following objectives:

(a) to provide finance for the acquisition, production, reorganization or trade of residential or commercial real properties and urban lots;
(b) to purchase, sell, refinance and manage mortgaged credit of their own or of third parties;
(c) to manage real property investment funds, provided that the necessary authorization is obtained from CVM;
(d) to transfer resources for the financing of the production or acquisition of residential or commercial real properties;
(e) to provide loans and finance for mortgage credit with other objectives as described in item (a) above; and
(f) to manage investment funds (Instruction CVM n. 455/07).

According to the law in force, mortgage companies can be transformed into multiple banks; commercial banks; investment banks; development banks; credit, financing and investment companies; real estate credit societies; leasing companies; stock brokerage companies; securities distribution companies or exchange companies.

21.4. Foreign Financial Institutions

According to Article 18 of Law n. 4.595/64, for foreign financial institutions to be able to operate in Brazil, they shall obtain a previous authorization.

The 1988 Constitution was passed with the intention of facilitating foreign investment in Brazil. At the same time, however, the Constitution imposed strict restrictions on foreign investment in Brazilian financial institutions.

Article 52 of the Transitory Provisions of the Constitution provided that any opening of new branches of foreign institutions and any increase in foreign ownership of the capital of existing Brazilian financial institutions be vetoed pending the enactment of a Complementary Law, in accordance with Complementary Law n. 192 . However, Article 52 determined that such restriction is not applicable in cases where it is in the best interest of the Brazilian government for authorization to be granted, or in cases an authorization deriving from international treaty are issued.

Nowadays, in order to incorporate a foreign financial institution in Brazil, firstly it is necessary to complete an application form to be submitted to BACEN's analysis (Circular BACEN n. 3.317/06). BACEN's recommendation and all the additional information requested by the National Monetary Consul's "Communiqué" n. 10.844/03, modified by Circular BACEN n. 3.317/06, will be submitted for the deliberation of the CMN and then to the final decision of the President of the Republic of Brazil, who shall, in turn, issue an "Executive Decree" (Article 52 of the Transitory Provisions of the Constitution).

It is important to note that besides all information requested for Brazilian financial institutions, in order to grant an authorization for its constitution, the foreign financial institution shall provide to BACEN two copies of the legal document that indicates the nomination of the legal representative of the foreign institution with respective translations duly notarized.

21.5. Crimes against the Financial System

Law n. 7,492 of June 16, 1986 ("Law 7,492/86"), which regulates crimes against the Brazilian Financial System, defines financial institution as the public or private entity that has as its core or ancillary business, cumulatively or not, the capture, intermediation or application of financial resources of third parties, in Brazilian or foreign currency, or the custody, issue, distribution, negotiation, intermediation or administration of securities. Additionally, Law 7,492/86 also defines as equivalent to financial institutions: (i) the legal entities that capture or manage insurance, exchange transactions, consortium, capitalization or any type of savings or third party resources; and (ii) the individuals that are engaged in such activities, even if sporadically.

Law 7,492/86 establishes the following crimes against the Brazilian Financial System:

