Brazilian state bank BRB implicated in $1.9bn fraud scheme, court documents reveal
A federal judge in Brazil has found evidence that executives at state-run lender BRB knowingly participated in an alleged fraud scheme at Banco Master that could result in losses exceeding 10 billion reais ($1.87 billion). The ruling, seen by Reuters, authorized the arrest of Master's controlling shareholder and the temporary removal of BRB's top executives, shedding new light on the collapse that prompted Brazil's central bank to liquidate the private lender earlier this week.
Background and Context
The case centers on transactions between July and October 2024, during which BRB purchased credit securities from Master to ease the private bank's severe liquidity problems. According to court documents, these transfers totaled 16.7 billion reais, with the purchased portfolios representing approximately 30% of BRB's total assets. The intervention came as Master struggled with regulatory breaches and a funding crisis, ultimately leading to its liquidation by Brazil's central bank on Tuesday.
Key Figures and Entities
Federal Judge Ricardo Augusto Leite identified "emerging evidence that BRB executives knowingly took part in the alleged fraudulent scheme devised by Banco Master's managers." The ruling specifically mentions the temporary removal of BRB's top executives, including then-CEO Paulo Henrique Costa and CFO Dario Oswaldo Garcia Junior, whose homes were raided by police on Tuesday. Banco Master's owner Daniel Vorcaro was among those arrested during the operation. The state-controlled BRB, which is overseen by the regional Federal District government, has announced plans to hire an external audit firm to investigate the matter.
Legal and Financial Mechanisms
The alleged fraud centered on BRB's purchase of credit portfolios from Master, some of which were tied to non-existent assets. Investigators discovered that Master had acquired loan portfolios from Tirreno Consultoria Promotoria de Crédito e Participações S.A. without making any payment, describing the firm as a shell company for payroll-deductible loans that never existed. Judge Leite noted that earlier this year, BRB had arranged 12.2 billion reais in transfers between January and May to keep Master afloat, matching the private bank's shortfall after it issued approximately 50 billion reais in debt while holding largely illiquid assets. The judge has ordered these amounts frozen from the private assets of executives and companies involved.
International Implications and Policy Response
The case highlights significant vulnerabilities in Brazil's banking oversight system, particularly regarding transactions between state and private financial institutions. Judge Leite characterized BRB's participation as "the most serious so far," suggesting systemic failures in regulatory supervision. The incident may prompt tighter scrutiny of interbank lending practices and credit portfolio acquisitions, especially involving state-owned entities that serve public functions. The substantial potential losses—exceeding 1.9 billion dollars—raise questions about the adequacy of existing safeguards against large-scale financial fraud in Brazil's banking sector.
Sources
This report draws on court filings reviewed by Reuters, corporate information regarding BRB (BSLI3.SA), and public statements from Brazil's central bank regarding the liquidation of Banco Master. Information is also drawn from the Thomson Reuters Trust Principles governing financial reporting standards.
