Legal Letter

August 2009

The Ministry of the Environment (MMA) and the Brazilian Institute for the Environment and Renewable Natural Resources (IBAMA) issued Joint Ordinance 259 on August 7, 2009, introducing some changes to the environmental impact assessments and statements (EIA/RIMA) required for licensing of all undertakings that may have an impact on the environment. As a result, the EIA/RIMA must now contain a specific chapter on cleaner technology alternatives to mitigate potential impacts on the environment and on workers, including excessive heat, noise and emission levels.

The Basic Environmental Program (PBA) for future undertakings must suggest a specific program covering safety, environmental and occupational health issues. Once this program is submitted as part of the environmental impact studies, IBAMA will send it over to the federation to which the trade union representing most workers in the undertaking is a member. The federation will have 30 days to render an opinion on this program, without interrupting the licensing procedures.

Until recently, trade unions and local labor representative offices had no say on preparation and approval of EIA/RIMA, or on environmental licensing procedures, except when taking part in public hearings. Under Joint Ordinance 259, however, these union entities were given voice at licensing procedures, in that they are now entitled to review and even express themselves on the content of environmental studies before a license is issued. (DOU-I of August 10, 2009)

Federal Law 12,016 was enacted on August 7, 2009, introducing new rules on the motion for writ of mandamus (mandado de segurança) set out in article 5, LXIX of the Federal Constitution, and repealing the ancient rules on this matter (some of them dating back to the 1950s and 1960s).

The motion for writ of mandamus – drawing on the classical remedy of habeas corpus and originally envisaged in the 1932 Constitution – has traditionally been used as a means of protecting individuals against actions taken by the government authorities in detriment to an uncontested and documented right. This relief has always been more advantageous and less burdensome than other procedural strategies, notably because of its celerity (as no evidence need be produced).

Federal Law 12,016 consolidates the sparse rules on individual motions for writ of mandamus, and also incorporates some views long established in legal writings and past rulings of the Brazilian higher courts (Federal Supreme Court and Superior Court of Justice).

Besides, Federal Law 12,016 innovates by regulating the collective motion for writ of mandamus generically envisioned in article 5, LXX of the Federal Constitution, which is available to political parties, labor union organizations and professional entities.

Some restrictions will apply, such as the judge’s right to have the movant post bond (up to the value at dispute) to secure the effects of a mandamus. If the Judiciary exercises such option frequently, it may end up making the motion for writ of mandamus a moot relief.

Other potential pitfalls are the impossibility of pursuing an injunctive relief for offsetting of tax credits, clearance of imported goods, or delivery of assets, among others. The Brazilian Bar Association (OAB) intends to challenge the constitutionality of these provisions before the Federal Supreme Court. (DOU-I of August 10, 2009)

President Lula da Silva issued Decree 6,398 on August 13, 2009, regulating Law 11,540 of 2007 which deals with the National Scientific Research and Technology Development Fund (FNDCT).

FNDCT was created by Decree-law 719 of 1969, but its first tentative regulation would not come until 2007. In 2006, Congress passed a bill of law regulating the Fund, but the Executive Branch vetoed it on grounds that the budgeting process could not be fettered by a law that was actually proposing to put a ban on allocation of FNDCT funds to the government contingency reserve, a strategic mechanism for primary surplus compliance control by the government.

Decree 6,398 now consolidates the major changes envisioned by the regulatory framework devised in 2007, namely, the creation of a Steering Board and formal implementation of transversal actions. The FNDCT Board will comprise representatives of the government, educational institutions, companies and workers in the science and technology area, and will be in charge of directing and monitoring the use of FNDCT resources. The transversal action issue, in turn, is pivotal to social and economic development through FNDCT. Transversal actions refer to investments targeted at specific industry funds unrelated to contributing segments. This makes it possible to adopt a more consistent incentive policy in that it generates funding alternatives for projects currently unsponsored by existing government support funds, while also fostering multi-industry actions.

After a long period of inactivity and idle capital due to the intricacies of regulatory development, FNDCT at last seems to count on a robust set of rules. (DOU-I of August 14, 2009)

On August 13, 2009, the National Treasury Attorney’s Office (PGFN) issued Ordinance 1,153, setting out the general rules and requirements for acceptance of judicial bond insurance (seguro garantia) as security of past-due federal tax liabilities (dívida ativa).

The possibility of taking out insurance to cover judgment debt enforcement proceedings gained momentum in late 2006 by enactment of Law 11,382, but judges were still reluctant to accept them in tax enforcement cases (despite favorable precedents), as the Tax Enforcement Law did not expressly provide for this type of guarantee. But the PGFN regulations are expected to change this scenario.

The judicial bond insurance is one of fastest growing products in the Brazilian insurance market, with a sound history of liquidity and effective enforcement of guarantees. Besides, this product is far less expensive than judicial deposits or bank guarantees (the most common types of guarantee for tax enforcement proceedings), and dispenses with bank credit facilities.

