Opice, Jose Roberto C.

Skola, Thomas J.

English

bepress Legal Repository

Recent Highlights in Brazilian Banking Legislation

University of Miami School of Law

University of Miami Law SchoolInstitutional RepositoryUniversity of Miami Inter-American Law Review4-1-1982Recent Highlights in Brazilian Banking LegislationThomas J. SkolaJose Roberto C. OpiceFollow this and additional works at: http://repository.law.miami.edu/umialrPart of the Comparative and Foreign Law Commons, and the International Law CommonsThis Report is brought to you for free and open access by Institutional Repository. It has been accepted for inclusion in University of Miami Inter-American Law Review by an authorized administrator of Institutional Repository. For more information, please contact library@law.miami.edu.Recommended CitationThomas J. Skola and Jose Roberto C. Opice, Recent Highlights in Brazilian Banking Legislation, 14 U. Miami Inter-Am. L. Rev. 121(1982)Available at: http://repository.law.miami.edu/umialr/vol14/iss1/10RECENT HIGHLIGHTS IN BRAZILIANBANKING LEGISLATIONTHOMAS J. SKOLA*JOSE ROBERTO C. OPICE**A recent decree-law' and pronouncements of the Central Bankand the Attorney General of the National Treasury have profoundimplications for practicing lawyers dealing with Brazilian bankingtransactions or the authority and status of Brazilian banks operat-ing abroad. Decree-Law No. 1,928 of February 18, 1982 assumesthat interest and principal of foreign currency loans contracted bypublic sector companies and governmental agencies will be paid onschedule. A recent opinion of the Office of the Attorney General ofthe National Treasury2 concludes that set-off clauses in foreigncurrency loan agreements are illegal. In addition, the Central Bankhas just issued regulations governing the opening and operation offoreign offices of Brazilian banks.3 The purpose of this brief com-ment is to explain the major substantive points and possible effectsof this legislation and administrative rulings.Decree-Law No. 1,928It was reported in a number of newspaper articles during thefirst few months of 1982' that the Federal Government of Brazil,acting through Banco do Brasil S.A., had to step in and pay U.S.$4,900,000,000 on foreign currency loan obligations of several pub-lic sector companies and governmental agencies. These paymentswere said to have been made by the Federal Government becausecertain public sector companies and governmental agencies wereunable to make their scheduled repayments because they had al-Presently practicing law in Miami, Florida.** Presently practicing law in Slo Paulo, Brazil.1. Article 55 of the Federal Constitution authorizes the President of the Republic, incases of urgency and significant public interest, and provided that there is no increase inexpense, to promulgate decree-laws dealing with public finance and taxes.2. Opinion of Mar. 10, 1982, D.O. Mar. 17, 1982, at p. 4627.3. Central Bank Resolution No. 728 of Mar. 24, 1982 and Central Bank Circular No.685 of Mar. 30, 1982.4. Jornal do Brasil of Mar. 21, 1982 and Apr. 2, 1982.LAWYER OF THE AMERICASready spent the funds budgeted for such loan repayments. Toavoid tarnishing its excellent credit reputation within the interna-tional banking community, the Brazilian government authorizedBanco do Brasil S.A. to advance the necessary funds in behalf ofthe soon-to-be defaulting borrowers.Decree-Law No. 1,928 contains four important provisions.One, it establishes the absolute priority of payment, within thebudgets of public sector companies and governmental agencies, ofall foreign currency loan obligations, regardless of whether suchloans are guaranteed by the National Treasury. Two, it makes theadministrators of public sector companies and governmental agen-cies jointly and personally liable for any delays in the repayment offoreign currency loan obligations of their respective companies oragencies. Three, it authorizes the Brazilian Central Bank to blockor freeze all bank accounts of public sector companies or govern-mental agencies in order to insure the timely repayment of all theirforeign currency loan obligations. Four, it establishes proceduresfor reporting and judicially expediting all violations of this Decree-Law, including the sanction of immediate dismissal of all responsi-ble administrators.Decree-Law No. 1,928 is a message to the international bank-ing community that the Brazilian Government will not tolerate anydefault of foreign currency loan obligations contracted by publicsector companies and governmental agencies, by far the greatestnumber of borrowers of foreign loans in Brazil. It is also a sternwarning to all officers and directors of public sector companies andofficials in governmental agencies that they must promptly repaytheir foreign currency loan obligations, regardless of their cash-flowsituation or unbudgeted extraordinary disbursements. Many Bra-zilian lawyers and legal commentators consider Decree-Law No.1,928 a type of "comfort letter" designed to reassure foreign lend-ers that the Brazilian government fully intends to honor all its for-eign loan commitments, even those which do not have the guaran-tee of the National Treasury.Attorney General's Opinion on Bank SetoifsMost international loan agreements contain a clause permit-ting the bank or creditor to set-off and counterclaim in the eventof default by the borrower. The following language is typical:The Borrower expressly consents and agrees that any Bank or[Vol. 14BRAZILIAN BANKING LEGISLATIONholder of a Note may exercise any and all rights of banker's lien,set-off and counterclaim with respect to any and all monies ow-ing by the Borrower to such Bank or holder.Such a clause, as well as normal banking practices, enables thelending bank to "set off" all amounts which such Borrower mayhave on deposit with or credited to it against any amounts due andowing by the Borrower under a loan agreement.A March 10, 1982 Opinion of the Office of the Attorney Gen-eral of the National Treasury ("Opinion") holds that such set-offclauses are illegal and unenforceable as a means of satisfying debtsincurred under foreign currency loan agreements. The Office of theAttorney General of the National Treasury based its Opinion ontwo separate rationales:a. Law No. 4,131 of September 3, 1962 authorized the BrazilianCentral Bank to regulate all foreign remittances, including prin-cipal and interest payments on foreign loans, amortizations,commissions