Why Brazil proposes a reform of its foreign exchange regulation
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Renata Cardoso
Lefosse Advogados, São Paulo
Brazil has more than 400 foreign exchange rules currently in force. Some of them were issued back in the 1930s. This is astonishing for one of the largest export countries of the world. Needless to say, we argue for a significant reform of such laws and regulation, in order to simplify the procedures and be consistent with the global economy. This would improve productivity and encourage foreign direct investment.
The current laws and regulation are generally strict and reflect the government’s historic concern with foreign exchange controls. Despite the modifications made over the past decade, which aimed to create a more relaxed regulatory framework, the rules still impose significant obstacles to foreign currency flows.
Pursuant to Law 4,131/62 and Federal Law 4,595/64, the foreign exchange market is subject to oversight and regulation by the Central Bank of Brazil. Accordingly, the inflow and outflow of funds in Brazil can only be made through financial institutions authorised to operate in the foreign exchange market. This means that all transactions for the purchase and selling of foreign currencies or international transfers in Reais can only be carried out through an intermediary agent authorised by the Central Bank of Brazil, which is always the counterparty of such trades. Transactions carried out without such intermediation are considered a financial crime and offenders are subject to a fine and two to six years' imprisonment.
As a principle, Brazilian regulation already sets forth that all foreign exchange transactions are generally allowed without any limit on the amount, provided that they are licit, supported by proper evidence and documentation allocating responsibilities between the parties and the existence of economic and legal grounds. However, in practice, any remittance of funds is very complex and sometimes simply not possible.
Any transfer can only be made for a specific purpose expressly set forth in the regulation. Each purpose has a corresponding nature (or code) that must be indicated in the corresponding foreign exchange contract, and the responsibility for attributing the correct code rests with the financial institution. In several situations, there is not a clear and unblemished nature for the remittance, and local agents frequently refuse to carry out certain transactions due to the risk of being subject to administrative penalties, despite the underlying transaction being fully legal and based on economic grounds.
A significant reform of the Brazilian foreign exchange system has been discussed for many years, but only recently has the Central Bank of Brazil submitted to the House of Representatives a bill of law proposing fundamental changes to the legal framework applicable to this matter (Bill no 5,387/2019). This bill of law would replace the various outdated laws with one piece of legislation.
The bill sets forth that foreign capital has to be granted the same legal treatment afforded to local capital under equivalent conditions. This is a condition already provided in the Brazilian Federal Constitution of 1988, but now it seems that it has been brought into the bill of law to allow for a profound exclusion of the obsolete regulation that imposes practical barriers to foreign investments. The elimination of the registration of foreign investments with the Central Bank of Brazil is a great example of this.
The Central Bank of Brazil has already clarified that the reform will be implemented gradually, and the new regulation will be issued over a number of years, until eventually the market achieves full convertibility of Reais into foreign currency. This would allow, for example, a Brazilian individual or entity to open a bank account in a foreign currency in Brazil, something that is unthinkable under the current rules.
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