I.

INTRODUCTION
The present Brazilian banking structure was designed by Law No. 4595, of Decembe
r 31, 1994 (the "Banking Reform Law"), which entirely formed the domestic financ
ial system according to the specialization of the financial institutions, and co
nsists of the National Monetary Council ("CMN"), the Central Bank of Brazil ("Ba
cen"), Banco do Brasil S.A. ("BB"), the National Economic and Social Development
Bank ("BNDES"), the Federal Savings and Loan Association ("CEF") and all other
public and private financial institutions authorized by Bacen.
The CMN is the senior agency of the Brazilian Financial System and is responsibl
e for monetary policies directed toward economic and social development. Bacen i
s an autonomous governmental entity responsible for the execution of monetary po
licies, exchange controls, regulation of banks and financial institutions and co
ntrol of foreign investments. BB is a mixed-capital corporation and, as a commer
cial bank controlled by the federal government, is the principal bank agent for
the Union. It is involved in public and private financing and has a major role i
n executing federal government-subsidized lending programs. BNDES is a public fi
nancial institution which acts as the main instrument for implementing the feder
al government's investment policy, granting loans, many of which are at subsidiz
ed interest rates, and supervising government financing plans. Presently, it als
o carries out the Brazilian privatization program. CEF is the principal agent of
the National Housing System, receiving deposits and granting mortgage loans. It
also administers the Employees Guarantee Fund (FGTS), the Social Integration Pr
ogram (PIS/PASEP) and the national lotteries.
II. FINANCIAL INSTITUTIONS
Financial institutions are public or private corporations whose principal or sec
ondary business is the collection, brokerage or investment of financial resource
s belonging to themselves or third parties, in domestic or foreign currency, and
the custody of assets belonging to third parties. This definition is contained
in Article 17 of the Banking Reform Law. Individuals who undertake any such busi
ness, either regularly or sporadically, are regarded as financial institutions f
or the purposes of this legislation.
The state or interstate development banks are regional financial institutions co
ntrolled by the respective state governments, which grant medium or long-term lo
ans for fixed or working capital, according to the economic and social needs of
the regions where they operate. The principal activities of these entities are t
he on lending of loans and providing of loans for the financing of rural and ind
ustrial development schemes.
Federal and state saving banks are financial institutions which undertake almost
the same types of business as the commercial banks. They accept savings from in
dividuals, by means of deposits in current accounts for a fixed term or in savin
gs accounts (cadernetas de poupanca) and make loans, thereby playing an importan
t role in the National Housing System. They also provide various services of the
public interest, such as the receipt of federal taxes and charges, and payments
of wages to civil servants.
Except as outlined below, private financial institutions must be incorporated as
sociedades anonimas ("Corporations"), having all their shares in registered for
m, and include the following entities:
(i) Commercial Banks (bancos comerciais) - They engage in both wholesale and ret
ail banking and are the main source of short and medium-term financing. In addit
ion to making loans, they provide a wide range of financial services, such as ac
cepting deposits, paying checks, issuing letters of credit, dealing in foreign e
xchange, cash management services, electronic transfers of funds, investment ban
king services and investment management.
(ii) Investment Banks (bancos de investimento) - They are specialized in medium
and long-term finance for the supply of capital and investment of third party fu
nds. With the assistance of an investment bank, a foreign investor may be able t
o obtain long-term financing through the sale of the stock or debt obligations i
n the public market or through private placement. Their activities include: the
on lending of foreign loans; the making of loans for providing fixed or working
capital (including finance for the production and export of goods); the purchase
of securities (shares, founders' shares, debentures and their respective coupon
s and subscription bonuses, certificates of deposit of securities and commercial
paper) and other documents of title for investment or subsequent sale on the st
ock market; the distribution or placing of new issues of securities; the underwr
iting of share issue; the administration of mutual investment funds; the receipt
of deposits; and, when authorized, foreign exchange dealings. They may also hav
e a specialized leasing department to effect a lease-back transactions, which ar
e conducted directly with the vendors of the goods or with corporations which th
e vendors are connected with.
(iii) Credit, Finance and Investment Companies (financeiras) - They are speciali
zed in credit opening operations by acceptance of bills of exchange to finance p
urchases of goods and services by consumers or by final users and may also trade
in other commercial instruments, such as promissory notes and duplicates. They
include subsidiaries of large manufacturing or retail companies. Due to the grea
ter risks and a higher cost of funds, financeiras charge higher rates than comme
rcial banks.
(iv) Securities Dealership (distribuidoras) - They may be incorporated either as
a limited liability company (sociedade por quotas de responsabilidade limitada
- "Ltda") or as a Corporation and their object is the subscription of securities
for resale or distribution on the market and may engage in the following transa
ctions: the sale, at sight or at term, of securities or commercial instruments o
n their own account or for third parties, the subscription, on their own account
or jointly with other authorized companies for the securities or other commerci
al instruments for resale; the making of agreements with the issuing company, jo
intly or separately, for the maintenance of the price of securities on the marke
t during the placing of an issue; acting as intermediary in the placing of issue
s on the market; and the formation and management, as leader or participant, of
consortia for underwriting issues of securities.
