Thiago Luís Sombra
Mattos Filho, Brasília
thiago.sombra@mattosfilho.com.br

Laura Senra
Mattos Filho, Brasília
laura.senra@mattosfilho.com.br

Iago Grillo
Mattos Filho, Brasília
iago.souza@mattosfilho.com.br

Juliana Fonseca
Mattos Filho, São Paulo
juliana.fonseca@mattosfilho.com.br

Beatriz Borges
Mattos Filho, São Paulo
​​​​​​​beatriz.almeida@mattosfilho.com.br

Law No 14,286, the so-called ‘Foreign Exchange Law’, was sanctioned on 30 December 2021. It introduced new provisions for foreign exchange and international capital markets in Brazil to modernise, simplify and increase the sector’s efficiency. The Foreign Exchange Law brings Brazil closer to the recommendations of the Organisation for Economic Cooperation and Development (OECD), as it makes it easier for Brazil’s financial institutions to invest funds raised there or abroad, subject to the regulatory and supervisory requirements defined by the National Monetary Council (CMN) and the Central Bank of Brazil (BACEN). This legal innovation might improve Brazil’s business environment and facilitate the operation of Brazilian companies in foreign economic and financial chains.

Payment, purchase, and sale of foreign currency

One of the measures aimed at simplifying Brazil’s exchange market is the authorisation of payments, in foreign currency, for obligations performed in Brazilian territory, as set out in article 13 of the Foreign Exchange Law. Payments in foreign currency for obligations enforceable within the national territory are allowed for: (1) contracts and titles referring to foreign trade of goods and services, their financing and guarantees; (2) obligations whose creditor or debtor is a non-resident, including those resulting from credit or leasing operations, with the exception of rental agreements for real estate located within the national territory; (3) leasing agreements entered into between residents, based on the raising of funds from abroad; (4) the assignment, transfer, delegation, assumption or modification of the obligations referred to above, even if the parties involved are residents; (5) the purchase and sale of foreign currency; (6) indirect exportation; and (7) contracts entered into by exporters where the counterparty is a concessionaire, permissionaire, authoriser or lessee in the infrastructure sectors – the latter being a relevant innovation.

The Foreign Exchange Law also vested the CMN with the authority to allow payments in foreign currency in other hypotheses not specifically anticipated in the law, since it may mitigate the exchange risk or increase the efficiency of the transaction. Although the new law seeks to rationalise Brazil’s exchange market, it maintained that entrance into and exit from the country of national and foreign currency must be carried out exclusively through an institution authorised to operate in the exchange market. Such an institution will be mandatorily responsible for identifying the client and the receiver or sender, unless the transaction is under US$10,000 in any currency, in which case it may take place outside an institution authorised to operate in the Brazilian exchange market.

The purchase or sale of foreign currency in cash under US$500 to encourage a peer-to-peer (P2P) market for foreign exchange commerce has also become legal, provided it takes place between individuals on an occasional and non-professional basis.

Non-compliance with these provisions may entail the loss of the amount exceeding the abovementioned limits in favour of the National Treasury, irrespective of the criminal sanctions anticipated in the specific legislation.

BACEN’S responsibility

From a bureaucratic perspective, BACEN became the main regulatory body in the new Foreign Exchange Law. It is BACEN’s responsibility to:

• regulate the exchange market and its operations (including swap operations) and to establish the types and characteristics of products, the forms, limits, rates, terms and other conditions;
• regulate the constitution, functioning and supervision of institutions authorised to operate in the foreign exchange market, including when they involve the participation of non-residents;
• authorise the constitution, operation, transfer of control, merger, split and incorporation of institutions authorised to operate in the foreign exchange market, including when they involve participation of non-residents;
• authorise institutions to operate in the exchange market, including when they involve participation of non-residents;
• cancel by its own authority or on request the abovementioned authorisations – pending specific regulation;
• authorise tenure and exercise in statutory bodies of institutions authorised to operate in the foreign exchange market – pending specific regulation;
• supervise institutions authorised to operate in the foreign exchange market and to apply sanctions;
• regulate accounts in BRL held by non-residents including with respect to the requirements and procedures for their opening and operation;
• regulate foreign currency accounts in Brazil including with respect to the requirements and procedures for their opening and operation;
• keep deposit accounts and clearing, settlement and custody accounts in BRL and in foreign currency held by international organisations – pending specific regulation; and
• keep deposit and clearing, settlement and custody accounts in BRL held by foreign central banks or by institutions domiciled or headquartered abroad which provide clearing, settlement and custody services in the international market – pending specific regulation.

