The following superb article on money laundering policy in Brazil in the Age of Dantas’ Inferno was published yestetrday on what appears to be the blog of its author, Caio Junqueira — the Valor reporter, not the actor — and datelined to the Valor Econômico business daily, 26 September 2008.
I have not checked to see if it showed up in VE today or not. I have been busy with other things. (I now see that it ran in Valor’s modest but very worthwhile little weekend magazine, EU& (Eu, hein?) Fim de Semana.)
Still, I thought I would translate it pra inglês ver because it really is a superb and informative overview of the subject.
As I pointed out before, and as Mr. Junqueira points out, Brazil is about to assume the leadership of FATF-GAFI, the multilateral Financial Action Task Force that ostensibly works to keep the international money pipelines free of the toxic sludge of blood, drug, and generalissimo-misappropriated graft money.
Which I tend to think is a pretty worthwhile thing to do, in principle. You? See
And speaking of international cooperation, news comes in today that the British government has accepted a Brazilian request to freeze another R$48 million in assets of banker Daniel Dantas that tripped “suspicious transaction” flags.
Dantas’ stupefyingly strident lead defense attorney, Nélio Machado, continues to insist that his client is the object of political persecution — although he has yet to seek asylum at the Swedish or Bahamanian embassy, as far as I know.
In other news, the District Attorney of Manhattan issues an arrest warrant for Paulo Salim Maluf — currently running once again for mayor of São Paulo. (You should see this fascistoid kleptocrat’s campaign ads. Brrrr.)
- Rohter on Maluf: The Blind Eye Misreading the Blind Eye
- International Thief Thief Indictments: Precedents For Larry Rohter’s Editor to Consider
My hasty translation, as always, using the OmegaT open-source translation memory software — it rocks — rather than my usual interlinear method.
Crime and Punishment and Rights
The case of Isidoro Rozenblum Trosman and his son Rolando Rozenblum Elpern, both Uruguyan, began when both of them began sending millions abroad, a maneuver that attracted the attention of police. Owners of the Sundown bicycle factory, Isidoro and Rolando soon became the target of an investigation code-named Operation Sundown. They were arrested on charges of tax evasion, active and passive corruption, money laundering and illegal exporting of capital — R$150 million in all, according to investigators.
The two years in which father and son had their phones tapped by court order provided the basis for their conviction on charges of active corruption: Isidoro was sentenced to 10 years, his son to five. The ruling sentencing them to 15 years of jail time, however, was overturned this month when the federal appeals court, the Superior Tribunal de Justiça (STJ) ruled that the amount of time authorized for telephone intercepts was abusive.
The case, ruled on by the second-highest court in Brazil, resembles any number of others. After all, how can complex criminal enterprises be taken down without access to financial records and telephone conversations? How to reconcile the individual right to privacy with the collective rights violated by such crimes?
The question gained more exposure after the catch and release of banker Daniel Dantas in July, and arrived on the floor of an otherwise empty Congress in the middle of election season thanks to the CPI of Clandestine Wiretaps — which has become the leading forum for debate on wiretapping in Brazil. Installed on the last working day in the Congress last year, the CPI got a major dose of oxygen from Operation Satyagraha, which eventually put its principal figures— federal police investigator Protógenes Queiroz, Judge Fausto De Sanctis and Dantas himself— on the witness stand in the lower house of Congress.
Supported by Chief Justice Gilmar Mendes and the Order of Brazilian Attorneys (OAB), the commission is due to propose a new regulatory framework for telephone intercepts. “If we live under the democratic rule of law, there is no room for flexibility in the enforcement of civil liberties. Rights are rights and must be protected. They are constitutional guarantees. And the ends never justify the means. Everything must be done in accordance with the law”, says CPI president Marcelo Itagiba (PMDB-RJ). “The authorization of wiretaps has become a rubber-stamp procedure The State cannot establish who its enemy of the moment is.”
Several members of that committee have had charges filed against them, sometimes based on wiretap evidence. Most notably, perhaps:
Official involved in oversight and prosecutor of financial crimes, however, argue that existing rules should be maintained. They present, as the ace up their sleeve, the statistics on the increasing number of police investigations and criminal prosecutions into financial crimes.
