Brazil extends successful offshore wealth amnesty

By:
Rob Dwyer
Published on:

Amnesty has been a big fiscal bonus for government in 2016; large inflows have been counterintuitively a net-negative for local AUM.

Senior private bank professionals in Brazil expect that the extension to the amnesty on undisclosed offshore assets will lead to further inflows – for the government and private banking industry – in 2017.

The initial deadline of the end of November this year raised R$46.8 billion for the Brazilian government, with 15% fines and 15% tax on a total of R$132 billion declared by Brazilian nationals.

However, the deadline was extended by 120 days – with a higher combined government take of 35% – and João Albino Winkelmann, head of private banking at Bradesco Private Bank and head of the Brazilian banking association Anbima’s private banking committee, says he expects the extension to drive material additional declarations.

“I was expecting between R$70 billion and R$80 billion of taxes and so I think the extension will see an additional R$20 to R$30 billion in taxes,” he says.

Luiz Ribeiro, head of private banking at Itaú Private Bank, says: “We were expecting between R$80 billion and R$100 billion so we would expect the extension to lead to more declared assets next year – depending on who is eligible for the next stage.”

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Luiz Ribeiro, Itaú

That eligibility criterion referenced by Ribeiro is in response to a draft amendment that would change the regulations that governed the November amnesty, which prevented anyone participating if they have a close relative working as a public servant. Wealth managers report that they had many clients who wanted to declare offshore assets, but were unable to do so because of relatives’ ties to the public sector.

“We are in favour of anyone being eligible to participate in the amnesty because the source of these assets is pretty clear very quickly when you start to examine the source of funds documentation,” says Bradesco’s Winkelmann.

He argues the amnesty couldn’t be used to clean money related to recent public-sector corruption scandals because “it’s so easy to see in the due diligence and if someone is lying [about the source of funds] they can stull suffer the consequences later on”.

However, the irony is that despite the large volume of declared funds, the impact on AUM for local private banks was negative. This is because some clients used onshore money to pay the fines and kept assets offshore. And with the majority of clients just bringing in the amount needed to pay the fine and tax, the net effect was negative for onshore AUM.

“Most clients left it to the last minute to participate and many just brought back enough resources to pay the fine or used onshore funds” says Rudolf Gschliffner, executive superintendent of Santander Private Banking in São Paulo.

“However, we opened [international] accounts and helped the clients through the process and now we will enter the battle for the [management] of this money. Next year, now that the money is clean, we can go to the next step managing inflows and organizing portfolio diversification.”

However, there were other benefits: Itaú’s private bank increased FX sales and trading revenues by more than 200% when compared with 2015.

“The growth in our net new assets was positive but below expectations, but on the other hand the revenues from FX trading were very strong,” says Itaú’s Riberio.

Also, next year will see individuals move on to developing coherence in their onshore and offshore portfolios that – in many cases – will see positive AUM effect for domestic managers.

International operations

Local bankers are also heavily marketing their international operations in a bid to boost the AUM of Brazilians who want to keep the now-declared money offshore. Ribeiro says that Itaú has already opened 300 international accounts and is working with lawyers to market Itaú’s international banking services, based in Miami and Zurich.

“Itaú is already the leader in the local market and so our main strategy for growth next year is to be the global adviser for those clients [that have just declared significant offshore assets],” says Ribeiro, who is targeting 15% growth in international AUM and 12% domestically.

Winkelmann says that much of the offshore funds was at small private banks and he believes clients will look to consolidate portfolios next year.

“Some of these banks in places like Switzerland – or Michigan in one example – I have never heard of,” he says. “I believe Bradesco will be able to capture those accounts – either through the client bringing the money back to Brazil, which is already happening, or the transfer of these assets to one of our international banking offices.”

And there are other advantages of combining international and domestic accounts, with the former being able to be used a collateral by Brazilian banks if it’s under their management to enable high-net-worth individuals greater flexibility to use offshore capital to provide local working capital without liquidating positions.

Another is simply practicality.

“Clients tell me these banks used to visit Brazil three times a year and now it’s once – if at all,” says Winkelmann. “In many cases clients have to travel overseas to check on these assets and now that it is declared, the attraction of being able to speak to us here in Brazil – even if they keep the assets offshore – is very attractive.”