The Chargé in Brazil ( Daniels ) to the Secretary of State
[Received March 29.]
Sir: I have the honor to submit herein a general review of the accomplishments of the Banco do Brasil S.A. and its Agencia Especial de Defesa Economica in the administration of the Brazilian enemy property control measures and Axis replacement program.
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There is no question but that in general the Banco do Brasil has followed closely the Embassy’s break-down of the Proclaimed List in selecting the firms which should be subjected to nationalization, liquidation or other action.… In recent months, … the Embassy has even intervened with Banco do Brasil in one or two instances to suggest that enforced liquidation was perhaps too drastic a measure and, if carried out, would lead to repercussions which might be harmful to the main objectives of the replacement program—the nationalization or liquidation of “spearhead” Axis concerns. Such was the case with Industria de Electro-Aços Plangg Ltda. (See Embassy despatches nos. 19018 of December 5, 1944 and 114 of February 5, 194589). It was, of course, stated to the Director of Exchange90 and his associates that the final determination as to how far the replacement program should be carried is a matter for the Brazilian Government to decide, but that the Embassy desired to make its [Page 651] views on the cases in question abundantly clear so that the Bank would not place itself in the position of taking perhaps indefensible action in the belief that it was desired by the American Government or required to implement the program we had suggested.
Another difficulty encountered in the administration of the replacement program has been the character of some of the interventors—liquidators, administrators or fiscals—who have been named for enterprises brought under the program.…
Generally speaking, criticisms of this nature cannot be levied against the interventors nominated by the Banco do Brasil after it took over the administration of the replacement program. In one or two instances where conflicts arose between the interventor originally named by the Economic Defense Commission and those sponsored by the Banco do Brasil, the Bank has requested and obtained the replacement of the interventor first named. In the case of “Sidapar” Usina Siderurgica e Laminadora Nosso Senhora da Aparecida S.A., for example, it is doubtful that the company ever would have been nationalized if the fiscal originally named had been continued in office. However, it has been apparent that the Director of Exchange hesitated to request the replacement of these earlier appointees except as a measure of last resort, largely it is believed because such appointees had the support of the War Ministry, which has great influence with the President of the Republic,91 or were sponsored by politically prominent individuals. Since the rebuff experienced in the Bayer case, when the two liquidators designated by the Banco do Brasil were removed instead of Major Franca (originally appointed, it is understood, at the instance of the brother of President Vargas), the Director of Exchange obviously has no intention of recommending the replacement of interventors whose performance has been unsatisfactory. It is very unfortunate that the Director of Exchange did not find it possible to carry out the plan he once mentioned to the reporting officer, namely, that, as the replacement program progressed, the less satisfactory interventors would be replaced by those who efficiently carried out their duties in the nationalization or liquidation proceedings first completed.
Still another difficulty encountered by the Banco do Brasil has been the general lack of a strong interest on the part of Brazilian business men in acquiring the Axis enterprises offered for sale under the replacement program. It is in this connection that the loss of time represented by the period that the Economic Defense Commission was in existence has been made especially evident. It is believed that, if many of these Axis enterprises could have been offered for sale six months to a year earlier than they were, they would have found a [Page 652] much readier market at higher prices. When the supply and shipping situations were at their tightest, resulting in very small entries of imported merchandise, industrial facilities of almost all kinds were very much in demand. Beginning in the latter part of 1943 and in 1944, however, both shipping and supply began to ease up and, apart from the fact that many lines of merchandise were much more freely available in Brazil (in some instances at reduced prices compared with those previously prevailing), business men began to think of the post-war period when general competition from abroad would again have to be met. Since the latter part of 1944, there was evident a definite trend toward retrenchment—a disposition to postpone new commitments.
In the case of companies manufacturing or dealing in iron and steel, it might almost be said that the bottom dropped out of the market. This is evidenced by the fact that, in the case of concerns like Stahlunion Ltda., Aços Phenix Ltda., Aços Marathon do Brasil Ltda. and Aços Roechling–Buderus do Brasil Ltda., several successive offerings of the businesses as entities were made without the receipt of acceptable bids and eventually the Banco do Brasil has had to resort to sales of the assets in piece-meal lots. From our viewpoint, as most of these enterprises were specified for liquidation, rather than for nationalization, the result is not bad, but the lack of success on these repeated offerings undoubtedly discouraged the Director of Exchange and his associates.