(v) Brokerage Companies (corretoras) - They may be incorporated either as a Ltda
. or as a Corporation and have the exclusive right to deal on the stock exchange
, in authorized securities and other commercial instruments, and may also purcha
se, sell and distribute securities and instruments on their own account or for t
hird parties. They may form and manage, either as leader or as a participant, co
nsortia for underwriting issues of securities; purchase and subsequently sell se
curities and commercial documents and distribute and place them on the capital m
arket, as well as act as intermediaries in the auctions held in connection with
the debt/equity conversion and the privatization program.
(vi) Multi-Service Banks (bancos multiplos) - These entities, through special de
partments (portfolios), may carry out the activities of two or more different fi
nancial institutions, among the following: commercial bank, investment bank, cre
dit, finance and investment company and real state credit company.
(vii) Leasing Companies (sociedades de arrendamento mercantil) - They may only e
ngage in leasing operations and are prohibited from making any other type of bus
iness.
(viii) Savings and Loan Associations (associacaes de poupanca emprestimo) - They
 must be incorporated as civil companies and are restricted in their operations.
They accept deposits from individuals and provide financing to companies and in
dividuals secured by real estate. Their principal function is to administer fund
s for direct financing of building projects and for the concentration of capital
and monetary resources in other official credit agencies by encouraging savings
.
(ix) Real Estate Credit Companies (sociedades de credito imobilidrio) - Their fu
nction is to provide funds for housing construction companies that sell houses b
y instalments, and for the purchase and construction of houses. In order to carr
y out their responsibilities, real estate credit companies may obtain funds by i
ssuing property bonds, receiving deposits and others for a minimum term of one y
ear and by obtaining credit in Brazil or abroad for housing schemes and refinanc
ing granted by the CMN.
With respect to regional banking, unlike other jurisdictions, Brazilian legislat
ion does not limit the operations of the financial institutions to specific regi
ons, although in practice some banks decide to concentrate its activities in cer
tain regions of the country.
III. LEGISLATION AND REGULATION: MAIN ASPECTS AND SCOPES
The future structure of the Brazilian financial system depends on a Complementar
y Law to be enacted pursuant to the requirements of article 192 of the Federal C
onstitution, promulgated on October 5, 1988 (the "Federal Constitution").
Currently, financial institutions are basically governed by the Banking Reform L
aw. In addition, these entities are regulated chiefly by resolutions, circulars,
circular-letters, letter-instructions and notices issued by Bacen. All rules ap
plicable to the financial institutions have been consolidated by Bacen into a bo
oklet called Manual of Rules and Instructions (Manual de Normas e Instrucoes - M
NI).
The legislation entrusts Bacen with the role of implementing the currency and cr
edit policies laid down by the CMN and with the task of controlling and supervis
ing all public and private financial institutions, as well as to authorize their
functioning. The activities of these entities are controlled by Bacen, which ap
proves their corporate documents, amendments to their by-laws, minimum capital r
equirements, increases of capital, method of paying-up capital, the setting-up o
r transfer of its principal place of business or any branch (whether in Brazil o
r abroad), etc. and supervises their operations, transformations, consolidations
, and mergers.
Bacen also monitors firms which are directly or indirectly engaged in transactio
ns in the financial and capital markets, including leasing companies, and is res
ponsible for controlling foreign capital invested in Brazil and the country's fo
reign indebtedness by regulating the conversion and registration of foreign debt
s into investments in Brazil. Bacen may take whatever measures are required to m
aintain the normal functioning of the exchange market, the stability of exchange
rates and the balance of payments, and may accordingly purchase gold and foreig
n currency and enter into loans abroad.
IV FOREIGN BANKING
Several foreign banks hold minority ownership positions in local banks. A few fo
reign banks of significance have subsidiaries or branches in Brazil. In addition
, many of them have representative offices.
A. Acquisition of Controlling Interest in a National Bank: Pursuant to Articles
50 and 51 of Law No. 4.131, of September 3, 1962 (the "Foreign Capital Law"), fo
reign participation in Brazilian financial institutions is limited to 30 percent
of the voting capital and 50 percent of the total capital. Financial institutio
ns that already had foreign participation were allowed to maintain their status
quo.
According to Article 192, III of the Federal Constitution, foreign equity invest
ments in financial institutions will be regulated by a complementary law, which
must still be enacted by the National Congress. Article 52 of the Temporary Cons
titutional Provisions Act established that:
"Article 52 - Until the conditions referred to in article 192, III, are establis
hed, it shall be forbidden:
I the installation, in the Country, of new branches of financial institutions do
miciled abroad;
II increase of percentile participation of individuals and legal entities reside
nt and domiciled abroad in the capital of financial institutions with headquarte
rs in Brazil.
Sole Paragraph - The prohibition referred to in this article does not apply to t
he authorizations resulting from international agreements, from reciprocity and
from interest of the Brazilian government."
