IIEffective Insolvency and Creditor Rights Systems
According to the Organization for Economic Co-operation and Development (OECD), the passage of the new Corporate Recovery Law No. 11.101 in 2005 reprioritized the previous insolvency regime from its preferential treatment of tax claims, lack of consistency and clarity, and its emphasis on liquidation. The new legislation, which a 2008 article by Standard and Poor's calls a complete overhaul of the insolvency regime, aims to facilitate the recovery of troubled firms, thus better safeguarding creditor interests and protecting jobs. The Law is the culmination of 11 years of effort. In addition to the above reforms, the Law also facilitates recourse to out-of-court arrangements reached between debtors and creditors. While agreeing that the new legislation offers improvements over the old system, the OECD suggests that five principal challenges facing Brazil's insolvency regime are still outstanding. First, although the prioritization of tax claims is eliminated, labor claims retain top priority. Second, the claims of unsecured creditors remain weak, reducing incentives for credit creation. Third, greater clarification is needed with regard to bank participation in restructuring processes. Fourth, law enforcement and judicial procedures must be streamlined to cut down on the time required to go through the insolvency process. Finally, the special courts that existed in only a very few states should be established more consistently across the country. The 2008 article by Standard & Poor's notes that the 2005 legislative changes have been further strengthened by reforms to the Civil Code in 2007 that further render the insolvency regime "creditor friendly." Nonetheless, there is insufficient publicly available information as to the extent of Brazil's compliance with the Principles and Guidelines for Effective Insolvency and Creditor Rights Systems developed by the World Bank.
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IDInternational Financial Reporting Standards
According to the assessment of Brazilian accounting and auditing practices conducted by the World Bank in 2005, Brazilian Generally Accepted Accounting Principles (GAAP) have been converging with international standards; however, significant areas of inconsistency still exist. The World Bank recommended mandating application of International Financial Reporting Standards (IFRSs) in preparation of consolidated financial statements by all public interest entities and amending the Corporate Law and other legislation to bring Brazilian GAAP in line with international standards. Further, given a fragmented nature of accounting standard-setting with multiple agencies responsible for issuing accounting rules for the entities under their respective jurisdiction, it was advised by the World Bank to establish an independent accounting standard-setting body. It was also suggested to develop a simplified accounting framework for small and medium size enterprises. As indicated on the Deloitte IAS Plus website, following the World Bank assessment, in 2006 the Central Bank of Brazil decided to require application of IFRSs in preparation of consolidated financial statements of banks starting financial year ending December 31, 2010. In 2007, the Securities and Exchange Commission (CVM) followed the suit by issuing Instruction No. 457 which stipulates that all Brazilian listed companies are required to apply IFRSs in their consolidated financial statements starting in 2010 (optional from 2007). However, individual financial statements of banks and listed companies will continue to be prepared under the Brazilian GAAP. The Deloitte IAS Plus website further notes that the accounting bodies and the Brazilian government are considering whether to extend the IFRS requirement to unlisted companies. Moreover, according to Deloitte, the adoption of Law No. 11,638 in 2007 (effective January 1, 2008) amended aspects of the Corporate Law allowing for an alignment of Brazilian accounting practices with the international framework, although not mandating it. Finally, in 2005, the Brazilian authorities established the Accounting Standards Committee (CPC) - an independent accounting standard-setter with a mandate to converge national practices with international requirements. As of July 2007, the CPC had issued two standards based on the corresponding international accounting standard.
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IIPrinciples of Corporate Governance
In 2003, the OECD published a White Paper on Corporate Governance in Latin America. According to this paper, Brazil has seen "comprehensive and far-reaching" reforms in local corporate governance practices. The 2001 and 2009 reforms of the Corporations Law strengthened minority shareholders rights and improved standards for disclosure, with improved laws on tag-along rights, de-listing, non-voting shares, election of board members by minority shareholders and private arbitration. In 2000, the Sao Paulo Stock Exchange (BOVESPA) launched three new market segments: "the Special Corporate Governance Levels 1 and 2" and the "Novo Mercado", with each market segment requiring progressively stricter standards of corporate governance. So far, the BOVESPA has been successful in attracting listings on the level 2 and Novo Mercado segments, implying improved standards in corporate governance practices. In July 2002, the Securities Exchange Commission published its Recommendations on Corporate Governance that apply to all listed companies on a comply-or-explain basis. Despite these comprehensive reforms, weaknesses still persist. The concentration of control in the hands of a few shareholders and issuance of preferred or non-voting shares is prevalent, which to a large extent is due to the family controlled ownership structure. Other problems range from the poor functioning of boards, the disregard of minority shareholders' rights to the lack of adequate legal protection to investors. Nevertheless, a 2008 Brazilian Institute of Corporate Governance report points out that development of Brazilian capital markets has resulted in improvements in self-regulation, changes in corporate law, and the adoption of good corporate governance practices. Still, while Brazil's corporate governance system is widely cited, surprisingly, there is no comprehensive report publicly available allowing the assignment of a level of compliance against the OECD's principles.
