I have written before about how Brazil was in the right way regarding arbitration. This post it to take that back.
I'm not recommending Brazil as a venue for arbitration anymore. At least not until some very sensitive issues are solved.
Here is the story:
In February, the Brazilian Revenue Service (which I will call Beast from now on) has contacted many arbitration chambers, asking them for information about the fees their arbitrators were receiving. I read the news at the time (I read everything related to Brazilian taxes compulsively, as the old readers already now), but didn't pay too much attention.
The Beast has the right to ask for commercial information, of course. Arbitration chambers are organized as foundations, associations or companies, all of which must keep financial books, collect labor taxes over what the pay their employees, etc. So, nothing wrong about asking to check the chamber's own books.
But the Beast has required a full copy of all the arbitration procedures, evidences and confidential documents included !
You know what that means? It means delivering your computer codes, commercial plans and, theoretically, even the Coca Cola Formula to some government employee.
Not to mention that the Revenue Service employs several law interns, who usually are 18 or 19-year-olds and who have full access to all the data and procedures.
Why would they do that?
1) The Beast is afraid that arbitration will turn out to be big money laundering and tax evading schemes;
2) Brazilian government's "zeitgeist" is that professional secrecy, specially regarding lawyers, it getting in the way of tax collection (if destroying professional secrecy is against the constitution does not seem to bother them)
3) The Beast has noticed that many arbitration procedures are not conducted by lawyers, and, therefore, are easier to break in, since other professions are not as well protected regarding confidentiality (one should note that the chambers managed by the Bar Association have not suffered any attack)
4) The Beast wants to use the information it acquires from the arbitration procedures, specially regarding corporate structures, offshore subsidiaries, etc to plan raids and investigations against big companies.
And can they do it?
It depends.
If there is no lawyer involved in the arbitration, the Revenue Service could, theoretically, ask for the documents that are strictly necessary in order to assess how much the arbitrators have been paid, and how much the chamber has received in fees. A previous agreement or some excerpts of the final decision should suffice.
But I understand that full disclosure is way out of their powers, and completely illegal.
How to prevent it?
1) Do not arbitrate in Brazil;
2) If arbitration in Brazil is mandatory for some reason, use the Bar Association arbitration chambers, and use only (or mostly) lawyers as arbitrators;
3) Add an obligation to destroy the arbitration procedure's records.
I'm very sad, but I'm serious.
What do you think about that?
You may check part 3 and part 2.
Why not arbitrate using foreign based arbitrators? Lay people cannot beat the lawyers!
ResponderExcluirIt is not as easy as this. I have no experience with Brazilian arbitration yet, however, the issue is extremely serious, for the following reasons:
Excluir1. If the Arbitration institution collects the files of a proceeding, these files are in danger. In such case appointing foreign arbitrators is not the solution.
2. Appointing foreign arbitrators may be a solution if the files remain in their hands.
3. If appointing foreign arbitrators is considered as a solution, it must be assured that the foreign arbitrator is not charged with brazilian taxes. This depends on the notion of the place where the service of the arbitrator is delivered and if the Brazilian tax legislation considers a service rendered by a foreign arbitrator as rendered in Brazil and additionally, if in such case the Brazilian tax law considers the arbitrator as taxable, notwithstanding his origin, citizenship and seat.
5. As to Brazilian politics: it is clear that such practice is not compatible with the principle of confidentiality of arbitration. We all know that arbitration is from time to time used for money laundring. But it is under the sole responsibility of the arbitrators if they disclose facts to public authorities. Actually, they may be obliged to do so according the legal framework they are working in. But the state is under no circumstances allowed to demand the submission of files, despite in case where concrete investigations for criminal offenses are pursued.
6. At the end, I would like to ask: What is the legal basis of such practice? Is there a statute law? What would the Constitution or/and the Constitutional Court of Brazil say in such a situation?
This is one of the solutions, I think.
ResponderExcluirWhat Court decisions have been given in Brazil about the revelation of arbitration papers?
ResponderExcluirWhat should an arbitrator do when s/he suspects that the arbitration is a collusive device for money laundering?
The matter has not reached courts yet.
ExcluirBrazil has some rules on gate keeping, that demands financial institutions (inter alia) to report suspicious activities.
But these regulations do not include arbitration chambers, and also do not include accountants or lawyers. Professional secrecy duties prevent these professionals from reporting tax fraud or any other schemes.
Are you from the UK? I understand things are very different in the UK. Your lawyers must report suspicious activities, right?
Regards,
Adler
Este comentário foi removido pelo autor.
ResponderExcluirDear Adler,
ResponderExcluirinteresting article. From my view as lawyer I agree with some points but regarding some points I would make distinctions.
That the revenue service looks for hidden incomes of the arbitrators etc. is quite normal. But I think that your are right that the tax authorities should not take the opportunity to take the case files.But this is the game. I think it would be a big mistake to believe that such information are confidental. The German tax authorities have bought in the last years several times CD´s from bank employees of Swiss and Luxemboughian banks and of banks of Liechtenstein with data of German tax dodgers. In these countries this was a criminal act of the employees because the bank secret was protected also by criminal law. Therefore, we had a very controversial discussion if the German authorities may use also illegal sources. The end of the story was that the German revenue certainly used the data independent of any legal doubts.
