Brazil is fortunate to be located in the east-central part of South America, where it borders almost all other South American countries except Chile and Ecuador. Brazil is a large country that, with an area of about 3,286,488 square miles, covers almost 48 percent of South America.

Brazil is comprised of 26 states plus its capital, the Federal District of Brasília. The country is divided geographically into five different regions: North, Northeast, Southeast, South and West-Central.

The population of Brazil is currently estimated at 163,947,554 inhabitants, and that number is likely to double within the next 35 years. The population is young; 65 percent of Brazilians are under 30 years old. The country has a population density of 46 inhabitants per square mile with 73.8 percent of the population living in urban areas.

Brazil is a Federal Republic and has had eight Constitutions. The first Constitution was signed in 1824, and the current one was enacted in 1988. The 1988 Constitution is regarded as the most democratic in Brazilian history.

The Federal Government has three branches: the Executive, the Legislative and the Judiciary.2.1. General Features

Foreign capital in Brazil is governed by Laws 4.131 (the Foreign Capital Law) and 4.390, of September 3, 1962 and August 29, 1964, respectively. Both laws are regulated by Decree 55.762 of February 17, 1965, as amended.

The law defines foreign capital as “any goods, machinery and equipment that enter Brazil with no initial disbursement of foreign exchange, and are intended for the production of goods and services, as well as any funds brought into the country to be used in economic activities, provided that they belong to individuals or companies resident or headquartered abroad.” (Law 4.131)

The exchange markets in Brazil are subject to Central Bank of Brazil rules, and operate with floating exchange rates. The most common markets are:

(a) the commercial floating exchange rate market, which is applicable to transactions related to: (i) import and export; (ii) foreign currency investments in Brazil as well as repatriation of profits or capital from those investments; (iii) foreign currency loans to Brazilian residents; (iv) certain other transactions involving remittances abroad and (v) transactions among the Federal Government, the States and Municipalities; and

(b) the “tourism” floating exchange rate market. Applicable regulations indicate the types of transactions that qualify for this market.

The distinction between these two exchange markets is that (i) the commercial exchange market is restricted to transactions that in certain cases require prior approval from the monetary authorities; and (ii) the tourism exchange market is open to transactions that do not require any approval from the monetary authorities.

There is, in addition, the “Euroreal market”. The Euroreal is the general designation applied to amounts in Brazilian national currency existing abroad either in cash or in the form of deposits with foreign banks.

2.2. Direct Investment

2.2.1. Currency Investments

No preliminary official authorisation is required for remittances of funds concerning investments in Brazilian territory. Such funds can be used to subscribe or purchase shares in Brazilian companies. The money must be remitted to Brazil through a banking establishment authorised to deal in foreign exchange.

For registration of investments with the Central Bank appropriate application forms, along with documents evidencing the corporate capital subscription or the shareholding acquisition, as the case may be shall be presented to the Central Bank by the Brazilian company or by the foreign investor, within thirty days.

2.2.2 Investments by Conversion of Foreign Credits

Investment by foreign credit conversion requires that prior authorisation be granted by the Central Bank. A symbolic exchange transaction is executed, representing the purchase and sale of the foreign currency.

This investment is also subject to registration with the Central Bank within thirty days of its capitalisation.

2.2.3. Capital Contribution Through the Import of Goods Without Exchange Cover

Capital investments made by importing goods without exchange cover requires the prior approval of the Central Bank and the Foreign Trade Secretary of Banco do Brasil S.A. (SECEX).

2.3. Stock and Securities Market

Foreign investment in the domestic securities market is permitted. However, it is limited to investors using the following vehicles:

(a) investment companies;

(b) investment funds;

(c) managed portfolios of individual or legal entities resident abroad; and

(d) managed portfolios of institutional investors located abroad.

Brazil has at present one of the most important financial centres in the developing world, in terms of market capitalisation (US$ 181.4 billion in November 1999). The São Paulo Stock Exchange, BOVESPA, is presently the largest stock exchange in South America, and is responsible for approximately 85% of the total national share market. The remainder is divided among eight other regional stock exchanges, the largest of which is the Rio de Janeiro Stock Exchange. Both exchanges are responsible for approximately 97,3% of all trading in Brazil and are privately owned by the member firms.

The markets are self regulated by the stock exchanges, but there is a government agency, the Securities Commission (the CVM), under the Ministry of Finance and the National Monetary Council (the CMN), with powers to oversee the markets; suspend participants; suspend trading of shares; authorise issues; audit public companies and exchanges; apply sanctions; and promote liquidation. The stock exchanges are considered to be auxiliary agencies to agencies the CVM.

There are three different categories of operations at the major Brazilian stock exchanges:

(a) the spot;

(b) the options market; and the

(c) forward market.

On the spot market, as elsewhere, securities are bought for immediate delivery against apposite payment. Derivatives now answer for approximately 13.2% of the total turnover of BOVESPA. With respect to the options market, puts and calls are negotiated for a given price, on a certain date. Buyers pay a premium to the writer as soon as the transaction is made. The buyer will then have the obligation to either sell or buy the shares by the exercise price of the option. In the event the option is a put, the exercise will only be possible on the exercise date. In the event the option is a call, the exercise will be possible at any time until the exercise date. Naturally, the payment of the exercise price will only take place if the option is exercised. Sellers of options are required to either deposit with the stock exchange the shares or an initial margin equal to twice the amount of the premium of the option or such greater amounts as the stock exchanges may establish and are required to make daily settlements of the respective positions. Buyers are not required to make deposits.