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IDInternational Standards on Auditing
According to the 2005 World Bank report on Brazilian accounting and auditing practices, the gap between national auditing requirements and International Standards on Auditing (ISAs) issued by the International Auditing and Assurance Standards Board is "nominal." However, differences do exist and the World Bank, therefore, recommended further eliminating the differences between ISAs and national requirements, and requiring audits of all public interest entities (PIEs), including listed companies, banks, insurance companies, pension funds, and large non-listed companies. Absent the adoption of ISAs, the World Bank suggested that securities market and financial sector regulators require ISAs for entities under their respective supervision. In March 2006, the Central Bank of Brazil issued Communication No. 14259 announcing its intent to develop procedures for the convergence with ISAs. Per this Communication, by 2010 auditors of Brazilian financial institutions will be required to apply ISAs for conducting the audits. At the time of the World Bank report, significant changes to auditing requirements were to be introduced by the enactment of the Law No. 11638, extending the requirement to use ISAs in audits of all public interest entities. This law became effective on January 1, 2008. Auditing standards are set by the Federal Accounting Council (CFC) and the Institute of Independent Auditors of Brazil (IBRACON). According to a 2010 International Federation of Accountants (IFAC) report, while there seems to be “no clear legal mandate” for the CFC or IBRACON to set auditing standards, the national auditing standards developed by the two bodies are recognized as generally accepted auditing standards in Brazil. The CFC and IBRACON have indicated that their standards are based on ISAs and that there is a process on going for eliminating differences. The IFAC report stated that a comparison of the Brazilian auditing standards with ISAs was expected to be completed by September 2009. As of April 2010, however, there is no publicly available information regarding the progress of this initiative.
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IDAnti-Money Laundering/Combating Terrorist Financing Standard
Brazil is named by the Financial Action Task Force (FATF), in its 2008-2009 Annual Report, as one of the countries that has committed to implement the organization's 40 recommendations on anti-money laundering (AML) and 9 special recommendations on combating the financing of terrorism (CFT). A 2005 report by the IMF in making reference to a detailed assessment by the FATF concluded that Brazil had a "comprehensive legal and regulatory framework" to combat money laundering. However, the assessment was not conducted per the 2004 (revised) FATF methodology and therefore cannot be used as an accurate measure of Brazil's AML and CFT regime. Nevertheless, the 2005 IMF report does provide some valuable insights into the Brazilian AML/CFT regulatory framework. For example, at the time of the report, Brazil did not have clear legislation criminalizing the financing of terrorism. A later report in 2010 by the U.S. Department of State (DoS) also mentions that, as yet, terrorist financing is not an autonomous crime in Brazil. Instead it is a predicate offense for money laundering under Law No. 10.701 of 2003. The 2008 version of the DoS report noted that at the time of its publication, there were no money laundering prosecutions in which terrorist financing was a predicate offense, rendering debatable whether the financing of terrorism could be contested as an enforceable predicate offense. According to this report, there was a proposed amendment bill (PLS 209) in the Brazilian Senate, which if adopted would bring Brazil's AML/CFT regime more in line with the FATF's recommendations. Subsequent reports by the U.S. DoS in 2009 and 2010 did not mention PLS 209 specifically, and information elsewhere on PLS 209 is scant as of April 2010. However, the 2010 U.S. DoS report does refer to an unspecified bill in the legislature awaiting enactment that would make terrorist financing an autonomous offense.
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ENCore Principles for Systemically Important Payment Systems
Various recent reports from the Central Bank of Brazil, such as a 2008 Financial Stability Report and a 2009 Brazilian Payment System report point to two systemically important payment systems operating in Brazil. The two systems are the Reserve Transfer System (STR), which is a real-time gross settlement (RTGS) system operated by the BCB, and the Funds Transfer System (SITRAF), a hybrid settlement system with characteristics both of an RTGS and a deferred net settlement system. According to a joint report issued by the Center for Latin American Monetary Studies and the World Bank in 2004, there are nine basic principles that apply to and govern all participants in the Brazilian payment systems. The implementation of these principles, per the report, and the accompanying legal framework and institutional architecture have brought about the compliance of Brazil's systemically important payment systems with international standards and best practices. The report further attests that National Monetary Council Resolution 2.882 strictly follows the Core Principles for Systemically Important Payment Systems (CPSIPS), except for Principle VI, which is implemented by BCB Circular 3.057. The 2009 BCB publication on payment systems also lauds CMN Resolution 2.882 and the core principles it lays down for the operation of the Brazilian payment system and notes that they comply with the CPSIPS. Lastly, the November 2007 Financial Stability Report issued by the BCB remarks that the BCB complies with internationally established criteria by looking after the safety and efficiency of the Brazilian payment system through ongoing oversight of its systemically important payment systems. While these various sources assert Brazil’s legislative commitment to compliance with the CPSIPS, there is no comprehensive public assessment that directly addresses a level of compliance for each individual principle.
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