“This generalized invasion of privacy they would have you believe is going on does not exist. What exists is a concerted campaign to discredit investigative tools that have proven that they work. Without these tools, it is practically impossible to discover how these criminal organizations work”, says federal prosecutor Sílvio Luis Martins de Oliveira, who has worked such financial crimes cases as the MSI/Corinthians, Banco Santos and Toninho da Barcelona affairs.
These officials fear the backlash against these methods will contaminate other legislative bills that are scheduled to be voted on shortly — all of them drafted for the purpose of conforming Brazilian law to international standards on the repression of financial crimes, such as a more flexible approach to banking secrecy and money laundering.
Approved in the Senate after three years in the queue, the new money laundering bill is currently in the Constitution and Justice committee of the lower house, where its sponsor is former national justice secretary Antonio Carlos Biscaia (PT-RJ). As in the issue of telephone intercepts, the issue is polarized between defenders of an individualist view and those who argue with the fundamental rights guaranteed by the constitution.
The bill is intended to make Brazil one of the countries with Level 1 anti-money laundering laws, along with France, Italy and Switzerland. The possibility of punishing someone for money laundering presupposes a preexisting crime from which the money to be laundered was generated. Thus, the first laws to define this sort of crime were predicated on the assumption that only money from narcotrafficking could be subject to laundering.
Later, the definition was extended to other sorts of cases, which served as a reference for Brazil’s 1998 money laundering statute, which considered not just drug trafficking but also terrorism, smuggling and arms trafficking, kidnapping, official corruption, crimes against the financial system practiced by organized criminal conspiracies, and crimes involving official corruption in other countries. In the new bill, any crime can serve as an antecedent, and this broad scope is what is likely to produce the most tension in the lower house. That is because the sorts of crimes most likely to be committed by politicians, such as fiscal evasion through the formation of “slush funds,” would now become subject to money laundering prosecutions.
Another hot debate will likely emerge over a provision to broaden the kinds of activities subject to oversight. The bill provides that anyone providing any sort of service to a business has the obligation to report suspicious transactions to the Treasury ministry’s COAF, the Financial Activities Control Board. Lawyers see in this provision a veiled attempt to control activity of their clients.
“There is obviously a need to combat organized crime, but crime cannot be combated no matter what the cost. Every time the State is granted overbroad police powers, history shows that these forces wind up acting against the public interest”, says Cezar Britto, national president of the OAB.
His dad is a Supreme Court justice. (The Supreme Court just handed down a landmark ruling on nepotism. Found it to be a bad thing.)
Anticipating politcal pressure, the bill’s sponsor, Biscaia, is adopting a collectivist interpretation of constitution rights as his strategy. “Constitutional guarantees comprise a long list of rights, and we must understand these as whole in a manner consistent with the desire of society to combat corruption. Social rights are also fundamental, and are seriously affected by the cesspool of corruption,” said Biscaia.
Official estimates are lacking, but it is believed that between 60% and 70% of the money laundered in Brazil comes from official corruption. Worldwide, the International Monetary Funds estimate that the flow of funds linked to this crime represent 2% to 5% of global GDP. If, as the CIA estimates, 2007 global GDP was some U$ 54.6 trillion, this means that between U$1 trillion and U$3 trillion are laundered every year.
The form assumed by the new law on communications intercepts should serve as a canary in the coal mine for other bills that seek to broaden the war on financial crimes by relaxing individual rights. Such is the case with the so-called “extinction of title proceeding”, in which assets proven to have been acquired with illicit funds can be seized from the accused before the end of legal proceedings against him or her. This obviously opens room for controversy, given that the property rights of the accused would allegedly be violated, as is occasionally argued. Another idea is to weaken the right to banking secrecy, to make it possible for authorities to share financial information on suspects.
The evaluation, however, is the the moment is not “politically opportune” for such proposals to be formally presented— the same rationale used to explain why a good portion of anti-money laundering rules have been made in the administrative sphere, bypassing Congress.
