In the past few years, legislations to avoid money laundering in several jurisdictions started imposing limits on banking secrecy duties of financial intermediaries and now impose limits on lawyers’ professional secrecy duties as well. More recently, tax legislations, such as the EU SAVING TAX DIRECTIVE which is being negotiated for a target implementation on 1 January 2005, limit individual rights to confidential information and tax avoidance, which is not the illegal practice of tax evasion, and impose obligations to financial intermediates beyond those already imposed by anti money laundering legislations. The purpose of this opinion is to analyse the perils represented by yet another precedent on similar tax limitations to bank secrecy in a Country of a young democracy like Brazil, where we will still be paying, for many more years to come, a very high price for the sombre years of dictatorship without the Rule of Law.

In Brazil, banking secrecy is both a right of the customer and a duty of the financial professional. Banking secrecy, as part of data secrecy, is one of the fundamental rights of the individuals as guaranteed by the Brazilian Federal Constitution of 1988 (“Constitution”) as further explained below.

In accordance with Article 5 of the Constitution, any and all Brazilian citizens and foreigners resident in Brazil shall have basic rights including:

(i) protection against intrusion to the individuals’ intimacy, to their private lives, to their honour and to their public images. Any individuals suffering such intrusions shall have the right to claim indemnification for any material or moral loss resulting therefrom; [1]

(ii) the secrecy of correspondence and of telegraphic communications, data and telephone communications shall be inviolable, except, in the latter case, by Court Order, in the cases and in the manner prescribed by law for the purposes of criminal investigation or for criminal proceedings; [2]

(iii) the law shall not exclude the jurisdiction of the Judiciary in relation to damages or threats to rights; [3]

(iv) everyone shall have the right to obtain, from public bodies, information which is relevant to him or herself individually, or to the public in general, with the exception of information which must be kept confidential for the safety of society or national security; [4]

(v) Habeas Data (a constitutional judicial remedy) shall be available, free of charge: a) for the data subject to access information contained in ledgers or databases of governmental bodies or public entities; and b) for the data subject to request the correction of any inaccurate information, when he or she does not choose to claim the correction through a judicial or administrative confidential proceeding; [5]

(vi) the litigants, in judicial or administrative proceedings, and those, who have been generally accused, shall have the right to the due process of law and broad defence, with the necessary means and resources; [6]

(vii) guarantee to other rights resulting from the principles adopted by the Constitution, or from international treaties in which Brazil is a party. [7]

The above-mentioned Article 5 of the Constitution lists fundamental rights which can only be modified in certain and specific cases, with due observance to all applicable Constitutional principles. It has been argued that banking secrecy, as such, is not included in the protection guaranteed by Article 5 of the Constitution. However, a considerable portion of the Brazilian scholars and jurisprudence recognise that bank secrecy is included in the ambit of Article 5 of the Constitution as one of the fundamental individual rights and most of them agree that bank secrecy can only be released as a result of Judicial Orders in specific cases.

The legislation which originally regulated banking secrecy, as a duty of the financial institutions, was the banking Law nº 4.595/64. Its article 38 required a Judicial Order for any financial institution to release to third parties any information on its active or passive operations, or services rendered. Any individuals responsible for breaching Article 38 would be subject to prison for a period of one to four years, without possibility of bail.

Subsequently, other legal texts aimed at superseding the necessity of the Judicial Order in certain cases and, eventually, Article 38 of Law 4.595/64 was revoked by the very controversial Complementary Law 105/2001, which has been the subject of at least five claims of breach of the Constitution as further detailed below.

The range of information covered by banking secrecy was, and still is, very broad. The obligation of secrecy by the financial institutions covers all activities that involve banking and in particular it covers all information about customers and third parties received by the financial institutions in the course of business. Individuals responsible for breaches of bank secrecy are still subject to the same penalty of imprisonment for a period of one to four years, without the possibility of bail. The disclosure of bank account information may still be ordered during a judicial proceeding.

However, several limits have been imposed on banking secrecy in Brazil and, unfortunately, most of them without the due process of law. In this respect, Article 8º of the Law nº 8.021/90 came to foresee the possibility of the fiscal authority requesting information on financial operations of taxpayers without the necessity of Judicial Orders and at least part of the jurisprudence [9] considered it to be an illegal administrative act.

Subsequently, Law 9.311/96 instituted the Provisory Contribution on the Movement or Transmission of Securities and Credits of Financial Nature (CPMF) and in its article 11, second and third paragraphs established as follows:

“Art. 11. The administration of the contribution, including the activities of taxation, monitoring and collection, is incumbent on the Secretariat of the Inland Revenue.
(…)

§ 2º The institutions responsible for collecting and paying the contribution [10] shall provide the Secretariat of the Inland Revenue with the necessary information for identification of the taxpayers and the total values of the respective transactions, under the terms, conditions and periods of time to be established by the Treasury.

