The Brazilian securitisation market has received considerable attention during the past years for its growth and for the competitive economic environment that sustains it through consumption and an expansion in the availability of credit. As a result, securitisation has been explored by financial institutions as a concept that may create conditions that improve their profits and reduce costs.
By enhancing diversification of financing sources, securitisation transactions have created longer-term mortgage loans and investments, improved asset liquidity and increased housing development. They have also become an important sector in the context of Brazil's capital markets and economy2 and have thus attracted many participants into this market, including banks and financial institutions.
This type of transaction is mainly used with the aim of obtaining funding from investors at a more accessible cost, which is often essential if large projects and undertakings are to be feasible. Another advantage is that this type of structure segregates the risks associated with the company that generated the receivables, also making it possible to back debts up with assets.
In general, securitisation in Brazil is commonly structured by means of the following vehicles, details of which are provided later in this chapter: (1) receivables investment funds (FIDCs); (2) financial credit securitisation companies (FCSCs); (3) real estate credit securitisation companies (RECSCs); and (4) agribusiness credit securitisation companies (ACSCs).
The aforementioned securitisation activities are part of Brazil's financial and capital markets, which are essentially composed of regulatory bodies, such as the National Monetary Council (CMN), and supervisory bodies, such as the Central Bank of Brazil and the Securities and Exchange Commission (CVM), which supervise, regulate and inspect financial institutions, stock exchanges, investment funds, securitisation companies, etc.
i Regulatory agencies
Below is a brief summary of the purposes of the principal regulatory agencies mentioned above.
The CMN3 is the highest authority in the Brazilian financial system and is responsible for formulating monetary and credit policies with the goal of promoting the economic and social development of Brazil. The primary objectives of its policies, among others, are:
- adjusting the volume of payment methods to the needs of the Brazilian economy;
- regulating domestic currency value;
- regulating foreign currency value and maintaining the balance of payments in Brazil;
- assisting investment in funds by financial institutions;
- encouraging enhancements in the funds of institutions and securities;
- protecting the liquidity and solvency of financial institutions;
- coordinating monetary, credit, budget, tax and public debt policies; and
- defining the organisation and operational policies to be followed by the Brazilian securities market.
Central Bank of Brazil
The Central Bank of Brazil is the authority competent to implement the monetary and credit policies drawn up by the CMN,4 as well as to inspect financial institutions in the private and public sectors. In addition, the Central Bank of Brazil may sanction such institutions in accordance with the applicable law.
Moreover, the Central Bank is also responsible for exercising control over credit and foreign capital, receiving compulsory withholdings and voluntary demand deposits of financial institutions, and executing rediscount transactions and loans to banking financial institutions, as well acting as a depository of gold and foreign currency reserves.
The Central Bank of Brazil is also responsible for controlling and approving the incorporation, functioning, transfer of control and equity reorganisation of financial institutions.
CVM regulates, develops, controls and inspects the securities market, in accordance with Law No. 6,385/1976 and Law No. 6,404/1976.
CVM is a quasi-governmental agency connected with the Ministry of Economy and has jurisdiction over the entire Brazilian territory. It has independent administrative authority, legal standing and its own assets.
CVM is also responsible for regulating the examination and inspection of publicly held companies, the negotiation and intermediation of the securities and derivatives markets, the organisation, functioning and operation of stock markets, commodities and futures markets, and the management and custody of securities.
Law No. 10,303/2001, which amended certain provisions of Law No. 6,404/1976, granted jurisdiction to CVM to regulate and supervise financial and investment funds that were originally regulated and supervised by the Central Bank of Brazil.
ii Securitisation vehicles
As the main vehicle currently used for securitisations in the local market, FIDCs are regulated and supervised by CVM, pursuant to the applicable regime in force, namely CVM Ruling No. 356/2001. FIDCs are incorporated in the form of a 'condominium' (i.e., a pool of assets), which invests at least 50 per cent of its portfolio in receivables.
In addition to CVM Ruling No. 356/2001, FIDCs that invest mainly in distressed credits (e.g., non-performing credit rights, future flow credits and credit rights originated by public sector companies) are subject to the rules set out in CVM Ruling No. 444/2006.
Investments in quotas publicly issued and distributed by FIDCs are generally available to foreign investors, who can subscribe and pay in the quotas, in Brazil, through the foreign exchange market.
