The successful investigation and prosecution of high-level corruption crimes often requires access to detailed financial intelligence, which in turn requires close cooperation and information-sharing between law enforcement officials and financial intelligence units. This has certainly been the case in Brazil, where the Lava Jato (Car Wash) investigation—considered the most successful anticorruption operation in Brazilian history—has been made possible in large measure by the reports supplied to federal prosecutors by Brazil’s financial intelligence unit, known as the Counsel of Control of Financial Activities (COAF). COAF, created in 1998, has provided Brazilian federal prosecutors with suspicious activity reports on potential targets of the Lava Jato investigation, including politicians, high-level public officials, corporations, and business executives. And in the early days of the administration of President Bolsonaro, who positioned himself as an anticorruption champion during the election, there were some signs that COAF’s role in supporting law enforcement efforts would be strengthened. President Bolsonaro, for example, proposed transferring COAF from the Ministry of Economy to the Ministry of Justice—a signal that COAF would continue to work in the support of law enforcement activities—though the Congress rejected this proposal. President Bolsonaro’s Justice Minister, Sergio Moro, also nominated an auditor of the Brazilian Internal Revenue Service who worked in Lava Jato to be the new COAF chief.
But over the course of the last year, the ability of COAF to support anticorruption investigations has been jeopardized, partly by a judicial ruling, but also by other less visible efforts by the administration to undermine the unit’s autonomy.
The precipitating event occurred at the end of 2018, when Brazilian media outlets reported that one of COAF’s reports revealed suspicious financial activities on the part of the former parliamentary assistant of President Bolsonaro’s son Flávio, a report that prompted an investigation of Flávio Bolsonaro himself. In July 2019, Flávio Bolsonaro filed a motion before the Brazilian Supreme Court to stay and nullify the investigation against him. The court was in recess, so the motion was heard by the Chief Justice sitting alone. The Chief Justice issued a preliminary ruling that not only halted the case related to Flávio Bolsonaro, but also halted all other investigations and proceedings that were based on COAF financial reports. The Chief Justice reasoned that because COAF reports contain detailed financial information, the constitutional right to privacy means that COAF may not provide these reports to law enforcement authorities without prior judicial authorization.
The Chief Justice’s order was preliminary, and subject to later review by the full Supreme Court, but its effect had a significant immediate adverse impact, affecting at least 700 cases. To outside observers, it might at first seem that requiring prior judicial authorization is reasonable and manageable, but the reality of slow-moving Brazilian criminal procedure makes this requirement enormously burdensome. Consider the fact that in 2018, COAF issued 7,345 direct reports to law enforcement authorities, raising money laundering suspicions for over 378,334 individuals and corporations. The delay to obtain a judicial warrant in each one of those situations would be substantial. It’s no answer to say that COAF can still provide reports if it omits the details of the transactions that give rise to suspicion. A non-detailed COAF report, containing only names and sizes of financial operations, is of little help to law enforcement authorities.
Moreover, the legal basis for the Chief Justice’s ruling appeared thin and unpersuasive. The Chief Justice relied on a precedent about the reporting of data from financial institutions to the Brazilian Internal Revenue Service, neglecting the crucial distinction between the reporting of financial information from banks to the Internal Revenue Service about legal financial operations for tax collection purposes and, on the one hand, and the reporting by COAF of information about possibly illegal financial operations to law enforcement authorities, on the other. Moreover, COAF’s reports are used by law enforcement authorities solely for investigative purposes, not as evidence; these reports can start investigations, but cannot be used to prove a crime. And these reports are kept confidential by both COAF and by law enforcement agencies. Thus, it is difficult to imagine how the right to privacy could be substantially threatened. Indeed, the Chief Justice’s opinion is badly out of step with the approach taken in most other jurisdictions. For example, 45 years ago, when the United States was taking the first steps to counter money laundering, the U.S. Supreme Court upheld analogous reporting provisions in the Bank Secrecy Act, which required financial institutions to provide the government with information about suspect operations of its clients without prior judicial authorization.
