Bankers' suggestion to Supreme Court justices is not a solution to escape Magnitsky

Executives of public and private banks reportedly advised Supreme Court justices to open accounts with credit unions as an alternative to banks to protect themselves from the consequences of the Magnitsky Act. The advice, which was reportedly discarded, would not solve the problem of Alexandre de Moraes or any members of the Court who may also be sanctioned .

The advice given by bankers, revealed by Folha de S.Paulo , would serve more as protection for financial institutions, which are more exposed to the global financial system.

The Magnitsky Act prevents sanctioned individuals from accessing services and goods in the United States. Furthermore, it imposes fines on companies that have relationships with sanctioned individuals.

Given Moraes' inclusion on the list of those affected by the law, representatives of Brazilian banks began to worry about the penalties that the institutions could face for keeping the minister's accounts open.

By conducting business in the United States or using services from U.S. companies, banks could be fined or lose access to important systems, such as credit card infrastructure, foreign exchange transactions, and investments in foreign assets.

The situation became even more complicated for banks after Minister Flávio Dino determined that sanctions under foreign laws can only be applied in Brazil if they are validated by international agreements or are endorsed by the Brazilian Judiciary.

Faced with the impasse between complying with the American ruling, under the risk of being punished by the Supreme Federal Court, or obeying Dino's ruling, with the possibility of suffering secondary sanctions under the Magnitsky Act, representatives of the national banking system suggested to the judges that they migrate their accounts to credit unions.

The ministers, however, did not like the idea, as they considered it to be a capitulation of the Court and Brazil to the American government.

Like a bank, a credit union is under the supervision of the Central Bank (BC). The main difference is their legal nature, as the latter is a non-profit organization, whose net profits are distributed proportionally to each member's operations or reinvested in the cooperative itself.

Banks are for-profit corporations – profits are distributed through dividends to shareholders, but not to account holders.

Due to their corporate nature, cooperatives do not have a traditional hierarchical structure, with centralized control and an executive board, but rather a governance structure in which all cooperative members participate through assemblies in which everyone has the right to vote.

They are also exempt from taxes on so-called cooperative acts (transactions between the cooperative and members), although they are charged on non-cooperative acts (transactions with non-members).

The legislation governing credit unions is Complementary Law 130/2009 (Legal Framework for Credit Unions). Although there are differences depending on the size and complexity of the institution, cooperatives also comply with the Central Bank's prudential requirements.

With the same purpose as the Credit Guarantee Fund (FGC), the Credit Cooperative Guarantee Fund (FGCoop) covers losses of up to R$250,000 per associated CPF, per cooperative, for example.

Not following a purely business logic, cooperatives have a community and associative focus and generally operate on a regional scale. Even so, virtually all of them operate with systems that at some point come into contact with the United States, primarily credit or debit cards.

"Cooperatives are equivalent financial institutions, regulated by the Central Bank. If the Central Bank receives a letter from OFAC [the U.S. Office of Foreign Assets Control], it can apply the same restrictions. There is no technical shield," José Andrés Lopes da Costa, professor of International Tax Law at the Getúlio Vargas Foundation (FGV), told InfoMoney .

Just like a bank, if a credit union fails to comply with the sanctions imposed on a member under the Magnitsky Act, even if operating exclusively in Brazil, it may also be subject to secondary sanctions as a “ facilitating institution” by OFAC, losing access to international networks.

Just like a bank, the cooperative could not carry out any transaction with an American institution or even a Brazilian institution operating in the United States, use the credit card infrastructure, carry out foreign exchange transactions or make investments in North American companies.

Brazil has 774 credit unions

According to data from the Central Bank, there are 774 credit unions operating in the country under its supervision. These entities can be singular, central (formed by individual cooperatives), confederations (organizations that bring together credit unions), and credit union systems (a group of credit unions).

Among the main systems that integrate cooperatives, Sicoob and Sicredi, for example, are integrated with Swift and even have their own banks.

Economist Hugo Garbe, professor of Economic Sciences at Mackenzie Presbyterian University, explains that even cooperatives that use cards with the Brazilian Elo brand, administered by Bradesco, Banco do Brasil and Caixa, may face legal consequences.

"Because they have ties with the United States, these institutions must terminate their relationship with the sanctioned individual," he explains. "This doesn't happen automatically, but if they don't, the American operations of Brazilian banks may be subject to fines," he adds.

“We have recent cases, for example, of HSBC and BNP Paribas, which were penalized billions of dollars because they hid from the US government that they were transacting with people who had been sanctioned.”

The big difference is that, if a cooperative fails to comply with the sanctions provided for in the Magnitsky Act, the consequences would be more limited to the institution itself and would have a smaller impact on the national financial system as a whole, since they are less exposed to the international flow of funds and are less dependent on the dollar.

The report contacted the Federation of Credit Unions (FCC), but had not received a response on the matter by the time this report was published.

The OCB System (Organization of Brazilian Cooperatives) informed, in a note, that it “is promoting internal studies” on the application and scope of the Magnitsky Law in Brazilian territory “and, at this time, does not take a position on the matter”.

"Credit unions are solid financial institutions, regulated and monitored by the Central Bank of Brazil. They are part of the National Financial System, operating safely and transparently to provide financial services exclusively to their members," the statement reads.

The entity adds that cooperatives are not parallel or alternative instruments to the regulated financial system. "On the contrary, they act to expand the population's access to quality financial services, especially in regions where commercial banks are not always present," it explains.

In the statement, the OCB System also emphasizes that credit unions “have rigorous supervision and transparency mechanisms, guaranteeing security for operations and full traceability of their members’ transactions.”

Magnitsky Act sanctions are not limited to the financial system

Garbe explains that the sanctions provided for in the law are not limited to a blockade of the international banking system, but also imply a technological ban. Any company with a presence in the United States that offers services to a company sanctioned by the Magnitsky Act is required to suspend its accounts.

This includes email and data storage platforms like Gmail, iCloud, Google Drive, and OneDrive; Apple ID-linked devices like iPhones, iPads, and MacBooks; streaming services like Prime Video, Netflix, and Spotify; transportation apps like Uber; and marketplaces.

Furthermore, the individual's CPF or passport are subject to a global security filter, preventing contract renewals or the installation of new software. Even WhatsApp can be disabled by connecting to blocked email or payment accounts.

For Garbe, Dino's suggestion that Brazilian companies that apply sanctions to Moraes could be punished internally leaves banks and other national institutions in a "trap."

"This type of demonstration is unprecedented in the world. There's no record of any judicial system interfering in law enforcement to defend an individual," he says. "Not even in Venezuela has this happened."