FIDCs' administration may only be performed by multi-service banks, commercial banks, the Federal Savings Bank, investment banks, brokerage firms, securities dealerships, or credit, finance and investment companies.
The greatest advantage FIDCs have over RECSCs and FCSCs is their tax treatment – because they are organised as a pool of assets, they are not subject to the usual corporate taxes.
The FIDCs' quotas may be offered through a public offering (under CVM Ruling No. 400/2003) or through a public offering with restricted placements (under CVM Ruling No. 476/2009).5
All financial credits qualify for securitisation, including those originating from loans, financing and leasing transactions by multi-service, commercial and investment banks; credit, financing and investment companies; real estate credit companies; leasing companies; mortgage companies; savings and loans associations; the Federal Savings Bank; and joint-stock companies specifically organised for the acquisition of such credits.
FCSCs are regulated under CMN Resolution No. 2,686/2000. These securitisation vehicles are incorporated as corporations and can raise the necessary funds for acquisition of credits through equity or debt instruments, which may be offered through a public offering (under CVM Ruling No. 400/2003) or through a public offering with restricted placements (under CVM Ruling No. 476/2009).
The securitisation of real estate credits in Brazil is almost always made through RECSCs,6 which were created by Law No. 9514/1997 and have since been used increasingly as a vehicle for securitisation transactions involving real estate receivables.
RECSCs are non-financial entities that are incorporated as corporations and registered with the CVM as publicly traded companies for disclosure purposes only (i.e., such enties are not required to have their shares publicly traded, but only to adhere to the same disclosure standards as publicly traded companies).
RECSCs are the only entities in Brazil authorised to issue the Brazilian equivalent of mortgage-backed securities (CRIs). A CRI is a security that is backed by real estate receivables, which may be acquired from third parties (originators). Usually, the receivables are related to credits from real estate financing contracts, credits from build-to-suit lease agreements or typical lease agreements, and credits arising from other rights related to real estate property. The CRIs may be offered through a public offering (under CVM Ruling No. 400/2003) or through a public offering with restricted placements (under CVM Ruling No. 476/2009).
ACSCs are securitisation companies authorised to issue Agribusiness Receivables Certificates (CRAs), which are securities regulated by Law No. 11,076/2004 and CVM Ruling No. 600/2018.
These securities may be freely negotiated and are backed by agribusiness credit rights, arising from transactions between rural producers, or their cooperatives, and third parties, including financing or loans related to the production, trading, processing and manufacturing of products, and agricultural and animal husbandry inputs or machines and improvements used in agriculture and animal husbandry activities.
The definition of agribusiness encompasses all commercial and industrial relations regarding agriculture and animal husbandry (i.e., agricultural and animal husbandry-related production or extraction activities, with end products such as meat, leather, milk, sugar, coffee, soya and fruit).
The CRAs may be offered through a public offering (under CVM Ruling No. 400/2003) or through a public offering with restricted placements (under CVM Ruling No. 476/2009).
iii Relevant tax law
Normative Ruling No. 1,585/2015 was enacted by the Brazilian Federal Revenue Office with the purpose of updating and consolidating rules regarding the taxation of income and capital gains recognised by local and foreign investors in financial transactions carried out in the Brazilian markets.
Before the introduction of Normative Ruling No. 1,585/2015, it was common for investors to contribute their equity interest in corporations to investment funds and, whenever corporations paid dividends, they were paid directly to the quota holders or fund investors, and those amounts were exempted from income tax as the payments would retain the legal character of dividends (which are exempted from income tax under the current tax regulations).
According to this regulation – the legality of which is debatable as regards this specific provision – the direct on-payment of dividends by investment funds whose portfolios are focused on equity interest to their quota holders are to be treated as a legal act that equates to a redemption or amortisation of quotas and, therefore, withholding tax will apply at the general rate of 15 per cent.
Income tax exemption on capital gains on various securities investments of natural persons
Under the previous regime, certain debt securities (such as CRAs and CRIs) were exempted from income tax; nevertheless, they were not exempted from tax on capital gains. Pursuant to the provisions of Normative Ruling No. 1,585/2015, these investments are now exempted from tax on capital gains – a positive change that had been requested by the market for a long time.
