By Brazil Stock Guide – Brazil’s central bank fined Banco Genial R$ 21.56 million and barred its current chief executive, André Schwartz, from serving as an officer or statutory director at regulated financial institutions for four years after concluding that the bank failed to properly assess clients responsible for more than US$ 1.2 billion in foreign-exchange transactions, most of them linked to cryptoasset purchases overseas.
The decision was unanimously approved on Wednesday by the Banco Central do Brasil’s Administrative Sanctions Decision Committee, known as Copas. Schwartz was also fined R$ 516,000.
Director Willian Kenzo Yoshihiro was fined R$ 732,000 and received a six-year ban, while Luís José Rebello de Resende was fined R$ 180,000.
Genial disputed the ruling and said it would take the appropriate steps to overturn it.
“Banco Genial wishes to clarify that the proceeding concerns foreign-exchange transactions conducted between November 2020 and October 2021,” the bank said in a statement. “At the time, Banco Genial complied with all applicable regulations. The BCB interpreted facts from more than five years ago based on rules that only came into effect in February of this year.”
“Banco Genial is fully compliant with all regulations currently in force. The proceeding resulted in a total of 21 acquittals, demonstrating the excessive and unfair nature of the allegations. The financial institution has robust governance, has always complied with regulation, and will take all appropriate measures to overturn the unjust convictions.”
BCB Says Clients Acted as Intermediaries
The central finding in the case involves 2,038 foreign-exchange transactions conducted for nine clients between November 2020 and October 2021, totaling US$ 1.208 billion.
According to the BCB, Genial failed to adequately assess the clients’ financial capacity, track records and business practices.
Four of those clients accounted for more than 1,800 transactions and US$ 1.154 billion in foreign exchange used to acquire cryptoassets overseas.
Genial’s defense argued that the clients were crypto arbitrage firms conducting proprietary transactions with their own funds. The bank said their trading limits were calibrated to available cash and that the cyclical nature of the transactions allowed them to replenish their financial capacity throughout the day.
The BCB rejected that explanation.
According to the opinion delivered by rapporteur Climério Leite Pereira, the cash balance reported on a single balance-sheet date represented only a snapshot of liquidity and could not establish whether the clients had sufficient financial capacity to conduct transactions throughout the year.
BCB examiners also identified a mismatch between the business model presented to the bank and how the transactions actually operated.
Account statements reviewed by the regulator indicated that the funds used to settle the overseas cryptoasset purchases came directly from Brazilian counterparties. Anti-money-laundering reports later prepared by Genial also described the clients as intermediaries in cryptoasset purchases and sales.
The BCB concluded that Genial had treated intermediaries as if they were conducting proprietary trades funded exclusively with their own capital.
The transactions involving clients without adequate due diligence represented 61.9% of all financial transfers sent overseas by Genial during the period.
That category of transaction also accounted for nearly 80% of the bank’s activity in Brazil’s primary FX market, where financial institutions trade directly with end clients rather than with other banks.
The regulator classified the violation as serious, saying the volume was large enough to severely affect the bank’s foreign-exchange operations.
Schwartz, who was responsible for the bank’s FX business until March 2021, was held accountable for approximately US$ 520 million of the transactions. Yoshihiro, who subsequently assumed responsibility for the area, was held accountable for about US$ 687 million.
The BCB said it found no corrective action by either executive sufficient to mitigate the effects of the violations. A previous administrative conviction involving Yoshihiro also weighed on the decision to impose the longer, six-year ban.
BCB Rejects US$ 421 Million Reporting Allegation
The proceeding initially alleged that Genial had failed to report 502 foreign-exchange transactions totaling US$ 421.18 million to Brazil’s financial intelligence unit, the Council for Financial Activities Control, known as Coaf.
The transactions were conducted for a client whose reported financial capacity was considered inconsistent with the volume involved.
Copas, however, sided with the bank on this specific allegation.
The rapporteur said a breach of foreign-exchange client due-diligence requirements did not automatically make the underlying transactions suspicious for anti-money-laundering purposes.
According to the opinion, the evidence was insufficient to establish that the client’s funds had an illicit origin or were intended for an unlawful purpose.
Genial’s Coaf-related conviction instead arose from a separate episode.
The bank learned in December 2021 that some clients had been named in a police investigation and decided to terminate the relationships. One of the required reports, however, was not filed with Coaf until Nov. 25, 2022, after Federal Police agents executed a search warrant at the bank’s São Paulo office in September of that year.
The BCB concluded that the suspicious activity should have been reported by Jan. 31, 2022.
The regulator said the delay exposed the bank to being drawn into a police operation and caused reputational damage to both the institution and the wider financial sector. The violation was therefore classified as serious.
Internal-Control Deficiencies
A third part of the proceeding examined Genial’s anti-money-laundering framework between December 2022 and April 2023.
The bank’s defense said Genial had a robust structure, including policies, manuals, automated systems and procedures commensurate with its size. It also challenged the extension of the period under review, arguing that the disputed FX transactions had occurred in 2020 and 2021.
The BCB accepted some of those arguments.
The rapporteur acknowledged, for example, that the bank had a specific manual covering customer identification, ultimate beneficial owners, representatives and risk classification.
Copas nevertheless identified deficiencies in Genial’s internal risk assessment, the formalization of procedures, record-keeping for cash-paid payment slips processed through other financial institutions and evidence that the bank had tested the effectiveness of its controls.
According to the opinion, the only control-effectiveness report submitted by the bank was issued in March 2023 and did not demonstrate that such an assessment had existed during the period under review.
The BCB also dismissed an allegation that Genial had failed to implement adequate procedures to identify assets belonging to individuals or entities subject to United Nations Security Council sanctions.
The committee found that the case record did not contain sufficient evidence to establish that violation.
How the Fine Was Calculated
The R$ 21.56 million fine imposed on Genial was divided into three components:
- R$ 4.20 million for deficiencies in internal policies and controls;
- R$ 8.92 million for inadequate due diligence on foreign-exchange clients;
- R$ 8.44 million for the delayed Coaf report.
Apart from the bank and the three executives who were sanctioned, the other administrators named in the proceeding were either cleared or had the allegations against them dismissed.
Ailton de Aquino Santos, the BCB’s director of supervision and president of Copas, said the opinion had accepted some of the defense’s arguments while making the regulator’s position clear on billion-dollar transactions involving cryptoassets.
Aquino said the four-year ban should result in Schwartz stepping down as Genial’s chief executive.
The ruling was issued at the first level of Brazil’s administrative enforcement system and may be appealed to the National Financial System Appeals Council, known as the CRSFN.
Under Brazilian law, an appeal against the monetary fine automatically stays its enforcement. The management ban, however, is not automatically suspended, although Schwartz may ask Copas to stay the penalty while his appeal is pending.
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