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«A case study of Fair Finance Guide International Transparency & Accountability in the Financial Sector A case study of Fair Finance Guide ...»

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-24Another important milestone in the combat to corruption and the pursuit for more transparent processes in state controlled and private companies was the Anti-corruption Law of 2013 (Law no. 12,846/2013). The law determines penalties against corporate entities that engage in corruption with public officials and fraudulent practices in connection to public tenders and government contracts. The law prohibits companies from defrauding public tender processes in any way, gaining an undue advantage or benefit from modifications or manipulations of government contracts, or hindering government's investigation or auditing activities. One of the main results of the law was the enforcement of the National register of inapt and suspended companies (CEIS). This instrument constitutes a list of companies and individuals who have suffered sanctions due to corruption practices, prohibiting them to participate in biddings or establishing contracts with the Public Administration.39 Since 2007, the Brazilian Bank Federation (FEBRABAN), through its Self-Regulation System (SARB), has also been working on improving different operational practices that include transparency instruments and processes to counter corruption and money laundry. The most relevant norms implemented by FEBRABAN and the signatory banks of the Self-Regulation System are norm SARB 011/2013 - Prevention and combat to money laundering and terrorism financing and SARB 014/2014 - Framework for the creation and implementation of a socioenvironmental responsibility policy.40 The first one resulted in the implementation of important instruments for the combat against illegal operations and transparency processes, such as Know Your Customer (KYC), Know Your Supplier (KYS), Know Your Partner (KYP) and Know Your Employee (KYE).41 The second norm includes specific topics on the implementation of a socio-environmental responsibility policy, such as the creation of a database to register the data referring to losses arising from socio-environmental issues for a minimum period of five years after the issue/risk identification. Moreover, signatories commit to cooperate with the government, including the public prosecutor, the judiciary and the federal, state and municipal environmental bodies in investigations of socio-environmental nature arising from their activities and transactions. This norm is a response to Resolution 4327/2015 from the National Monetary Council (CMN), which establishes that all institutions supervised by the Brazilian Central Bank must develop and disclose a Socio-environmental Responsibility Policy, disclose it publicly, and develop and Social and Environmental Risk Management System compatible with their risk exposure and nature of products and services.42 The Brazilian Central Bank (BCB) also has an important role in the improvement of banks transparency and especially in the prevention and countering of money laundering. BCB participates in the Council for Financial Activities Control (COAF), an intelligence unit set up by the Ministry of Finance.43 COAF’svi main competencies are: 44 Coordinate and propose mechanisms for cooperation and exchange of information that allow fast and effective action to prevent and combat the concealment or disguise of assets, rights and values;

Receive, examine and identify suspicious or illicit activities;

Apply disciplinary and administrative penalties to companies linked to sectors that do not have regulatory authority or own oversight;

vi COAF was created in the scope of Law 9,613 / 98 (as amended by the laws 10701 of 07/09/2003 and 12,683 of 09/07/2012) and organization and structure defined by Decree 2,799 / 98. Furthermore, it is an organ of collective deliberation whose plenary is composed of representatives of the Central Bank of Brazil (BCB), the Brazilian Securities Commission (CVM), the Superintendency of Private Insurance (SUSEP), the Attorney General of the Treasury (PGFN), the Federal Revenue of Brazil (RFB), the Brazilian Intelligence Agency (ABIN), the Federal Police Department (DPF), the Ministry of Foreign Affairs (MFA), the Comptroller General of the Union (CGU), the Ministry of Social Security (MPS) and the Ministry of Justice - Department of Asset Recovery and International Legal Cooperation (DRCI).

