Circular Letter CVM/SMI 05/2015

SECURITIES COMMISSION OF BRAZIL
Rua Sete de Setembro, 111/2-5th and 23-34th Floors – Center – Rio de Janeiro - RJ – ZIP: 20050-901 – Brazil Tel.: (21) 3554-8686 - www.cvm.gov.br Circular Letter No. 05/2015/CVM/SMI Rio de Janeiro, July 30, 2015.
To institutions participating in the securities distribution system, registrars, central depositories and custodians of securities.
Subject: Guidelines on internal routines and controls related to the prevention of money laundering and terrorist financing (AML/CFT) – CVM Instruction No. 301/99 and amendments.
Dear Sir/Madam,

1. The main objective of this Circular Letter is to present the interpretation of this technical area regarding the best way to comply with the determinations imposed by CVM regulation for the prevention of money laundering and terrorist financing (AML/CFT), in the provision of services with securities by the institutions referenced.

2. The document will begin with a presentation of general considerations regarding the scope and applicability of AML/CFT regulation to market participants supervised by this Superintendency, and on the fulfillment of obligations provided for in the regulation, such as the communications provided for in articles 7 and 7-A of the aforementioned Instruction.

3. Subsequently, details related specifically to the fulfillment of regulatory requirements by each of these activities will be presented.

1. GENERAL CONSIDERATIONS

4. The crime of money laundering can be defined as a set of commercial or financial operations that seek the incorporation, into the country's economy, in a temporary or permanent manner, of resources, assets, and values of illicit origin, through a dynamic process that involves, theoretically, three independent phases that, not infrequently, occur simultaneously, namely 1: Placement, Concealment, and Integration.

1 http://www.coaf.fazenda.gov.br/pld-ft/sobre-a-lavagem-de-dinheiro

SECURITIES COMMISSION OF BRAZIL
Rua Sete de Setembro, 111/2-5th and 23-34th Floors – Center – Rio de Janeiro - RJ – ZIP: 20050-901 – Brazil Tel.: (21) 3554-8686 - www.cvm.gov.br

5. Thus, by the very nature and objective of the illicit activity to be combated, the agent who uses a money laundering process always seeks to rely on complex and opaque legal and operational structures and operations, to hinder their detection by those obligated by Law 9.613/98, with regard to their preventive action, and the competent authorities responsible for their investigation.

6. In this sense, it is natural to assume that, precisely because of knowledge of the supervision and inspection activities exercised by participants in the financial system, the criminal has a preference for fragmented operations and structures to ensure that none of the obligated persons and respective supervisors can have complete visibility of the money trail (follow the money), in order to hinder the satisfactory accomplishment of supervision activities over such illicit activities.

7. In this way, much less than denouncing an illicit operation, an act that would require an inconceivable conclusive assessment regarding the illicit nature of the operation, the duty of article 7 of CVM Instruction No. 301/99 deals with a communication of a suspicious operation, that is, operations that, under the terms of that norm, present only "serious indications of money laundering crimes", in accordance with the hypotheses provided for in article 6 of the same Instruction.

8. Therefore, it is not a condition for the communication of a suspicious operation that the communicating institution has conviction of its illicit nature. It is sufficient for this that it can establish a consistent and well-founded conviction of its atypicality, in accordance with art. 6 of the norm.

9. In this context, the role of COAF (Financial Activities Control Council), as the Financial Intelligence Unit, is to receive, analyze, and disseminate, when appropriate, such atypical events originating from all persons obligated by Law No. 9.613/98, including those obligated by CVM Instruction No. 301/99, for the competent authorities to take the appropriate measures regarding the criminal sphere.

10. In this sense, CVM has identified, in its supervision efforts, that market participants, when carrying out communications involving several market segments (for example, the banking and capital markets), often opt to make only a single and exclusive communication, usually to the Central Bank of Brazil (“BACEN”), with all information regarding the suspected case consolidated.

11. We emphasize that such procedure is incorrect and should be avoided by institutions, as it is well known that market segments regulated by their own entities (as is the case, in the example given, of the banking and capital markets, regulated, respectively, by BACEN and CVM) are assigned the institutional mission of inspection regarding the adequacy and sufficiency of the structures maintained for AML/CFT by their regulated entities, work that is made impossible when the institution consolidates its communications through an exclusive channel and, consequently, omits the due communication to some other regulator(s).

