Not long ago, Brazil appeared to be fulfilling its glorious destiny. The country was enjoying a 7.5% economic growth and the prospects of hosting the World Cup and the Olympic Games, combined with soaring prices of the Brazilian commodities and discovery of new oil reserves by Petrobras guaranteed records of foreign investment to the country. This flourishing scenario is already part of a nostalgic past. Brazil is facing its worst economic and political crisis in decades. As unemployment and public deficit rose quickly, many companies, nationals and international alike, closed their Brazilian doors, looking for more auspicious markets. The economic and political mistakes by the federal government which ultimately led to the impeachment of President Dilma coincided however with great development within Brazil´s legal system, with the passing of important laws and judgments, with a view to improving transparency, curbing red tape, combating corruption and attracting investment. These 10 legal facts from the last few years (some of which still in progress) show that despite the current gloomy economic situation, now that the storm is over Brazil is ready to rise again.
1. Operation Car Wash and Impeachment of President Dilma. The investigation being carried out by the Curitiba branch of the Federal Police of Brazil and commanded by Judge Sérgio Moro has turned the political scenario of the country up-side down. Many powerful politicians and business owners were arrested, mainly due to corruption and money laundering charges in connection with the state-controlled oil company Petrobras, where, allegedly, executives accepted bribes in return for awarding contracts to big construction firms at inflated prices (a scheme known as "Petrolão” in Portuguese). Whereas prior to operation Car Wash, the Federal and State Public Prosecution Services were reluctant in the use of the institute of plea bargaining in proving their case, the unprecedented results deriving from such method have had an important impact on the scope of use of this legal tool (although not without criticism).
The numbers of Car Wash operation are indeed impressive. As of 31st October 2016, 1397 proceedings were commenced, 654 dawn raids conducted, 112 requests for international cooperation issued, 70 plea bargains signed and 51 criminal charges against 243 people were filed. The total bribes arising from crimes already prosecuted amount to approx. BRL38.2 billion, of which BRL3.6 have already been recovered. Although President Dilma was not officially impeached for corruption charges but for breaking budget law by using government banks to temporarily fund social programs and issuing spending decrees without congressional approval, there is no question that the impeachment procedure could not have gone the extra mile had her “overall work” as President, combined with the various corruption scandals charges involving her close collaborators not created the necessary consensus for her ousting.
The impeachment procedure was conducted in full compliance with the Constitution and the applicable law and proved that Brazil has grown institutionally stronger not only with respect to the Rule of Law but also in the fight against corruption and poor management.
2. Anti-Corruption Law and Possibility of Imprisonment after Appeal Courts Conviction
Supporting the fight against corruption, Law No. 12,846/2013 (known as the Brazilian Anticorruption Act), which was further regulated by Decree No. 8,420/2015 introduced, inter alia, the following novelties into the Brazilian legal system: a) strict liability regime for application of civil and administrative sanctions. Whereas prior to such law companies could argue that the offense was an isolated act of an employee / director, thereby avoiding any liability, they may now be held liable even if did not directly give cause to the offense; b) penalties of up to 20% of the company´s gross revenue for the year prior to the opening of the administrative proceedings (or BRL60 million if gross revenue cannot be calculated for any reason); c) expressly providing that liability of the company survives any merger, acquisition, spin off or any other restructuring operations triggering a growing emphasis on criminal due diligence before entering into any investment deals, since liability does not go away with the change of control / ownership.
Further, in 2016 the Brazilian Supreme Court, in a tight and controversial vote, decided that a person whose conviction has been upheld by a Court of Appeals should begin serving its jail sentence while awaiting the results of further appeal to higher courts,. Although many lawyers and pundits were shocked by this decision, which they claim is a flagrant violation to the constitutional principle of presumption of innocence, it seems that this is a revolutionary precedent in terms of closing the loophole in which convicted criminals are permitted to remain free until exhausting the endless appeals provided by the Brazilian criminal system, which in practice may mean impunity, corroding thereby the trust in the system and the Rule of Law.
