Mundie Advogados

Budget watchdog accuses Brazilian government of creative accounting

Thursday, 25 June 2015 (4 days ago) by Toby Luckhurst

Brazil’s Federal Court of Accounts (TCU), a government budget watchdog, has asked President Dilma Rousseff to explain financial irregularities in the federal government’s accounts – the first time the TCU has called on a Brazilian president to do so – but while lawyers agree the decision has damaged the government’s credibility, impeachment remains unlikely.

The TCU will pass its report to Congress, which will vote on whether to approve or reject the accounts The TCU will pass its report to Congress, which will vote on whether to approve or reject the accounts (Credit: filipefrazao)

The TCU gave President Rousseff 30 days from 17 June to explain hidden liabilities totalling more than US$90 billion in the government’s accounts for 2014. The court wants the Rousseff administration to explain what it has dubbed “creative accounting” to artificially boost the economy during an election year. President Rousseff was re-elected on a slim majority in October last year, winning a second round runoff with a 51.4 per cent share of the vote. The government denies the allegations.

The TCU claims the government delayed transferring funds to three state-owned banks, Banco do Brasil, BNDES and Caixa Econômica Federal, used for social security programmes. The banks distribute funds as payment for unemployment insurance, agricultural credits for farmers, the family allowance (known as Bolsa Familia), the social housing programme (known as Minha Casa, Minha Vida), and a sustainable investment programme (a lending scheme adopted by the government that provides discounted loans through state banks). By delaying the transfer of funds, government expenditure in 2014 seemed lower and the accounts more balanced – when in reality, the government had simply not made the payments.

The banks were still able to make payments for the social programmes on time, but they only received compensation from the Treasury afterwards. As Demarest Advogados banking and finance and corporate restructuring partner António Aires explains, this meant the state-owned banks made the payments without prior authorisation and effectively gave loans or credit to the government. This is a violation of Brazil’s Fiscal Responsibility Law. Partner Paulo Prado at KLA-Koury Lopes Advogados agrees and says that, strictly speaking, the government’s decision to postpone transferring the funds to the banks until after the social security payments were made comprised a tacit loan, “which would be classified as a crime against the public finances.”

The case is the first time in Brazil’s history that the TCU and Public Prosecutors Office have agreed to reject the government’s accounting statements and the TCU has never before issued a report recommending that Congress reject the government’s accounts. The TCU does not have the power to approve or disapprove the federal accounts, but issues a technical report giving its opinion on whether or not to accept the accounts. This report passes to the Public Prosecutor’s Office, an independent body of public prosecutors charged with enforcing the law, who recommend their view on how the TCU should proceed. The court then passes its final report on to Congress.

During the dictatorship of Getúlio Vargas in 1937, a TCU minister recommended rejecting the government’s accounts, but the TCU did not approve the plan. “To this day, this is remembered as the best example of the independence of the TCU,” explains Gustavo Alexandre Magalhães, a public law partner at Campos Fialho Canabrava Borja Andrade Salles Advogados, who believes this move by the TCU is a positive step for the independence of Brazil’s institutions. “The current situation, in which the [TCU] and Public Prosecutor’s Office have already issued their technical report recommending the rejection of the statements, is unprecedented in Brazilian history,” he says. Mundie e Advogados partner Elinor Cotait agrees that this is a sign that the country’s independent institutions are working. The majority of TCU members are former politicians nominated by the president, she explains, so their decision shows the institutions are effectively holding the government to account.

The government could be penalised if Congress agrees with the TCU’s technical report. Brazil’s Fiscal Responsibility Law says the government can be sanctioned for crimes against public finances and for carrying out domestic or international credit transactions without authority from Congress. Moreover, Aires explains that individuals found to have violated the law could be removed from office and prevented from exercising public duties. “This means impeachment, in the case of the President,” says Aires. Impeachment would require Congress to vote by a two-thirds majority to have the President tried by the Senate, or alternatively the Supreme Court could criminally charge the president for her actions.

However, Rousseff is protected by Brazil’s constitution, which states that the president cannot be punished for acts committed in a previous period. Since the alleged creative accounting occurred in Rousseff’s first term and not her second, she technically cannot be impeached for it, says Aires. Prado agrees that impeachment is one possible outcome, but is unwilling to speculate. “In theory, a president found responsible for practices deemed to be irregular could open a door for impeachment proceedings, [but] this is mainly a political discussion,” he says.

The case could have implications for Brazil’s credibility in the eyes of the market. “It is beyond doubt that these circumstances will have effects on the financial markets and on potential investors,” says Magalhães. The government’s actions have damaged investor confidence. “These technical reports that show such ‘creative accounting’ by the Brazilian government hurt its credibility before the markets, further damaging confidence needed to create an environment where investors are comfortable putting their money in Brazil – be it the Chinese government or any other private investor that may have been interested in the recently announced package of public concession and infrastructure works.”

On a more positive note, others believe the TCU’s allegations could force positive change in the way Brazil’s government handles its finances. “This close scrutiny represents a significant incentive for the government to adopt healthy and transparent financial management,” explains Cotait.

Aires says the unprecedented case represents “an evolution never before seen in Brazil, towards the strengthening and autonomy of its institutions.” He believes that Brazilians are now more willing to hold those in positions of power to account, as shown by the millions of protesters who took to the streets in the summer of 2013 to protest against rising fares in public transport and government corruption, and in April 2015, again to protest against corruption and to denounce Rousseff’s administration.

But Prado is more doubtful, believing this could be more of a sign that the government has been unable to handle the current economic crisis effectively. “It is probably too early to decide whether this is a signal of stronger institutions or a demonstration of weak government,” he says. Brazil registered negative growth in the first quarter of the year and is expected to see its economy contract by 1 per cent this year. All the while, rumbling corruption scandals have engulfed state oil company Petrobras and drawn in politicians in the president’s inner circle, including the incumbent Workers’ Party’s treasurer.