§ 3º The Secretariat of the Inland Revenue will protect, in the form of the applicable legislation, the secrecy of information rendered, being forbidden its use for constitution of tax credit relative to other contributions or taxes “. (without underlines in the law)

The above-mentioned limitations to bank secrecy were made even worst immediately after the enactment of Complementary Law 105 of 2001[11], as detailed below, with Law 10.174/01, which substantially modified the above-translated paragraph 3, making it possible to the Treasury Department, among others things, to cross check data relating to the CPMF with information on other tax.

As mentioned in the initial pleadings of the Constitutional Direct Action 2406 initiated by the Federal Confederation of Industries in February 2001 and still pending a decision, both the 4th paragraph of Article 5 of Complementary Law 105 of 2001 and paragraphs 2 and 3 of Law 10.174/01, as amended, automatically tear apart the bank secrecy, establishing that financial institutions periodically provide, regardless of any Judicial Order or any suspicious of illicit activity, information to the tax authorities for the purposes of monitoring collection of taxes.

Worst, however, was the enactment of Complementary Law number 105 of 2001 (“CL 105/2001”), which revoked Article 38 of the banking law. In its place, Article 1 of CL 105/2001 repeats the provision that financial institutions must keep secret their active and passive operations as well as services rendered.

However, the third paragraph to article 1 of CL 105/2001 establishes that the following situations shall not be considered a violation of banking secrecy:

(i) the exchange of information between financial institutions for record purposes, including the exchange made through risk centres, observing the rules enacted by the National Monetary Council and the Central Bank of Brazil (“BACEN”);

(ii) the supply of information of default debtors to private data banks and entities of credit protection, observing the rules enacted by the National Monetary Council and the BACEN;

(iii) the supply of information by financial institutions to the Internal Revenue Service for the purposes of collection of the Provisional Contribution on Financial Transfers (“CPMF”), in accordance with the conditions and terms established by the Treasury Department;

(iv) the reporting of criminal or administrative illicit activities to the competent authorities, including information on transactions that involve funds deriving from criminal activities;

(v) the disclosure of confidential information with the express consent of those concerned; and

(vi) the supply of information as set forth in articles 2 [12], 3[13] , 4 [14], 5[15] , 6[16] , 7[17] and 9[18] of CL 105/2001[19].

In accordance with Article 1, paragraph 4 of CL 105/2001 , the disclosure of bank secrecy may only be ordered when it is necessary to verify the occurrence of any illicit activity, in any stage of investigations or legal proceedings, and especially (but not only) in case of:

(i) terrorism;

(ii) illicit trafficking of narcotic substances or similar drugs;

(iii) smuggling or trafficking of weapons, munitions or materials used for their production;

(iv) extortion through kidnapping;

(v) crimes against the national financial system;

(vi) crimes against the Public Administration;

(vii) crimes against the fiscal and social security order;

(viii) money laundering or concealment of assets, rights and valuables; and

(ix) crimes performed by criminal organizations.

It must be emphasized that the aforementioned list of illicit activities is not exhaustive.

In accordance with articles 2 and 3 of CL 105/2001, banking secrecy is also incumbent on the BACEN and on the Securities Exchange Commission in their activities monitoring financial institutions. Paragraph 6 of Article 2 of CL 105/2001 reiterates money laundering limitations to bank secrecy. However the third paragraph to article 3 of CL105/2001 determines that the BACEN and the Securities Exchange Commission shall provide the Attorney General with information and documents necessary to the defence of the Federation. This, predictably, is another provision being questioned as being against the Constitution[20] .

Worst, still, Article 5 of CL105/2001 establishes that the Executive Branch of the Government shall determine the criteria in relation to banking operations to be informed by the financial institutions to the tax authorities. This provision has been claimed to be unconstitutional by several authors and in four Direct Constitutional Actions still pending a decision. In accordance with paragraph 4 of Article 5, the tax authorities may request additional information and perform inspections and auditing in the books of financial institutions.

Likewise, Article 6 of CL105/2001 establishes that the Brazilian tax authorities may examine the documents, books and records of financial institutions, including those related to deposit accounts and the financial investments of third parties, when a tax administrative proceeding is taking place. The sole paragraph establishes that any resulting information shall be kept secret in accordance with the tax legislation. This provision has been questioned in three Direct Constitutional Actions[22].

Pursuant to Decree 3.724 of January 10, 2001 a tax proceeding will depend on a specific order, called a Writ of Tax Proceeding, established by an act of the Internal Revenue Service. Public agents or inspectors of the Internal Revenue Service are empowered to dispatch the Writ of Fiscal Proceeding and to request financial information. Such request should be addressed, as the case may be, either to the BACEN, the Brazilian Securities Exchange Commission, the financial institution, or finally, the manager of a banking agency. The BACEN and the Brazilian Securities Exchange Commission, through their respective presidents, or a public servant, should communicate, to the Internal Revenue Service, within 15 (fifteen) days, any irregularities and administrative offences of which they become aware.