3. Simpler and Faster Civil Law Procedures.
The new Brazilian Code of Civil Procedure (“CPC”) which came into effect on 17th March 2016 brings welcome news on combating the backlog of cases piling up in the Brazilian courts. In addition to reducing the number of admissible appeals, the new CPC also seeks to ensure procedural celerity upon extending the fines to punish the use of such instruments only to slow down proceedings. The following demonstrates how the new CPC should cause Brazilian civil legal conflicts to be settled faster and easier: a- reduction of the number of admissible appeals; b- greater effectiveness of the decisions by curbing the use of repetitive lawsuits; c- the possibility of conversion of individual actions into class actions; d- the valorization of the electronic process e- provision for loss of lawsuit fees for public lawyers; f- the creation of consensual disputes resolution centers responsible for mediation hearings; g- the presentation of oral arguments by video conference. As a matter of fact, the Brazilian judicial system which is already almost fully automatized and on-line has never worked so well (for Brazilian standards). It may take some time until law practitioners and courts staff are fully familiarized with the new rules, but it will certainly make the Brazilian Judicial system faster and more efficient.
4. Legal safety and transparency relating to selection of foreign jurisdiction
Selection of foreign jurisdiction has always been the object of great controversy among Brazilian courts and scholars. Art. 88 of the now revoked 1976 CPC provided that Brazilian courts would have jurisdiction when: (i) the defendant, whatever his/her nationality is domiciled in Brazil; (ii) the obligation is to be performed in Brazil; (iii) the lawsuit results from a fact which occurred, or of an act that was performed in Brazil. This jurisdiction was considered as non-exclusive (concurrent) and therefore, notwithstanding the selection of foreign jurisdiction being acceptable under Brazilian law, the dominant view of the Superior Court of Justice was that when the main obligation/object of an agreement was to be performed in Brazil, the selection of foreign jurisdiction would not prevent the parties to file suit in Brazil. Brazilian courts would have no choice but to accept the claim, creating a situation of legal uncertainty and possible conflicting decisions from different jurisdictions.
It seems that Art. 25 of the new CPC was tailor-made to resolve this controversy. It explicitly provides that Brazilian courts have no jurisdiction over proceedings in the event of existence of a selection of foreign jurisdiction clause provided in an international contract, which shall be pleaded before the court with defendant´s Statement of Defense.
Although we are yet to see how courts will apply such new rule, it gives hope that the parties will be finally free to choose an international jurisdiction and law to govern their affairs without fear that such choice of law and foreign jurisdiction should be considered null and void.
5. Adoption of International Financial Reporting Standards (IFRS), FATCA and OECD Tax Multilateral Convention/ Amnesty Program
With the coming into effect of Law No. 12.973/2014, Brazil has finally adopted the International Financial Reporting Standards (IRFS), whose primary goal is to set out common language for the different markets and a favorable environment for international capital flow. The full adoption of IRFS is bringing legal and accounting transparency and further enabling better fiscal planning by multinationals doing business in Brazil as well as Brazilian companies doing business overseas. Such transparency was further boosted with the coming into effect of the Cooperation Treaty between Brazil and the United States for the implementation and enforcement of the Foreign Account Tax Compliance Act “FATCA” and the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. Albeit the main aim of such treaties is the prevention of tax evasion, they will certainly strengthen the ties between the signatory countries, fostering a more positive environment for cooperation in the various fields.
In addition, in 2016 Brazil established an amnesty program to encourage the repatriation and regularization of undeclared assets by both Brazilian individuals and entities against the payment of 30% (15% as tax withholding and 15% as penalty) of the amount remitted, in favor of the Federal Revenue Office. This amnesty program, which only covers assets accumulated legally, ended on 31st October 2016, and was responsible for the repatriation of BRL169,9 billion and tax withholding/penalties collection of BRL50,9 billion, respectively. The unparalleled success caused the government to push for a new round of repatriation at the end of November 2016, which has already been approved by the Brazilian Senate. In a time of unprecedented budget deficit, hopefully this massive amount will be wisely used to get the Brazilian finances back in order.
6. Possibility of Fast-track Procedure for Patent Request, BPTO New Structure and Safer Rules for Angel Investors
Brazilian Patent and Trademark Office “BPTO” Normative Instruction No. 151/2015 provided for the possibility of fast track patent examination, inter alia, when third parties are allegedly reproducing the subject matter of a patent without authorization or when the grant of a patent is a condition for obtaining financial resources from official credit institutions. This fast track procedure together with recent change of BPTO´s structure provided by Federal Decree No. 8854/2016 may be the first of many steps towards curbing the staggering backlog that prevents the country to increase its patent registrations.