The general impression is that Ordinance 1,153 will have positive implications for taxpayers, as an express acknowledgment of such type of guarantee gives greater certainty to its use in administrative and judicial tax proceedings. For their part, insurers will probably give greater attention to the judicial bond insurance market, as the PGFN green-light will probably give a boost to use of this product in tax enforcement proceedings. (DOU-I of August 18, 2009)

The Central Bank of Brazil issued Circular 3,461 on July 24, 2009, consolidating and improving the anti-money laundering (AML) rules and procedures to be adopted by financial institutions in lieu of a sparse set of all-too-general and somewhat confusing regulations applying until then.

To that end, the Central Bank focused on (a) detailing the AML prevention requirements to be observed by financial institutions and clarifying the existing rules on know-your-customer procedures, registration and monitoring of transactions, etc.; and (b) bringing AML banking rules up-to-date with international practices and current concerns (by introducing rules on correspondent banking, politically exposed persons, customer definition, and so forth).

Prior to Circular 3,461, financial institutions basically had to observe some generic rules on internal controls and compliance mechanisms, namely: (a) to devise and implement internal controls for their core activities and financial, operating and management  information systems, as well as for compliance with applicable laws and regulations; and (b) to adopt consolidated internal controls and records allowing for proper identification of customers and checking whether transactions are consistent with their financial and economic conditions.

Circular 3,461 detailed how financial institutions should put these “policies” and “internal controls” into practice, as follows:

(a)       AML prevention policies must (i) specify the responsibilities at each level of the institution; (ii) arrange for timely collection of information on customers; (iii) set clear-cut criteria for staff selection and monitoring; (iv) order the prior review of new banking products and services; and (v) provide for full in-house disclosure of such policies; and

(b)       internal controls must comprise prior measures aimed at (i) confirming record data of customers and end beneficiaries; and (ii) identifying a customer’s status as “politically exposed person” (PEP); among other issues.

In addition, a financial institution is required to keep record of all financial services and transactions carried out with its customers or on their behalf, including: (a) monthly transactions exceeding R$ 10 thousand in the aggregate; (b) suspected transactions; (c) cash transfers above R$ 1 thousand by means of checks, wire transfers, money orders, and the like; (d) suspected issuance or recharge of stored value cards (smart cards); among others.

Besides, specific records must be kept for transactions (a) above R$ 100 thousand in cash; (b) signaling a suspected deal; or (c) involving checks or wire transfers above R$100 thousand.

All these records and data must be kept by the financial institution for at least 5 to 10 years (depending on the type of information involved) as from the first day of the year after that in which the underlying transaction is completed or the relationship with the customer ends.

Suspected activities or transactions must be reported to the Brazilian financial intelligence unit, Conselho de Controle de Atividades Financeiras (COAF), in a manner yet to be detailed by the Central Bank. Suspected activities include, among others:

(a)       actual or proposed issuance or recharge of one or more stored value cards totaling R$ 100 thousand in a given calendar month;

(b)       actual or proposed cash transactions exceeding R$ 100 thousand;

 (c)       suspected transactions above R$10 thousand (i.e., those involving suspicious parties or values, or without economic reasons, etc.);

 (d)       transactions apparently intended to sidestep identification mechanisms or controls;

 (e)       actions suspected of financing terrorist activity.

Further, the financial institution must designate to the Central Bank an officer who will be in charge of reports to COAF as well as of compliance with the measures set out in Circular 3,461.

The Central Bank may mete out the following penalties on non-compliant financial institutions and on their senior management, depending on the severity of the offense: (a) warning; (b) fine; (c) temporary prohibition from holding a senior management office in financial institutions; and (d) cancellation of authorization or license to operate.

Besides, the Central Bank modified some foreign exchange rules set out in the International Capitals and Foreign Exchange Regulations (RMCCI), as per Circular 3,462 of July 24, 2009. In brief:

(a)       financial institutions must devote closer attention to currency inflows through electronic orders that do not state the name, address, identification document and bank account of the foreign remitter;

(b)       new rules of conduct and diligence were established for Brazilian financial institutions in their correspondent banking activities; and

(c)       during the course of transactions with individuals or legal entities located in countries where the FATF/GAFI recommendations are not applied (or poorly applied), financial institutions must review these transactions in writing, and advise COAF if their lawfulness or economic reasons are not clearly identified; and so forth.

All things considered, Circulars 3,461 and 3,462 are worthy of acclaim for (a) helping financial institutions understand and better enforce the banking rules against money laundering activity, and (b) improving the Brazilian anti-money laundering systems and controls to bring them closer to recommendations by international organisms. (DOU-I of July 27, 2009)

After receiving 163 suggestions from electricity, telecommunications and other industry players between March 12 and May 11, 2009, the National Electricity Agency (ANEEL) issued Normative Resolution 375 on August 27, 2009, regulating the use of electric power infrastructure to carry digital or analog signals.

