Banks don't know what to do with restrictions on Moraes

Brazilian banks are still studying the scope of the Global Magnitsky Act sanctions imposed by the Trump administration on Supreme Court Justice Alexandre de Moraes . Financial sector analysts interviewed by Gazeta do Povo admit that legal consultations on the impacts on banking products and services are ongoing. In addition to the unprecedented nature of the case, the assessment is that not even legal experts in the United States are clear about the legislation's full effects.

The Magnitsky Act — passed in 2016, during the Barack Obama administration — authorizes sanctions against foreigners accused of serious human rights violations and corruption, without the need for a conviction in court.

Moraes was included in the list of OFAC (Office of Foreign Assets Control), an agency of the US Treasury, accused of leading an “oppressive campaign of censorship” and authorizing abusive arrests of defendants in the invasion of Congress on January 8, 2023.

The sanctions against the judge, according to the US Treasury note, include the freezing of his assets in the United States, a ban on transactions with American citizens and companies, and exclusion from the dollar-linked international banking system.

Moraes downplayed the impact, stating he has no assets or investments in the US. But the legislation's effects go further. In practice, the measure is considered a kind of "financial death penalty."

Since most global transactions pass through the American system, banks, individuals, or institutions that, even if not American, maintain commercial or financial relations with the target may be hit by secondary sanctions.

In this sense, a Brazilian bank that processes transactions for Moraes could, in theory, face millions in fines, have assets frozen in the US, or even lose access to the American banking system. Therefore, financial institutions are on alert.

How far can Magnitsky go?

In the financial world, there's a perception that the note regarding Moraes' inclusion on the sanctioned list is vague and that domestic transactions—conducted in reais—remain permitted, meaning the minister could maintain bank accounts in Brazil. International transactions—including credit cards—and foreign exchange transactions, on the other hand, may run afoul of US regulations.

But there are also those who believe that financial institutions with which Moraes has a relationship would need to terminate their contracts with the minister, under penalty of being punished, since they have operations in the US and conduct transactions in dollars.

The question—which has consumed experts in litigation and compliance in the financial system—is how far Brazilian institutions will need to go to comply with Washington's determinations.

Gazeta do Povo questioned Brazil's three largest banks on the matter. Itaú's statement was straightforward: "Itaú Unibanco strictly complies with the laws of all countries in which it operates. The bank does not comment on specific cases, regardless of whether they are related to clients or not, in strict compliance with banking secrecy."

Banco do Brasil, through which the minister receives his salary as a public servant, stated: "In compliance with banking secrecy laws, BB does not comment on clients' financial transactions." Bradesco did not respond to questions by the time this report was published. The Brazilian Federation of Banks (Febraban) said it would not comment.

Judicialization can be "embarrassing"

Amid the uncertainty, one alternative in particular raises concerns: the judicialization of Magnitisky's sanctions. For one industry source, a challenge by the judge would create an "embarrassing" situation. "It would be a serious problem," he says. "Compliance with American law could pose serious problems for a figure of internal influence, who wields influence over institutions."

Another executive, however, believes in the banks' pragmatism. "Ultimately, there's not much room for maneuver. Those who operate abroad, with businesses and assets in the United States, know they need to follow what comes from abroad," he summarized. "Very clearly, it's something that must be complied with, regardless of whether there are constraints or not."

Criminal lawyer Berlinque Cantelmo, a partner at RCA Advogados, believes Moraes may challenge the measure in court in Brazil, arguing that Brazilian financial institutions are not obligated to comply with the orders of a foreign country.

"However, the reality of the global market, which depends on the US financial system, may make this challenge ineffective in practice," he said. He added that banks should assess legal and reputational risks, seek "expert opinions, and possibly restrict operations to avoid involvement with anyone listed in the sanctions."

Guilherme Barcelos, a doctor of Constitutional Law and partner at Barcelos Alarcon Advogados, believes the legal dispute is legitimate “if Brazilian banks feel pressured to cut ties with Minister Moraes.”

"The decision of institutions to follow restrictions imposed by the US, without the support of a competent national authority, could be considered unconstitutional and an attack on sovereignty," he states. "This is without taking into account executive mechanisms, such as provisional measures, which could also, at least in theory, be triggered."

For him, however, three paths are most clearly feasible: through the Ministry of Foreign Affairs; through the administrative and institutional sphere, directly at the U.S. State Department; and through the judicial system, still in the U.S. But he emphasizes that, to date, within the U.S. judiciary, "no affected party who has sought judicial redress to overturn the sanction has been successful."

Another executive sees room for Brazilian diplomacy to try to negotiate an "interpretation" with the US, arguing that Moraes's situation does not fit within the original purpose of Magnitsky—created to target drug traffickers, international corruption, and human rights violators. "There are even American legal experts who share this interpretation," he states.

Magnitsky at lunch, at dinner, and in Washington

Moraes, in turn, has already stated that he wants the government to act politically, including canceling visas and Magnitsky sanctions in protests and demonstrations that the Ministry of Foreign Affairs may hold regarding the Trump administration's measures.

The topic has been discussed in private meetings. In early August, President Luiz Inácio Lula da Silva (Workers' Party) hosted a dinner in support of the judge. Days later, Moraes, Gilmar Mendes , and Cristiano Zanin attended a lunch with banker André Esteves (BTG Pactual), the Attorney General of the Union, Jorge Messias, the Attorney General of the Republic, Paulo Gonet, and representatives of other financial institutions.

At this meeting, in Brasília, at the home of Rodrigo Maia, president of the National Confederation of Financial Institutions (CNF), details were given of how the automatic verification mechanisms that block transactions by clients listed in the law work, making any circumvention attempt impossible.

So far, however, the sanctions against Moraes have not reached the maximum level. According to a banker, the situation is still "fixable," Globo reported, but it is not ruled out that his wife, lawyer Viviane Barci, will also be included.

Another meeting, this time in Washington, promises to bring news. Federal deputy Eduardo Bolsonaro (PL-SP) and journalist Paulo Figueiredo will participate, this Wednesday (13) and Thursday (14), in a new round of talks with American authorities and direct advisors from the White House.

In addition to articulating the application of the Magnitsky Act against Moraes, the possibility of sanctions against other justices of the Court will be discussed. The idea, according to Paulo Figueiredo, is also to "talk with American authorities so that OFAC can clarify and leave no shadow of doubt about the extent of the sanctions."

Even without the details, legal experts initially understand that compliance with Magnitsky will be inevitable.

"Obviously, these banks will obey that law and freeze Moraes's accounts. There is no other alternative," says constitutionalist Vera Chemim. "The issue is complex in any arena—diplomatic, administrative, or judicial—and, judging by the accusation for which Moraes is being sanctioned, I think it's unlikely to be reversed in the short term."

For Chemim, law enforcement should become more rigorous, depending on Moraes' future conduct. The "serious political-ideological crisis" at the root of the entire imbroglio, she says, will persist for some time. "Later, the situation may spontaneously ease with the reestablishment of the diplomatic crisis. In the medium to long term, perhaps there will be a light at the end of the tunnel."