This misguided ruling has not gone unnoticed by the international community. Last October, the Organization for Economic Cooperation and Development (OECD) Working Group on Bribery issued a public statement highlighting its concern with possible steps back in the fight to corruption in Brazil, including this decision. Similarly, the Financial Action Task Force (FATF), in its last plenary meeting, expressed its concern about Brazil’s capacity to effectively counter corruption and money laundering. Moreover, last November, the OECD Working Group on Bribery went to Brazil and had a meeting with the Brazilian Chief Justice to explain the reasons for the OECD Working Group’s public discussion and criticism of the decision. And while it is not clear how much of an impact this international criticism did (or should) have on the Brazilian Supreme Court’s legal judgment, the full Court did end up reversing the Chief Justice’s initial holding, and ruled last December that COAF can send reports to, and share financial intelligence data with, law enforcement authorities without prior judicial authorization.
While this judicial reversal is a source of relief, unfortunately the Bolsonaro administration, despite its early signals that it would support and strengthen COAF’s role in anticorruption efforts, has not been helpful. Indeed, the administration never even commented on the controversy surrounding the Chief Justice’s ruling, let alone undertook any efforts to address the situation. The only member of the government to publicly criticize the Chief Justice’s decision was the then-COAF Chief whom Minister Moro had selected, but he was subsequently fired. And that was only one part of what now seems like a more ominous effort by the Bolsonaro administration to undermine the autonomy and effectiveness of this unit. Last August, President Bolsonaro changed the name of COAF to Financial Intelligence Unit (UIF) and, more significantly, transferred it to the Brazilian Central Bank. While he asserted that the move would grant the unit greater insulation from political interference, in fact the opposite is likely to be true, because the Central Bank president is nominated by and serves at the pleasure of the Brazilian President. In addition, the Bolsonaro administration enacted new regulations under which high-level positions in the UIF can be occupied by any Brazilian citizen knowledgeable about anti-money laundering; previously, only public officials could be nominated to those positions, which reduced the risk of external interference in appointments and UIF activities. Anticorruption advocacy groups, including Transparency International, criticized this move as a threat to the UIF’s independence and technical competence. Fortunately, at least the administration’s initiatives were stymied: Although COAF remains in the Central Bank, the Brazilian Congress disapproved not only the name change, but also (and much more importantly) established that COAF’s directors must be chosen from among public officials with experience in the area.
While the worst damage has been averted for now, these developments portend a worrisome undermining of the role that Brazil’s COAF has played in anticorruption and anti-money laundering efforts. Virtually all the relevant anticorruption investigations and proceedings carried out in Brazil in the last five years could have been nullified if the Supreme Court had affirmed the Chief Justice’s provisional decision. More generally, undermining or politicizing COAF could turn Brazil into a money laundering haven. So far, domestic and international civil society organizations have been successfully warning Brazilian authorities, and the Brazilian citizenry, about the need to protect the crucial role of financial intelligence in fighting corruption and other forms of financial crime. But considering the permanent resistance against anticorruption advances in Brazil, constant vigilance is still necessary.
The knowledge about corruption practice is useful the to support anticorruption investigations
This is a really fascinating post, Rodrigo. While, I am not surprised that another anti-corruption champion/anti-establishment candidate has seemingly reneged on his commitments to meaningful reform, this was an interesting look at how this phenomenon is playing out in the Brazilian context. I especially appreciated your detailed account of how the Central Bank dimensions are particularly troubling. As you mentioned, it seems like Brazil walked away from a dangerous cliff with the Supreme Court reversing the Chief Justice’s initial holding but I wanted to know a bit more about the power dynamics and relationship between the President and Congress. What kind of power does Congress have to check the powers of the President and does the current Congress generally support or diverge from the President’s decisions? Lastly, to what extent does the Brazilian citizenry care about the institutional independence of COAF? I ask this because you mentioned that civil society has done a good job of informing the population about this important issue but I wonder about which groups of citizens would point to this as a top priority for their households (i.e. is there a difference between rural vs. urban areas)?