You recommend to avoid arbitration in Brazil. In this point I agree in the field of international arbitration if all parties accept an arbitrator outside Brazil.
For lawsuits in Brazil I would prefer in the most cases still arbitration because the alternative would be a public court (long duration, no specialized judges, etc.). It is only important to be aware that the files are not protected.
In our firm we have extensive experience with arbitration. The main problems are:
- Establishing the arbitration court: If the rules are not clear the defendant can take the opportunity and can jam or at least delay the trial.
- Advance on cost: The most arbitration courts require a payment in advance. Normally each party has to pay 50 %. Sometimes it happens that the defendant does not make the payment. If the plaintiff does not make also the payment for the defendant the arbitration would fail.
- Finding of a good arbitrator: Not each good lawyer or legal expert is a good arbitrator. As to that we have made already some bad experiences.
How is the situation in Brazil?
Regards,
Thank you very much for the comments.
ExcluirI know that everywhere in the world tax authorities are cracking arbitration and banks. But in Brazil the situation is disproportionate. Receita Federal already has access to all bank accounts (illegally, but still) and all company's information. And now it is looking for ways to get rid of professional secrecy altogether. It it wasn't for the Brazilian Bar Association, Receita Federal would be monitoring our email messages right now.
The problems you indicate are, indeed serious. But they are less prominent in Brazil, for the following reasons:
1) The procedures of most Arbitration Chambers are very strict, and contains provisions taking power away from the parties that act with unjustifiable delay (we are experts in delaying court procedures, so the lawyers who drafted the procedures took extra care to avoid that);
2) Most of time, claimant will advance 100% of the costs.
3) We have some excellent arbitrators, who are easily available. This is because arbitration is still scarce in Brazil, of course. If arbitration picks up and gets popular, we will suffer from a severe brain shortage.
I think arbitration is still better than a regular court procedure.
My team and I are studying ways to prevent inspections from Receita Federal. Some simple steps, such as keeping the records in a law firm, are very effective (Receita Federal has lost the power to perform raids in law firm's offices looking for third party's evidence).
Grüße aus Belo,
Sounds tad bit alarmist/hasty, Adler.
ResponderExcluirThere are remedies available to prevent disclosure (writ of mandamus) and destroying the records raises a number of issues (e.g., enforceability to start with, as it'll be really easy to vacate any award).
Well, I'm alarmed. After all, the hundreds of pages of the FGV's arbitration procedures are already in the hands of the Revenue Service, and cannot be taken back. No writ of mandamus (I assume you are talking about Mandado de Segurança) will remedy that (Receita may hand back the files, but it already had access to all the data).
ExcluirThe enforceability really is an issue. But only the arbitral decision is essentially necessary in order to start the execution. The expert opinions, exhibits and other documents related to the procedure are not required. In this sense, the destruction of the records (at least the records that would be kept by the arbitration chamber) will not cause any harm.
Thanks for the comments.
Adler
With all due respect, I have a diverse opinion.
ResponderExcluirBrazil ratified the New York convention in 2002 and parties are fully protected under arbitration international principles in Brazil.
There are many Court decisions refusing to rule when it verifies there is arbitration clause.
To bear in mind that Brazilian Federal Revenue BFR is entitled to "request" documents but not to force its presentation.
In the last case, only Judiciary can do that and according to law.
with all due respect, the above main post discussion seems more a "fairytale arbitration" than a concrete case.
With all due respect, it does not bring any contribution in academic view and risk to pass worldwide a complete failed, misscorrect and misstechnical information about International Arbitration in Brazil..
With all due respect Adler, if you do not have yet enough data to put in discussion some issue because of some closure of information, in my view it is better to await the apropriate moment instead of give worldwide a complete errouneous view of how Arbitration works in Brazil and the erroneous view that lawyers and accounts are untouchble here, because they are not.
The main principle and interest of arbitration is confidentiality and Judiciary in Brazil reinforce it always when claimed to say about.
The solution of this "players" called by BFR is simple: call a lawyer (and it is not necessary a lawyer who participated in the arbitration) to go to court to ask to rule some provisionary measure untill rule in what cases the Chamber is obliged to show the books/numbers/payments (and there are some cases in law that presentation of books is mandatory). As simple as that. And the court will rule, reinforcing Arbitration confidentiality, reinforcing necessity to furnish to BFR the payment subjetcted to taxes.
Contrary to the above main post, I state that it is secure to choose arbitration in Brazil, which 1997 Law is very strengthened, studied and ruled as constitutional by the Supreme Court and, as I said above, Brazil is part of New York convention, what gave to arbitration parties safe and security.
There is not "mandatory arbitration" in Brazil, with all due respect. Arbitration is an act of free will. "Mandatory arbitration" is a viscious in the source because the condition sine qua non of arbitration is free will to submitt to it, with all due respect.