(a) Print, copy or by any means manufacture or place in circulation, without the authorization of the issuer, a certificate or other document that represents a security;
(b) Disclose false or harmful incomplete information on a financial institution;
(c) Manage a financial institution fraudulently or recklessly;
(d) Expropriation, committed by the controlling shareholder and/or administrator of the financial institution, of monies or any other security that is under their possession or divert it to their or a third party's benefit or negotiate a right or any other movable or immovable asset that is under its possession, without authorization of the lawful owner;
(e) Mislead or maintain in error a partner, investor or the relevant government authority as to the operation or financial status, retaining information or providing false information thereon;
(f) Issue, offer or negotiate in any way papers or securities: (i) that are false or falsified; (ii) that lack prior registration of issue before the competent authority, in conditions that do not match those stated in the registration or that are irregularly registered; (iii) without sufficient support or guarantee, as required by the law; (iv) lacking prior authorization of the competent authority in the cases where this is legally required;
(g) Determine, in nonconformity with the law, interest, commission or any type of remuneration over the credit or insurance, administration of mutual fund or tax operation, or over a consortium, brokerage or securities distribution operation;
(h) Fraud the inspection or the investor by inserting or causing the insertion of a false statement or a statement different that what should have been stated in a document supporting an investment in papers or securities;
(i) Insert false data or omit data required by the law in accounting statements of a financial institution, insurance company or entity that comprises the securities distribution system;
(j) Maintain or operate resources or sum separately from the accounting records required by the law;
(k) Failure, by the former administrator of a financial institution, to provide to the interventionist, liquidator or estate manager, within the timeframes and conditions established in the law, the information, statements or documents under its responsibility;
(l) Deviate an asset covered by the legal indisposition resulting from intervention, extra-court liquidation or bankruptcy of a financial institution or, in the case of the interventionist, liquidator or estate manager, take possession of such asset or deviate it to own or a third party's benefit;
(m) Present in an extra-court liquidation or bankruptcy of a financial institution, a false statement of credit or false claim or present with same a false or disguised instrument; or, in the case of the ex administrator or bankrupt party, recognize as true a credit that is not true;
(n) False statement made by the interventionist, liquidator or estate manager on an issue related to the intervention, extra-court liquidation or bankruptcy of a financial institution;
(o) Operate without the sue authorization or with an authorization obtained through a false statement, (vetoed) a financial institution, including a securities distribution or exchange entity;
(p) Take or receive, in the quality of controlling shareholder and/or administrator of a financial institution, directly or indirectly, a loan or cash advancement or extend it to a controller, administrator, statutory board member, their spouses, ascendants or descendants, lateral relatives up to the second degree, co-breeds or similar, or to a company whose control is exercised, directly or indirectly, by such financial institution or any such persons;
(q) In self behalf, in the capacity of controller or administrator of the company, grant or receive a cash advance of professional fees, remuneration, salary or any other payment, in the conditions mentioned in (p) above, or promote the distribution or receive profits of a financial institution in a disguised manner;
(r) Violate the confidentiality of an operation or service provided by a financial institution or entity that comprises the securities distribution system, which is known by the agent pursuant to the position that the agent holds;
(s) Obtain, fraudulently, financing extended by a financial institution;
(t) Apply, for a purpose different from the purpose established in the law or contract, the resources originated from financing extended by an official financing institution or by an institution authorized to provide such resources;
(u) Attribute to itself or to a third party, a false identity to realize an exchange operation; or fail to provide, for the same purpose, information that was necessary to be provided or provide false information;
(v) Realize an unauthorized exchange operation with the purpose of promoting unreported remittance of currency from Brazil; or promote for any reason and without legal authorization, the exit of currency or foreign currency to a foreign country or maintain abroad deposits unreported to the relevant federal authority; and
(w) The omission, delay or performance by a governmental worker, contrary to an express provision of the law, an official act required for the regular operation of the Brazilian financial system and to preserve the interests and values of the economical-financial system.

The controlling shareholder, directors and managers of a financial institution, being equivalent thereto the interventionist, liquidator or the estate manager in the cases of intervention and extra-court .liquidation extrajudicial, are criminally liable for the crimes foreseen in Law No. 7.492/86. The practice of the crimes mentioned above are subject to detention periods ranging from one to twelve years plus fine.

21.5.1. "Money Laundering"

On 03 March 1998, the Federal Government approved Law n. 9.613, which regulates "money laundering" crimes and creates, under the Ministry of Finance, the Counsel for the Control of Financial Activities (hereinafter referred to as "COAF") an agency whose function is to accept, examine and identify suspected occurrences of unlawful activities and to discipline and impose administrative penalties.

The purpose of this law is to combat crimes relating to "money laundering" (such as the hiding or camouflaging of the nature, origin, disposition, movement or ownership of assets, rights or amounts) and to detect and punish all and any attempts to legalise the assets generated by such crimes. The law makes it possible to have greater control over these kinds of operations and to enable BACEN to maintain a closer view of financial transactions.

The groups subject to the law are those companies or other legal entities whose primary or secondary activity is the acquisition, intermediation or administration of financial resources of third parties in Brazilian or foreign currency; the buying or selling of foreign currency or gold as a financial activity or exchange instrument; and real estate activities.

Also included under the legislation are insurance companies and brokers, banks, stock exchanges and futures markets; users of magnetic cards, or their equivalent, which permit the transfer of funds; companies that deal with foreign exchange, leasing, and factoring; individuals or companies dealing in commercial jewels, gemstones and precious metals, objects of art and antiquities; companies that distribute money, goods, services or their respective discounts by lottery and such like; companies that promote the purchase and/or sale of real state; individuals or companies that deal with luxury and very expensive merchandise; branches or representative offices of a foreign institution that operates with any of the above-mentioned; and any company or institution that depends on authorization of any financial, exchange, securities or insurance markets' government entities .

All of the above groups are required to identify their clients, maintaining an up-to-date client list and, for a minimum of five years, maintain records of all transactions in Brazilian or foreign currency as well as document of all operations having a value which exceeds a level as determined by a qualified authority.