and income taxes. Law No. 4,595 of December 31,1964 established strict exchange controls and authorized the Na-tional Monetary Council and the Brazilian Central Bank to su-pervise all such controls.Based on the foregoing legislation, the Office of the AttorneyGeneral of the National Treasury has concluded that set-offclauses in foreign currency loan agreements materially prejudiceand hamper the ability of the Brazilian Central Bank to admin-ister and supervise foreign remittances and exchange controls,and are thus illegal and unenforceable in Brazil.b. Decree No. 23,258 of January 19, 1933 and Decree-Law No.9,025 of February 27, 1946 prohibit certain foreign currency ex-change operations and private bank clearings, respectively. TheOffice of the Attorney General of the National Treasury arguesand holds that the set-off procedure under a foreign loan agree-ment is similar to an illegitimate foreign exchange operation orprivate bank clearing, as described and prohibited by theaforecited Decree No. 23,258 and Decree-Law No. 9,025, respec-tively, and is thus illegal and unenforceable in Brazil.The Opinion is not unexpected and will not greatly alter cur-rent banking practice in Brazil, since public sector borrowers andthe Office of the Attorney General have for some time objected tothe inclusion of set-off clauses in foreign currency loan agreementscontaining the guarantee of the federal government. Furthermore,because of the excellent performance record of most Brazilian bor-rowers (and the watchful eye of the Brazilian Central Bank), there1982]LAWYER OF THE AMERICAShave been few, if any, recent occasions for use of a set-off clausebecause of default by a Brazilian borrower. The Opinion clarifiesthe legal basis for Brazilian borrowers and guarantors objecting tothe inclusion of set-off clauses in international loan documents. Inthe final analysis, however, this legal argument may have littlepractical significance because most international loan agreementsentered into by Brazilian borrowers and guarantors stipulate thatthey are governed by the laws of New York or England, both ofwhich permit, in practice, set-offs as a means of satisfying debtsdue and owing under loan agreements.Brazilian Central Bank Resolution No. 728 and Circular No.685.According to newspaper reports,5 Brazilian banks have openedmore than 100 offices outside Brazil. Fifty-one of these offices havebeen opened during the past three years. An unofficial estimate ofthe number of Brazilian banks with New York offices is eighteen;four Brazilian banks have opened offices in Miami, Florida. Theforeign offices of Brazilian banks, including agencies, branches andrepresentative offices, are now starting to play a significant role incapturing foreign funds for foreign currency loans to private andpublic companies in Brazil.In an effort to regulate and control the activities of these for-eign banking offices, and thus the effect that such foreign bankingoperations have on the national economy, the Brazilian CentralBank recently passed regulations governing the opening and oper-ating of branches, agencies and representative offices of Brazilianbanks abroad. Such regulations also govern any participation byBrazilian commercial and investment banks in the capital of for-eign banks. All such activities require the prior authorization ofthe National Monetary Council. Application for such authorizationmust include all personal information on its proposed representa-tive abroad, a certified copy of the Board of Directors Resolutionapproving the foreign activity and the reasons for such decision,the types of activities that will be undertaken by the bank outsideBrazil, and a detailed report regarding the performance of anyother foreign offices of the bank.The National Monetary Council will only approve applicationsthat meet the following requirements:5. Jornal do Brasil, Mar. 15, 1982.[Vol. 14BRAZILIAN BANKING LEGISLATION1. The paid-in capital of the parent bank in Brazil cannot beless than 2.14 billion cruzeiros (approximately $ U. S. 14.3 mil-lion at the exchange rate prevailing on April 6, 1982).2. The amount of capital allocated to the foreign office cannotexceed 25% of the capital of the parent bank in Brazil, andmust be accompanied by a paid-in capital increase of the parentbank, unless the capital of the foreign office will be derived fromfunds generated abroad.3. Brazilian banks either opening an office abroad or participat-ing in the capital of a foreign bank must hold at least 51% ofthe capital of such foreign bank.4. If a banking group in Brazil desires to open a foreign office orparticipate in the capital of a foreign bank, only the commercialbank of such group will be permitted to be the principal orstockholder of such foreign banking entity.5. Foreign offices will only be permitted for commercial banksthat already have agencies abroad or where the actual establish-ment of offices is a pre-condition for opening a banking agencyin the chosen country.6. The expenses of establishing and maintaining offices abroadcan only be paid for with funds generated by the commercialbank outside Brazil, except in the case of Brazilian parent banksthat do not have foreign offices operating for more than threeyears.7. In the event that the foreign country imposes no limitationson the borrowing of sight or term deposits or the issuance ofguarantees, the foreign office must comply with the respectiveborrowing limits and pertinent rules applicable to the parentbank in Brazil.8. All parent banks with foreign offices must have a managementdepartment at the level of its Board of Directors responsible forits international operations, as well as appropriate auditing pro-cedures relating thereto.These regulations by the Brazilian Central Bank are the first steptowards regulating an area which, for all practical purposes, hadbeen unregulated and is rapidly becoming a significant factor inthe planning of Brazil's economy.The legal matters described above will no doubt be supple-mented and modified with great frequency. It is imperative thatcounsel be familiar with these legislative and administrativechanges and stay abreast of all developments in this area.19821

https://repository.law.miami.edu/cgi/viewcontent.cgi?article=1798&amp;context=umialr

Recent Highlights in Brazilian Banking Legislation

Abstract

Similar works

Full text

Available Versions

bepress Legal Repository

University of Miami School of Law