Part of the lack of success on some of these offerings has been attributed to the high prices placed upon various enterprises offered for sale, for which the Banco do Brasil has been subjected to considerable criticism. It is possible that the Bank, and its representatives in the enterprises scheduled for nationalization or liquidation, have erred in this respect. However, it was not unnatural that the Bank should wish to realize the highest possible prices, both in order to increase the size of the Indemnization Fund and to avoid possible claims after the war that the enterprises had been sold for less than true values. Undoubtedly the fact that the interventors in these enterprises were made civilly and criminally liable for any misfeasance led them to overvalue, rather than undervalue, in their recommendations, the assets of the businesses in their charge and, not unnaturally, the Bank would hesitate to reduce the valuation fixed by its own representatives charged with the primary responsibility. It is true that, at a rather early stage in the offerings of these Axis properties, the Bank abandoned the practice of specifying in the notices of sale a minimum price below which offers would not be accepted. Nevertheless, it did continue to include in the editais a statement of the estimated value of the properties offered for sale, and this, as a practical matter, had very much the same psychological effect as specifying an upset price.[Page 653]
Interest in the purchase of these Axis enterprises was also chilled by the fact that, about the time that the Banco do Brasil took over the administration of the replacement program, the tax fiscais in the Ministry of Finance began levying very high fines against these enterprises for alleged tax infractions. Unfortunately, there obtained, and in general still obtains, in Brazil a system whereby the Treasury fiscais receive one-half of all fines which they levy and collect. It seems also that, prior to the war, many foreign exchange transactions which were literally outside the law were looked upon with complaisance by the exchange authorities, to such an extent that they were practically considered legitimate. The Treasury fiscais began a strong campaign on these old “black market transactions”, and evidently felt that Axis-owned enterprises furnished a promising field for the assessment of substantial penalties, since no one, presumably, would be interested in defending the interests of the enemy owners. At any rate, very heavy fines, in some cases exceeding the estimated net worth, were levied against enterprises scheduled for nationalization or liquidation.
Much of the attraction of this little game for the fiscais was removed by the enactment of Decree-Law no. 6681 of July 13, 1944 (see Embassy despatch no. 16958 of July 18, 194492) which provided that the entire amount of tax fines and penalties levied against concerns subject to the replacement program should be paid to the Federal Union, and transferred to the Ministry of Finance jurisdiction over fiscal actions initiated against such concerns. However, this did not completely nullify the harm that had been done, as the impression had become quite definitely fixed in the minds of business men and potential purchasers of these Axis enterprises that, in buying such properties, they might be taking on a tangle of undisclosed tax claims or claims for alleged breaches of other laws and regulations.
A similar consideration mentioned by some is the possibility that, due perhaps to manipulations of the records by the former Axis owners, purchasers of these enterprises might be faced at some future date with undisclosed liabilities not reflected in the books and not discovered or revealed by the government interventors.
Neither the tax claims nor possible undisclosed liabilities of other types would have had such an adverse influence if the Banco do Brasil had offered for sale only the assets of these enemy enterprises, retaining in its own charge the responsibility for the satisfaction of their debts and liabilities. The Embassy repeatedly urged that this procedure be adopted, pointing out that the Banco do Brasil, as agent of the Federal Government, was in a much better position than any private individual to argue about matters such as the validity of tax [Page 654] claims, advanced by another agency of the Government, or other claims. Nevertheless, the Director of Exchange persisted as a rule in the practice of offering the quotas or shares of the enterprises scheduled for sale, usually with a clause making it clear that the purchaser would assume full responsibility for all liabilities of the enterprise being sold. In so doing, he was undoubtedly influenced by the consideration that sales of this character would be the most expeditious means of completing the replacement program and bringing his own duties and responsibilities to an end.