In addition to the loss of their illegally acquired assets to the State, with the exception to the rights of bona fide third parties or others who may have suffered injury, various levels of penalties have been established for offenders:

(a) warnings for irregularities concerning the identification of the clients and the maintenance of the registry of financial transactions within 24 hours;
(b) fines ranging from one percent to two hundred percent of the value of the operation or the derived profit, or a fine of up to R$ 200,000.00 (fines are levied for negligence in correcting cited deficiencies within a designated period or failure to fulfill the requirement to identify the clients and maintain proper registers);
(c) suspension, to a maximum of ten years, in the exercise of corporate administrative responsibilities (suspension results from cases of severe, verified infractions of the law, or specific and recurring transgressions previously penalized by fines); and
(d) cancellation of activities for the repeated incidence of infractions relating to the above suspension penalty.
In the event that the crime of money laundering is practiced abroad, any assets resulting from the contravention of a treaty or conversion enacted by the competent foreign authority will be seized and apportioned between the country and Brazil, again with exception to the rights of bona fide third parties similar to the above.

21.6. Leasing

21.6.1. Leasing Companies

The leasing companies must be incorporated as "S.A." companies, and shall be subject, whenever applicable, to the same conditions set forth for the financial institutions, as per Law n. 4.595, from 31.12.1964, and subsequent amendments enacted by the CMN. Additionally, the leasing companies shall carry in their names the term "Leasing" ("Arrendamento Mercantil") - Resolution BACEN n. 2.309/93 and amendments.

The principal objective of a leasing company, which shall be taxed as per Laws nos. 6.099/74 and 7.132/83, is the practice of leasing operations dealing with movable assets produced within Brazilian territory or abroad, or with real properties acquired from third parties to be used by the lessee in its economic activity. At the end of the leasing contract, the lessee has three options: (i) to buy the movable asset; (ii) to renew the leasing contract; or (iii) to return the movable asset to its lessor.

21.6.2. Leasing Transactions

The Arrendamento Mercantil (hereinafter referred to as "Leasing") is regulated by Law n. 6.099 of 12 September 1974 . The English term "leasing" is frequently used in Brazil. In general, leasing transactions may be divided into two groups, subject to specific regulations: domestic leasing transactions and cross-border leasing transactions.

21.6.3. Domestic leasing transactions

Domestic leasing transactions are basically regulated by Law 6099/74 and by Resolution BACEN n. 2309, of 28 August 1996. These transactions are entered into between a company domiciled in Brazil (herein after referred to as "lessor") and an individual/or legal entity also domiciled in Brazil (hereinafter referred to as "lessee"). The subject of these transactions is the leasing of goods acquired by lessor in accordance with lessee's specifications for lessee's use.

In articles 5 and 6 of Resolution BACEN n. 2309 two types of domestic leasing transactions are basically defined: (i) finance lease and (ii) operating lease (which in Brazil includes the option for purchase).

21.6.4. Domestic Finance Lease

Accordingly, in order to fulfill the requirements established by Resolution BACEN n. 2309, domestic finance leases must contain the following basic features:

(a) the leasing payments and other amounts established in the agreement should be sufficient for lessor to recover the cost of the leased goods during the lease term and to have a return on the investment made;
(b) maintenance expenses related to the leased goods should be borne by lessee; and
(c) the price freely agreed for exercising the option for purchase should be stated and the residual or the market value of the leased goods may be agreed.

21.6.5. Domestic Operating Lease

Furthermore, domestic operating leases must contain the following basic features, in order to fulfill the requirements established by Resolution BACEN n. 2309:

(a) the payments to be made by lessee should include the cost of leasing the goods as well as the services required to put such goods at the disposal of lessee, and the present value of the payments cannot exceed ninety percent (90%) of the cost of the goods;
(b) the lease term should be shorter than seventy-five percent (75%) of the goods' useful life;
(c) the price for exercise of the purchase option should be the market value of the leased goods; and
(d) the lease does not contain a provision establishing the payment of a guaranteed residual value.

Leasing agreements must contain a number of indispensable conditions required by BACEN. Particularly important is lessee's right to three alternatives at the end of the lease term: (i) to renew the agreement; (ii) to return the goods; or (iii) to acquire the leased goods.

Article 8 of Resolution BACEN n. 2309 establishes the minimum terms for leasing transactions: a 2 or 3 year term for domestic finance leases (such term may vary depending on the useful life of the leased goods) or a 90 day term for domestic operating leases.
Article 13 of Resolution BACEN n. 2309 deals with sale and leaseback transactions. These transactions are entered into with the seller of the goods or with affiliates of the seller and can only vest in the form of a finance lease.

