Brazil: Financing And Lease Agreements Funded Through BNDES Finame Must Now Include New Compliance-Related Clauses

The National Bank for Economic and Social Development ("BNDES") has issued new regulations concerning its BNDES Automatic, BNDES Finame, BNDES Finame Lease and BNDES Finame Agriculture programs ("Programs") which require that new loan and lease agreements for on-lending of funds, or leasing of assets acquired with funds, as applicable, from any of the Programs contain obligations commonly associated with corporate compliance programs.

The Programs are popular sources of funding for debt-financed acquisition or lease of equipment and machinery by Brazilian mid-sized and large companies, as they rely on funding sources available to BNDES, a federal government-owned company, which are priced below market rates. Brazilian banks authorized by BNDES act as financial agents in the Programs by on-lending funds for financed acquisition of assets or acquisition and lease of assets to clients. The overall financial cost comprises BNDES funding costs and charges plus a spread charged by the bank.

The new clauses concerning compliance, which Rule SUP/AOI No. 04/2016-BNDES, of February 2, 2016 requires be inserted in relevant agreements with clients, set forth the following obligations:

  • ensure absence of improper advantage: borrower or lessee, as applicable, shall not offer, promise, give, authorize, request or accept, directly or indirectly, improper advantage, whether financial or of any nature, related in any way to the scope of the loan or lease, and shall take all measures available to it to prevent its directors, officers, employees, agents, representatives, suppliers, contractors, subcontractors, and those of companies controlled by borrower/lessee, from doing so;
  • reporting: within 30 days from the date when borrower/lessee first becomes aware that borrower/lessee, or any company controlled by it, or any of its or a controlled company's directors, officers, employees, agents, representatives, suppliers, contractors, or subcontractors are involved in any investigation, inquiry, lawsuit, judicial or administrative proceeding related to a harmful conduct, a breach of law or a crime concerning economic or tax policy, "laundering" or concealment of assets, the national financial system, capital markets, or the public administration of Brazil or a foreign nation, borrower/lessee must (i) provide lender/lessor with copies of any ruling issued within said proceeding as well as detailed information on the measures taken in response to the proceeding, to the extent that borrower/lessee, a controlled company or their directors, officers, employees, agents or representatives are involved; and (ii) submit to lender/lessor, once available, copies of any judicial or extrajudicial settlement, conduct adjustment commitment, leniency agreement or other similar arrangement reached or executed, to the extent that borrower/lessee, its controlled companies or their directors, officers, employees, agents or representatives are involved.

Rule SUP/AOI No. 04/2016-BNDES also establishes that analysis and custody of the documents provided pursuant to the reporting obligation described above are the sole responsibility of lender/lessor.

The obligation to ensure absence of improper advantage is inspired by Article 5 (II), of Act No. 12,846, August 1, 2013 ("Anticorruption Act"). The clause required by BNDES, however, covers a wider scope, since (i) the prohibited conduct includes "authorizing, requesting or accepting" improper advantage, which are not included in the wording of the Anticorruption Act; (ii) the improper advantage is not limited, as in the Anticorruption Act, to that attributed "to a public agent or related third party", meaning that the clause may in principle be applied to dealings between private agents; and (iii) borrower/lessee's undertakings extend to third parties such as "suppliers, contractors or subcontractors."

In the latter point BNDES has gone beyond compliance obligations provided for under Brazilian law and in business practice, and seems to have put the parties in a dilemma: they could either construe the clause as implying an obligation narrower than the text suggests (e.g., by reading "reasonable efforts" where the clause refers to "all measures available"), giving rise to legal uncertainty, or they could apply it strictly, potentially imposing an excessive burden on borrower/lessee.

Borrower/lessee's obligation to report, combined with lender/lessor's responsibility for analyzing and keeping incoming documents in custody, may add complexity and costs to the contractual relationship.

An interesting point is the potential interaction between the clauses required by BNDES and Article 5 (II) of the Anticorruption Act. This subsection provides that "demonstrably funding, financing, sponsoring or otherwise subsidizing the practice of unlawful acts set forth in this Law" constitutes a harmful conduct against the public administration subject to administrative and civil penalties. According to Article 2 of the Anticorruption Act, such penalties apply on a strict liability basis, i.e. without a finding of fault. In the absence of regulations or judicial precedent (which as yet do not exist), such provision has aroused fears among banks that they may indiscriminately be held responsible for corruption or other harmful acts against the public administration performed by borrowers or related parties with funds provided by the bank – the destination of which, ultimately, banks cannot control.

BNDES does not have authority to regulate or provide guidance on the Anticorruption Act. Nevertheless, Rule SUP/AOI No. 04/2016-BNDES is relevant to the discussion because the required clauses imply a modus operandi that does not appear consistent with a direct link between lending of funds and responsibility for the use of proceeds. Rather, said clauses suggest that, at least in the context of the Programs, the bank's role and responsibility shall be limited to demanding that the borrower and related parties refrain from corruption and other illicit acts, monitoring compliance with such demands through documents and information provided by borrower, and accelerating the loan if a violation occurs. Such a solution would certainly be less harmful to banks than a direct link of responsibility for the use of loan proceeds, but may still prove sufficiently burdensome to have an impact on the cost of capital in Brazil.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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