Forward operations are transactions by which seller and buyer agree on the value of a purchase and sale of shares to be effected in the future. The seller must deposit one hundred percent of coverage of the transaction. The buyer is obliged to deposit as margin an amount that may vary from twenty percent for the shares of greater liquidity to one hundred percent for those of more restricted liquidity. A variation of the stock forward operations are the so called financial futures.

The Brazilian stock exchanges do not allow the concentration of positions on the risk markets and closely follow up the operations, both on-line and off-line. Transactions that do not conform to the rules are cancelled and bids of the positions are made in fifteen minutes, and one, twenty-four or forty-eight hours thereafter. At BOVESPA, the structure of liquidation of the transactions functions as the primary security mechanism, in which it establishes the solidarity of all clearing agents and counts on a fund of liquidation of operations. All clearing agents have individual operational limits.

Much of the growth of the Brazilian stock markets in the 90´s was due to the easing of restrictions on foreign capital which were introduced by means of a programme called ANNEX 4, an integral part of Central Bank of Brazil´s Resolution 1832. In 1998, the foreign capital entering Brazil totalled US$ 26.1 billion, in the period from January to November of 1999, alone the entry of foreign capital in the country reaching US$ 22.4% billion.

2.4. Commodities and Futures Exchange

The Brazilian Mercantile and Futures Exchange (BM&F), based in São Paulo and founded in 1986, is the tenth largest derivatives exchange in the world having transacted approximately 40 million contracts in the period of January to September, 1999. Since its inception, BMF has serviced basically the local market, grown at an average rate of sixty percent a year, and does not deal in share options, which are admitted for trade by both the São Paulo and Rio de Janeiro stock exchanges and in spot contracts.

In financial terms, the items which are most frequently negotiated at the BM&F are those contracts which deal with interest rates. In terms of commodities, the BM&F is basically specialised in contracts regarding the trade of cattle, coffee, soya beans, sugar, cotton and corn.

The so called “Operations Statute” of the BM&F establishes that in the futures market the following conditions shall be observed:

(a) each transaction shall be effected by a seller client and one or more buyer clients; and

(b) the transaction shall be contracted for the terms of 30, 60, 90, 120, 150 or 180 days (however, the buyer may anticipate the liquidation of the contract).

The BM&F maintains an Operations Liquidation Fund. This fund was formed by resources of the Clearance Members (banking sureties, public and private titles, credit insurance, currency, gold and other assets) for the purpose of guaranteeing the liquidation of operations. The Member who does not provide guaranties or does not liquidate contracts registered under its responsibility will be debited, to a corresponding amount, in its respective Fund account; the debited amount shall be deposited within a certain term as established by the Administrative Council.

Notwithstanding the above, BM&F still maintains a Guarantee Fund for the purpose of assuring to the clients of the Commodities, Agricultural Goods and Cotton Brokers, the restitution of price differences resulting from (i) culpable damage or inaccurate execution of orders accepted for trading on the floor of the exchange; (ii) inadequate utilisation of amounts received for the purchase or resulting from the sale of commodities and financial assets. The Guarantee Fund, we shall emphasise, also assures the liquidation of operations effected within the BM&F by the above mentioned Brokers on their clients account.

In October 1999, individual international investors were allowed to freely trade in agricultural commodities futures without being subject to the exchange controls still prevailing for other transactions in Brazil, or subject to the resulting exchange risks. For that, BM&F maintained an account in New York, to receive and effect the relevant payments in US dollars.

The Provisional Measure 1.858-10 of October 26, 1999 brought some tax incentives to foreign investments in the BM&F. Accordingly, international investors are exempt from the otherwise applicable 10% Brazilian tax on capital gains, provided that the investment originates from a jurisdiction that imposes at least 20% tax on such capital gains. With this new rule, the Brazilian government intends to keep investors from low tax policy countries and tax havens from benefiting from the tax exemption in Brazil.

2.5. Loans

Loans in any currency are made by remittance from the foreign source to Brazil for conversion into reais.

Prior to taking out a loan, the Brazilian borrower must apply to the Central Bank for approval. The application is made indicating the basic details of the agreement, including the amount, repayment terms and interest chargeable. The Central Bank has complete discretion regarding loan approval but approval usually will be granted as long as the details given comply with the Bank´s requirements in existence at the time of presentation.

The minimum period for repayment may vary according to Central Bank regulations. At this time, the minimum period for repayment is ninety days. Thus, no foreign loan can be totally repaid in less than three months counting from its advancement to the Borrower. However, there are no requirements as to number of instalments for repaying the principal. As an example, in the case of a loan to be repaid in two equal instalments, the first instalment can be repaid in one month, and provided that the second instalment is paid in three months, there is no tax on the remittance of the principal. However, there is a withholding tax of fifteen percent at source on the remittance of interests which may be paid either by the creditor or by the debtor. The interest charged must be considered “reasonable” in the judgement of the Central Bank of Brazil.

There are two types of loans: cash loans and credit loans for importing goods. The former is characterised by the entry of cash into Brazil and the latter by credit abroad to pay for the import of machinery or equipment.

Cash loans may be contracted directly by the firm with the foreign financing agency or through private development banks, investment banks, the Banco Nacional de Desenvolvimento Econômico (National Economic Development Bank) and banks authorised to operate with foreign exchange. Cash loans are contingent upon authorisation by the Central Bank of Brazil, and transactions of this nature must be effected at the current interest rates in the international market.

Imports of goods financed for a period of more than 360 days are subject to prior registration with the Central Bank of Brazil.