21.6.6. Cross-border leasing

Cross-border leasing transactions are basically regulated by Law 6099/74, Resolution BACEN n. 1969 published on September 30, 1992, and Circular BACEN n. 2731 of December 13, 1996. Resolution BACEN n. 2309, which deals with domestic leasing transactions, and applies on a supplementary basis to cross-border leasing transactions.

As established by the specific legislation, cross-border leasing transactions are those entered into with a foreign party that figures therein either as lessor or lessee. If a Brazilian party figures as lessor, such party must obtain the BACEN's prior authorization to engaging in leasing transactions.

The main types of cross-border leasing are finance leases, operating leases (rents), and sale and leaseback transactions.

21.6.7. International finance leases

The main characteristic of international finance lease transactions is the fact that after the minimum lease term has expired, lessee has the option to acquire the leased goods at its residual or market value. In addition, these transactions have the following features:

(i) the total amount of the agreed payments, including all charges, as well as the residual value, cannot exceed the value that the goods would have if they had been purchased through an import financing transaction; in any case, the proportionality between the term of the agreement and the useful life of the leased goods must be maintained;
(ii) the fixed payments established in the agreement must be distributed throughout the lease term, so that at any time during the agreement the proportion between the total amount already remitted and the leasing amount is not greater than the proportion existing between the period already elapsed and the total lease term; and
(iii) by the date of the certificate of delivery and acceptance of the leased goods, the total payments to lessor abroad may not exceed 15% of the amount of the transaction.

The minimum terms for international finance leases are: (i) 2 years, when the useful life of the goods is equal to or less than 5 years; or (ii) 3 years, in other cases.

21.6.8. International operating leases

There are no specific rules governing international operating lease transactions, which are contemplated by sparse rules and regulations issued by BACEN and the Foreign Trade Department (hereinafter referred to as "DECEX").

International operating lease transactions, specifically rent, should also observe the following conditions: (i) the leased goods must be returned to lessor upon expiration of the agreement or the lease term may be extended, depending on the useful life of the leased goods; (ii) by the date of the certificate of delivery and acceptance of the leased goods, the total payments to lessor abroad may not exceed three leasing payments; (iii) the transaction may be subject to the "special temporary admission customs system".

21.6.9. International sale and leaseback

Article 4 of Resolution BACEN 1969/92 establishes the possibility of leasing transactions between lessor-buyer domiciled abroad and lessee-seller domiciled in Brazil. The transaction value, however, must be lower than 75% of the cost of the leased goods, which must be purchased in cash by lessor-buyer.

Such transactions are also subject to the international finance leases rules. As a result, the provisions that apply to international finance lease agreements, such as mandatory clauses, minimum terms, tax treatment, also apply to international sale and leaseback transactions.

21.6.10. Registration of cross-border leasing transactions

The first step to be taken by a Brazilian lessee that intends to enter into a cross-border leasing transaction and to import the leased goods is submit to Foreign Trade Office (hereinafter referred to as "SECEX") information on the conditions regarding the intended leasing and the goods to be leased, in order to obtain an Import License (hereinafter referred to as "LI"). This information is provided via SISCOMEX. After the terms of the transaction are approved by SECEX, the LI is issued to the importer. The LI number is indispensable for the registration of the transaction with BACEN.

After the LI is obtained, the following step is the registration and approval of the financial clauses and conditions of the leasing by the BACEN, so that lessee may remit the leasing payments to lessor abroad. Circular BACEN n. 2731/96 addresses the ROF, which must be obtained through the SISBACEN.

Once the customs clearance has been obtained, lessee must register the Leasing Payment Scheme with the BACEN via SISBACEN. To obtain this registration, lessee must: (i) evidence the connection between the ROF and the Declaration of Importation; and (ii) inform BACEN the number of payments owed to the foreign lessor, as well as the respective due dates.

Lastly, after registration of the payment scheme, lessee may remit the leasing payments as stipulated in the cross-border leasing agreement.

21.6.11. Accounting

Due to the Law n. 11.638 of 27 December 2007, large legal entities, not yet incorporated joint stock companies, shall refer to the leasing operation in its accounting entry within their Balance Statements as (i) a credit purchase and sale agreement, or merely as (ii) an acquisition financing. The purpose of this stipulation is force legal entities comply with the international accounting practices that up to now have not been carried out by the Brazilian companies.