Compliance Guidelines:

Regulatory Bodies in Brazil

Some of the regulatory bodies collaborate to ensure AML compliance across various sectors of the Brazilian economy are given below:

Financial Activities Control Council (COAF)

• COAF is the central regulatory authority responsible for receiving, analyzing, and disseminating information related to suspicious financial transactions and activities.
• It plays a crucial role in detecting and preventing money laundering and terrorist financing. COAF also provides guidance to reporting entities and issues AML regulations.

Central Bank of Brazil (Banco Central do Brasil)

• The Central Bank of Brazil is responsible for regulating and supervising financial institutions, including banks, credit unions, and other entities under its jurisdiction.
• It sets AML compliance standards for these institutions and conducts inspections to ensure compliance.

Anti-Money Laundering Legislative Framework

Law 9.613/98 & Law 12,683/12

The Financial Action Task Force on Money Laundering (FATF) guidelines have driven Brazil to adopt a risk-based approach towards anti-money laundering and compliance in its banking sector.

• This law primarily addresses money laundering and establishes mechanisms for reporting suspicious transactions.
• The law provides clear definitions of money laundering activities, including the illegal origins of funds, financial transactions involved, and related terms.
• Non-compliance with AML/CTF regulations can result in significant penalties and legal consequences.
• This includes conducting Know Your Customer (KYC) checks and ongoing monitoring of customer transactions.
• Special attention is given to politically exposed persons, and enhanced due diligence measures are required when dealing with them.
• Initially, AML requirements were detailed in Law No 9.613, dated 3 March 1998.
• It underwent an amendment in 2012 via Law No 12,683, making the AML rules more comprehensive and stringent.
• The scope of the laws covers financial institutions and an array of entities involved in financial and payment-related activities, which includes consultancies, accounting firms, advisors, and other financial services providers.

Reference to Brazilian Central Bank & CVM

• The Brazilian Central Bank and the Brazilian Securities and Exchange Commission (CVM) provide additional AML regulations.
• The Central Bank has issued specific regulations regarding compliance and AML controls.

Circular 3,461/09 & Circular 3,978/2020

Circular No 3,461, dated 24 July 2009, was the primary regulation encompassing AML rules and processes for financial institutions under the Central Bank.

This will be substituted by Circular No 3,978, dated 23 January 2020, which emphasizes a risk-based approach over a detailed AML procedure.

Risk-Based Approach Explained

The risk-based method allows institutions to proportionally allocate controls based on the risk level of a given operation or customer.

• This approach provides flexibility, allowing financial entities to direct resources more efficiently and implement preventive measures in line with risk levels.

Provisions of Circular 3,978/20

• The new circular empowers financial institutions to assess their own operations and clients and categorize their risks.
• Institutions are mandated to constantly re-evaluate their know-your-customer (KYC) processes, which now also require more comprehensive data during customer onboarding.
• Every transaction must be recorded in a way that identifies involved parties and traces the origin and recipient of funds. The regulation also outlines criteria for identifying politically exposed individuals.
• Taking cues from FATF, the new rule permits global financial groups to have group-wide AML programs. However, the analysis of suspicious transactions cannot be outsourced or conducted abroad.

AML in the Brazilian Capital Market: Reference to ICVM 617

• The risk-based approach extends to the Brazilian capital market with the introduction of CVM Ruling No 617, which came into effect on 1 July 2020.
• This ruling, like Circular 3,978/2020, delineates new standards for AML policies, KYC processes, and monitoring within the capital market.

Customer Due Diligence (CDD):

• Reporting entities are obligated to implement robust customer due diligence procedures, which include verifying the identity of their customers, assessing customer risk, and conducting ongoing monitoring of customer transactions.
• Enhanced due diligence measures are required for higher-risk customers and activities.

Penalties and Sanctions:

• The law outlines penalties and sanctions for entities and individuals that fail to comply with AML/CTF obligations.
• Penalties may include fines, suspension of activities, and even imprisonment.Reporting entities may also face reputational risks if they are found to be non-compliant.

BACEN – Resolution No. 23/ 2013

This resolution by the Brazilian Central Bank (BACEN) establishes guidelines for implementing sanctions in the financial sector. This includes if anyone has to be a part in business with financial intermediaries, they must have to go through the guidelines of sanctions.

Sanctions Compliance Program: 

• Financial intermediaries are required to establish and maintain effective sanctions compliance programs.
• These programs should include policies, procedures, and controls to identify and mitigate the risks associated with sanctioned entities or activities.
• The goal is to ensure that the financial institution does not inadvertently facilitate transactions that violate sanctions.

Due Diligence on Customers and Business Partners: 

• Financial intermediaries are obligated to conduct enhanced due diligence on their customers, including verifying the identities of customers and beneficial owners.
• They should also perform ongoing monitoring to detect and report any suspicious transactions that may involve sanctioned parties.

Normative Instruction No. 1,634/2016

• Issued by the Brazilian Federal Revenue Service, this instruction provides guidance on sanctions related to money laundering and tax evasion.
• The primary objective is to prevent and detect suspicious activities related to money laundering and tax evasion.

Instructions under Law 9,613/98

• The Law stated that entities have to comply with AML regulations and the measures they should take to do so.
• The Law also explains how to administer identification, reporting and record-keeping processes.
• This is the main law addressing money laundering and terrorism financing in Brazil. This law deals with the customer Due Diligence CDD/EDD.  CDD measures are essential for identifying and verifying the identity of customers and assessing the risk associated with their transactions.

Brazilian Financial Intelligence Unit/ COAF

The Brazilian Financial Intelligence Unit (UIF), also known as the COAF, plays a critical role in the fight against money laundering, terrorist financing, and other financial crimes in Brazil. COAF is responsible for receiving, analyzing, and disseminating information related to suspicious financial transactions and activities.

Recommendations and Sanctions: 

• COAF has the authority to issue recommendations to reporting entities based on its findings.
• These recommendations may include enhanced due diligence on specific customers or transactions.
• In cases of severe violations, COAF can impose administrative sanctions on non-compliant entities, such as fines or restrictions on their operations.

Regulations Enforcing The Financial Action Task Force (FATF) Recommendations

Customer Due Diligence (CDD) 

• FATF Recommendation 10 emphasizes the importance of customer due diligence measures to identify and verify the identities of customers.
• Brazil’s AML regulations, including Resolution No. 23/2013 issued by the Brazilian Central Bank, require financial institutions to conduct CDD and maintain customer identification records.

Suspicious Transaction Reporting

• FATF Recommendation 20 emphasizes the obligation to report suspicious transactions to financial intelligence units (FIUs).
• Brazil’s Financial Activities Control Council (COAF), in line with FATF guidance, oversees the reporting of suspicious transactions by various reporting entities, including financial institutions.

Sanctions and Asset Freezing

• FATF Recommendation 6 relates to targeted financial sanctions and asset freezing measures.
• Brazil, through its regulatory framework and cooperation with international sanctions regimes, implements measures to freeze assets and impose sanctions on individuals, entities, or countries involved in financial crimes or terrorism.

References

1. BACEN
2. ICLG
3. B3
4. Presidency of the Republic