How Brazil is battling money laundering

How Brazil is battling money laundering

Loans Politics Features Brazil

The bribery and corruption scandals that have racked Brazil in recent years could not have come to pass without the help of money launderers. Now a growing cadre of critics suspects the problems go beyond crooked politicians and shady business people to the heart of Latin America’s largest financial services industry.

“The colossal amounts of money that have been laundered in the past decade would not have been possible without a degree of leniency from certain financial institutions,” says Carla de Carli, a money laundering expert at Brazil’s public prosecutors’ office, or MPF.

But if Brazil is serious about fighting corruption, Carli says, it has to eliminate suspicious financial transactions. “Investigations have shown that it is impossible to dissociate corruption from money laundering,” she says.

The Lava Jato investigation, for example, started as a probe into a suspected money laundering scheme at a gas station in Brasília. It has since ballooned to involve accusations of laundering more than 30 billion reais ($9.25 billion). Unlike some other countries in Latin America, experts say bribes in Brazil move more laundered money than drug trafficking.

Brazil has strengthened its laws in recent years and requires banks to report all suspicious activities, Carli says. But as the government piles more regulations on to the financial sector, some critics say lawmakers have gone overboard, making it too difficult and too expensive to conduct legitimate business in Brazil.

Legislators, however, say the sheer size of Lava Jato and other corruption investigations in Brazil means cooperation from local financial institutions is key.

“The central question is, how can there be the transfer of billions of reais in resources between the corrupt and the corrupted without the criminal complicity of the banks?” Roberto Requião, a senator from the state of Paraná, asked during a speech in September. “It just looks impossible.”

Requião occupies the left wing of the centrist Brazilian Democratic Movement Party, or PMDB, the same party as the reform-minded President Michel Temer, but he voices a suspicion that many Brazilian share after years of investigations have shown that corrupt politicians and business people were able to move money at will. Some of the suspects who have signed plea bargain agreements with federal prosecutors have hinted at the possible connivance of financial entities in the corruption schemes.

The lobbyist and concert promoter Adir Assad has said his good relationships with banks allowed him to access large amounts of cash to pay bribes. Luiz Eduardo da Rocha Soares, who handled illicit payments for the local engineering firm Odebrecht, has said the local banks’ “somewhat flawed” compliance standards made it easier to circulate dirty money in Brazil than in the United States. The currency trader Luccas Pace has said he worked with four local banks that willingly ignored transactions with shell companies and fake bank accounts. In 2015, a manager at state-owned lender Banco do Brasil received jail time for helping the dollar trader Nelma Kodama launder some $300,000 per day.

According to local press reports, the Lava Jato investigators are now looking into the roles that Brazil’s financial institutions played in the corruption schemes.

“One thing is to have controls in place,” Carli says. “Another thing is to enforce them.”

Cost of compliance
Brazil passed its first anti-money laundering law in 1998. The law has been updated over the past few years, widening the number of activities that banks have to report to 106 from 43.

As a result, the Council for Financial Activities Control, or COAF, the division of the Finance Ministry that leads the government’s activities to combat money laundering, produced 5,662 case reports in 2016, compared to 1,149 in 2010. The council was already close to passing last year’s totals by the end of August this year.

The rise in COAF cases can be traced in part to increased investments in compliance procedures by Brazil’s financial institutions, according to the local banking association Febraban. In a statement to LatinFinance, Febraban said its member institutions reported 56,000 suspicious transactions to COAF last year and and 34,000 between January and July of this year.

Brazil’s banks have expanded their compliance teams and invested in technology to screen illicit activity. Alexandre da Silva Gluher, the chief risk officer at Bradesco, says Brazil’s second largest privately-owned bank has added 300 people to the compliance and ethics department in the past year, bringing the total to 1,600 employees involved in the prevention of money laundering.