“We are first trying to figure out among ourselves what we can do, with improved communication among agencies”, says federal judge Salise Monteiro Sanchotene, who coordinates the legal advisory group of the National Corruption and Money Laundering Strategy task force (Enccla), a group of disparate agencies that has met annually since 2003 to discuss and define measures to be taken against money laundering. At the first meeting, 28 agencies were represented from various sectors, ranging from the Brazilian National Intelligence Agency (ABIN) to the Brazilian Banking Federation (Febraban). Last year, 51 organizations met.
It is from Enccla that concrete measures against financial crime emerge. At one of its meetings, a draft of a new money laundering bill was developed, as well as the bill that proposes conditioning banking rivacy and allowing “extinction of title” proceedings. The creation ofthe National Registry of Account Holders was also born at an Eccla meeting. The database enables relationships between individuals and corporations in the national financial system to be tracked. Before this database, it took several weeks for the Central Bank to respond to information requests from judges. Now, it is possible to identify such relationships instantaneously and to provide detailed information in each case within 24 hours.
The determination that “politically exposed persons” be afforded special attention by banks was first proposed in 2006. Thus there was created a registry of 30,000 persons associated, within the last five years, with other persons who hold or have held public office — as well as the officeholders themselves, obviously.
The Justice ministry’s Department of Asset Recovery was also developed at an Enccla meeting and is now responsible for international cooperation on money laundering cases, among other duties.
Enccla was born because of the negative results Brazil’s money laundering legislation, recently passed at the time, was having. The bill was signed in 1998. In 1999, only seven investigations had been installed. No one had been arrested and no funds had been recovered. The federal judiciary, together with other agencies, then dd a study to determine the reasons for this lack of effectiveness and found that the agencies involved did not communicate with one another and lacked specialized technical, juridical and investigative expertise.
The most visible consequence of this study was the creation of a number of courts specializing in financial crimes, inspired by the example of Italian judge Giovanni Falcone, known for his campaign during the 1990s against the Italian mafia (by which he was assassinated).
The foundation of specialized courts was proposed to the Federal Justice Council by STJ justice Gilson Dipp, considered one of Brazil’s leading authorities on combating money laundering. “In these courts, the most modern criminal and procedural codes in Latin America are applied. It is a model unique in all the world, which we are exporting.The objective is to speed up the process by concentrating all the phases of the process in the hands of a single judge”, Dipp explains.
One example is the Banestado case, the first major financial crime investigation. “The case was being heard in a common court in Foz do Iguaçu, a place plagued by smuggling and petty drug trafficking across the Friendship Bridge to Paraguay. There was no way the case could be conducted calmly. The main advantage of these specialized courts is that they focus their work on complex cases. Without this specialization, the cases are dispersed among common courts and wind up being set aside”, says Judge Sérgio Moro, of the Second Federal Bar. The Banestado case resulted in 95 different charges against 684 pessoas, of whom 97 have already been convicted.
Today, Brazil has 24 specialized courts in 14 states, though which, in 2006, there passed 2,228 investigations and 462 criminal proceedings related to money laundering. In 2003, 1,097 investigations were conducted and 132 prosecutions brought.
There are those who contest the activities of these special courts, however. Chief Justice Gilmar Mendes, in a meeting with lawmakers this month, called them “militias”, because judges, police and prosecutors work jointly, facilitating the authorization of wiretaps and thereby violating fundamental civil liberties.
This is a justice who would not recuse himself from voting on an administrative probity case in which the vote would potentially lead to the dropping of an administrative improbity case against him.
They tell me thing like this are due to cultural differences here in Brazil, but I have a hard time believing that Portuguese has no word for “recuse myself” and “conflict of interest” much as Martians, inhabitants of a waterless planet, have no word for “surfing.”
In any event, there is a general sense that the most positive sign of progress in combating this crimems — in major part because of international pressure — is that the current debate is organized around possible confllicts between different rights.
It is not for nothing that Brasil was awarded the presidency of the principal international anti-money laundering body, FATF-GAFI. Created in 1988 by the G-7, the role of this group is to develop anti-money laundering polcies. Its annual meeting will be held in Brazil for the first time in October this year, in Rio de Janeiro, where Antonio Gustavo Rodrigues, president of Coaf, will be installed as FATF-GAFI president for a term of two years.