There is no legal requeriment of lawyers as arbitrators in Brazil and the presence of a Brazilian lawyer fortunately is not a guarantee for criminal acts in Brazil (fortunately) like money lawndery, with all due respect.
In a recent example we have the Ação Penal 470, ruled by the Supreme Court where the Court condemned lawyers that used its profession to commit crimes with their clients.
A lawyer that commit crime is a criminous (and a lawyer until have s/he licence got off).
With all due respect, (i) or I missunderstood your point (ii) or the solution is as simple as I stated above, with no risk to the institution of Arbitration in Brazil.
BFR may "ask" citizens (individuals or companies) whatever it wants, but BFR can ask them only what the law says that BFR can ask. If BFR ask more than the law allow, we have a serious Judiciary to rule and put the train on the tracks.
Thanks for the comments.
ExcluirThe case about FGV chamber is, indeed, real. It is outrageous, but real. You may check it easily, it is in most newspapers.
A very good coverage may be found here: http://www.conjur.com.br/2013-abr-26/receita-fiscaliza-camaras-arbitrais-exige-acesso-sentencas . No fairy tale.
You technical arguments are correct (a lawyer is not mandatory in Brazilian arbitrations, STF has upheld arbitration as valid, there is no mandatory arbitration, etc.)
Except for a few details: 1)the parties to the arbitration may not be able to seek provisional measures in order to stop the Revenue Service from having access to the records, because the records are kept by the arbitration chamber. If the arbitration chamber fails to seek the appropriate legal remedies, the parties will be helpless. Technically, they will not even receive a notification stating that their records have been compromised. It will be up to the arbitration chamber to inform the parties.
If you add the situation above to the fact that BFR is famous for making illegal requests regarding documents, you may see that the secrecy of the arbitration is under great pressure.
Also, 2) BFR may not be able to force anyone to present documents, but it can certainly arbitrate any value it judges appropriate as due taxes in case the documents are not handed over. Since the reversal of such actions takes many years, most people choose to simply hand the documents.
Finally, keep in mind that FGV chamber is one of the major chambers in the country, and that it indeed handed over all its files. It is not hypothetical, it is been reported broadly, and FGV did not deny it. Any harm that could have been caused has already taken place. Therefore, I don't think my warnings are overstated.
Of course, I hope for a reaction from the Brazilian legal community, both before the judiciary and through political pressure. Also, it should be noted that ad hoc arbitrations are still safe, since there is no central body that can be contacted by BFR.
Yet, if a client of mine asks if he should choose Brazil as the venue for arbitration, I must, under the current circumstances, point out that the Brazilian Revenue Service has put the secrecy of arbitration at risk. All other conditions being the same, Brazil should not be chosen.
I have received all kinds of feedback on this. I'd say the results are split between those who believe that BFR is only performing its duties and those who take the recent events as a frontal attack against arbitration and professional secrecy.
Abraço,
Adler
to not be "intruded" one might choose an administered arbitration which is outside of Brazil like the ICC which would never disclose any information regarding a case to foreign least French authorities. If on top the place of arbitration is not Brazil ne shuld be on the safe side.
ResponderExcluirThis is a good idea. Thanks.
ExcluirHow is this matching with the New York Convention of 1958? Will a foreign arbitral award be regarded somehow different?
ResponderExcluirRegarding the Brazilian Revenue Service, the only difference is that an arbitration conducted abroad would be very difficult to be investigated.
ExcluirThe arbitral decision, of course, will be public, for it must be presented before Brazilian courts in order to be enforced. But the records would remain private.
What of "ordinary" ad-hoc arbitrations conducted by individuals or panels without reference to or involvement of an arbitral chamber?
ResponderExcluirAd-hoc arbitrations would be much safer. Still, Revenue Service could, in theory, ask the arbitrator for copies of the procedures. This is why I insist that using a lawyer as arbitrator would be safer, as lawyers are protected from this kind of scrutiny.
ResponderExcluirWelcome to the "brave new world". Tax collectors everywhere are becoming bolder in their activities to confiscate your money. I don't know where all of this will lead, but it is not good.
ResponderExcluirThe revenue service in Brazil always acted this way. People in charge of finding money, and does not matter if this proceeding is legal or not. The exceptions of law are never applicable to the cases, following the belief of the revenue agents. Do not matter if you are under a prerrogative of the law, and exactly following the precedents. The question is "how much money the revenue could take from you". These abuses have been done indistinctly, not only about arbitration. Sad but true!
ResponderExcluirVery interesing. In my opinion this may mean that arbitration court in Brazil have 'something' to hide. I am not suprised by public interest in 'clear' arbitration. Should we be afraid or rather support behaviour of Brazil public authorities? The arbirtration court should be subject to investigantion an equal basis as common courts. At the end arbitration courts play the same role in judicial system of given country.
ResponderExcluirI'm not so sure they have anything illegal to hide. All the information required by law can be obtained by the Revenue Service directly with each company. I think the discussions in arbitration are related to commercial secrets that the Revenue Service is not entitled to have.
Excluir