Remittances of principal and interest may be effected by the simple presentation of the Certificate of Registration issued by the Central Bank of Brazil to any Brazilian commercial bank authorised to operate in foreign exchange.3.1. The Central Bank of Brazil

The Central Bank of Brazil is responsible for maintaining a special register of all foreign capital, irrespective of the procedure used to bring it into the country. Records are kept of the following transactions:

(a) direct investments and loans, whether in cash or goods;

(b) remittances effected as return of capital or as earnings of such capital, profits, dividends, interest, amortisation, as well as royalties for payment of technical assistance, or by means of any other title which represent the transfer of earnings to a foreign country;

(c) reinvestment of foreign earnings;

(d) capital increases of companies, effected in accordance with the law in
force (Law 4.131 of September 3, 1962).

The application for registration of foreign capital must be made within 30 days of the date of entry into the country or, in the case of reinvestment of profits, within 30 days of the date the capitalisation of the profits is effected by the Brazilian company.

Foreign capital is registered in the currency of entry and, in the case of financial imports and investments in the form of goods, in the currency of the creditor´s or investor´s domicile or head-office. In special cases, foreign capital may be registered in the currency of the country of origin of the goods or financing, provided prior approval is granted by the Central Bank.

Upon completion of an analysis by the Central Bank, a Certificate of Registration (CR) stating the amount of the investment made is issued on behalf of the foreign investor.

Reinvestment of earnings is allowed by the Central Bank. Reinvestment of this type is registered by simply being added to the stated amount of the CR. Reinvestment necessarily implies that the Brazilian company must realise profits on the original investment. Profits must have been earned by the company located in Brazilian territory and reinvested in the same company or in another company also located in Brazilian territory.

Once registration is made and the Certificate thereof is duly issued by the Central Bank, the foreign investor is permitted to remit profits and dividends abroad, pursuant to Law no. 4.131/62 and other norms in force.

As with remittances from a foreign country into Brazil, remittances to a foreign country must be processed through banks authorised to operate with foreign exchange, under the supervision of the Central Bank.

An application must be submitted to the bank retained to make the remittance, along with evidence of the availability of the foreign investor´s earnings (such as a copy of the balance sheet of the Brazilian company or a resolution of the shareholders regarding the distribution of the profits, among others).

Repatriation of foreign capital invested in Brazil is also permitted at any time. The foreign investor is entitled to remit up to the limit of the amount registered in the CR, any excess being subject to prior authorisation by the Central Bank.4.1. Purpose

In view of the formation of large trading blocks such as the European Union and the North American Free Trade Association, the southern Latin American countries have been working since July 1986 on a means to stimulate trade between the region and the rest of the world, and to encourage foreign investment.

In July 1990, a timetable for the formation of a Common Market between Brazil and Argentina was established. After December, 1990, Brazil and Argentina signed a treaty incorporating all previous agreements liberalising trade between the two countries. This agreement already reflected the characteristics and objectives of what was to become Mercosul.

On March 26, 1991, Argentina, Brazil, Paraguay and Uruguay signed the Treaty of Asuncion formalising the decision to integrate the economy of these countries into a Common Market of the South (MERCOSUL), effective as of January 1, 1995.

The first country to fully approve the Treaty of Asuncion was Uruguay, by Law 16.196 of June 22, 1991, followed by Paraguay, which approved it on June 28, 1991 (Law 91/91). Argentina approved the Treaty by Law 23.981 on August 15, 1991. In Brazil, the Treaty was approved by Legislative Decree 197 of September 25, 1991, promulgated by Decree 350 of October 21, 1991. Brazil deposited the ratification instrument on October 30, 1991.

Mercosul has as its purpose the co-ordination of macroeconomic and sectorial policies; the free transit of goods, services and means of production; the establishment of joint customs duties; and the adoption of a common commercial policy towards other countries and communities.

4.2. Banking

Concerning the banking sector, subgroup no. 4 of Mercosul intends to consolidate the supervision of global banking through a convention of the Central Banks of the signatory countries, reduction of the differences existing between the banks on national treatment for banks of the signatory countries or harmonisation of the practice of insurance and reinsurance, etc..

Through Resolution 11/94 the signatories of Mercosul approved the Protocol for Promotion and Reciprocal Protection of Investments of non-signatory countries. The Resolution 11/94 establishes that investors of non-signatory countries will have treatment no less favourable than those available to local investors. Such Protocol is presently in the Brazilian Congress awaiting to be voted.

Also, Resolution 12/94 has adopted the Consolidated Principles of Global Banking Supervision which is partly is force in Brazil owing to Resolution 2302 of BACEN of July 25, 1996.5.1. Banking Law

Law 4.595 of December 31, 1964, also known as the Brazilian Banking Law, was enacted in order to regulate the whole the Brazilian financial system, and is responsible for its present structure.

In accordance with article 17, any “public or private legal entities which have as their primary or accessory activity the assessment, intermediation or application of financial resources of their own or of third parties, in Brazilian or foreign currency, as well as the custody of third parties´ properties” are considered to be financial institutions. Additionally, the Banking Law establishes that individuals who regularly or occasionally perform any of the above-mentioned activities shall be treated as financial institutions.

Pursuant to the Banking Law, the Brazilian financial system is composed of:

(a) the National Monetary Council (“Conselho Monetário Nacional”);

(b) the Central Bank of Brazil (“Banco Central do Brasil”);

(c) the Bank of Brazil S.A. (“Banco do Brasil S.A.”)

(d) the National Bank of Economic and Social Development (“Banco Nacional do Desenvolvimento Econômico e Social” – BNDES); and

( e) other public and private financial institutions.

5.2. The National Monetary Council

The National Monetary Council, created by Law 4.595/64, replaced and abolished the former Council of the Superintendence of Money and Credit (“Conselho da Superintendência da Moeda e do Crédito”).