SECURITIES COMMISSION OF BRAZIL
Rua Sete de Setembro, 111/2-5th and 23-34th Floors – Center – Rio de Janeiro - RJ – ZIP: 20050-901 – Brazil Tel.: (21) 3554-8686 - www.cvm.gov.br

12. Thus, whenever a suspicious communication involves, even partially, operations with stocks, derivatives, investment fund shares, or other securities, this communication must necessarily also be made to COAF through the “CVM Segment”.

13. For this purpose, we understand it to be important that institutions maintain control and monitoring systems for the identification of atypical operations that are not only effective and efficient, but also designed in a rational and proportional manner, in the sense of prioritizing the verification of operations that have a higher probability of revealing themselves to be atypical. In this sense, we cite throughout this document some non-exhaustive examples of situations for which, in our view, the AML/CFT control systems of market participants should be particularly attentive. These considerations are the result of the main doubts and questions brought to the attention of the technical area, and are also the result of some perceptions and conclusions arising from ongoing supervision actions.

2. SPECIFIC CONSIDERATIONS

2.1 NECESSITY OF SPECIAL ROUTINES FOR INVESTORS PROVIDED FOR IN ART. 6, § 1

14. An initial issue concerns the need to maintain special and more rigorous verification routines for hypotheses of suspicious operations for the categories of investors provided for in article 6, § 1, of CVM Instruction No. 301/99.

15. We emphasize that, given the peculiarities inherent to the categories of investors inserted therein, it does not seem possible to sustain that the treatment given to clients classified as non-resident investors, especially companies constituted with bearer shares and trusts, Private Banking investors, and politically exposed persons, is the same as that given to other categories of clients, however rigorous the verification routines adopted may be.

16. In this vein, an observation worthy of mention concerns the service providers contracted by non-resident investors to act in the Brazilian securities market, in accordance with CMN Resolution No. 4.373/14.

17. As provided for in CVM Instruction No. 560/15, non-resident investors must contract, to operate in accordance with CVM regulation, at least one representative and one provider of securities custody services, services that are usually provided by the same financial institution or institution authorized to operate by the Central Bank of Brazil.

18. Furthermore, when carrying out operations in a regulated securities market that depend on an intermediary, the non-resident investor may avail themselves of the option provided for in article 9 of CVM Instruction No. 505/11 to carry out a simplified registration, provided that the conditions provided for in that norm are met.

SECURITIES COMMISSION OF BRAZIL
Rua Sete de Setembro, 111/2-5th and 23-34th Floors – Center – Rio de Janeiro - RJ – ZIP: 20050-901 – Brazil Tel.: (21) 3554-8686 - www.cvm.gov.br

19. At this point, we underline that the registration of a non-resident investor by an intermediary under these conditions does not mean nor allow assuming that AML/CFT routines are also mitigated in any aspect, either by the intermediary in which the investor carried out their registration, or by the service providers of representation and custody of these investors.

20. In these cases, the alert of article 6, § 1, of CVM Instruction No. 301/99 remains equally valid, that obligated persons “must pay special attention to operations in which... non-resident investors participate, especially when constituted in the form of trusts and companies with bearer titles”.

21. Thus, we alert that if the intermediary, custodian, or even the representative of the non-resident investor encounters any situation that may suggest a communication of an atypical operation to COAF, the absence of complete registration information regarding this non-resident investor cannot serve as a basis for not continuing the usual inquiries practiced by the institution, and it must, if necessary, proceed to obtain complementary information essential for forming a conclusive judgment on the atypicality of the operation.

22. In short, the possession of simplified content of registration information, within the scope of CVM Instruction No. 505/11, cannot be interpreted as synonymous with simplified monitoring of this investor's operations in the securities market, as provided for in articles 3-A, 6, and 7 of CVM Instruction No. 301/99.

23. We recall, moreover, that many of the hypotheses of monitoring and detection of warning signs provided for in article 6 do not necessarily depend on the completeness of the non-resident investor's registration information.

24. It is also worth mentioning that, on some occasions, such categories of investors may use investment vehicles to carry out their operations, for example, exclusive funds.

25. For this reason, the example of funds constituted with the purpose of welcoming as shareholders the investors listed in article 6, § 1, of CVM Instruction No. 301/99, highlights the need for a more rigorous (or broader) verification posture of atypical operations, since, in these cases, the vehicle used may conceal the real identity of the beneficiary of the operations.

