Brazil’s central bank has caused uproar by proposing to drop relatives and close associates from the definition of “politically exposed persons” under the country’s anti-money laundering rules.
The changes were revealed in an exposure draft released for public comment by Banco Central do Brasil (BCB), the country's central bank, on January 17 — eliciting a barrage of comments from respondents, most of them negative.
The bank previously said that politically exposed persons (PEPs) included the “representatives, family members, and others from close relationships” with those who have held public office in Brazil or elsewhere in the preceding five years.
This definition is missing from the latest draft. Instead, the central bank said the guidelines will shift compliance to a risk-based approach that will make anti-money laundering and counter-terrorist financing more “rigid, comprehensive and efficient”.
In a press release issued after fierce criticism, the BCB said the new approach will require financial institutions “to monitor and analyse all financial transactions, regardless of value or type of person, and report everything suspicious”, and insisted the rules are consistent with Financial Action Task Force (FATF) recommendations.
“It would no longer make sense to establish a reporting threshold, but instead make it clear that suspicious transactions of any value should be reported, which broadens the scope of relevant reports,” the bank said.
The regulator’s entreaties were insufficient to dampen howls of criticism from the country’s legal profession. One high-profile prosecutor decried them as “hampering the investigation of money laundering”.
André Martinez, a public attorney and former compliance officer with Banco Itaú, a private bank, told PaymentsCompliance that if the BCB pressed ahead with the changes it would be a blow to fighting corruption in South America’s largest economy.
“The intent of PEPs rules has always been to look at these clients, public agents, or other closely connected relatives, with special care and thus to observe their financial transactions more closely and in more detail in respect to KYC (know your customer),” he said.
“Removing the close relatives of people of high political and social relevance from the surveillance spectrum would be a setback.”
A spokesperson for the BCB did not respond to a request for comment.
The furore has coincided with revelations in the Brazilian media that Flavio Bolsonaro, the son of recently elected president Jair Bolsonaro, received 48 suspicious deposits into his account while he served as a state legislator, which are reportedly being probed by Brazil’s financial intelligence unit, the Council for Financial Activities Control.
Earlier this month, a Supreme Court judge suspended an investigation into why BRL1.2m ($320,000) slushed through the bank account of Bolsonaro’s former driver in 2016/17.
Bolsonaro’s lawyers reportedly argued that he now enjoys certain legal protections following his election to the federal Senate. He denies any wrongdoing.
“If it is at the core of money laundering transactions or proceedings to hide the money, you would hide your money with people you trust — so who better to trust than your family members or close associates?” said Heloísa Estellita of FGV São Paulo.
There is no indication the scandal is linked to the changes drafted by the BCB, which is generally seen in the country as a highly effective and transparent regulator.
However, the high-profile case could not be “a better example of how important it is that the scope [of the defintion] also reaches family members and close associates”, said Heloísa Estellita, a law professor at FGV São Paulo, a think tank and university.
“If it is at the core of money laundering transactions or proceedings to hide the money, you would hide your money with people you trust — so who better to trust than your family members or close associates?”
The BCB’s move “really doesn’t make any sense”, she argued, suggesting that “if the draft is passed, banks will neither monitor nor consequently submit SARs regarding PEPs’ family or close associates”.
She said the authority of the regulator to alter the definition of a PEP could be challenged in court, however, and that the Council for Financial Activities Control has not indicated any willingness to change its own definition, which still includes relatives and close associates.
Brazilian banks that operate offshore are also likely to continue conducting customer due diligence on the politically exposed using the current definition, Estellita added, to remain compliant with anti-money laundering rules in jurisdictions such as the EU.
She said she would be surprised if the changes to PEPs survived the eviscerating consultation process and make into the final regulations. “We — I mean scholars and criminal lawyers — really believe the central bank will not keep this restriction.”
In recent years Brazilian politics has been thrown into turmoil by vast corruption cases involving some of the countries most senior politicians in the since turfed-out Workers’ Party.
A former president, Luiz Inacio Lula da Silva, was sentenced to 12 years in jail for his involvement in “Operation Car Wash”, which involved bribery at the state-owned oil giant Petrobras.
The country’s president between August 2016 and December 2018, Michel Temer, was also charged in a separate corruption case.
This week Brazil received its worst score card in seven years on Transparency International’s annual Corruption Perceptions Index, dropping two spots to 105 out of 180 countries ranked. Given the result, “Brazil should consider increasing the number of PEPs, and not the opposite”, Martinez argued.