The purpose of this paper is to comment on the Brazilian foreign exchange system and to show why informal money transfers are not allowed. The sections that follow briefly describe Brazil’s financial system and its foreign exchange system and discuss the most important aspects of their regulation. The section “Monitoring of the Foreign Exchange System” comments on the surveillance procedure, which aims to maintain the regular operation of the system. The last part of this paper describes the treatment of informal money transfers.

The purpose of this paper is to comment on the Brazilian foreign exchange system and to show why informal money transfers are not allowed. The sections that follow briefly describe Brazil’s financial system and its foreign exchange system and discuss the most important aspects of their regulation. The section “Monitoring of the Foreign Exchange System” comments on the surveillance procedure, which aims to maintain the regular operation of the system. The last part of this paper describes the treatment of informal money transfers.

The Brazilian Financial System

The Brazilian financial system has 16 public banks, 104 national private banks, and 71 banks under foreign capital control, with 16,866 bank branches. In addition, it has many other kinds of entities, such as securities dealers, securities brokers, credit unions, consumer finance companies, and savings and loan companies (see Table 8.1).

Table 8.1.

Number of Institutions in Operation

(Selected months)

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Source: UNICAD.

Includes foreign banks’ full branches.

Includes 15 real estate credit companies that cannot accept deposits from the public.

Banco Central’s Information System (Sisbacen)

Banco Central’s information system, Sisbacen, performs the processing, storing, and online recovery of data, as well as real-time information updating. Sisbacen is a tool designed to make rational use of computer resources to provide Banco Central with the instrumental assistance required to fulfill its legally defined activities.

Sisbacen incorporates a sophisticated network that connects national financial institutions, federal and state government agencies, and legislative and judiciary branches with Banco Central. Sisbacen is equipped with a public access feature that allows any interested party to consult generic information.

In accordance with the rules and procedures established by Banco Central, all foreign exchange operations done in Brazil by the authorized institutions, and all operations involving bank deposits above 10,000 reias (R$) that are maintained in Brazilian banks by nonresidents, must be recorded daily. Approximately 300 international transfers in Brazilian currency and 15,000 foreign exchange transactions are recorded in Sisbacen daily.

The Brazilian Foreign Exchange System

The free floating of the market determines the rate in the Brazilian foreign exchange regime. Banco Central’s interventions occur only to smooth high volatility in low-liquidity scenarios, providing market liquidity and regulating the availability of dollar-indexed assets.

To operate with foreign exchange in Brazil, banks and other businesses must be authorized by Banco Central. Currently, 120 banks, 11 securities dealers, 33 securities brokers, and 262 travel agencies and hotels are authorized to operate with foreign exchange. The travel agencies and hotels are licensed only to buy and sell traveler’s checks and exchange cash for tourists. Only banks can carry out financial transfers with foreign countries.

The authorized institutions buy and sell foreign currency for natural persons and legal entities. Foreign currency can only be exchanged against the national currency. These transactions are formalized by standardized foreign exchange buy-sell contracts registered in Sisbacen. Each of the contracts is an autonomous, legally enforceable instrument. The contract registers must contain the identification of the sender and of the receiver in Brazil and abroad, the amount, the exchange rate, the purpose (investments, loans, services, imports, exports, or interbanking operations), the country of origin and of destination, the form of payment, and other kinds of information.

The authorized institutions record the data related to each transaction in Sisbacen, which generates the foreign exchange contract that must be signed by the parties (the buyer and the seller of the foreign exchange currency). Each transaction is classified in accordance with the IMF’s Balance of Payments Manual, Fifth Edition.

At the end of each day, Banco Central obtains all foreign exchange contracts, which will be available for monitoring. Foreign exchange contracts are the main source of information for the balance of payments. Exchange contracts related to exports or imports are linked with the data from the Customs Department’s computational system (Siscomex).

International Transfers in National Currency

Another way to receive or transfer money is by means of the system “International Transfers in National Currency.” With this system, a Brazilian individual or company can make a remittance by depositing Brazilian reais into an account at any bank in Brazil. The account owner must be an international bank nonresident in Brazil. That bank will then transfer the funds to an indicated account abroad in the recipient country’s currency.

The Brazilian bank where the account is maintained must register every account movement above R$10,000 (about US$3,450) in Sisbacen. The same occurs for debts of the account.

The nonresident international bank must be a correspondent of the bank where its account is opened. Deposits or withdrawals from this account are made using the normal forms established in the financial system. Transactions in cash are allowed only for values up to R$10,000.

The registers must contain the identification of the sender in Brazil and of the receiver, abroad, the amount, the purpose (investments, loans, services, or interbanking operations), the depositor account in the country, and the account where the funds will be deposited abroad.

Brazilian Foreign Exchange System Regulation

Banco Central’s regulation obliges the financial institution to maintain, for five years, a dossier with documents that identify the party in Brazil and confirm the reason for the money transfer.

Law No. 4595 of December 31, 1964, established that Banco Central can require financial institutions, or individuals or legal entities, to provide it with documents, papers, and accounting records. The law considers non-compliance an impediment to Banco Central’s inspection, which may result in an administrative proceeding with a penalty of R$100,000 (about US$34,500).

