What powers do national financial services authorities have to examine and investigate compliance? What enforcement powers do they have for compliance breaches? How is compliance examined and enforced in practice?
The Central Bank and the CVM have administrative powers to examine and investigate compliance, and to punish infractions.
Compliance is examined through a number of periodical filings by financial services firms (including a number of online filings), coupled with site inspections carried out by the Central Bank and the CVM.Disciplinary powers
What are the powers of national financial services authorities to discipline or punish infractions? Which other bodies are responsible for criminal enforcement relating to compliance violations?
The Central Bank and the CVM can impose the following penalties on firms and individuals for compliance breaches:
- cash penalty;
- prohibition from the exercise of certain activities or rendering certain services; and
- cancellation of the licence to operate, partly or completely.
An administrative proceeding begins when the Central Bank or the CVM notifies the financial institution of the alleged infraction. The financial institution then presents a defence. The Central Bank or the CVM may request additional information and documents, and then renders a decision. The financial institution may appeal to the Board of Appeals of the National Financial System (CRSFN), a collegiate body responsible for hearings at second and final administrative levels. The CRSFN decision may be challenged in court.
The Banking Law originally provided the administrative penalties that the Central Bank and the CVM could impose on regulated entities. On 13 November 2017, the Brazilian President sanctioned Law 13,506 modifying the administrative procedures and penalties applicable to regulated entities (with no effects in the criminal area).
The four key changes are:
- The cap on fines has increased to 2 billion reais or 0.5 per cent of the revenue of the institution (for fines imposed by the Central Bank); and 50 million reais, two times the amount of irregular securities issue or transaction, three times the amount of the economic advantage gained or loss avoided due to the violation, or two times the losses caused to investors (for fines imposed by the CVM).
- The new law establishes the possibility of signing a settlement commitment, which does not include an acknowledgement of guilt.
- The act introduces the possibility of leniency agreements, by which the defendant agrees to confess to and provide information and evidence on the wrongdoing and, in exchange, receives a discharge or reduction of penalties.
- Harsher preventive measures are now in place, such as a request for information or cessation of an act that, in case of contempt, is punishable by fines up to 100,000 reais per day (capped at 60 days) or injunction measures to remove senior managers from office.
This new sanctioning regime is already in effect, and does not apply retrospectively to misconduct that pre-dates the new legislation.
In the criminal sphere, only the Public Prosecutor’s Office has powers to prosecute compliance violations before the criminal courts.Tribunals
What tribunals adjudicate criminal and civil financial services infractions?
Both federal and state courts have jurisdiction to adjudicate on claims and complaints dealing with financial matters.
Second-instance courts (represented by regional federal courts at federal level; and by appellate state courts at state level) typically have chambers, panels or sections responsible for reviewing and ruling on banking and financial matters.
The Superior Court of Justice (STJ) and the Federal Supreme Court (STF) are the highest appellate courts in the Brazilian court system. These mainly adjudicate cases already decided by regional federal courts or appellate state courts. The STF jurisdiction is triggered when the regional federal court or appellate state court issues a decision allegedly in breach of the federal constitution. The STJ’s jurisdiction is triggered by a decision that allegedly breaches a federal law.Penalties
What are typical sanctions imposed against firms and individuals for violations? Are settlements common?
Law 13,506 also establishes the penalties against firms and individuals for violations, which are:
- cash penalty up to:
- two billion reais; or
- 0.5 per cent of the financial services firm’s gross revenue from financial services and products as ascertained in the year before that of the breach, or, in the case of an ongoing violation, in the year before that of the last breach;
- prohibition for up to 20 years from engaging in certain activities or rendering certain services (applicable in the case of severe violation);
- disqualification for up to 20 years from holding senior management positions or from serving as a member of governing or supervisory bodies of financial institutions (applicable in cases of severe violation); and
- cancellation of the authorisation to operate, partly or completely (applicable in the case of severe violation).
Severe violation means practices that produce or may produce any of the following effects:
- causing damage to the liquidity, solvency or soundness or assuming a risk incompatible with the economic condition of a financial institution or any other institution supervised by the Central Bank;
- contributing to disorder in the financial system or disrupting the stability or smooth functioning of the national financial system;
- concealing by any means the actual economic or financial condition of a financial institution or any other institution supervised by the Central Bank;
- seriously affecting the continuity of activities or operations within the Brazilian payment system; and
- causing the population to lose confidence in financial and payment instruments.
Specific orders followed by orders to comply are a feature of the day-to-day supervisory roles of the Central Bank and the CVM. After starting an administrative proceeding, settlement commitments have long been used by the CVM to end cases quickly and avoid the costs of prosecution; only recently has Law 13,506 instituted a settlement commitment for use at Central Bank level.