Brazil Audit Court Orders Probe Into Liquidation of Banco Master

(Bloomberg) -- A member of Brazil’s audit court ordered an investigation of the central bank’s procedures that were used to liquidate Banco Master SA, a move that risks undermining the legal certainty of the bank’s regulatory rulings in Latin America’s largest economy.

In his decision, Minister Jhonatan de Jesus wrote that the inspection of related central bank documents should move swiftly to clarify the “motivation, coherence and proportionality” behind its decision to dismantle the financial institution.

The investigation does not reverse the liquidation of Master, but opens the door to that possibility. De Jesus has not ruled out that “precautionary measures” to protect the liquidated assets could be taken, but the audit court has not specified a timeline.

Banco Master’s liquidation followed months of investigations into its operations and its politically connected Chief Executive Officer, Daniel Vorcaro, who spent about a month in jail before being released with an ankle monitor.

The central bank found evidence suggesting attempted fraud in the proposed sale of Master to Banco de Brasilia SA, an institution owned by the government of Brazil’s capital city. The findings were forwarded to the federal police and the federal public prosecutor’s office, who in turn sought the arrest of Vorcaro and other executives last November. Two seperate accusations of irregularities are also under investigation by authorities.   

As the controversy over Master has intensified, the central bank is under growing pressure, from both the audit court as well as the nation’s highest court. 

In early December, Supreme Court Justice Dias Toffoli moved to take control of the investigation after a defense lawyer argued that police actions could affect individuals with parliamentary immunity. 

Among documents seized during a search of Vorcaro’s home was paperwork related to a real estate transaction involving a federal lawmaker. Although unrelated to the Master investigation, Toffoli ruled the document sufficient to require that any legal action be evaluated first by the Supreme Court instead of by a lower court.

Although the decision to investigate the central bank should be approved by other ministers, the chief of the audit tribunal, Vital do Rego, accepted de Jesus’ request. Do Rego asserted in a statement that there’s “no doubt” that his court has jurisdiction over the central bank. He pointed to constitutional provisions that grant the audit court control over the direct and indirect federal public administration that extends to autonomous bodies like the central bank. 

Once touted as a rising star in Brazilian finance, Master attracted billions of reais from retail investors through investment platforms, promoting its bonds as safe because they were backed by Brazil’s deposit insurance system, the Credit Guarantee Fund, or FGC. The fund covers up to 250,000 reais per investor, capped at 1 million reais over four years.

A central bank rule change in 2023 tightened access to the FGC, punching a hole in Master’s business model. A second rule change, approved in August, will require banks to contribute to the fund based on their risk profile starting in June.

The liquidation of Master could cost the FGC as much as 55 billion reais ($10 billion) if other smaller banks also fail. According to people with knowledge of the matter, authorities are concerned that unwinding the liquidation of troubled banks like Master could jeopardize the credibility of Brazil’s judicial system.

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