Under the new rule, telecom operators may resort to Power Line Communications (PLC), using the electricity grid to transfer multimedia content (data, voice, video and audio) or carry management, automation and control data to all devices connected to the electrical wiring. The PLC technology will be available for broadband, telephone, remote control, VoIP, pay TV, security and other services, for which only minor adaptations will be required (the setup of routers on poles, and modems at switches in homes and offices).

In the power distributor’s own interest or upon request by third parties, the power distributor must make its networking available for use of PLC technology; to that end, its infrastructure conditions must be published in newspapers circulating nationwide. The power distributor must give interested parties at least 60 days to apply for use.

The power distributor may only reject applications in case of capacity, safety or reliability constraints, or if engineering requirements are not met. An infrastructure sharing agreement will be executed with the service provider that meets the technical requirements and is willing to pay the highest price for networking availability.

Any adaptations required in the power grid for infrastructure sharing will be on the telecom service provider, which will likewise be responsible for any damage caused to the power distribution infrastructure. Potential telecom operators using the PLC system will have to comply with the technical rules and practices adopted by the power distributor itself; by ANEEL; and by the National Telecommunications Agency (ANATEL). Besides, the quality of electricity supply to consumers must remain unharmed.

Electric power consumers were directly benefited from Normative Resolution 375, which states that a portion of the income earned by power distributors from PLC-based operations must be used to reduce electricity tariffs. Besides, PLC is expected to foster the expansion of services in general and digital inclusion efforts, as 95% of the Brazilian population have access to electricity services (through concessionaires and cooperatives), covering some 63.9 million consumer units.

ANATEL previously approved in April of 2009 Resolution No. 527 on the conditions of use of radio frequency by PLC systems. The main purpose of this regulation was to avoid harmful interference to other telecommunication and broadcasting services that use radiofrequencies from 1075 kHz and 50MHz. Existing systems that are not compliant are only allowed to operate until June 30, 2010.

The PLC system introduces a new source and level of services, which will increase competition in the service industry and push prices down. The major advantages of PLC for investors are the possibility of exploiting infrastructure assets already in place (poles, ducts and cabling) by setting up a modular technology at a fast clip and at reduced investment and operating cost levels, but with a higher coverage potential as compared to competing technologies. (DOU-I of August 28, 2009)

In the recently judged AMBEV case, CADE (the Brazilian primary competition authority) has decided that fidelity discount arrangements between AMBEV (the largest beverages company in Brazil) and several resellers amounted to illegal exclusivity agreements that reduced competition, foreclosed the market, and raised rival costs. In view of such illegal vertical restraints of trade, CADE imposed the highest fine ever: R$ 352.7 million (US$ 185 million) against AMBEV,  for an alleged abuse of its dominant position in the beer market. The severe fine amounted to 2% of AMBEV’s   annual revenues in 2003, one year before administrative proceedings were initiated by the Economic Law Office (SDE) in response to a complaint filed by AMBEV's competitor Schincariol.

In relation to the evidence produced during SDE’s investigation, CADE ruled that polls conducted by research institutes – in the case, the Brazilian Institute for Public Opinion and Statistics (IBOPE) – may be used in administrative proceedings. In addition, CADE pointed out that SDE does have powers to perform inspections  at the respondents’ premises, even without court authorization.

CADE’s decision is important not only because of the unparalleled fine imposed, but also because it is considered to be the most relevant decision in a vertical restraint type of case. CADE has had the opportunity to rule on several complex and non-complex merger cases, and has already rendered important decisions on cartel cases, which have been elected the top priority for the Brazilian competition authorities. However, CADE has a very limited record of decisions on cases dealing with vertical restraints of trade. The AMBEV case most likely signals that investigations will become more frequent in this area.

AMBEV has challenged CADE’s decision before a federal court  sitting in Brasília, arguing that the administrative proceedings were null due to illegalities committed by SDE and CADE. An injunction suspended the possibility for CADE to collect the fine imposed. CADE is now to defend its decision before the federal court because, under the Brazilian Constitution, any decision rendered by CADE may be challenged before the federal courts in Brasília.  

In any event, considering the terms of the landmark decision on the AMBEV case, companies holding market shares equal to or higher than 20% in a given relevant market should expect more attention from the Brazilian competition authorities. In fact, Fernando de Magalhães Furlan, Reporting Commissioner for the AMBEV Case, pointed out that any market player that holds high market shares must be “responsible and careful enough for its practices not to have negative repercussions.”

Acknowledgments:

Partners Esther Donio B. Nunes, Gilberto  Giusti,  Raphael de Cunto,  Marcos Chaves Ladeira, Werner Grau Neto, Bruno Balduccini, Leonardo Peres da Rocha e Silva, Diógenes Mendes Gonçalves Neto and Ricardo Simões Russo

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This is a monthly publication of Pinheiro Neto Advogados issued with the intention of providing our clients with news on developments in the legal field that may affect their businesses or personal affairs. For your convenience, this newsletter is also published on our web page. Copyright © 2009 by Pinheiro Neto Advogados. All rights reserved.