Through Message No. 311, of August 23, 1995, published in the Official Gazette o
f the Union dated August 25, 1995, the President of the Federative Republic of B
razil, upon proposal of the Ministry of Finance based on the sole paragraph of a
rticle 52 of the Temporary Constitutional Provisions Act, resolved to recognize
as matters of interest of the Brazilian government, the participation or the inc
rease of the percentile participation in the capital of financial institutions w
ith head office in Brazil, by individuals or legal entities resident or domicile
d abroad.
The request for authorization must be presented to Bacen by each Brazilian finan
cial institution interested in receiving foreign capital equity investments, on
a case by case basis. Bacen will then submit such request to the appreciation of
the National Monetary Council, as a condition precedent to the final decision o
f the President of the Republic.
B. Establishing a Subsidiary:
The establishment of any financial institution in Brazil, including a local subs
idiary of a foreign financial institution, must also be licensed by Bacen. The s
etting-up of new subsidiaries depends on a complementary law to be enacted by th
e National Congress pursuant to Article 192, III, of the Federal Constitution.
C. Establishing Branches and Representative Offices:
The opening of a branch of a foreign financial institution in Brazil must be lic
ensed by Bacen and required further authorization by government decree. While th
e already mentioned complementary law has not been enacted, this authorization w
ill only be obtained under very special circumstances, according to the interest
s of the Brazilian Government or resulting from an international or a reciprocit
y agreement entered into between Brazil and the country where the foreign financ
ial institution is headquartered.
Likewise, the opening of representative offices of foreign banks in Brazil is al
so subject to the prior approval of Bacen. This approval was formerly only grant
ed to individuals, although Bacen has authorized certain companies organized in
Brazil for this purpose to operate as legal representatives of foreign financial
 institutions.
The business undertaken by the representative of a foreign bank in Brazil is sev
erally restricted. At no time may the representative act as a bank or undertake
any banking business. He may, however, promote the services and facilities which
the foreign bank has to offer and thereby solicit clients for the bank. The rep
resentative may also obtain and supply the bank with information regarding a var
iety of matters, and act as a point of contact between the principal place of bu
siness and its clients. If the representative exceeds the limits, his approval m
ay be canceled by Bacen.
V. RULES AND RESTRICTIONS ON DISCLOSURE OBLIGATIONS
The CMN issues accounting and statistical rules to be observed by financial inst
itutions in accordance with the guidelines set by the Executive Branch and furth
er Bacen ensures that these rules are complied with and supervises the financial
institutions. The procedure necessary for theses entities to submit to Bacen th
eir balance sheets, trial balance sheets and, then appropriate, accounting books
and to furnish other documents to Bacen is constantly being reviewed.
There are certain obligations which must be complied with by all financial insti
tutions to enable Bacen to exercise control. They must remit periodically to Bac
en certain documents, in particular interim balance sheets prepared monthly and
semi-annually, as of June 30 and December 31 of each year, in compliance with th
e standard accounting rules established by Bacen for each type of financial inst
itution. The auditing of these entities is also subject to the provisions contai
ned in the above-mentioned MNI.
VI. BANK SECRECY
As a general rule, all financial institutions operating in Brazil must keep secr
et their transactions and services rendered. The matter is regulated by Article
38 of the Banking Reform Law.
According to the provisions of Article 38, financial institutions shall maintain
secrecy as to their operations and services rendered. The furnishing by Bacen o
r by financial institutions of information demanded by the courts, and the discl
osure in court of books and documents shall always be made in secret, and only t
he parties concerned may have access to such information, which may not be used
for purposes other than that for which it was required.
Revenue officers of the Ministry of Finance and of the States may only proceed t
o examine documents, books and registers of deposit accounts when proceedings ha
ve been started, and the same are considered essential by the competent authorit
y. Likewise, the supply of information by financial institutions to the tax auth
orities shall be confidential and the use thereof shall be restricted.
Any breach of the duty of secrecy imposed under this article constitutes crime a
nd renders any who are found guilty liable to imprisonment for a term of between
one and four years, the Penal Code and the Code of Criminal Procedure being app
licable where appropriate, without prejudice to other sanctions.
Recently, an exception to the general rule of Bank Secrecy was submitted to the
National Congress through a Bill proposing the creation of a provisional contrib
ution on financial operations (Contribuicao Provisoria sobre Movimentacao Financ
eira - "CPMF") which, if finally approved by the Senate, will incur most of the
financial transactions at a rate of 0.2% (the "Bill").
According to the Bill, for purposes of fiscalization of the CPMF withholdings, f
inancial institutions operating in Brazil shall state to the competent Secretari
at of the Ministry of Finance, all information required for identifying taxpayer
s and the corresponding financial transactions. However, the Bill does not allow
the use of such information by the Ministry of Finance for fiscalization and co
llection of other taxes, imposts and charges of any nature whatsoever.
The content of this article is intended to provide a general guide to the subjec
t matter. A specialist's advice should be sought in order to provide professiona
l advice on a case to case basis which will meet specific circumstances.