Another factor which probably chilled the interest of potential bidders for these Axis enterprises was that many of them had a large number of enemy nationals and other suspect individuals among their personnel. It has become a matter of fairly common knowledge that the American authorities are not inclined to look with favor upon the retention of Axis citizens in nationalized concerns, particularly if such persons are known to have been active adherents of the Axis cause or are subject to material doubt on that score. On the other hand, as has frequently been reported, employees of industrial and commercial enterprises in Brazil cannot normally be discharged except upon the payment of indemnities measured by the length of service and the amount of compensation received over a period prior to the time of dismissal, and, in the case of employees having ten years service or more, dismissal is impossible unless very good cause can be shown. Under Decree-Law no. 4638 of August 31, 1942, provision was made that employees of Axis nationality could be released even though they had more than ten years service, but only if they were shown—in practice, by police certificates or other specific documentary evidence—to be dangerous to the national security or to the proper functioning of the enterprise with which they were employed. Each case had to be specifically passed upon by the Minister of Labor, and the legislation by its terms applied only to persons of Axis nationality and not to naturalized Brazilians. In some instances, this decree-law has even been held not applicable to Axis nationals who have been in Brazil for many years, own property here and have Brazilian wives or Brazilian children. Generally speaking, the decisions of the Ministry of Labor have leaned against authorizing dismissals, especially in enterprises which do not have a public utility aspect or a fairly direct relationship to the war effort, and, even where dismissals are authorized, indemnizations at a reduced rate must be paid.
The result of the foregoing has been that not infrequently, in the case of an enterprise having a number of Axis employees, prospective purchasers have felt it necessary to make provision, in submitting their bids, for the payment of substantial indemnities to employees, which [Page 655] usually are not included among the liabilities mentioned in the notices of sale. In some cases, bidders seem to have proceeded on the assumption that the Ministry of Labor would not authorize the discharge of possibly suspect Axis employees, and hence have made allowance for maximum indemnities—if they decided to bid at all. Here again, much of the resistance of prospective bidders could have been obviated if the Banco do Brasil had sold merely the assets of an enterprise scheduled for nationalization, undertaking responsibility for satisfying the claims of employees for accrued indemnizations up to the date of sale, along with other liabilities. Such an arrangement was adopted, for example, in the case of Schering Productos Chímicos e Farmaceuticos S.A., but only on the second offering and then as the result of representations by the Embassy and some of the prospective bidders. In such a case, the Bank, in its capacity as special agent for the Federal Government, could have gone to the Ministry of Labor with a strong practical basis for urging the reduction of indemnities to a reasonable minimum, in the interests of the Indemnization Fund and hence of the Brazilian Government and people. This the Bank seemingly was unwilling to do—perhaps in part because it functions under the supervision of the Ministry of Finance and there has been apparent a certain constraint or hostility on various points between the Ministry of Finance and the Ministry of Labor.
In general, it must be said that the Embassy has received very little support from the Banco do Brasil in the effort to bring about the elimination of suspect personnel from enterprises scheduled for nationalization (as distinguished from liquidation, where the enterprise ceases to exist). The Bank has not explicitly opposed any demands of this character made by the Embassy as a condition to the removal of the nationalized enterprises from the Proclaimed List, but neither has it affirmatively lent any assistance. Generally speaking, the Bank did not give instructions to its representatives in the intervened enterprises to eliminate politically doubtful personnel (in many instances the old management was retained, although ostensibly shorn of their administrative powers). The interventors as a rule seemed to have interpreted the instructions given them “to maintain the prosperity of the enterprise in their charge” to mean that no personnel should be dismissed, and in fact the instructions of the Economic Defense Commission did not permit changes of personnel, agents or representatives without specific prior authorization by the Commission.