The objective of the National Monetary Council is to establish Brazilian Monetary and credit policies aimed at the economic and social development of Brazil.

In accordance with article 3 of the Banking Law, the National Monetary Council policy has as its functions:

a. to adapt the volume of resources of payments to the real necessities of the national economy;

b. to regulate the internal volume of the Brazilian currency;

c. to regulate the value of the Brazilian currency overseas and the equilibrium in the Brazilian balance of payments, aiming at the best use of resources in foreign currencies;

d. to orient the application of public or private financial institutions´ resources, in order to help create favourable conditions for the national economic development;

e. to help improve institutions and financial institutions, aiming at the efficiency of the payments system and at the mobilisation of resources;

f. to protect the liquidity and solvency of financial institutions; and

g. to co-ordinate monetary, credit, budgetary and tax policies and public internal and foreign debt.

The National Monetary Council is the controller of the Brazilian currency, thus being responsible for the authorisation of the issuance of paper money and for the determination of its characteristics.

Law 9.069 of June 29, 1995 created the so-called Technical Commission of Money and Credit, which is an advisory commission of the National Monetary Council.

The Technical Commission of Money and Credit is responsible for issuing declarations relating to the activity of the National Monetary Council, as well as proposing regulations concerning specific matters such as the issuance of Brazilian currency.

The National Monetary Council, in accordance with Article 8 of Law 9.069/95, is composed of:

(a) the Economy Minister, who is its President;

(b) the Minister of Planning and Budget; and

(c) the President of the Central Bank of Brazil.

The National Monetary Council is assisted by five Consulting Commissions, which deal with: the rules and organisation of the Brazilian financial system; the securities market and the futures market; rural credit; industrial credit; habitancy credit, sanitation and urban infra-structure; public debt; and monetary and exchange policies.

5.3. The Central Bank of Brazil

The Central Bank of Brazil has as its objective to perform and to enforce legal norms and rules issued by the National Monetary Council.

Additionally, the Central Bank of Brazil has the following exclusive functions:

(a) to issue paper currency and coins under the conditions and within the limits authorised by the National Monetary Council;

(b) to perform any services regarding the money supply;

(c) to determine the amount of compulsory deposits of financial institutions within the legal limits;

(d) to receive compulsory payments and voluntary deposits of financial institutions;

(e) to effect rediscount and loan transactions with financial banking institutions;

(f) to exercise control over all forms of credit;

(g) to control foreign capital;

(h) to act as custodian of the gold and foreign currency official reserves, and of special drawing rights (SDRs) and with the latter to carry out all the operations provided for in the Convention of Incorporation of the International Monetary Fund;

(i) to inspect financial institutions and apply penalties;

(j) to authorise financial institutions: to operate in Brazil; to establish or relocate their head offices or premises, including abroad; to be reorganised, consolidated, merged or expropriated; to carry out exchange and real credit transactions and the regular saving of federal, state or municipal bonds, shares, debentures, mortgage bills and other credit instruments or securities; to extend the periods granted for operations; and to amend their by-laws;

(k) to establish conditions for the investiture and exercise of any administrative position in private financial institutions, and also for the exercise of any position on advisory, audit or similar bodies, pursuant to the rules issued by the National Monetary Council;

(l) to carry out transactions of purchase and sale of federal government bonds, as an instrument of the monetary policy;

(m) to require the head offices of financial institutions to register the record of firms which have dealt with their branches for more than one year.

5.4. The Bank of Brazil S.A.

Before the enacting of Law 4.595/64, the Bank of Brazil S.A. (“Banco do Brasil S.A.”) used to function as a Central Bank, besides operating as a private bank.

The Bank of Brazil S.A. is today a commercial bank, although it is also engaged in activities which are not common to commercial banks as an instrument for the administration of financial and credit policies of the Federal Government.

In accordance with the law presently in force, the Bank of Brazil S.A. is responsible for the following:

(a) as a Financial Agent of the National Treasury, it may: (i) receive for the credit of the National Treasury proceeds of the collection of federal revenue taxes and of federal credit operations through advances of budget revenue, or any other funds, within legally authorised limits; (ii) effect payments and provisions required for the implementation of the General Budget of Brazil and (supplementary laws) in accordance with instruction given to it by the Ministry of Finance; (iii) grant suretyship, securities and other guarantees as expressly authorised by law; (iv) acquire and finance inventories of exportable production; (v) execute the policy of minimum prices for agricultural products; (vi) act as paying agent and receiving agent abroad; (vii) execute the service of the consolidated public debt;

(b) as the principal executor of banking services to the Federal Brazilian Government, including its government agencies, receive for deposit, exclusively, the available funds of any federal entity, including agencies of all the civil and military ministries, social security institutions and other government agencies;

(c) execute cheque and other paper clearing services;

(d) collect the voluntary deposits of financial institutions, maintaining the respective accounts;

(e) exclusively receive the deposits relating to the subscription in cash of the capital of legal entities;

(f) on its own account and on account of the Central Bank of Brazil, purchase and sell foreign currency, under conditions established by the National Monetary Council;

(g) be in charge of receipts or payments or other services of interest to the Central Bank of Brazil;

(h) cause the foreign trade policy to be executed;

(i) finance the purchase and installation of small and medium-sized rural properties, pursuant to the pertinent legislation;

(j) finance industrial and rural activities; and

(k) propagate and orient credit, including commercial activities, supplementing the activities of the banking network in the financing of economic activities, complying with credit requirements of the different regions of the country, as well as in the financing of imports and exports.