Even as Brazil’s banks increase their efforts to combat corruption, government regulators are not likely to apply less pressure anytime soon. “The central bank is looking at banks very closely, especially now that revelations are coming from all parties involved,” says Maria Balbina Martins de Rizzo, an independent consultant who advises banks on to how to identify and avoid money laundering.

The central bank has performed 200 audits in the past three years to determine if local banks are doing enough to prevent money laundering, the bank said in an email to LatinFinance.

New regulations keep coming and compliance costs keep rising. The central bank’s national monetary council, or CMN, has ruled that local financial institutions must implement new mandatory compliance guidelines by the end of the year. The securities commission CVM is preparing its own compliance guidelines for the organizations it supervises, many of which belong to banking groups.

Carli points out that Brazil’s highly regulated financial system makes it simple to implement additional controls, but some banks have griped that the rules are piling up and some of them appear to replicate demands already in place.

Among the more rigorous new standards, the central bank will require banks to report any cash withdrawals above 50,000 reais, down from the current trigger at 100,000 reais. Customers will also have to inform banks of large transaction three days in advance, instead of the 24-hour notice now required.

Absurd levels
In a September raid in Salvador, the state capital of Bahia, Brazil’s Federal Police found several suitcases and cardboard boxes stuffed with 51 million reais in cash. The stash, which included more than $8 million in dollars, was tied to Geddel Vieira Lima, a former member of congress who had also been a minister in the Temer administration.

“It’s not that we weren’t worried before about the comings and goings of bags full of money,” says Claudio Damasceno, head of the tax auditors’ labor union Sindifisco. “But this case has shown us that we have stepped up to absurd levels.”

Even if banks adhere to all the new rules, some skeptics do not expect that much will change. “No compliance tool can prevent a dishonest employee from opening the doors of the bank to a money laundering professional,” one market source says. “Banks’ internal audits and control systems make it likely that irregularities will be spotted eventually. But for a while an employee can get away with it.”

Rinaldo Carvalho, the former Banco do Brasil employee who went to jail for his part in a bribery scheme, claimed in defense that it was not his responsibility to report suspicious transactions to COAF. The argument did not hold much sway with the judges, but by simply omitting data he was able to keep the scheme going for a long time. He was sentenced to two years and eight months in jail in 2015.

Discussions are underway to allow the central bank, the CVM and other regulators to pursue leniency agreements with financial institutions that blow the whistle on illegal activities. The argument is that banks will be more likely to report misdeeds committed by employees and executives if the authorities are willing to negotiate fines. The antitrust agency CADE has successfully used the arrangement in cartel cases, says Renato Ximenes de Melo, a partner at the local law firm Mattos Filho.

Carli points out that prosecutors have used US-style plea bargains not only to expand the scope of their investigators, but also to recover embezzled funds.

But there is a catch for companies that cooperate. If Congress passes a bill currently in the lower house, regulators will be able to levy fines for as much as 2 billion reais for cases that are part of leniency deals.

The challenge for Brazilian authorities is to enforce the rules and make good use of the data produced by the system, says Heloisa Estellita, a money laundering expert at the private university Fundação Getúlio Vargas (FGV). In her view, COAF lacks the staff to analyze the information reported by financial institutions. “The problem, as is often the case in Brazil, is a dearth of resources to do the job in a more thorough way,” she says.

Investigators need to be well equipped because criminal groups do not lack imagination when it comes to laundering ill-gotten gains, she says. The Lava Jato investigation, for example, uncovered allegations that associates of former Rio de Janeiro Gov. Sergio Cabral purchased jewelry to hide their money. Other suspects reputedly sponsored stock car racing teams to launder money. And the Oscar Niemeyer Museum in Curitiba once hosted a show with paintings by Joan Miró, Emiliano Di Cavalcanti and Iberê Camargo, along with a counterfeit Renoir, all artworks that were confiscated from corrupt executives at the state-owned energy company Petrobras. “Money laundering professionals show incredible creativity,” Estellita says. LF