Changes in capital gains rates
Under Brazilian tax law, the general rule is that non-resident investors are subject to the same tax rules that are applicable to individuals who are tax residents in Brazil in respect of income and capital gains derived from transactions carried out in Brazilian financial and capital markets.
In this scenario, capital gains made by foreign investors on the disposition of shares in Brazilian companies have generally been subject to withholding tax at a rate of 15 per cent. As from 1 January 2017, however, Law No. 13,259/2016 changed this rate to a progressive regime under which the applicable rates vary as follows:
- 15 per cent on gains that do not exceed 5 million Brazilian reais;
- 17.5 per cent on the portion of gain exceeding 5 million reais, but lower than 10 million reais;
- 20 per cent on the portion of gain exceeding 10 million reais, but lower than 30 million reais; and
- 22.5 per cent on the portion of gain that exceeds 30 million reais.
Only if the investor is based in a blacklisted tax-haven jurisdiction7 would these rates be increased to a flat 25 per cent rate.
Capital gains accrued on the disposition of Brazilian listed stock (when carried out on the Brazilian Stock Exchange by an investor registered pursuant to the terms and conditions of CMN Resolution No. 4,373/2014 and CVM Ruling No. 560/2016 and who is not located in any blacklisted tax-haven jurisdiction) qualify for full exemption from withholding tax. As a result, if an investor registered in accordance with the rules noted above disposes of shares in a Brazilian listed company at a gain, through the Brazilian Stock Exchange, this transaction would be exempt from any withholding tax in Brazil.
Potential changes in taxation applicable to investment funds
In 2018, the lower house of the National Congress, the Chamber of Deputies, and the Senate proposed two new bills,8 the contents of which were analogous to provisions originally brought the previous year in a bill9 that was not approved by Congress and thus not converted into law.
The new legislative bills substantially alter the rules for the deferral of taxation applicable to closed-end investment funds, in an attempt by the government to eliminate the tax deferral regime for these legal entities. According to those bills, those investment funds would be taxed according to the rules currently applicable to open-end funds.
Among the main changes proposed in the bills, the following are of particular note:
- automatic taxation of investment fund gains (known as the 'come-cotas' regime);
- retroactive taxation on all gains accrued by closed-end funds up to May 2019; and
- taxation on spin-off, merger and transformation transactions of closed-end funds made on or after 1 January 2019.
At the time of writing, both bills were pending before specific congressional committees. For this reason, and taking into account that the 2017 bill was not converted into law, it is important to highlight that no tax effects are expected at present.
Also, Brazil, like several other countries, has been passing certain progressive transparency-related tax regulations, mostly based on concepts such as beneficial ownership provisions and in line with recent Organisation for Economic Co-operation and Development guidelines on base erosion and profit shifting.
As from 1 July 2017, Brazilian regulations imposed the obligation for certain Brazilian entities and investors holding assets in Brazil to disclose to tax and regulatory authorities the taxpayer identification numbers (or CNPJs) of non-resident investors who qualify as the final beneficiaries of a given Brazilian investment (e.g., stocks of Brazilian companies, owners of fixed-income investment funds and quotas of other investment funds).
III SECURITY AND GUARANTEES
This section provides an overview of the common methods of taking security over different types of assets in Brazil.
The following methods of credit support are available:
- in rem guarantees;
- personal guarantees;
- contract bonds;
- standby letters of credit or demand guarantees; and
- avals on promissory notes.
Fiduciary sales or assignments, mortgages and pledges are in rem guarantees, which create a privilege over the collateral in favour of the creditor, whereby the asset granted as collateral is bound to the secured obligation. With guarantees of this kind, creditors do not have recourse against the guarantor that provided the in rem guarantee to collect outstanding amounts after the foreclosure of the collateral, unless agreed otherwise.
The most common types of in rem guarantee are the fiduciary sale, mortgage and pledge.
A fiduciary sale is a type of security interest pursuant to which the guarantor assigns to the creditor the title of certain assets. Therefore, the guarantor continues to have possession of the assets and remains liable for the duties of an escrow agent or bailee, or a trust in relation to them. Title of the asset granted in a fiduciary sale is only given back to the guarantor when the latter has fulfilled all its obligations under the guaranteed credit.