5.5. The National Bank of Economic and Social Development

The National Bank of Economic and Social Development (“Banco Nacional do Desenvolvimento Econômico e Social” – BNDES) is considered by Law 4.595/64 as a public financial institution whose primary objective is the execution of Federal Government Investment Policies. It is also responsible for the Brazilian Privatisation Program. The BNDES has two subsidiaries: the BANESPAR, whose objective is the development of the stock market, and FINAME, which is the administrator of the export financing operations.

5.6. Public Financial Institutions

Law 4.595/64 defines public financial institutions as auxiliary bodies in the execution of the Brazilian Federal Government credit policy.

As its has been previously mentioned, the National Bank of Economic and Social Development is the main instrument in the execution of such policy.

The first paragraph of Article 22 of the Banking Law establishes that the National Monetary Council is responsible for regulating the public financial institutions.

Notwithstanding the above, the Banking Law (article 24), determines that the non-federal public financial institutions are subject to the rules concerning private financial institutions.

5.7. Private Financial Institutions

In general, private financial institutions may only be constituted as joint stock companies.

The initial capital of private financial institutions shall be fully paid up in Brazilian currency. Subsequent capital increases of financial institutions may also be made by means of the incorporation of reserves or of accumulated profits within the limits established by the National Monetary Council

At least fifty percent of the initial capital and subsequent increases in the capital of financial institutions authorised to function by the Central Bank of Brazil shall be paid in upon subscription. The remaining amount shall be fully paid up within one year counting from the date in which the subscription occurred or counting from the approval of the increase of the capital by the Central Bank of Brazil.

Private financial institutions (with the exception of investment institutions), will only be able to participate in the capital of other companies when an authorisation is duly issued by the Central Bank of Brazil; however, this authorisation will not be necessary in the event such private financial institutions grant subscription guarantees, provided that such grants comply with the general requirements established by the National Monetary Council.

In general financial institutions may engage in the following activities:

(a) participation in loans and financing operations;

(b) receiving deposits of any nature;

(c) acquiring shares, obligations and another securities as investment for sale in the capital market;

(d) transfer of loans obtained abroad;

(e) execution of guarantees;

(f) distribution and placement of any issue of securities and bonds;

(g) operating in the Stock and Commodities Exchange;

(h) the issue and/or registration of shares or obligations;

(i) participation in exchange operations;

(j) opening and maintaining accounts; and

(k) participation in gold operations.

5.8. General Rules Concerning Financial Institutions

Article 18 of Law 4.595/64 establishes that financial institutions shall only operate in Brazil with the prior authorisation of the Central Bank of Brazil, or, if foreign, by decree of the executive branch of government.

Article 10 of the above-mentioned Law establishes the exclusive competence of the Central Bank of Brazil to authorise financial institutions to operate in Brazil; to install or transfer their head offices or premises, including transfer abroad; to be reorganised, consolidated, merged or expropriated; to carry out exchange and real credit transactions and the regular saving of federal, state or municipal bonds, shares, debentures, mortgage bills and other credit instruments or securities; to extend the periods granted for operations; and to amend the by-laws of financial institutions.

Furthermore, in accordance with Article 13 of the National Monetary Council´s Resolution 2.212, dated November 16, 1995, new authorisations for the functioning of financial institutions are conditional upon the institutions being members of the private and non-for-profit entity incorporated for the protection to creditors of financial institutions as per the terms of the National Monetary Council´s Resolution 2.197, dated August 31, 1995 (the private entity in question relies on contributions from its members and some other resources to pay credits against insolvent financial institutions within certain limits).

The following acts of reorganisation also require the authorisation of the Central Bank of Brazil:

(a) direct or indirect transfer of control of the company;

(b) reorganisation into a multiple bank;

(c) amendment in the social objectives;

(d) creation, by a multiple bank, of an operational portfolio;

(e) alteration of the juridical type; and

(f) merger, split or incorporation.

In any case, the granting and validity of authorisations from the Central Bank of Brazil are subject to the financial institution complying, at all times, with the minimum capital requirements established in Annexes II and IV of the National Monetary Council´s Resolution 2.099 of August 17, 1994 as amended.

The authorisation procedure is uniform for all financial institutions and the Central Bank of Brazil shall consider each application in strict compliance with the prevailing legislation and regulations.

5.9. Multiple Banks

Multiple banks shall have at least two of the following portfolios, one of which must be either commercial or of investments:

(a) commercial;

(b) investment and/or development, the latter being exclusive for public

(c) real estate credit;

(d) credit, financing and investment;

(e) leasing.

Multiple banks cannot issue debentures.

5.10. Commercial Banks

Commercial banks operate in the discounting of credit instruments, in exchange operations, in the opening of credits, in the custody of assets, in all types of collections and payments, and in taking deposits for the Employee´s Dismissal Fund (“Fundo de Garantia por Tempo de Serviço” – FGTS).

5.11. Investment Banks

Investment banks are private financial institutions constituted as joint stock companies, whose primary objective is to conduct investment or financing operations in medium and extended terms, aiming at the provision of capital for companies in the private sector, from their own resources, as well as by the collection, intermediation and application or third parties´ resources.

The legislation requires that investment banks include in their name the term “investment bank” (“banco de investimento”), which is to be combined with their own names.

5.12. Development banks

A development bank is a non-federal public financial institution constituted as a joint stock company with head-offices in the capital of the state in which its share control is held. It is required to include in its name the term “development bank” (“banco de desenvolvimento”) followed by the name of the Brazilian State where its head-office is located.

