Banks Growing Concerned Over Liability Concerns in Brazil

Brazil has a robust economy but some foreign lenders are growing concerned about participating in this expanding market because of potential liability for environmental issues associated with projects they finance. This anxiety follows a 2009 decision by the Superior Court of Justice,Brazil’s highest federal court of appeals, that suggested a lender could be liable for environmental damage caused by a project it financed. In many ways, the recent developments resemble market conditions in theUnited Statesin late 1980s when lenders became concerned about their potential liability following a series of conflicting federal court decisions.

Under Brazil’s national environmental law (Federal Law No. 6,938/1981) a “polluter” may be strictly and jointly liable for damages caused to the environment and to third parties resulting from its activity.  The term “polluter” is defined broadly so that it includes any entity that is directly or indirectly responsible for the activity that caused environmental degradation.

The problematic decision of the Superior Court of Justice involved damage to a mangrove. In holding a hardware manufacturer liable, the court said that liability could extend to “those who finance what others do”. In other words, the court seemed to suggest that a lender could be found to be an “indirect polluter” simply on the basis that it financed a project.

As a result of these case, two class action lawsuits were filed in 2011 by a federal prosecutor against Banco da Amazônia S.A. (“BASA”) and Banco do Brasil (“BB”).  The main allegation against the banks in those cases is that they failed to comply with Brazilian environmental legislation when they financed a project that resulted in illegal deforestation in Amazon Region. According to a Brazilian environmental lawyer, Renata Soares Piazzon, the prosecutors are claiming that the banks violated the national environmental law by failing to ensure that their borrowers complied with environmental laws.

Many thanks to Renata Soares Piazzon for bringing this case to my attention. She will be working on an initiative to address the concerns of lenders and will keep us informed on this effort.

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