2.2 ON THE MONITORING OF OPERATIONS

26. In accordance with arts. 3-A, 4, and 7 of CVM Instruction No. 301/99 and amendments, all operations subject to negotiation or registration must be subject to monitoring for the purpose of identifying the warning signs described in art. 6 of the same norm.

SECURITIES COMMISSION OF BRAZIL
Rua Sete de Setembro, 111/2-5th and 23-34th Floors – Center – Rio de Janeiro - RJ – ZIP: 20050-901 – Brazil Tel.: (21) 3554-8686 - www.cvm.gov.br

27. As already mentioned, the atypical event now detected must be analyzed with a view to defining whether it will be communicated, or not, to the CVM segment of Siscoaf, without any judgment regarding its illicit nature.

28. Finally, it is pertinent to highlight that, as provided for in § 5 of art. 7 of the norm, the records of the conclusions of your analyses regarding operations or proposals that underpinned the decision to make, or not, the communications referred to in the main text must be kept for a period of 5 (five) years, or for a longer period by express determination of CVM, in case of administrative process.

Sincerely,

WALDIR DE JESUS NOBRE
Superintendent of Market Relations and Intermediaries (SMI)

SECURITIES COMMISSION OF BRAZIL
Rua Sete de Setembro, 111/2-5th and 23-34th Floors – Center – Rio de Janeiro - RJ – ZIP: 20050-901 – Brazil Tel.: (21) 3554-8686 - www.cvm.gov.br

ANNEX I
ON THE QUALITY OF SUSPICIOUS COMMUNICATIONS
Within the scope of Law No. 9613/98, especially in CVM Instruction No. 301/99, and with a view to the permanent increase in the efficiency of the Brazilian system for the prevention of money laundering and terrorist financing (AML/CFT), as well as the supervision of the securities market, we present below some issues to improve the communications of suspicious operations originating from the securities market, which must, whenever applicable, be explored by the obligated persons subject to SMI supervision when sending reports to COAF.

Initially, it is important to recall that, unlike what occurs with some of the communication hypotheses provided for in the norms of the Central Bank of Brazil, CVM Instruction No. 301/99 does not bring hypotheses of automatic communications. On the contrary, article 6 of the Instruction lists only events that must be worked as suspicious communications, and that always require the punctual analysis of the event to be communicated, or not.

It is worth noting that the cited article 6 brings a merely exemplary list, and not exhaustive, that is, if any situation not provided for in the device is identified, but that constitutes an atypicality capable of being communicated to COAF, such communication must be made, with the detailed description of the situation then identified.

In this line, each report must be worked individually and justified in the most detailed way possible, and it must contain, whenever applicable, the following information:

• Client's relationship start date with the institution;
• Date of the last registration update;
• Value declared by the client of income and assets on the date of their last registration update;
• Operational modalities carried out by the client that led to the identification of the atypical event, if applicable;
• Value of the operational limit in the period in which the operations subject to the communication were carried out;
• Within the “Know Your Customer” policy, any supplementary information obtained when applying item I of art. 3-A of CVM Instruction 301/99;
• Data that allow identifying the origin and destination of the resources that were the subject of the client's business, and of its counterparty, if applicable;
• Additional information that may better explain the suspected situation identified (without prejudice to the description of the item of art. 6 of CVM Instruction 301/99 that relates to the atypical event detected), that is, the reason why the event was considered atypical by the institution.

It is worth remembering here that, when carrying out the report, one or more of the segments listed there (stocks, derivatives, investment funds, or other securities) may be indicated, as well as one or more classification hypotheses, within the items of art. 6 of CVM Instruction 301/99.

Still on this subject, when the eventual detection of an event related to item I of article 6 (operations whose values appear objectively incompatible with the professional occupation, income and/or the asset or financial situation of any of the parties involved, taking as a basis the respective registration information) the possibility of this event also being associated with other classifications must be evaluated, especially items XIV, XV, and XVI:

XIV – situations in which it is not possible to keep client registration information updated; XV – situations and operations in which it is not possible to identify the final beneficiary; and XVI – situations in which the diligence provided for in art. 3-A cannot be concluded.