The primary objective of the development bank is to provide an adequate finance program and to assist projects which promote the economic and social development of the State in which it is located, favouring especially the private sector.

In order to comply with its objective, the development bank shall support regional or sectoral programs or projects which:

(a) increase the economy´s production capacity, by means of the implementation, expansion or relocation of ventures;

(b) benefit productivity, by means of reorganisation, rationalisation or modernisation of companies and formation of inventories of raw materials and final products or by means of the formation of integrated trade companies;

(c) contribute to the improvement of the local economic environment and local companies by means of the incorporation, merger, association, assumption of the share control and/or the liquidation or consolidation of assets or liabilities;

(d) improve rural production by means of investment in projects with a view to the formation of fixed or semi-fixed capital;

(e) promote the incorporation and development of production technology, management improvement, the formation and improvement of technical staff, for this purpose being allowed to sponsor technical assistance programs through specialised companies and entities.

5.13. Credit, Financing and Investment Companies

According to the law in force, credit, financing and investment companies have as their purpose the provision of finance for the acquisition of goods and services, as well as for the working capital.

5.14. Real Estate Credit Companies

A real estate credit company is a financial institution with the objective of providing financial support to real estate operations relating to the incorporation, construction, sale or acquisition of housing.

Its name shall contain the phrase “real estate credit” (“crédito imobiliário”).

5.15. Credit Cooperatives

Credit cooperatives may be divided into two categories: economy and mutual credit cooperatives; and rural credit cooperatives. However, the Central Bank of Brazil may consider and allow other types of cooperatives, in accordance with the law in force.

Economy and mutual credit cooperatives shall be composed of individuals who engage in a certain profession or other common activities; or who are linked to a determined entity; or, exceptionally, by legal entities which are considered as micro enterprises or small businesses and which have as their objective economic activities exercised by individuals; or certain other entities with non-profit purposes.

Rural credit cooperatives shall be composed of individuals who engage in the same section of activity of the cooperative, agricultural, cattle raising or extraction sectors or who are wholly engaged in fishing; or, exceptionally, by legal entities which perform such activities.

It is important to note that credit cooperatives are prohibited from using in their denomination the term “bank” (“banco”).

5.16. Leasing Companies

Leasing companies shall be constituted as joint stock companies. Additionally, the pertinent legislation establishes that the company´s name shall contain the term “leasing” (“arrendamento mercantil”).

The main objective of a leasing company is the practice of leasing operations dealing with movable assets produced within Brazilian territory or abroad, or with real properties acquired from third parties to be used by the lessee in its economic activity.

5.17. Stock Brokerage Companies

Stock brokerage companies, which shall be constituted either as joint stock companies or as private limited liability companies, are those institutions which have the following objectives, among others:

(a) to operate in locations or in systems maintained by stock exchanges;

(b) to subscribe, solely or by means of a consortium with other authorised companies, the issuance of securities for resale;

(c) to intermediate public offers and distribution of securities in the market;

(d) to purchase and sell securities on its own or third parties´ account, in accordance with the legislation enacted by the Securities Commission (“Comissão de Valores Mobiliários” – CVM) and by the Central Bank of Brazil;

(e) to administer securities portfolios and the custody of securities;

(f) to subscribe, transfer and certify endorsements, share certificates, receipt and payment of redemptions, interest and other earnings relating to securities.

For the granting, by the Central Bank of Brazil, of an authorisation to operate, it is indispensable that the company be admitted as a member of a stock exchange and has the approval of the Securities Commission for the exercise of activities in the securities market.

The approval of the Securities Commission will also be necessary for the conducting of the following acts: relocation of the head-quarters; establishment, relocation or closure of branches or offices; alteration in the corporate capital; appointment of managers and other officials, fiscal counsels and members of other corporate bodies; foreign participation in the corporate capital; any other kind of alteration of its by-laws; and liquidation.

Additionally, the Securities Commission shall also be consulted in regard to any alienation in the control of the company, as well as in regard to any kind of change of its legal type, merger, incorporation and split.

5.18. Exchange Brokerage Companies

Exchange brokerage companies shall also be constituted as joint stock companies or as a limited liability company, whose name shall expressly contain the term “exchange brokerage” (“corretora de câmbio”).

The main objectives of an exchange brokerage company are to intermediate exchange operations and to conduct operations within the floating rates market.

For the intermediation of exchange operations and the negotiation of the respective bills of exchange (this latter being exclusively conducted by business individuals organised by official brokers of public funds and brokerage companies), the exchange brokerage company – provided that it is not a member of an exchange – shall comply with all rules applying to exchange member-companies.

5.19. Securities Distribution Companies

A securities distribution company, whose name must contain the term “securities distribution” (“distribuidora de títulos e valores mobiliários”) shall be constituted either as a joint stock company or as a limited liability company, with the following objectives, among others:

(a) to subscribe, solely or by means of a consortium with other authorised companies, the issuance of securities for resale;

(b) to intermediate public offers and distribution of securities in the market;

(c) to purchase and sell securities on its own or third parties´ account, in accordance with the legislation enacted by the Securities Commission (“Comissão de Valores Mobiliários” – CVM) and by the Central Bank of Brazil;

(d) to administer securities portfolios and the custody of securities;

(e) to subscribe, transfer and certify endorsements, share certificates, receipt and payment of redemption, interest and other earnings relating to securities.

In addition to the necessary authorisation granted by the Central Bank of Brazil for their functioning, securities distribution companies shall also apply for the issuance of a prior and express authorisation before the Securities Commission.

The Securities Commission shall also be consulted with regard to any alienation in the control of the company, as well as with regard to any kind of transformation of its legal type, merger, incorporation and split.