Some few interventors, notably in the cases of Schering Productos Chimicos e Farmaceuticos S.A. and Cia. Chimica “Merck” Brasil S.A., did take the initiative to obtain authority to dismiss suspect administrators and employees, so that most of the undesirables were eliminated. Other interventors have complained that repeated requests by them for authority of this character were ignored.[Page 656]
It is unquestionably true that there are several different ways of looking at this matter of requiring the elimination of suspect personnel in enterprises which are transferred to satisfactory ownership, and there is much to be said for the view that it is preferable to keep such individuals under supervision which is believed to be satisfactory, rather than to force them out to seek employment elsewhere, particularly when the odds are that under the circumstances other employment can be obtained only with less reputable concerns. In any case, the Embassy has been left to a large extent to hoe a lone row on this matter of the elimination of personnel believed to be undesirable. Several months ago an approach was made directly to the juridical assistant handling labor matters in the Ministry of Labor, Industry and Commerce to see if it might be possible to bring about, in the case of enterprises scheduled for nationalization, some relaxation of the standards established for authorizing dismissals of suspect personnel, but the result was in effect a courteous but firm refusal to consider any change.
It may be remarked that the Embassy’s task in bringing about the elimination of undesirable personnel in these enemy enterprises has not been made any easier by the fact that it has not been possible to implement the earlier representations made on the subject of our assisting in furnishing technical assistance to replace individuals who might be eliminated from Axis businesses nationalized in Brazil. Not infrequently, when question has been raised about the continuance of suspect individuals in a nationalized concern, the claim is made that they are technicians whose retention is essential to the proper functioning of the enterprise unless suitable replacements can be found—not at some indefinite time in the future, but forthwith. At the present time in Brazil, the shortage of skilled technicians in many lines is notorious. At times, when questions of this nature are raised, the purchasers profess to be quite willing to dismiss the suspect technicians if we will furnish replacements from the United States, even though such a change would represent a financial sacrifice, represented by the indemnities that would have to be paid to the discharged technicians and the higher compensation that would undoubtedly be required for a replacement from the United States. It may be that offers of this kind have not been sincere in all cases, but the Embassy has not felt that it was in a position to call the bluff, if one existed, after the unsatisfactory experience in endeavoring to obtain American technicians in the Casa Lohner case and particularly in view of the increased manpower shortage in the United States since that time.
At one time during the latter part of 1944 when a number of offerings of Axis enterprises had been made by the Banco do Brasil without [Page 657] the receipt of any acceptable bids (in some cases, without any bids at all), the Embassy endeavored to ascertain the reasons for this lack of interest and particularly studied the possibility that there might be concerted refusal to submit bids for these properties, based on political opposition to the present government or other similar reasons. One instance was found where a Brazilian had refused to participate in a group proposing to bid for one of these Axis enterprises because he was not in sympathy with the basic idea of the nationalization program—the expropriation of private property as an instrument of economic warfare or to satisfy claims for losses suffered through acts of enemy governments. It is probable also that this individual’s position was influenced by his political opposition to the present government, although there can be no question of his pro-Ally sympathies. An inquiry on this subject was addressed to the Consulate General in Sao Paulo, as the lack of interest was particularly noticeable in respect of offerings of Axis properties located in that area, but the Consulate General also reported that it could find no evidence of a concerted “buyers’ strike” based on ulterior motives. As a matter of possible interest, a copy of the Consulate General letter, dated October 28, 1944, prepared by Mr. George T. Colman, Economic Analyst (together with copies of the attachments to such letter), is submitted herewith as an enclosure.93
The Embassy did find in certain cases evidence that potential purchasers of Axis enterprises decided not to submit bids or were hesitant about so doing because of doubts on their part that the Government of Brazil—or, more broadly, the governments of the United Nations—would lend energetic support after the war to the purchasers of these enterprises against claims which might be advanced by the former enemy owners or their governments. In some cases this fear was placed on the basis that, if a change of administration should occur in Brazil, the successor government might not be inclined to sustain the validity of action taken under the present regime. It was largely because of the expression of doubts of this nature that the Embassy suggested, in its despatches nos. 15226 of April 4, 1944 and 19207 of December 18, 1944,94 that it might be very helpful if arrangements were made to include in the future peace treaties or armistice agreements with the Axis powers provisions requiring the governments of the enemy countries and their nationals expressly and categorically to renounce any and all claims against the validity of action taken by the United Nations to nationalize or liquidate enemy property interests in their respective jurisdictions and in accordance with their respective laws. Of course, such an arrangement would have been of practical [Page 658] utility for present purposes only if public announcement had been made of the intention of the United Nations, or leading elements thereof, to require the acceptance of such a clause by the Axis powers.