The fiduciary sale was introduced in Brazil in 1965, but the applicable legal framework changed in the early 2000s with the enactment of a new Civil Code and other laws. These modifications fostered the use of the fiduciary sale, which is currently one of the main credit support transactions, especially because of its bankruptcy-remote feature. Since a fiduciary sale entails the transfer of the ownership of the underlying assets to the creditors, the creditors are not exposed to the risks inherent in a guarantor's bankruptcy.10 This is the main difference between a fiduciary sale and the other guarantees, which do not stipulate ownership transfer of the collateral and, therefore, the creditor may be subject to bankruptcy apportionment in respect of the guarantor.
There are two regimes applicable to fiduciary sales. On one hand, Law No. 4,728/1965 and Law No. 10,931/2004 regulate fiduciary sales within the scope of the financial and capital markets, expressly allowing the fiduciary sale of fungible11 and non-fungible property and credit rights. On the other hand, the Civil Code applies to fiduciary sales that are not within the scope of the above-mentioned markets. Although the Civil Code makes no provision regarding the characteristics of the asset given as collateral in a fiduciary sale, there are precedents of the Brazilian Superior Court of Justice narrowing the fiduciary sale under the Civil Code to non-fungible assets.12 Since foreign lenders or investors do not qualify as financial institutions under Brazilian law, it is arguable whether a transaction with these entities would qualify as a transaction within the scope of the financial or capital markets and, therefore, it is also debatable whether these entities could benefit from a fiduciary sale of fungible assets or credit rights.
Pledges and mortgages are also commonly used as collateral in securitisation transactions, with pledges being applicable to movable assets and rights (e.g., machinery, inventory, vehicles, credits and shares) and mortgages to immovable assets (e.g., real estate). In contrast to the fiduciary sale, the guarantor keeps the title of the collateral in pledges and mortgages and, therefore, creditors may be affected by the bankruptcy of the guarantor. In addition to that, pledges and mortgages are subject to multiple liens (first, second, third priority or more); therefore, the creditor may not necessarily receive a first priority security interest with respect to a particular asset if the asset has already been encumbered in favour of another creditor. A fiduciary sale is not subject to multiple liens, since it involves a transfer of ownership to the creditor.
Brazilian law does not provide any specific restrictions on taking security over all or substantially all the assets of a debtor or guarantor. Nonetheless, it is impossible to document such a security interest in a single document, since in rem guarantees have to be registered before different authorities depending on the type and location of the asset granted as collateral (registration with the competent authorities is a condition for perfection of such security interests).
Brazilian law forbids the creditor to keep or obtain title of collateral in the event of default (prohibition of commissoria lex), unless the guarantor grants express consent after the maturity date of the debt or its acceleration. In view of that, if the guarantor does not grant this consent, the collateral should be sold at a public auction, the proceeds of which will be applied to the payment of the principal and interest of the debt, judicial expenses and legal fees, provided that, in the case of attachment of quotas or shares13 requested by a creditor who is not a shareholder or partner of the company (as the case may be), the company shall be summoned for the purposes of securing the right of first refusal of its shareholders or partners.14 In any case, the balance amount (surplus), if any, shall be returned to the guarantor.
IV PRIORITY OF PAYMENTS AND WATERFALLS
In the event of bankruptcy liquidation, certain credits are excluded from bankruptcy apportionment, such as assets granted in a fiduciary sale, post-petition claims and certain labour claims. After those credits are paid, the balance of the funds received from the liquidation of the assets must be used to pay the pre-petition claims, in accordance with the following order:
- labour-related claims, limited to 150 minimum wages per creditor, and occupational accident claims;
- secured claims, up to the value of the collateral;
- tax claims, except for tax fines;
- special priority claims;
- general priority claims;
- unsecured claims;
- contractual penalties and monetary penalties for breach of criminal or administrative law, including tax law; and
- subordinated claims.
Exception is made for a fiduciary sale, which is bankruptcy remote and is, therefore, not subject to this list of priorities.
V ISOLATION OF ASSETS AND BANKRUPTCY REMOTENESS
An effective separation of asset risk from originator risk is instrumental in all securitisation transactions – in other words, the creditworthiness of the assets to be securitised should be separated from the originator's credit risk (achieved by means of what is known as a 'true sale' transaction).