Under Law No. 4131 of September 3, 1962, the financial institutions are responsible for correctly identifying their customers and for recording the foreign exchange transactions (including their correct classification) in accordance with the information supplied by their customers. If Banco Central verifies an intentionally incorrect classification, the institution can be charged under an administrative proceeding with a penalty of between 5 percent and 100 percent of the value of the operation. Also, the financial institutions are obliged to report suspicious transactions and situations under the regulations to control money laundering and terrorist financing (Law No. 9613, of March 3, 1998). Acts against the Brazilian financial system (Law No. 7492, of June 16, 1986) are included in the range of predicate offenses to the crime of money laundering.

Monitoring of the Foreign Exchange System

Banco Central’s supervision maintains a dedicated unit in charge of verifying the authorized institutions and of analyzing operations that present signs of a crime against the financial system, money laundering, or illegal foreign exchange transactions. Those actions involve the review of financial transfers from or to foreign countries in foreign or national currency. Basically, the actions focus on the identification of the parties involved in Brazil and abroad and on the analysis of documentary compliance and of the legal and economic bases of operations.

Banco Central performs the monitoring activities described in the previous paragraph, in addition to the internal monitoring that will be developed by the institutions. Banco Central is also responsible for auditing the identification and control procedures conducted by financial institutions. The identification of illegal foreign exchange or illegal financial activities during the monitoring conducted by Banco Central may indicate that the institution’s internal control and compliance system has failed or is not adequately designed or fitted to detect the illegal activities. An exception is complex illegal schemes that can only be detected from a macro view of the system.

For its review, Banco Central selects a sample of operations from the items listed below:

  • amount involved in each transaction;

  • types of companies that perform activities to facilitate the management of suspicious operations;

  • atypical operations with purposes and amounts that are incompatible with the principal purpose of the company;

  • customers with no tradition or companies that were recently set up;

  • operations with gold (loan contracts, purchase and sale, arbitrage, and BM&F—the Brazilian mercantile and futures exchange);

  • operations in cash settled in national or foreign currency;

  • frequent private unilateral transfers or transfers of large amounts (donation, support of residents, assets);

  • operations that, when added up, amount to significant sums;

  • operations involving tax havens;

  • transfers between companies related by capital, by association, or by common attorneys;

  • transactions with atypical contractual clauses (payments without defined due dates or with zero interest);

  • occurrences at bank branches located in border regions, airports, ports, or highways; and

  • occurrences involving individuals and legal entities with previous history of examinations by Banco Central.

The analysis of the selected operations considers the following:

  • other foreign exchange operations and international transfers in Brazilian reais performed by the parties involved;

  • inquiries to banking files, checking account statements, and documents supporting income;

  • the review of financial statements, the charter, and respective amendments;

  • the tracking of financial operations;

  • surveys by electronic media;

  • contacts with the compliance area of the institution that conducted the operation; and

  • other procedures necessary to characterize illegal transactions or signs of such transactions, including contact with other agencies involved in counteracting and preventing illegal financial transactions.

Along with this process, Banco Central will seek the complete qualification of the parties involved and the identification of the origin, destination, and legitimacy of transferred funds.

Informal Transfers

Informal money transfers are not allowed in Brazil. Only authorized banks can conduct financial transfers from and to foreign countries. Money transfer or remittance entities, such as Western Union or MoneyGram, must have a formal agreement with a bank that operates in Brazil. The bank receives the payment order in Brazil, pays the beneficiary, and registers the operation on Sisbacen. The bank is responsible for the transfer.

An individual who engages in an unauthorized foreign exchange transaction can be imprisoned for two to six years (Law 7492/1986, clause 16 and 22). The same rule applies to the representative of an entity that engages in unauthorized transactions. Offenders also can be punished in a Banco Central administrative proceeding. The charge can reach 200 percent of the amount involved.

To identify customers performing unauthorized transactions, financial institutions should have strict know-your-customer procedures, which are evaluated by Banco Central in its onsite supervision program. If a suspicious transaction is detected, the financial institution must report it to the financial intelligence unit (COAF), which may report it to the public prosecutor’s office. In Brazil, anyone may transfer his or her savings to other countries, provided that the transfer is registered in Banco Central and submitted to the Brazilian revenue authority. Similarly, transfers to hawaladars are illicit operations (foreign exchange black market) and are normally the result of a criminal activity. Participants in illegal activities, such as smuggling, corruption, tax evasion, illegal drugs, and weapons trafficking, do not want to be identified, so they use illegal money changers to send money abroad. Part of this money returns to Brazil in the black market or through the regular system disguised as legal transactions (loans or investments).

The Brazilian federal police department is responsible for combating the foreign exchange black market. In August 2004 it launched a large operation against money changers. In eight states, 74 money changers were arrested, and many other arrest warrants were served. Now, the police want to identify money changers’ clients through confiscated documents.

The foreign exchange primary market in Brazil raises some US$300 billion a year. The black market is considered to be much smaller than the legal market, but there are no reliable estimates of its size. Included in the US$300 billion a year are the remittances sent by Brazilian workers abroad. Most of those transfers are done in the legal market, where the cost runs 1 percent to 3 percent of the amount remitted. What sometimes occurs in those operations is that one person living in another country uses a legal remittance company abroad, but that company works with an illegal correspondent in Brazil.

Paulo Roberto Gonçalves is head of the Foreign Exchange Surveillance Division of the Department of Surveillance of Illegal Activities in the central bank of Brazil.