SECURITIES COMMISSION OF BRAZIL
Rua Sete de Setembro, 111/2-5th and 23-34th Floors – Center – Rio de Janeiro - RJ – ZIP: 20050-901 – Brazil Tel.: (21) 3554-8686 - www.cvm.gov.br

ANNEX II
ON NEGATIVE COMMUNICATIONS
As already described in item 1.1 of this Circular Letter, the obligations provided for in CVM Instruction No. 301/99 related to AML/CFT must be observed by all service providers listed in this document that maintain registration with CVM.

In this context, we recall that natural or legal persons obligated who have not provided any communication of a suspicious operation to COAF, as provided for in art. 7 of Instruction No. 301/99, in a given calendar year, are obliged to send, by the end of January of the following year, the non-occurrence in the previous calendar year of transactions or proposals for transactions capable of communication, in accordance with art. 7-A of the same Instruction (“negative declaration”).

We recall that the negative declaration must be effectively sent to COAF through the Siscoaf system, already available for such communications, and not to CVM, as already object of clarifications provided by several Circular Letters of this Superintendency together with SMI, such as No. 04/2013, No. 01/2014, and No. 01/2015.

For the necessary qualification and respective access to Siscoaf (maintained available by COAF on its website on the worldwide computer network) that allows the carrying out of positive and negative communications, the following clarifications apply:

i) To obtain general guidelines on the use of Siscoaf Access the COAF portal at URL: http://www.coaf.fazenda.gov.br Option: OBLIGATED PERSONS  Frequently Asked Questions.

(ii) For qualification in the Siscoaf system
Access the COAF portal at address http://www.coaf.fazenda.gov.br, option OBLIGATED PERSONS  Access to Siscoaf  Click on the option “First Access”. The screen for selecting the Type of Obligated Person will be displayed: Legal Person or Natural Person. After selecting one of the Types of Obligated Person, that is, CNPJ (legal person), or the CPF of the obligated person, if it is a natural person. The system will lead to the filling in of the basic data of the obligated person and definition of the respective responsible user. Before the conclusion of the qualification, the system will allow the definition/choice of the responsible user's password for access to Siscoaf. For more information, use the Siscoaf registration and qualification Manual, available in the option OBLIGATED PERSONS  Siscoaf Manuals.

(iii) Access profiles – Siscoaf will make two access profiles available to the Obligated Person. One of the profiles refers to the responsible user who is qualified at the time of the qualified person's qualification. The responsible user, once qualified, may include new users in the user profile.

SECURITIES COMMISSION OF BRAZIL
Rua Sete de Setembro, 111/2-5th and 23-34th Floors – Center – Rio de Janeiro - RJ – ZIP: 20050-901 – Brazil Tel.: (21) 3554-8686 - www.cvm.gov.br

(iv) To carry out communications related to art. 7 to COAF, Access the COAF portal at address http://www.coaf.fazenda.gov.br, option OBLIGATED PERSONS  Access to Siscoaf  use the CPF and Password or the Digital Certificate of the user of the E-CPF type. After access validation, opt for the segment “CVM – Securities Market”. Select the option Communicate. The referred system has functionalities to administer user, send/consult communications, batch communication sending, as well as access via webservice.

(v) To carry out communications related to art. 7-A to COAF, Access the COAF portal at address http://www.coaf.fazenda.gov.br, option OBLIGATED PERSONS  Access to Siscoaf  use the CPF and Password or the Digital Certificate of the user of the E-CPF type. After access validation, opt for the segment “CVM – Securities Market”. In addition to the functionalities above, the referred system also has the option of sending the “negative declaration”, PEP Registration Consultation.

(vi) To access all system functionalities, the responsible user must use a digital certificate of the E-CPF type. If digital certification is not used, the system will allow only the sending of communications, user registration (for the person responsible for the institution), and consultation of the protocol of the communications sent.

(vii) To access the Siscoaf Test and Training environment:
Access the URL: http://treina.siscoaf.serpro.gov.br

Observation:
The FOLDER OBLIGATED PERSONS, which is made available on the COAF portal www.coaf.fazenda.gov.br concentrates the functionalities and information regarding Siscoaf – Financial Activities Control System, pertinent to Obligated Persons.
Such as:

• Access to Siscoaf
• Siscoaf Manuals
• Siscoaf Communications
• Consultation of Obligated Persons
• Frequently Asked Questions

It is worth saying that the obligated person, in accordance with art. 7-A of CVM Instruction No. 301/1999, must send a single negative declaration, regardless of the number of registrations or authorizations it possesses in this Commission.