Notably, Brazilian law does not have a legal definition of a true sale. In Brazil, a true sale is deemed to have occurred, within the context of a sale and purchase of receivables, if the credit rights arising from the sale of a particular asset are effectively transferred by the seller (assignor) to the purchaser of the rights (assignee) in such a way that any creditors of the seller would not be entitled to any claims over the credit rights derived from those receivables if the assignor were to become insolvent or bankrupt.
Accordingly, in a typical true sale transaction, the sale of the underlying asset constitutes a valid transfer to the purchaser of ownership or the title thereof. Upon perfection of the sale of the underlying asset and assuming that the requirements under Law No. 11,101/2005 are observed (e.g., absence of fraud against creditors) (1) the purchaser will have good title to the asset sold; and (2) the asset will no longer be the property of the seller (i.e., the assignor) and, therefore, should not be attached to the bankrupt estate or be available for payments to any third-party creditors of the assignor.
A true sale transaction should be consummated on an arm's-length basis; that is, the assignor (seller of the receivables) should receive the payment of a fair price as consideration for the transfer of the receivables. Therefore, the assignor receives an advanced payment for the flow of receivables and is expected to use the proceeds resulting from the sale of the receivables in the best interest or for the benefit of its business.
Even though Brazilian law does not clearly define a true sale, certain requirements should be observed to avoid any doubt as to the validity and the legal nature of the sale.
i No recourse or partial recourse
True sale transactions in Brazil normally employ non-recourse or partial recourse structures to avoid any doubt as to the true-sale nature of the transaction in the event of insolvency or bankruptcy of the assignor. Note that recourse based on fraud or inexistence of a credit is allowed and would not change the nature of a true-sale transaction. In this regard, although Brazilian law does not prohibit a sale with recourse against the seller, it may be possible to disregard the true-sale treatment afforded to a certain transaction on the assumption that, by retaining substantial obligations related to the assigned receivables, the seller is not in fact disposing of those receivables.
In other words, the assignor could ultimately be viewed as co-debtor of the receivables and there is a risk that the transaction could be treated as a financing transaction, instead of a true sale. Note, however, that this risk is fact-intensive and therefore should be analysed and assessed on a case-by-case basis.
ii No fraud against creditors
In the event of the bankruptcy of the assignor, the true sale may be questioned and even revoked if it is considered to be an act performed with the intent to injure creditors; or upon demonstration of (1) fraudulent collusion between the assignee and the assignor, and (2) the actual loss suffered by the bankrupt estate, as set out in Law No. 11,101/2005.
iii Instruments for the sale of receivables
The legal instruments necessary to formalise the transfer of ownership of the receivables must be registered with the competent registry of titles and deeds, regardless of how the receivables subject to the sale are evidenced (whether bills of lading, etc.). Pursuant to applicable legislation, this registration is mainly required for the transfer instrument to be valid against third parties, including creditors of the assignor.
iv Notification to debtor
Under Brazilian law, the debtor of the receivables must be notified of the sale of the receivables for the sale to be effective and binding upon the debtor. Otherwise, the debtor could challenge the sale of the receivables by arguing that it is not effective and binding against the debtor and, therefore, that any payments made by the debtor to the assignor (and not to the assignee) in connection with the receivables satisfy all the debtor's payment obligations.
As a rule, no actual consent from the debtor is required for this purpose, only a prior notice informing the debtor of the assignment of the receivables to the assignee and providing the new payment instructions for payments to be made by the debtor to the assignee (new creditor). Notwithstanding this, it is worth mentioning that such notices are not requirements for the validity of the assignment of the receivables, nor for the enforceability of the assignment between the assignor and the assignee. If no notice is given to the debtor, thereby causing the debtor to make payments under the receivable to the original creditor (i.e., the assignor), the assignee would have recourse against the assignor to demand the payment of those amounts.
Also, pursuant to Article 286 of the Civil Code, assignments of credit rights can only be carried out if the assignments are not contrary to law, to the nature of the underlying obligation or to the agreement with the debtor. Therefore, if the agreement between the seller and the debtor restricts the assignment of the receivables arising therefrom, or if applicable law prohibits the transaction, in principle there could be no assignment.
On the other hand, the same article expressly states that such restrictions are not enforceable against the assignee if they are not contemplated in the original agreement. If such a restriction is set out in any agreement other than the one from which the credit right arises, the assignee would not be bound by that restriction.