Furthermore, BACEN may establish different requirements for the constitution and operation of institutions authorised to operate in the foreign exchange market and waive the authorisation for the constitution and operation of such institutions.

In the exercise of its supervisory activities, BACEN may require institutions authorised to operate in the foreign exchange market to provide data and make documents and bookkeeping available. Denial may be considered avoidance of inspection, subject to the applicable sanctions.

The accounts of residents and non-residents in Brazil now bear identical treatment, except for the requirements and procedures that BACEN may establish.

International banking relationships

The Foreign Exchange Law allows banks which are authorised to operate in the foreign exchange market to process payment orders in BRL received or sent from abroad through accounts in BRL held in banks, owned by institutions domiciled or headquartered abroad and subject to financial regulation and supervision in their country of origin. This new provision will only be enforced after BACEN has created the pertinent regulation. Enabling the investment abroad of funds raised in Brazil was an important legislative innovation which could increase the circulation of BRL outside of Brazil.

AML/CTF obligations

Being one of the sectors most vulnerable to the practice of illicit financial activities, the Foreign Exchange Law includes provisions about the prevention of money laundering within the foreign exchange market. Financial institutions authorised to operate in the Brazilian exchange market must comply with Anti-Money Laundering and Counter Terrorism Financing (AML/CFT) rules.

Within the scope of international correspondent banking relationships in BRL, banks authorised to operate in the foreign exchange market must gather information about the institution domiciled or headquartered abroad, to understand fully the nature of its activity, its reputation, and the quality of the financial supervision to which it is subject, as well as assess its internal controls in the fight against money laundering and the financing of terrorism.

The new law also provides that the institutions authorised to operate in the exchange market will be responsible for the identification and qualification of their clients based on a ‘know your customer’ (KYC) procedure and for ensuring the proper processing of operations in the exchange market. The said institutions must also adopt measures and controls designed to prevent operations aimed at concealing the practice of illicit acts, including money laundering and financing of terrorism, under the terms of Law No 9,613/1998 (Brazilian AML/CTF Law). Nevertheless, the client now becomes responsible for the classification of the purpose of the operation in the exchange market, in the form anticipated in the regulation to be edited by BACEN. Under the previous regulation, banks carried this burden and could face sanctions for misclassification.

The financial institutions and legal entities that operate in the exchange market must also comply with the specific regulations of BACEN – mainly BACEN Circular No 3,978/2020 – as they are obliged to comply with the Brazilian AML/CTF Law. Pursuant to Article 9, Section II, obligations set out in the Brazilian AML/CTF Law will apply to individuals and legal entities that have, on a permanent or occasional basis, as their main or ancillary activity, the purchase and sale of foreign currency or gold as a financial asset or foreign exchange instrument.

Among the obligations under the Brazilian AML/CTF Law, which are applicable to the legal entities and individuals operating in the exchange market, we highlight: (1) identifying clients and keeping their record updated; (2) keeping record of every transaction performed, in national or foreign currency; (3) adopting policies, procedures, and internal controls with the objective of ensuring compliance with AML legal requirements; (4) registering and keeping the registration updated with the regulatory body; and (5) meeting the requests from the Financial Activities Control Council (COAF).

Moreover, legal entities and individuals operating in the exchange market shall: (1) pay special attention to transactions that may present serious evidence of the crimes anticipated in Brazilian AML/CTF Law; (2) inform suspicious transactions to COAF within 24 hours, refraining from making their clients aware; and (3) inform COAF the non-occurrence of proposals, transactions, or operations susceptible to being communicated.

Non-compliance with the Brazilian AML/CTF Law may result in the application of the following sanctions: (1) warnings; (2) a variable fine of up to BRL20m; (3) temporary disqualification, for a term of up to ten years, for exercising the position of manager of the legal entities subject to the Brazilian AML/CTF Law; (4) cancellation of the authorisation to operate or function; (5) revocation or suspension of the authorisation to operate or function.

In turn, non-compliance with the Foreign Exchange Law may result in fines, a ban on providing certain services and/or to performing certain activities or modalities of operation and disqualification from acting as an administrator or from holding a position in a statutory body within financial institutions, other institutions overseen by BACEN and members of the Brazilian payment system.

Entry into force and pending regulation

The Foreign Exchange Law from 2021 will come into force on 29 December 2022. The pause between its publication in December 2021 and its entering into force a year later will be useful for regulatory bodies to edit pending regulations. In addition to what has been mentioned above, BACEN must also regulate the form, limits and conditions of entry and exit of national or foreign currency in Brazil, as well as the types of institutions authorised to operate in the foreign exchange market that will not be able to process entry and exit of national or foreign currency, due to their size, nature, or business model.