5.20. Mortgage Companies

The name of mortgage companies, which shall be constituted as joint stock companies, must contain the term “mortgage company” (“companhia hipotecária”).

Mortgage companies have the following objectives:

(a) to provide finance for the production, reorganisation or trade of residential or commercial real properties and urban lots;

(b) to purchase, sell and refinance mortgaged credit of their own or of third parties;

(c) to manage mortgaged credits of their own or of third parties;

(d) to manage real property investment funds, provided that the necessary authorisation is obtained from the Securities Commission;

(e) to transfer resources for the financing of the production or acquisition of residence real properties; and

(f) to conduct other operations duly authorised by the Central Bank of Brazil.

According to the law in force, mortgage companies can not be transformed into multiple banks; commercial banks; investment banks; development banks; credit, financing and investment companies; real estate credit societies; leasing companies; stock brokerage companies; securities distribution companies or exchange companies.

5.21. Foreign Banks

As mentioned above, article 18 of Law 4.595/64 establishes that for foreign financial institutions to be able to operate in Brazil a prior authorisation must be granted by decree of the executive branch of government.

The 1988 Constitution posed strict restrictions on the expansion of foreign capital participation in the Brazilian financial sector. Article 192, III of the 1988 Constitution determines that the conditions for the participation of foreign capital in Brazilian financial institutions shall be determined in a complementary law, to be enacted with due regard to the national interest and international agreements.

On August 25, 1995, the Brazilian Official Gazette published an administrative act by which the Brazilian President eliminated the restrictions imposed by the 1988 Constitution by formally recognising the country´s interest in the increased participation of foreign financial institutions in the local market. Potential foreign investors have since applied to participate in or increase their previously existing participation in the capital of private Brazilian banks. Provided the investment is approved by both the Brazilian Central Bank and the National Monetary Council, it will be subsequently authorised by presidential decree.

The foreign financial institution, installed or even operating in Brazil, is subject to the prevailing legislation applying to Brazilian financial institutions. However, as mentioned above, the minimum capital and equity requirements established in Annex II of the National Monetary Council´s Resolution 2.099 of August 17, 1994 as amended (which are specified on a case by case basis above) will be increased by one hundred percent in the case of branches of financial institutions domiciled abroad, as well as in the case of commercial banks or multiple banks with commercial portfolios directly or indirectly controlled by foreigners.

The operations between banks are permitted under the conditions fixed by exchange department (“Carteira de Câmbio”) of the Bank of Brasil.

5.22. Money Laundering

On March 3,1998, the federal government approved law 9613, which regulates money laundering crimes and creates, under the Ministry of Finance, the Counsel for the Control of Financial Activities – COAF – a body whose function is to accept, examine and identify suspected occurrences of illicit activities and to discipline and effect administrative penalties.

The purpose of this law is to combat crimes related to money laundering (as the hiding or camouflaging of the nature, origin, disposition, movement or ownership of assets, rights or amounts) and to the detect and punish all and any attempts to legalise the assets generated by such crimes. The law makes it possible to have greater control over these kinds of operations and to enable the Central Bank to maintain a closer view of financial transactions.

The groups subject to the law are those companies or other legal entities whose main or secondary activity is the acquisition, intermediation or administration of financial resources of third parties in Brazilian or foreign currency; the buying or selling of foreign currency or gold as a financial activity or exchange instrument; and real estate activities.

Also included under the legislation are insurance companies and brokers, banks, stock exchanges and futures markets; users of magnetic cards, or their equivalent, which permit the transfer of funds; companies that deal with foreign exchange, leasing, and factoring; individuals or companies dealing in commercial jewels, gemstones and precious metals, objects of art and antiquities.

All of the above groups are required to identify their clients, maintaining an up-to-date client list and, for a minimum of five years, maintain records of all transactions in Brazilian or foreign currency as well as document all operations having a value which exceeds a level as determined by a qualified authority.
In addition to the loss of their illegally acquired assets to the State, with exception to the rights of bona fide third parties or others who may have suffered injury, various levels of penalties have been established for offenders:

(a) warnings for irregularities concerning the identification of the clients and the maintenance of the registry of financial transactions;

(b) fines ranging from one percent to two hundred percent of the value of the operation or the derived profit, or a fine of up to $200,000 (Fines are levied for negligence in correcting cited deficiencies within a designated period or failure to fulfil the requirement to identify the clients and maintain proper registers);

(c) suspension, to a maximum of ten years, in the exercise of corporate administrative responsibilities. (Suspension results from cases of severe, verified infractions of the law, or specific and recurring transgressions previously penalised by fines);

(d) cancellation of activities for the repeated incidence of infractions related to the above suspension penalty.

In the event that the crime of money laundering is practised abroad, any assets resulting from the contravention of a treaty or conversation enacted by the competent foreign authority will be seized and apportioned between the country and Brazil, again with exception to the rights of bona fide third parties similar to the above.The current Brazilian economic climate is marked by the volatility of exchange. After the change to the floating exchange system (in which the rates are determined by the markets), the expectations are concentrated in the rate concerning the point of balance. There is a consensus that the Brazilian currency is under valued, and it can adapt itself to a level more adequate for the productive sector, since it has ability in the management of the economic policy. To attend to the supervisionary measures of the IMF (International Monetary Fund) and maintain interest rates at high levels is an impractical and unfavourable policy for Brazil, as high interest rates only aggravate recession and default.

