Brazilian Federal Court Rules for Public Scrutiny over BNDES Loans

Unprecedented decision calls for transparency in use of taxpayer funds

Rio de Janeiro, Brazil – A federal appeals court based in Rio de Janeiro (TRF-2) has ruled that the Brazilian National Development Bank (BNDES) must publicly disclose technical reports used for justifying approval of major loans. The court decision was provoked by a lawsuit filed in 2011 by Folha de São Paulo, one of Brazil's largest newspapers, after BNDES refused a request for access to "analytical reports" produced by bank staff to appraise loans above BRL 100 million (USD 46 million) approved between January 2008 and March 2011. The reports analyze the situation of intended borrowers, justifications for bank financing and credit risks of proposed operations. Despite its status as a public financial institution, ultimately funded by Brazilian taxpayers, BNDES has refused to publicly disclose such documents, citing federal legislation on banking secrecy (Complementary Law no. 105/2001).

Last year, a federal judge in Rio de Janeiro, Dario Ribeiro Machado Junior ruled partially in favor of the Folha de São Paulo lawsuit, authorizing public disclosure of reports on BNDES loans to public enterprises, but not on operations involving private companies. The newspaper appealed the decision to the TRF-2, calling for disclosure of all documents, while BNDES also appealed, demanding that all reports on loan operations remain secret. In a 2-1 decision last week, the appeals court determined that reports on BNDES loan operations requested by the Folha de São Paulo should be made public, except for "banking and fiscal information of borrowers." It is expected that BNDES will appeal the court's decision.

In casting her vote, Judge Carmen Silvia Lima de Arruda of TRF-2 concluded that the Folha de São Paulo possesses a Constitutional right, supported by a previous Supreme Court decision, to request public disclosure of BNDES documents that illustrate criteria for loan approval. Arruda's decision argues that "in reality, BNDES does not publicize any data relevant to the analysis carried out by its technical departments concerning the opportunity and convenience of loans that have been contracted. The absence of publicity regarding such criteria in the operations of BNDES reveals a system of planned obscurity."

In a similar vein, fellow judge Guilherme Couto de Castro of TRF-2 voted that BNDES documents concerning its loan operations are "essential and of unquestionable public interest; there should be no impediments to the disclosure of such data". The judge also argued that an unstated goal of BNDES, in denying public access to loan documents, is to avoid disclosure of "favors granted to the friends of the king."

Such mistrust reflects a growing controversy over a marked tendency within BNDES to favor a select group of powerful Brazilian multinational corporate actors in its lending portfolio, while failing to publicly disclose justifications for loan approval and credit risks. A particularly notorious example involves mining and oil tycoon Eike Batista, a so-called 'national champion' of the Lula and Rousseff administrations, that was the recipient of BRL 10.4 billion (USD 4.175 billion) in low-interest loans. Once Brazil's wealthiest individual, Batista dramatically fell from grace in 2013 when a series of high-risk business ventures failed to produce high returns promised by the billionaire causing widespread alarm that BNDES had no effective system for managing risks associated with its loans.

The TRF-2 decision benefitted from a legal opinion provided by the Federal Public Prosecutors' Office (Ministério Público Federal – MPF). In a document signed by federal prosecutor Luis Pereira Claudio Leiva, MPF argued that transparency is an essential element of BNDES' operations, given that it is a public financial institution funded by Brazilian taxpayers that should be financing projects in the public interest. "The performance of BNDES deserves severe criticism due to its manipulation by political interests, with fuzzy criteria that reach the extreme of complacency in the face of defaults by borrowers and concessionaires," he said.

"This ruling is a victory for transparency. The bank uses taxpayer money to back some of the riskiest loans in Brazil and abroad, and the costs of so many of these investments end up being shouldered by the public" said Brazilian lawyer Maíra Irigaray Castro, of Amazon Watch. "BNDES must open its books to the Brazilian public. That's the only way to guarantee that taxpayer funds are used correctly."

In November 2011, the Brazilian Congress passed a bill on public access to information (Federal Law 12.527/2011) within the context of a voluntary multilateral initiative known as Open Government Partnership which allows individuals to request information from government institutions that must be disclosed unless a clear justification can be provided on the need for confidentiality.

Civil society organizations have long lobbied for transparency regarding BNDES loans in Brazil and elsewhere – claiming that the public has the right to scrutinize the bank's use of capital obtained from the country's taxpayers. Particular attention has focused on controversial projects such as the Belo Monte mega-dam complex in the Brazilian Amazon, generously financed through a record-breaking loan package of BRL 25.5 billion (USD 11.6 billion). Despite the new legislation, BNDES has repeatedly denied requests for access to information on key aspects of its loans operations, such as analysis of social, environmental and economic risks.

"This decision (of TRF-2) is a positive sign from the Brazilian judiciary that represents a small and important step for human rights protection and accountability of BNDES operations. The bank's investments in large-scale development projects, such as Belo Monte and other large dams in the Amazon, have had serious impacts on the human rights of communities and on the environment." said María José Veramendi from AIDA. "Belo Monte, for example, has precautionary measures from the Inter-American Commission on Human Rights because of the lack of protection of indigenous communities that are impacted."

Lack of transparency linked to deficient social and environmental safeguards

In February 2012, the federal environmental agency, IBAMA, fined Norte Energia, S.A. a public-private consortium that holds the concession for the Belo Monte dam complex, a total for BRL $7 million for failing to implement required actions to mitigate the social and environmental impacts of the project], as stipulated in licenses granted in 2010 and 2011. The fine, which is under appeal at IBAMA, apparently provoked no concrete action from BNDES to address non-compliance with environmental legislation.

During the implementation of BNDES-funded projects, monitoring of human rights and environmental legislation, including compliance with other specific loan conditions, has been notoriously deficient, critics say. When violations have been documented, BNDES has typically failed to take corrective action, including suspension of loan disbursements, unless environmental licenses themselves are suspended by IBAMA or court decision. According to Brent Millikan from International Rivers, suspension of environmental licenses is highly unlikely, given the high levels of political intervention within IBAMA and the judicial system.

The number of civil lawsuits filed against BNDES-funded projects for violations of the rights of affected communities, labor legislation at construction sites and environmental legislation has become the focus of increasing attention in Brazil. A just-released study by investigative journals Agência Pública> and O ECO identified a total of 80 lawsuits filed by state and federal Public Prosecutors against 17 of 20 large infrastructure projects financed by BNDES in the Brazilian Amazon between 2008 and 2012. According to the report, the most common motivations for lawsuits include defective environmental impact assessments, lack of prior consultations with affected communities as legally mandated, non-compliance with conditions of environmental licenses and violations of workers' rights at dam sites, including unsafe conditions contributing to accidental deaths. The 'champion' among infrastructure projects under litigation was Belo Monte, with 21 lawsuits filed over more than a decade. In September, the Federal Public Prosecutor`s Office (MPF) filed a lawsuit that included BNDES as a co-defendant with Norte Energia and IBAMA, citing a chronic failure to assess and mitigate impacts of Belo Monte on the Xikrin indigenous people that live near the dam site on the Xingu River.

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