The legal, regulatory and market outlook has been changing significantly in 2019. During the past two decades, the Brazilian Social Democracy Party and the Workers' Party alternated in power in the federal government. These parties, however, were affected by the Operation Car Wash corruption investigations, the impeachment of Dilma Rousseff in 2016, the imprisonment of Luiz Inácio Lula da Silva (President of Brazil from 2003 to 2010), the unpopular government of Michel Temer (President of Brazil from 2016 to 2018, recently charged with corruption and money laundering) and a series of corruption accusations involving many politicians. In the fourth quarter of 2018, Brazilians elected as President the candidate for the once tiny Social Liberal Party, Mr Jair Bolsonaro. In addition, the Social Liberal Party has become a congressional powerhouse, being the party with the second-largest number of seats in the Chamber of Deputies.
In 2019, Mr Jair Bolsonaro prepared a draft bill to overhaul the Brazilian social security system, raising the minimum retirement age and cutting several benefits, which could save more than 1 trillion reais over the next 10 years. If approved by Congress, this pension reform could provide stability and boost the Brazilian economy; however, failure to reform the Brazilian social security system and cut government spending would be likely to drive the Brazilian economy downwards into another recession.
1 José Carlos Junqueira S Meirelles is a partner and Lawson Miralha and Vinícius Pimenta Seixas are associates at Pinheiro Neto Advogados.
2 Despite the recent political and economic instability that paved the Brazilian country in the recent years, which peaked with the impeachment of president Dilma Rousseff in 2016.
3 The basic institutional structure of the Brazilian financial system was created by Law No. 4,595/1964. This law created the CMN, which is responsible for examining monetary and foreign currency policies pertaining to economic and social development, as well as operating the financial system.
4 In accordance with the provisions of Law No. 4595, of 31 December 1964.
5 The public placement of securities under CVM Ruling No. 400/2003 is subject to registration with CVM. The registration process can take up to 90 days. However, CVM Ruling No. 476/2009 foresees a fast-track process, which applies to restricted placements of securities (similar to a placement under Rule 144-A in the United States). Under CVM Ruling No. 476/2009 procedures, a maximum of 75 potential investors can be approached and the quotas of the FIDC can be subscribed by a maximum of 50 investors, who must be professional investors pursuant to CVM's rules (i.e., financial institutions, investors with investments in financial assets corresponding to at least 10 million Brazilian reais, and foreign investors, among others).
6 On a separate note, real estate receivables can also be securitised under real estate investment funds (FII), which are investment funds designed to invest in real estate projects, and which are regulated by Federal Law No. 8,668/1993 and CVM Ruling No. 472/2008. FIIs may generally invest in: (1) real estate properties and rights; (2) equity of real estate companies; (3) special purpose companies with real estate business; (4) other funds (FIIs, FIDCs, for instance); and (5) CRIs and other instruments related to real estate business.
7 Normative Instruction No. 1,037/2010 enacted by the Brazilian Federal Revenue Office provides the list of jurisdictions considered to be blacklisted tax havens under the applicable Brazilian legal and regulatory framework.
8 Bill No. 10,638 of 30 July 2018 (PL 10,638/18) and bill No. 336 of 11 November 2018 (PL 336/18) respectively.
9 MP 806/17.
10 Law No. 11,101/2005 provides that the assets granted by means of fiduciary arrangements can have their foreclosure suspended for 180 days should the judge consider the assets as being 'essential' for the company's activities. An asset may be considered essential if the guarantor cannot perform its activities without it or when the performance of its activities is jeopardised in the absence of the asset. Brazilian courts tend not to hold financial assets and investments as essential asset, but this analysis must always be done on a case-by-case basis, since it depends on the business of the guarantor.
11 Regarded as commercially interchangeable with other property of the same kind.
12 Special Appeal No. 1,101,375, decided on 4 June 2013; Special Appeal No. 346,240, decided on 30 August 2002; and Special Appeal No. 97,952, decided on 6 April 2000.
13 Brazilian law presently in force does not expressly contemplate the creation of a pledge of quotas of a limited liability company. However, such a pledge of quotas has been accepted by Brazilian courts on the basis of provisions of law relating to the pledging of rights, contract rights and Law No. 6,404/76, as amended.
14 In certain cases, the transfer of shares or quotas may be subject to antitrust clearance and if the new, different, owner is a foreign entity, certain formalities required by the Central Bank must be observed by the foreign entity.