The above-mentioned provisions of CL 105/2001 and Laws 9.311/96 and 10.174/01 are clearly in breach of the Constitutional provisions referred to above, insofar as bank secrecy is a fundamental Constitutional right and a basic guarantee, which could only be lifted as a result of a Judicial Order. In accordance with Article 60, paragraph 4, item IV of the Constitution the individual rights and guarantees cannot be abolished, not even by Amendments to the Constitution. It is to be hoped that the final decisions on the several Direct Constitutional Actions as referred to above confirm this position, which is defended by several scholars [23]. In this respect, Professor Ives Gandra da Silva Martins [24] wrote:

“The question of breach of bank secrecy, in my opinion, has been propagated by the press, with sufficient frequency and much emotion, in announcements by authorities and specialists, with preconceptions pro and against the Treasury Department often prevailing on its legality.

The essence of the problem consists in the fact that the breach of bank secrecy contained in the complementary law 105/2001 is, fundamentally, a legal question and must be examined exclusively in light of the quality of the legislative diploma.

And through this prism, the affirmation that the bank secrecy could not be broken without the complementary law is not correct.
Nothing is more inconsistent than the affirmation that the previous system protected the tax evaders.

The system has never assured the tax evasion. It has always been possible to lift the bank secrecy, with the prevailing jurisprudence of the Supreme Court authorising such step, being enough for the tax authority to demonstrate the existence of indications.
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What the previous system evidently allowed, was the protection, not of the tax evader, but of the taxpayer against the tax authorities’ discretion, against possible politic persecution to the most severe critics of the Government, to the escape goats created, in the style of the romance of Orwell (1984), for demonstrating that the Public Power works.

The previous system, therefore, guaranteed the Treasury department against the tax evader and the good taxpayer against the Treasury department, being incumbent to a neutral and technical branch of the Government to say if the indications were sufficient to allow the breach of bank secrecy or not.

Thus, what the new law intended was to move the Judiciary away from this preliminary audit, granting, exclusively, to the Inland Revenue the right to invade the privacy of individuals, regardless of the participation of the Judiciary.

For this reason, the vice-president of the Supreme Federal Court, the President of the Superior Court of Justice and the President of the Tribunal of Justice of São Paulo, perceiving that the law is not against the tax evader – who has never had protection of the Judiciary – but against the Judiciary, which is in charge of preserving the constitutional guarantees, have declared said law as being of manifested unconstitutionality. The fundamental rights of the taxpayer (article 5º items X and XII) cannot be violated, being incumbent on the Judiciary, who is the guardian of the law, to preserve the rights of the State and those of the society, as the Judiciary has done many times, when cutting short badly supported attempts at breaching bank secrecy on the part of the Inland Revenue.

It is not excessive to recollect that all who have so far commented on the matter are, as the Secretary of the Inland Revenue, contrary to the tax evasion, as I am, already having, in successive opportunities, including together with the Secretary of the Inland Revenue himself – whom I like and respect – presented suggestions of improvement to the tax system, many times with his agreement.

The problem, however, is not this. Tax evasion must be fought and can be fought with the previously existing legal instruments. What one must not do is to harshly treat the fundamental rights of the taxpayers, removing the Judiciary from the auditing of the matter, which item XXXV of article 5º of the Federal Constitution prohibits. It seems to me, therefore, that the question is merely legal. The complementary law moves fundamental rights away from the taxpayers (article 5º items X, XI and XXXV) and does not aim at protecting the tax evader from breach of bank secrecy – protection which he has never had – but to prevent the Judiciary from exerting the function of Neutral Branch, that defends the Treasury department against the tax evader and the good taxpayer against the Treasury department. This is, by the way, the key-note of successive editorials of the “Estado”, which I applaud.

I can only understand such measure as repression by the Executive Branch of the Government to another Branch of the Government which, by having to preserve the Constitution, has many times become cumbersome to the Government which, unfortunately, in recent times, does not excel for the respect to the fundamental rights of the society.”

The above-mentioned provisions of CL 105/2001 and Laws 9.311/96 and 10.174/01, limiting bank secrecy, are also in breach of the Universal Declaration of the Human Rights, signed by Brazil in 10.12.1948, which foresees, in its article XI, that “nobody will be subject to interferences in its private life, in its family, its home or its correspondence, nor to attacks to its honour and reputation. All individuals have rights to the protection of the law against such interferences or attacks “. The same provision is contained in article 11, item “2” of the American Convention of Human Rights, ratified for Brazil in 25.09.1992.