It may be an unpalatable fact, but there is little doubt but that the Director of Exchange feels that he has been “let down” by the Embassy and the American Government in his administration of the replacement program. He has never said anything to indicate, even by implication, that he was disappointed over our inability to make good on our representations on the subject of providing replacements for politically undesirable technicians in enterprises scheduled for nationalization. For one thing, it had become apparent, even before the Economic Defense Commission was dissolved, that we would be able to do very little along that line, with the result that no representations in that respect were made directly to the Director of Exchange or others in the Agencia Especial. Also, as has been indicated above, the Director does not seem to be convinced of the necessity for or desirability of widespread changes of personnel in these concerns being nationalized, except perhaps in the case of the chief administrative figures.
The situation is, however, quite different in two other fields. The Director of Exchange was well aware of the representations made to the Economic Defense Commission, and later to him, that General Aniline & Film Corporation and/or General Dyestuff Corporation were prepared to take a prominent part in assisting in the nationalization of Alliança Comercial de Anilinas Ltda., the former I.G. Farben dyestuff subsidiary in Brazil, at least to the extent of granting the Brazilian representation for General Aniline products to Alliança upon its acquisition by a satisfactory Brazilian group. There is no need to review here the outcome of the negotiations initiated along those lines when Alliança was offered for sale. The Director of Exchange has never forgotten the matter and, coming as it did at the very beginning of the implementation of the nationalization program in Brazil, the incident had a very unfortunate effect not only upon our relationships with the Brazilian authorities, but upon the nationalization program as a whole, for the details of the Alliança case became quite well known in business circles and no doubt were used to advantage by the real Fifth Column in this country.
On top of this, there is the fact that, so far as the Embassy knows, arrangements have not yet been consummated for the acceptance by the Export-Import Bank of Washington of a financial participation in a single loan transaction proposed by the Banco do Brasil in furtherance of the nationalization of Axis enterprises in this country. The Director of Exchange participated personally in negotiating the basic [Page 659] agreement of February 3, 1944 providing for joint financing by the Banco do Brasil and the Export-Import Bank, and naturally feels a certain responsibility for its success or failure. It is true that the Embassy suggested withholding advice of the Export-Import Bank’s acceptance of a participation in the proposed loan operation on the purchase of J.D. Riedel–E. de Haen e Cia. Ltda. (because the principal trademarks appurtenant to the business had not been expropriated and transferred to the purchaser of the firm) and, in the Schering case, acceptance of a participation by Export-Import Bank has been held up until the new owners of the Schering business in Brazil should make a satisfactory supply contract with Schering Corporation of Bloom-field or some other qualified supplier. Although the reasons for non-participation in these two cases—and in several others which were never formally submitted to Export-Import Bank—have been explained to the Director of Exchange, he has been inclined to couple the break-down of the Export-Import Bank financing arrangements with the occurrences in the Alliança case and to characterize both in a not particularly favorable light. The situation is not eased by the fact that the Banco do Brasil, having made commitments to the purchasers of enterprises sold under the nationalization program, has considered itself honor-bound in several cases to provide the full amount of the financing for its own account.
It may be seen from the foregoing that the replacement program has not had entirely smooth sailing in Brazil, and that the Banco do Brasil and its Director of Exchange have had their own difficulties and problems in administering and carrying through the program. Therefore, although it may seem that progress has been discouragingly slow, it is perhaps a wonder that as much has been done and is fairly definitely in prospect as is reflected in the earlier pages of this despatch. With the current political unsettlement and the reluctance which will doubtless be increasingly apparent on the part of the Government to take any action which tends to antagonize any sector of the electorate, it seems an open question whether much more can be expected in the near future other than the completion of those liquidations (as distinguished from prospective nationalizations) which are already in progress and well under way. Apprehensions on this score would be all the more justified if the Director of Exchange of the Banco do Brasil should insist upon the acceptance of his resignation, as has been frequently rumored.
First Secretary of Embassy