In addition, Supplementary Law No. 155/2016 which came into effect on 1st January 2017 is expected to further contribute to the high-tech and innovation environment by providing more transparent and safer rules regarding seeding investment for micro and small size companies (currently up to BRL 3,6 million). Whereas prior to such law the angel investor would have to acquire new shares of the startup/ new company thereby becoming a shareholder and therefore being liable for the start-up/ new company ´s liabilities and debts (including in connection with employees and taxes), the new law provides a safe harbor with regards to such debts. The terms of the investment will be governed pursuant to a specific investment agreement entered into by the parties whose main guidelines are provided by the new law.
7. Adoption of the Hague Apostille Convention
On 6th July 2015 the Brazilian Senate approved the Hague Apostille Convention (the “Convention”), through Legislative Decree No. 148. Prior to the entering into effect of the Convention, all documents issued abroad (including powers-of-attorney and corporate documentation) needed to be legalized at the Brazilian Consulate where the document was issued and previously notarized, thus resulting in an extra layer of bureaucracy for the foreign investor. The adoption of the Convention, undoubtedly, constitutes a positive measure towards combating the culture of red tape, indicating to the international market that Brazil is ready to fight the same and adhere to international standards.
8. Simplification of Commercial Registry Procedures
As from September 2014, with the coming into effect of Law No. 147/2014 and Commercial Registry Authority Normative Instructions Nos. 25 and 26, there was a significant reduction in the amount of paperwork required for the registration of corporate acts with the relevant State Commercial Registries. Whereas prior to the coming into effect of these rules, a simple amendment to a company´s articles of association would require obtaining and filing several certificates of clearance and good-standing, discouraging many small and mid-size companies to freely operate, nowadays, registration of corporate acts (including incorporation, dissolution, merger and spin-off) required for the conduction of day-to-day business can be done in a much simpler way.
9. Possible Legalization of gaming and Betting
After more than 70 years of prohibition, there is a big chance that gaming and betting will be finally legalized and regulated in Brazil, as Congress is currently reviewing two bills of law aiming to legalize these activities. As Brazil is the world's largest and most populated catholic country and since religion has played an important role in maintaining the general ban on unauthorized gaming and betting, the two bills of laws are facing strong opposition from the religious factions of Congress and other more conservative groups, however, the key players of the industry are very optimist about the chances of one of these bills being converted into law.
Bill 186/2016, one of these two bills is part of the "Brazil Agenda", a package of measures aiming to revert the serious economic crisis Brazil has been struggling with. The legalization of gaming and betting is expected to generate more than BRL20 billion of government revenue per year, creating thousands of jobs. Despite the strong opposition, It seems that this time, the industry big players are ready to bet all their chips on the legalization.
10. Successful Hosting of the World Cup and the Olympic Games
Albeit not a genuine legal matter, the successful hosting of both the 2014 World Cup and the 2016 Olympic and Paralympic Games was something that Brazil and Brazilians could be proud of. At first, many Brazilians were reluctant to take part in the festivities as both events were perceived as money financially reckless, but the aftermath of both events (and regardless the humiliating 7-1 defeat in the World cup semifinals to Germany) have contributed to the strengthening of the country´s self-confidence and social cohesion, showing that when Brazilians set their minds on something, anything is possible.
Conclusions
All these legal novelties are strong evidence that although the economic and political crisis have had a deep adverse impact and have taken a big toll on Brazil, it seems that the country is now poised to rise again. Indeed, projections for the Brazilian economy for 2017 already show brighter numbers as inflation gradually returns into the target range and expected further curbing of interest rates and government expenditure should increase both domestic and international confidence and consequently direct investment and growth. Although there are yet many other well-known measures that could be taken towards promoting development and welfare, such as simplifying the indecipherable and ever-complex tax system, the so discussed “flexibilization” of labor laws and further curbing public deficit/expenditure, there is no doubt that the unprecedented institutional development of the legal and regulatory system described herein has played and will continue to play a significant role in the recovery of the Brazilian economy.
