BRAZIL: Easing of Bank Secrecy May Be Overturned by Courts

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Dec 27 2000 (IPS) - Brazilian President Fernando Henrique Cardoso is getting ready to enact a law that would permit tax authorities to waive bank secrecy regulations without court authorisation.

There are indications, however, that the initiative will be overturned by the judiciary.

The bill approved this month by Congress is considered unconstitutional by most of the lawyers and judges who have spoken out on the issue.

The immediate aim of the new law is to boost tax revenue in order to balance the national budget next year, in the face of the increase in the minimum monthly wage to 180 reals (92 dollars) from April, which will swell the social security deficit due to the rise in millions of pensions that are based on the minimum salary.

The new law will serve as a major weapon against tax evasion, and it will also help crack down on drug trafficking, organised crime and money laundering, said the secretary of federal revenue, Everardo Maciel.

Another element to be used in that endeavour is the information collected through the 0.3 percent “tax on checks” levied on bank withdrawals or transfers.

The tax, created as a temporary measure five years ago to help balance the public accounts, was extended to curb the impact of the global financial turmoil, and appears to be on its way to becoming a permanent fixture.

The tax on bank withdrawals tore the veil off an underground Brazilian economy marked by wholesale tax evasion, and provided concrete figures indicating the magnitude of that parallel economy.

To illustrate the dimensions of tax evasion in Brazil, Maciel pointed out that more than 21.5 billion reals (11 billion dollars) passed through the bank accounts of 24 large companies over the past year – accounts that were officially closed and thus did not pay a single cent in taxes.

Similarly, 62 individuals who moved 11 billion reals (5.6 billion dollars) in their accounts this year and 45 microenterprises whose financial movements averaged over 600 million dollars a year declared levels of income so low that they were exempted from paying income tax.

The legislation that created the “tax on checks” prohibited authorities from using information gathered through that mechanism. But a bill approved in Congress alongside the one that would ease bank secrecy regulations authorises the sharing of information to detect tax evaders and money launderers.

The government hopes the new laws will boost tax revenue by at least 1.6 billion dollars a year – money that is needed for next year’s budget, to cover the increase in 13 million pensions that are based on the minimum salary.

But legislators who defended the bills say the increase could be three times that, given the level of tax evasion in this country of 168 million – the world’s eighth largest economy.

Nevertheless, legal experts almost unanimously hold that the Supreme Court will overturn the law making it easier to waive bank secrecy regulations, on the grounds that it violates the constitutional clause stipulating that bank secrecy must be protected.

As things stand now, fiscal authorities or the police can gain access to bank accounts, telephone bills or correspondence only with a specific court order issued by a judge who has determined that there are grounds for suspecting criminal activity.

The president of Brazil’s bar association, Reginaldo de Castro, went so far as to call the bill “fascist,” and charged that lawmakers were “deceiving” the public, because they themselves were aware that the law would be struck down as unconstitutional.

The problem was created by the Senate, when it lifted the requirement of court authorisation for waiving the bank secrecy regulations, said Deputy Ney Lopes, one of the sponsors of the bill in its original form in the chamber of deputies.

The lower house of Congress had originally approved a proposal that set a 72-hour deadline for the courts to respond to a request for the waiving of the bank secrecy regulations. Once the time- limit was up, the authorities in question would automatically gain access to the accounts of suspects.

De Castro and several judges had also condemned the initial proposal, which set a 72-hour deadline, as unconstitutional, while business and industry leaders complained about any modification of the current legislation protecting privacy.

Members of the Supreme Court criticised Congress for leaving it up to them to overturn the new law and take the flak for appearing “soft” on crime and tax evasion.

Senate speaker Antonio Carlos Magalhaes said the judges should be more flexible, and should realise the benefits of the new legislation, especially with respect to the contribution it could make to the fight against corruption, even if the constitution ended up being “violated a little bit.”

The two bills set to be signed into law by Cardoso are accompanied by changes in the tax code designed to fill legal vacuums that currently make it difficult to crack down on tax evasion.

The modifications were approved by Congress this month, due to the urgent need to create the conditions for parliament to pass next year’s budget – which contains the rise in the minimum wage – by the Friday deadline.