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The creation of COAF and the participation of relevant institutions in its board such as BCB, the Brazilian Securities Commission (CVM), and the Superintendence of Private Insurance (SUSEP) pushed banks to improve their processes.45 Other important initiatives that impact banking transparency processes are from BM&FBOVESPA, the Brazilian stock exchange. One of the key initiatives is “Report or Explain”, which encourages companies to adhere to the practice of reporting progressively to their investors information and results related to environmental, social, and corporate governance (ESG) issues. The main objective is to provide investors and other interested parties quick access to this type of information. At the BM&FBOVESPA’s website, investors and the general public have access to the complete list of companies listed at BM&FBOVESPA that either publish or do not publish sustainability or integrated reports. In this list, companies explain why they do not publish an ESG report or, if they do so, where it is published.46 Another BM&FBOVESPA’s initiative provides bank to explain their vision and strategies on ESG is the Corporate Sustainability Index (ISE). ISE is a tool for comparative analysis of the performance of the companies listed on BM&FBOVESPA from the standpoint of corporate sustainability, based on economic efficiency, environmental equilibrium, social justice, and corporate governance. To become part of ISE, companies have to answer a questionnaire on the topics listed above. Companies that join this index have the option to publish the complete questionnaire on BM&FBOVESPA’s website. Bradesco, Banco do Brasil, Itaú, and Santander, all part of FFG Brazil’s research, publish their questionnaires (as well as BicBanco).47 In addition to market and government policies, NGOs have been pushing banks and other financial institutions to improve their operational processes, access to information and transparency. Since 2008, the Brazilian Institute for Consumer Rights (IDEC) published the first edition of the Guia dos Bancos Responsáveis, the national forerunner of the current Fair Finance Guide (FFG) Brazil. that the first report by IDEC and its coalition (Amigos da Terra, Contraf-CUT and DIEESE) was based on a questionnaire regarding banks policies and practices on three broad themes – Consumer Rights, Environmental Issues (covering different sectors) and Labour Rights. This project pushed banks to not only improve their policies and practices but also to invest more in processes to become more transparent, like CSR reports and publishing policies on their websites.48 As a consumer rights organisation, IDEC has an important role in improving banks’ transparency regarding their relationship with clients, enhancing access to contracts, products and services requirements, obligations, and fees with their annual case studies on Consumer Rights and complementary campaigns.49 Amigos da Terra – Brazilian Amazon is another NGO with an important contribution to banks transparency and CSR. The NGO has a long-lasting partnership with institutions that monitor the financial sector, such as BankTrack and Bank Information Center. They also participated in previous versions (2008; 2010 and 2012) of the Brazilian FFG. Its main program, entitled Eco-Finanças, started in 2000 and was instrumental in convincing many Brazilian banks to develop sustainability policies and sign up to the Equator Principles. It has a web portal where visitors can have access to relevant news, articles and publications on Banks and ESG themes. Additionally, it launched BankTrack publications in Brazil, such as Shaping the Future of Sustainable Finance (2005), Mind the Gap (2007) and Close the Gap (2010), all using a methodology similar to today’s FFG.50