In the beginning of 1999, doing to the possibility of a moratorium announced by the State of Minas Gerais and consequently the fall in the stock exchanges and the disregard of the exchange control policy, the Brazilian economy entered a very recessive scenario. The vulnerability represented by the increase of deficits in the external area (of 4,4% of the GNP) and in the publics accounts (more than 8% of the GNP) Brazil became particularly sensitive to the turbulence of the international market. [1]

This obliged the country to further increase the already high basic interest rates which damaged the development of the productive sector of the economy and increased the default in various segments, involving various sectors.

After the exchange maxi-devaluation in January 1999, and the consequent price-crash of the north American currency that brought US$ 1 to almost R$ 2,30, there were significant impacts[2] in the execution of contracts previously signed, especially related to contracts in dollars governed by Resolution BACEN n. 63[3], contracts in reais ballasted in dollars and the leasing agreements.

Faced with the increase of default in the referred agreements, the alternative reached by the Brazilian banks, on the whole[4], to avoid legal dealings of such contracts with default clients were re-negotiated in an effort to reach an extrajudicial agreement. In that way, the Brazilian banks decided to find negotiable alternatives, re-structuring debts with clients, before suing them in court. Such a preoccupation was also placed on banks, by the fact that many Brazilian courts considered the clauses that determined that agreements should be readjusted in accordance with the price of the dollar as illicit and determined that the rates be corrected by the IGPM, creating substantial damage for banks and leasing companies.

It is worth emphasising that the re-structuring of debts differs from bank to bank, as they must consider the clients condition and the assumed debt. On the whole, there are two basics mechanisms of re-structuring of debts[5]:

1) Through the settlement of a fixed level for the exchange rate in the case of agreements determined in dollars (governed by Resolution n. 63/67) and in the leasing agreements: Normally, contractual amendments are made in such cases recognising the agreement made with the client, setting the dollar at fixed levels and offering the client the possibility of expanding the period of payment. Thus, the dollar is fixed, for example, at a value equivalent to 1,21 for three months or 1,50 for five months (this fixing also depends of the specifications of each case). In this way, the client pays off part of the contract and differences in values are charged at the end of the period for the execution of the contractual amendment.

2) Through the increase in term of the contracts by contractual amendment (applicable also for contracts in reais) [6].

With respect to the legal aspects of the case, the collection is only realised after such re-negotiations have been revised and, in the case of non-compliance, legal collection through admission of competent judicial action against the default client, is initiated.

It is important that the period between 1999 and 2000, due to the devaluation in the exchange rate. The number of lawsuits initiated by banking institutions increased significantly.In contrast to common law, Brazilian Law has its roots in Roman and Germanic Law, with strong influence of the Napoleonic Code of 1804 and the Germanic Code of 1896.

The Federal Constitution confers jurisdiction to the judiciary, jurisdiction being understood here as one of the functions of the sovereignty of the state, which manifests itself through the judiciary, deciding conflicts of interests, and, in this way, ensuring the rule of law.

The Brazilian judicial system is divided between the ordinary courts (civil and criminal) and the special judiciary (labour, military and electoral).

7.1. Ordinary Courts

The ordinary courts are both federal (basically in processes in which the federal government is a party or in which a foreign state or international organisation is involved) or state courts. In spite of the existence of three levels of jurisdiction within the state and federal judicial systems, each individual judge or panel of judges is free and independent of a superior court to decide in relation to the cases brought before them.

Legal proceedings at lower level courts, both state and federal, are tried by individual judges.

The courts of the next level, which have the function of reviewing the decisions of the lower level courts, are the state appeals courts (“tribunais de justiça estaduais”) in their various sectors, and the regional federal courts (one in each state), respectively.

7.2. Specialised Courts

The Brazilian labour courts differ from the other courts in that they are presided over by panels of judges at all levels, including the courts of first instance. These courts are comprised of Panels of

Conciliation and Judgement, the Regional Labour Courts and the Superior Labour Court. They have jurisdiction over collective and individual labour disputes. Individual disputes are those which relate to questions relating to the interests of individuals, brought before the courts by the employees themselves against their employers. Collective disputes are those which involve the wider interests of a given category of workers and the respective trade unions in, for example, cases involving strikes. From the 93 enactment of the new Constitution, these (collective) disputes may now be resolved by judgements at arbitration.

At the trial court level, the specialised criminal courts are composed of:

a. Criminal Trial Courts and Criminal Appeals Courts, which are courts of first and second instance, respectively, have jurisdiction for the trial of ordinary citizens who are alleged to have committed crimes, as classified by the Penal Code. However, cases dealing with matters at the federal level are subject to the jurisdiction of the Federal Justice courts;

b. Jury Courts, which judge crimes with malicious intent against human life. In this forum the decision is arrived at by the people, represented by jurors, chosen from among common citizens;

c. Courts to Instruct Compliance with Criminal Penalties (“Vara de Execuções Criminais”) which supervise the measures necessary to ensure that sentences are duly served and penalties applied;

d. Police Internal Affairs and Prison Supervisory Courts, which oversee the actions of the police and of the prison administrations.

The specialised civil courts are composed of:

Brazil also has special courts, which have jurisdiction, among other things, for hearing cases in relation to minor criminal offences.

In those counties where there are no specialised courts the state judges have jurisdiction to hear such cases as would normally be heard by specialised courts.

Above these courts is the Supreme Court of Justice in Brasilia, which has the function of judging, among other matters, appeals against decisions of lower courts contrary to treaties or federal law and appeals against conflicting decisions of different courts (unification of jurisprudence).

Finally, at the top of the pyramid, is the Supreme Federal Tribunal. Created in the mold of the Supreme Court in the United States of America, it is a constitutional court formed by 11 judges responsible for guaranteeing that the principles of the Federal Constitution are applied and respected.