COMPLIANCE ZERO OPERATION REVEALS A SYSTEM, NOT A SCANDAL

THE COMPLIANCE ZERO OPERATION DOESN’T REVEAL AN ISOLATED CASE OF MISCONDUCT, BUT RATHER A SYSTEMIC PATTERN OF PRACTICES THAT ALLOWED FINANCIAL INSTITUTIONS TO TAKE EXTREME RISKS, IGNORING WARNINGS AND PUTTING TAXPAYERS AT RISK. THE SCHEME INVOLVED A BANK PAYING 140% OF THE CDI, COURT-ORDERED PAYMENTS (“PRECATORIOS”) APPARENTLY “APPRECIATING” 235% IN JUST FIVE DAYS, A R$50 BILLION CHECK GUARANTEED BY THE DEPOSIT GUARANTEE FUND (FGC), FAKE CREDIT PORTFOLIOS, AND A MARKET THAT TURNED A BLIND EYE BECAUSE COMMISSIONS WERE STILL FLOWING TO INTERMEDIARIES AND BROKERS.

THE SCHEME WAS SIMPLE IN THEORY BUT HIGHLY EFFECTIVE FOR THOSE ON THE INSIDE: BANKS, BROKERS, AND SOME AUDITORS PRETENDED EVERYTHING WAS NORMAL WHILE FINANCIAL PRODUCTS, INCLUDING PRECATORIOS, GUARANTEED CHECKS, AND FAKE CREDIT PORTFOLIOS, WERE OVERVALUED IN JUST A FEW DAYS. THIS CREATED AN ILLUSION OF EXTREME PROFITABILITY, ATTRACTING INVESTORS AND PRESSURING THEM TO MAKE NEW INVESTMENTS WITHOUT CLEARLY SEEING THE REAL RISKS.

BTG, WHEN ANALYZING R$70 BILLION IN POTENTIAL TRANSACTIONS, APPROVED ONLY 2%, SHOWING THAT THE VAST MAJORITY OF OPERATIONS DID NOT MEET BASIC SAFETY CRITERIA. BRB RECEIVED WARNINGS ABOUT THE RISKS, IGNORED THEM, AND ALMOST HAD TO COVER PART OF THE LOSSES WITH ITS OWN FUNDS. THE CENTRAL BANK WAS AWARE OF THE TRANSACTIONS, INTERNAL AUDITS KNEW, AND MARKET SPECIALISTS WERE ALSO AWARE, BUT OPERATIONS CONTINUED UNTIL THE LAST MINUTE WITHOUT INTERRUPTION.

THE SCHEME RELIED ON FOUR MAIN PILLARS:

• ILLUSORY RETURNS: PAYING 140% OF THE CDI, OVERVALUING PRECATORIOS, AND CREATING FAKE CREDIT PORTFOLIOS MADE THE INVESTMENTS APPEAR EXTREMELY PROFITABLE, ATTRACTING UNSUSPECTING INVESTORS.

• FGC GUARANTEES: USING CHECKS AND FINANCIAL INSTRUMENTS GUARANTEED BY THE DEPOSIT GUARANTEE FUND CREATED A FALSE SENSE OF SECURITY, EVEN WHEN THE UNDERLYING ASSETS WERE HIGHLY RISKY OR SIMPLY DIDN’T EXIST.

• COMMISSIONS AND INCENTIVES: THE FINANCIAL MARKET, RECEIVING COMMISSIONS FROM THESE TRANSACTIONS, IGNORED WARNINGS AND ASSESSED RISKS LESS RIGOROUSLY, PRETENDING EVERYTHING WAS NORMAL.

• ASSET MANIPULATION: FAKE CREDIT PORTFOLIOS WERE CREATED AND PACKAGED AS PROFITABLE PRODUCTS, OFTEN WITH OVERVALUED FIGURES. THESE PORTFOLIOS EITHER DID NOT EXIST OR WERE OF VERY LOW QUALITY, BUT THEY WERE USED AS COLLATERAL TO RAISE NEW FUNDS, MAINTAINING THE ILLUSION OF STABILITY.

THE ATTEMPT TO SHIFT A TROUBLED BANK TO TAXPAYERS’ POCKETS CONTINUED UNTIL THE LAST MINUTE. THE WORST PART IS NOT WHAT HAPPENED, BUT WHAT ALMOST HAPPENED. CASES LIKE THIS COULD HAVE RESULTED IN MILLIONS IN LOSSES FOR THE FINANCIAL SYSTEM AND PUBLIC FUNDS.

THIS TYPE OF SCHEME WORKS BECAUSE IT COMBINES ASSET OVERVALUATION, A FALSE SENSE OF SECURITY, ECONOMIC INTERESTS OF MARKET PARTICIPANTS, AND FAKE CREDIT PORTFOLIOS, MAKING SERIOUS WARNINGS EASY TO IGNORE. ADDITIONALLY, THE COMPLEXITY OF FINANCIAL PRODUCTS AND LACK OF TRANSPARENCY MADE IT DIFFICULT FOR INVESTORS AND AUTHORITIES TO QUICKLY IDENTIFY THE REAL RISKS.

IN SUMMARY, THE COMPLIANCE ZERO OPERATION SHOWS THAT THE PROBLEM IS NOT AN ISOLATED ERROR, BUT A SYSTEM THAT ALLOWS BANKS AND THE FINANCIAL MARKET TO TAKE EXTREME RISKS, IGNORE WARNINGS, AND APPEAR PROFITABLE, PUTTING TAXPAYERS IN DANGER. THE MAIN LESSON IS THE IMPORTANCE OF EFFICIENT AUDITS, STRICT INTERNAL CONTROLS, TRANSPARENCY, AND CRITICAL EVALUATION OF FINANCIAL PRODUCTS TO PREVENT CASES LIKE THIS FROM HAPPENING AGAIN.