832.506/27
The Chargé in Brazil ( Scotten ) to the Secretary of State
[Received April 23.]
Sir: I have the honor to refer to the Department’s instruction No. 589 of October 16, 1936,49 and previous correspondence concerning a bill pending before the Brazilian Congress providing for the nationalization of insurance companies and the establishment of a federal re-insurance institution in Brazil.
Mr. W. S. Cunningham, the local representative of the two American insurance companies doing business in Brazil, called at the Embassy yesterday and stated that the situation in regard to the proposed legislation had altered materially from that described in the Embassy’s despatches Nos. 1160 of September 22, 1936, and 1168 of September 25, 1936.50 Mr. Cunningham stated that the bill had been referred in turn to three committees of the Chamber of Deputies, namely, the Committees on Justice, Social Legislation and Finance. The first of these committees made certain minor amendments in the bill as originally presented, the main one of which would extend from six to nine months the period within which foreign insurance companies must turn their business over to Brazilian companies with at least two-thirds of their stock owned by Brazilian nationals. In this connection, Brazilian insurance companies already established, most of which are of predominantly foreign capital, have five years [Page 361] to adapt themselves under the bill to the new régime whereby two-thirds of the capital control is to be in the hands of Brazilian nationals. The Committee on Justice reported the bill, as amended, favorably some time ago, although there appears to have been some opposition in the discussions of the Committee.
The bill then went to the Committee on Social Legislation, which likewise shortly presented a favorable report, adopted by the Committee by acclamation and without any additional changes. Thereafter the bill was referred to the Committee on Finance. According to information which has reached Mr. Cunningham, the member of the Finance Committee to whom the bill was referred for study has already submitted a draft report to the whole Committee and it is expected that action will be taken on this shortly. While Mr. Cunningham is not informed as to the nature of the draft report, the inference is that it is likewise favorable. He expressed concern over the manner in which, in his words, the bill was “obviously being pushed through without adequate consideration”.
Should the report of the Finance Committee to the Chamber be favorable, the bill will go to the floor of the Chamber for action. While the President of the Chamber of Deputies, and certain other leading Deputies, have connections with Brazilian insurance companies (with foreign capital) which are just as opposed to the proposed legislation as are the foreign insurance companies operating in Brazil, Mr. Cunningham and the other representatives of the foreign insurance companies are not at all sanguine of success in securing the defeat of the bill or amendment thereof to make it satisfactory to them. Mr. Cunningham referred to the chances as being at the most “50–50”.
In view of recent developments, Mr. Cunningham stated that he felt that the time had now come for definite diplomatic representations by the Embassy on behalf of his American principals. He asked that the Embassy or the Department of State make formal representations to the Brazilian Government against the proposed legislation, as has already been done by the British Embassy in Rio de Janeiro. He said that he would today recommend by air mail to his principals that they immediately request the Department to have such action taken. In this connection Mr. Cunningham left with me a copy of an excerpt from a memorandum which the British insurance companies established in Brazil apparently presented to the British Foreign Office some months ago, as well as of a supplementary memorandum commenting thereon, which they submitted to the British Ambassador to Brazil and which he used in the last representations made by him to the Brazilian Foreign Office in this connection. [Page 362] Copies of these two documents, which give the principal arguments of the foreign insurance companies against the proposed legislation clearly and succinctly, are enclosed.51
Mr. Cunningham made certain comments of interest in that they modify the picture presented by him in his previous conversations with the Embassy, as reported in the Embassy’s despatches Nos. 1160 and 1168. He affirmed that while it was true that there were 19 British companies doing business in Brazil as compared to only two American companies, both represented by him, and that consequently, the British had the bulk of the business, nevertheless, the more important of his companies was the one which had the most important individual share of the Brazilian business.
So far as the plan is concerned which Mr. Cunningham had evolved to enable his principals to continue to do business through a dummy holding company of Brazilian nationality, described at the bottom of page two and top of page three of the Embassy’s despatch No. 1168, he stated that lie had had this scheme thoroughly studied by his attorneys. They have now given him their carefully considered opinion that the plan will be illegal in view of the clear wording of the bill, which provides that two-thirds of the shares of stock in a Brazilian insurance company shall be held by Brazilians and not more than one-third in the hands of foreigners, and that the latter capital interest must be in the hands of individual foreigners, preventing the possibility of any being held by foreign corporate organizations, directly or indirectly.
I asked Mr. Cunningham whether he thought that any legislation which would satisfy the foreign insurance companies and adequately protect their interests could be anticipated, under the most favorable circumstances, in view of the clear provisions of Article 117 of the Brazilian Constitution of July 16, 1934, which reads, in translation:
“The advancement of social economy (economia popular), the development of credit and the progressive nationalization of banks of deposit, shall be promoted by legislation. Similarly, it shall provide for the nationalization of insurance enterprises in all of their aspects; the foreign (insurance) corporations which now operate in the country should be transformed into Brazilian corporations.”
He replied that he thought this was possible, as he interpreted the Constitution merely to require that insurance companies be established in Brazil subject to Brazilian laws, just as most of the other large foreign corporations operating here have local subsidiaries. He expressed the belief that vested property and investment rights could and should be protected in complete accord with the Constitution, [Page 363] merely by providing for the establishment of national insurance companies under local laws, properly safeguarded, without any provision as to majority ownership thereof being in Brazilian hands.
In a conversation with a member of the Embassy staff yesterday evening, Dr. Mario de Pimentel Brandão, Brazilian Acting Minister for Foreign Affairs, stated that he had the day before discussed the matter of the pending insurance legislation with President Getulio Vargas, pointing out that the British Ambassador had made strenuous representations and that something should be done. It appears that the Acting Foreign Minister is sympathetic to the arguments of the foreign insurance companies. Dr. Pimentel Brandão said that the President had replied that he did not see what he could do in regard to the matter since legislation of the nature proposed was clearly provided for in the Constitution. It would consequently seem that, should the Brazilian Congress pass the proposed legislation in its present form, as is to be expected, the President will approve it, unless effective pressure can be brought to bear, and foreign interests will be faced with a fait accompli as in the case of the recent legislation in regard to freight rates from Brazil (see the Embassy’s despatch No. 1283 of February 17, 1937,52 and other correspondence.)
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Should the Department decide to take any steps on the insurance companies’ request, it would appear that they should be taken promptly in view of the advanced nature of the preliminaries to final legislation and executive action thereon.
Respectfully yours,