Under Brazilian financial and capital markets regulation, fund managers and administrators, like banks and fintechs, must comply with know-your-client (KYC) requirements. These rules are designed to ensure due diligence is conducted through to the ultimate beneficial owner, assessing reputational risks and signs of money laundering.

While administrators have a fiduciary duty to monitor fund portfolios, this doesn’t necessarily mean they were knowingly involved in criminal activity. However, they are responsible for conducting thorough background checks. “The likelihood that they failed to do this properly is high,” said a lawyer familiar with fund operations. “In some cases, the business model itself involves taking risks that others wouldn’t. They may not be deliberately complicit, but they turn a blind eye.”

Three fund administrators and one payment fintech were named in the investigation as key players in facilitating the movement and concealment of funds with suspicious origins.

According to documents seen by Valor, Reag Trust DTVM, Altinvest Gestão, and Trustee DTVM allegedly helped “move and conceal billions of reais from dubious sources.” Reag, which operates in both asset and fund management, had already resigned from managing eight of the ten funds under its control after detecting problems during internal monitoring last year.

Banco Genial, also mentioned in the court filings, dropped the multimarket private credit fund Radford—acquired one year ago—on the day the operation was made public. Genial said it was not a target of the investigation. Trustee had similarly exited its fund the day before the operation. Fintech BK Instituição de Pagamentos was also identified as central to the illicit financial scheme.

All the entities named denied any wrongdoing and said they are cooperating with authorities.

One asset management executive argued that it’s “impossible for a fund administrator, a bank, or any market participant to know what people are doing outside the formal economy,” noting that criminal matters ultimately fall to the police. Common measures taken in such cases include resigning from fund management or liquidating portfolios.

A fund industry representative noted that one vulnerability stems from fintechs investing in funds without revealing their end clients. These newer financial players are not currently required to report cash deposits over R$50,000 to the Financial Intelligence Unit (COAF), unlike traditional banks.

André Martinez, author of “Compliance Bancário Essencial” (Essential Banking Compliance), said the regulatory gap is not in the rules themselves—which he described as among the world’s toughest—but in enforcement. The emergence of fintechs, he said, “made it much easier for illicit money to flow.” “They’re all supposed to have compliance programs, but the breach is in willfully overlooking them.”

He added that existing guidelines require institutions to vet not just clients but also partners, suppliers, and employees, who can be co-opted into opening front accounts even in large banks. “The system feeds itself because everyone has sales targets to hit,” Mr. Martinez said. “Even a manager with no criminal ties might ignore a red flag if a R$1 million deposit from a pensioner helps him meet his monthly quota. Dirty money meets targets and boosts profits.”

Mr. Martinez cited a study by data bureau Quod, commissioned by Brazil’s banking federation FEBRABAN, showing some 10 million taxpayer IDs are suspected of being linked to scams involving front accounts. He added that Coaf lacks staff to review all suspicious activity reports, meaning many cases never reach prosecutors. Despite the scale of the current case, he believes it only affects a small part of the formal system.

“At a minimum, you need to know your client. Even fintechs and funds are already subject to high compliance standards, including anti-corruption and anti–money laundering rules,” said Eduardo Silva, president of the business ethics group Instituto Empresa. “While the market promotes corporate responsibility and sustainability, permissive mechanisms are still enabling organized crime to get in.”

Fund administrators know their investors (on the liability side), while asset managers are responsible for where the money goes (on the asset side), said one attorney, noting that Brazil’s Securities and Exchange Commission (CVM) has been vocal on this issue. Some firms, he said, knowingly take on risks to scale quickly by doing “things they shouldn’t be doing.”

Guilherme Cooke, a partner at law firm Lobo de Rizzo Advogados specializing in funds, cautioned against blaming the fund structure itself. “There have been other cases involving corruption by fund agents, but instead of holding individuals accountable, the whole industry gets blamed,” he said. He noted that fund transactions are in fact more transparent than in other corporate structures. “Funds don’t offer asset shielding, just some tax efficiency. You can’t do more through a fund than you could in a company.”

On Thursday, Brazil’s federal court authorized the full seizure of investment funds used for illegal financial activity, alongside the freezing of assets and bank accounts up to R$1.2 billion—the amount already flagged in tax assessments. The court also lifted banking and tax secrecy protections for individuals and companies under investigation.

João Paulo Gabriel, a prosecutor with the Special Organized Crime Task Force (Gaeco), said the investigation found direct links between Faria Lima–based fund operators and the PCC money laundering scheme.

“What we’ve identified in the fund management segment is coordinated action among firms, as well as with the criminal group. It’s not just a case of providing services to organized crime,” he said during a press briefing.

In a statement, the Brazilian Financial and Capital Markets Association (Anbima) said: “The investment fund sector is one of the most robust in the country’s capital markets and is subject to strict rules and controls that are internationally recognized.”

Brazil’s fund industry currently manages R$10 trillion in net assets, equivalent to 85% of GDP, across more than 32,000 funds and some 41 million accounts. The “Carbono Oculto” (Hidden Carbon) operation, as named by police, involves roughly R$30 billion and 40 funds, according to media reports.

Source: Valor International

https://valorinternational.globo.com/