-26Transparência Brasil, an independent NGO that aims to combat corruption, has important initiatives related to government transparency, including public institutions and state owned companies. Although the NGO has no specific action on banks, some of its initiatives have an influence on them, for example the project “Às claras” that tracks company donations to election campaigns.51 Plataforma BNDES, a coalition of NGOs and social movements that started in 2007 and aims to re-direct the bank’s investments, achieved a major change in the transparency of Brazil’s leading development bank BNDES. Since 2008 namely, BNDES publishes its list of customers and loans on its website, containing information such as its beneficiary owner(s), loan size, and location of the project. However, claiming bank secrecy law, BNDES still does not disclose other information such as interest rates or environmental/social risk of the loans, despite the fact that loans have a concessional rate.52 Since 2014, there is an increasing popular and media pressure on more transparency of public investments, especially from BNDES and other banks such as Banco do Brasil and Caixa Econômica Federal. One emblematic case is Banco do Brasil’s credit concession to Val Machiori, a Brazilian socialite. This case has shown the lack of transparency and non-compliance of the bank to its standard procedures and credit policies. In the end, the Banco do Brasil’s President at the time, Aldemir Bendine, was removed from office in November 2014.53 Since the presidential elections period, from August to October 2014, BNDES again became the major focus in the banking transparency debate. In August 2014, Conectas, a human rights NGO, published a study on the rules and standards of transparency, accountability and socio-environmental impact assessment mechanisms of the bank.54 In its press release, the NGO expressed that “the report reveals that the lack of transparency at the bank prevents affected communities and society from monitoring the effectiveness of the tools. BNDES claims it has to ensure its loans do not end up financing private business ventures that violate human rights in Brazil or abroad.”55 Moreover, one of the researchers that conducted the study concluded that: “BNDES denies access to a wide range of information on the grounds of banking secrecy, the need for additional data systematization, national security, trade secrecy and the risk of the information affecting the price of securities. All these exceptions are included in Brazil’s Access to Information Law. However, the error lies in the bank’s overly expansive interpretation of them.” 56 Even though there are some specific ideological and political factors, the BNDES case symbolizes the situation of banks transparency in Brazil, regardless their capital structure (private or public). What we can conclude is that there is opacity mainly in the social and environmental aspects of financed projects, corporations and equity investments. BNDES and many of the largest private banks claim to have tools for social and environmental risk management and to combat corruption, fraud and tax evasion. Although it is known that these banks have teams of professionals dedicated to ESG risk management, little is disclosed on the actual implementation of policies and their results.

It is necessary to highlight the importance of BNDES for financing long-term investments in Brazil. Private banks usually on-lend BNDES credit facilities for their mid-sized customers.

Furthermore, most project finance lending for large infrastructure projects also works as BNDES on-lending. Therefore, more requirements on BNDES transparency and accountability practices and policies may result in a higher pressure on banks researched by FFG to improve their policies as well.

-27In November 2014, Folha de São Paulo, one of the largest newspapers in Brazil, published that Itaú and Bradesco saved more than R$200 million with operations in Luxembourg.

Although the case is characterized as tax avoidance that is not configured as a crime, it gained prominence given the availability of documents that enabled a complete understanding of how banks operate (Luxembourg Leaks case). Both banks were assisted by PWC and operated this tax avoidance system through three financial/fiscal instruments: tax goodwill, hidden contribution and intangible assets. To sum up, banks were able to avoid the payment of tax to Brazil by declaring that they were providing services to themselves through their Luxembourg subsidiaries what resulted in a lower deduction base in Brazil (Brazilian operation profit). 57 Although cases like Bradesco and Itaú are not rare, they usually do not result in penalties or compensation payment. According to the same publication, in the year of 2013 the Brazilian Federal Revenue Office banks and companies were fined a total amount of R$105 billion in taxes allegedly unpaid. However, these values are rarely paid, once banks and companies appeal to the Administrative Tax Appeals Board (Carf), that result in long processes and normally result in acquittal.58 The recent presidential veto on adding two new articles of the Budget Law on January 2015 has heated up the debate on banking transparency. The vetoed articles had the objective to give greater transparency to public funds, mainly for state owned banks. One of the vetoes discharged state controlled banks from disclosing detailed statements of loans to governments. The other veto drops the mandatory disclosure of the register of all construction and engineering services in Brazil that are financed by public funds.59 In conclusion, even though there were some achievements in the past few years, Brazilian banks and companies still have a low level of transparency as showed by the NGO Transparency International. In its report Transparency in Corporate Reporting: Assessing Emerging Market Multinationals, the NGO showed that, regarding the level of transparency in emerging markets, Brazilian multinationals only performed better than the Chinese. It is imperative that banks encourage greater scope and clarity of the information provided, since the results of the companies are important to different stakeholders that interact with their activities.60 Results of the policy assessment In order to evaluate the transparency of banks in Brazil, we analyzed the banks’ performance in two themes of the Fair Finance Guide policy assessment: Taxes & Corruption and Transparency & Accountability. The results are summarized in Table 6.

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