In the 1990s, Brazil was practically forced by international bodies to intensify its AML efforts because significant criminal elements had taken root in the country. The open trade policy promoted by the Collor government, the floating of the currency byFernando Henrique Cardoso, the solidity of the banking system associated with high interest rates, a powerful informal economy immune to any oversight efforts, and thousands of kilometers of borders without any State presence, all of these factors have facilitated and stimulated money laundering.
Headed by the United States, the real motive of this pressure was to combat the narcotraffic. Although Brazil ratified the Vienna Convention in 1991, committing itself to create mechanisms to combat money laundering by the narco traffic, Brazilian authorities took no immediate action. Concrete measures would only be taken during the government of Fernando Henrique Cardoso, when Brazil took inspiration from AML laws in developed nations, especially Switzerland. The crime was defined in the criminal code, Coaf was founded to monitor financial transactions, and the banks were enlisted as allies rather than as co-defendants, as some interest groups wanted.
The idea wa that the Brazilian sate would not be able to succeed on its own. It was natural, therefore, to ask the banks to cooperate: They had a massive presence at home and abroad and vast transaction volume. Based on this cooperation, the Basel principles of 1988, which obliged financial institutions to adopted AML measures, began gradually to be adopted in Brazil. The most import of the Basel principles is that institutions should obtain as much information as possible about their clients .
At first, there was mild oppostion from the Brazilian financial sector, but nothing compared to the veritable warfare over the issue in the United States, where the debate over softening some rights for purposes of investigation ended up in the Supreme Court in the 1980s — with a decision favorable to the government. The adoption of certain of these practices in Brazil, therefore, was made easier by the removal of barriers elsewhere in the world in the years preceeding the first demands made on Brazil. Brazilian law ended up making banks the principal source of information on suspect transactions. A Brazilian Central Bank circular required banks to maintain records on clients that would enable regulators to determined the compatibility between their financial means and the volume of their transactions, and to communicate transactons above R$10,000.
Another stimulus came from the September 11 attacks in New York. The Bush government’s PATRIOT Act, passed in the wake of the attacks, was a smack in the face for the U.S. financial system, and therefore for the international financial sector as well, which found itself pressured to do investigative work and check international lists of terrorists and criminals.
Statistics reflect the increasing rigor in the application of the law in Brazil. From 2003 to 2008, the number of transactions reported to the central bank annually rose from 5,400 to 9,400. Compliance audits of banks also increased. In 2000, five banks were audited for compliance by the Central Bank. Last year, 97 banks were. The amount of fines levied in 28 proceedings brought so far have totaled R$19 million, and four persons have been barred from serving as an executive in a financial institution. All these proceedings targeted failures to communicate suspicious transactions.
As control over banks became more efficient, oversight of other financial institutions also improved. Reports on atypical transactions in self-regulated sectors, such as stock exchanges (regulated by the CVM), insurance (by SUSEP) and pension bunds (by the Supplementary Pension Secretariate) also grew by leaps and bounds.
In the nine sectors monitored by Coaf, the volume of reporting has also grown signficantly, though not uniformly across all sectors. With only 14 analysts, the solution for Coaf has been to computerize the system and increase its information-sharing with other agencies. In 2007, for example, in preparing 1,555 reports to federal authorities, some 23,858 rcommunications from non-banking financial institutions were used — a striking increase over 2003, when the numbers were 521 and 1,344, respectively. A good part of these reports lead to police investigations. From 2003 to 2006, of 181 operations conducted by the federal police, 27% used information from Coaf. In 2006, that percentage rose to 33%.
The arrest of the Rozemblums is part of that record. It remains to be seen whether the two men, owners of the main shopping mall in Joinville and a construction firm, will have their conduct evaluated in terms of individual rights or in terms of the rights of society. Both will watch the debate from Montevideo, where they are fugitives from Brazilian justice.
Uruguay: It’s the new Paraguay, some say.
Filed under: Brazil, Life in Sambodia, Organized Crime | Tagged: aml, corruption, crime, daniel dantas, fatf, financial action task force, law, money laundering
