TPO in Brazil The Implementation of a Ban

TPO IN BRAZIL: THE IMPLEMENTATION OF A BAN

Written by Marcos Motta* and Pedro Fida**, Partners of Bichara e Motta Advogados.

Published in World Sports Law Report – November 2015 Edition

I. Introduction

Much has been said about Third Party Ownership (“TPO”), especially after FIFA decided to ban in December 2014 any type of third-party ownership in relation to football players in transfers between clubs.

The ban against any type of TPO affected the international football market, specially those markets that were well known for operating via TPO structures and some even known as the true creators of third-party ownership mechanisms. Brazil, Argentina, Uruguay, Spain, Portugal, amongst several other countries suffered a tremendous impact with the worldwide ban imposed by FIFA.

Brazil was no different, despite the fact that its own national football association has forbidden TPO on a national level and even started to investigate and punish members who deviate from the current regulations that prohibit any type of TPO operation.

II. TPO and the Regulatory Framework in Brazil

Following the implementation of TPO by FIFA and regardless of the objections raised by the national football market, the Brazilian Football Association (“CBF”) has been the first national football association in the world to immediately adopt the same wording of Article 18ter of the FIFA Regulations on the Status and Transfer of Players (Edition 2015) (“FIFA RSTP”) within its recently published CBF Transfer and Registration Regulations (Edition 2015) (“CBF Transfer Regulations”).

Consequently, CBF adopted FIFA’s directives with respect to TPO and already started to implement, investigate and punish those members who infringe the national regulations. To this effect, the first TPO case in Brazil will be further analyzed in this article.

Along with the CBF Transfer Regulations, CBF also implemented the “CBF National Intermediary Regulations”, all in line with the FIFA Regulations on Working with Intermediaries in order to establish clear criteria regarding the registration of intermediaries, the work performed by them on a national level and, especially, a national dispute resolution body for controversies involving intermediaries.

As a result, Brazil is clearly following the international regulations enacted by FIFA and adapting them to the Brazilian reality, despite of the impacts that they can generate in clubs, players and intermediaries.

III. The Implementation of TPO in Brazil

(a) A Brief Overview of the Brazilian Clubs’ Finances

According to the most recent economic studies and research available, Brazilian football clubs had their revenues increased from 28% (2011) to 31% (2012), backed by an increase in TV broadcasting contracts, ticketing and the sale of economic rights of football players[1]. As naturally expected, the clubs invested most of their assets in the improvement of the main squads by hiring new talents, as well as with the payment of endless debts that accumulated throughout the years and presidential mandates.

During the past years, most of the Brazilian clubs have had a poor economic performance, mainly because of unstructured management, and lack of corporate governance principles. Added to that, the economic rights of football players have always been one of the preferred income resources for Brazilian clubs, which ultimately could count on these rights to keep their activities and existence.

In general, by analyzing the financial statements of Brazilian clubs as from 2011, they frequently depend on the sale of players and competition titles in order to increase their revenues or at least maintain their status quo.

(b) Sale of Players & Economic Rights

In view of the foregoing, clubs in Brazil tend to resort to the sale of players as a key income source of utmost importance. In this regard, and prior to the implementation of TPO, clubs commonly sold percentages of players’ economic rights to third parties and investors in order to obtain quicker alternative finance mechanisms for their daily operations, and thus escaping from the abusive banking loans and interest rates.

According to the FIFA RSTP, the sale of a player consists in the sale of the player’s registration rights from one club to another. In general, if such registration rights have not been transferred from the club, then no sale has been concluded. In this sense, and as defined by the Court of Arbitration for Sport in its solid jurisprudence on the definition of economic rights, “a club holding an employment contract with a player may assign, with the player’s consent, the contract rights to another club in exchange for a given sum of money or other consideration, and those contract rights are the so-called “economic rights to the performances of a player” […]; this commercial transaction is legally possible only with regard to players who are under contract, since players who are free from contractual engagements – the so-called “free agents” – may be hired by any club freely, with no economic rights involved.”[2]

The distinction between the registration and economic rights have caused a debate in the sports law community, due to the increase of third parties’ investments in football. As seen in Portugal, Spain, South American countries and many others around Europe, third party investments usually allow clubs to purchase and sell players’ economic rights and thus facilitate the renewal of squads.

In Brazil, transfers involving the purchase and sale of economic rights is a reality, and more than 80% of the Brazilian squads in the first division “Série A” are composed by players with economic rights divided between the clubs, players themselves, investors, and other third parties.

Additionally, given that Brazil is the biggest exporter of football players around the world, as acknowledged by the FIFA TMS Report (2014 Edition)[3], from January 2011 to June 2014, the highest number of worldwide transfers involved Brazilian clubs. Besides, Brazilians were the most transferred players worldwide, with 5,526 transfers in total during said period, which is the double of the second most transferred nationality, the Argentinian with 2,632 transfers. As a result, these transfers provide a positive result to Brazilian clubs and a relevant source of income that cannot be ignored, especially because most of these transfers are concluded involving some sort of third party investment.

Considering these numbers and the importance of TPO for the Brazilian market, its ban has provoked several impacts in every party usually involved in TPO operations, namely clubs, players and third parties, as is demonstrated below:

(c) Impacts on the Implementation of TPO

Clubs

Initially, the Brazilian clubs were extremely worried with the implementation of the ban on TPO, especially because the sale of economic rights of players to third parties corresponded to a significant parcel of the clubs’ annual revenues. It is undisputed that the number of transactions within Brazilian clubs in 2015 has decreased dramatically without the financial support of the investment funds.

While the majority of clubs in Brazil are struggling to adapt themselves to this new set of rules and the CBF Transfer Regulations, a few – richer – clubs can now see some advantage in the recently implemented ban.

On the one hand the poorer and smaller clubs saw a vast number of investors fading away with the implementation of the ban and, consequently, a significant part of their annual revenues reduced drastically.

By analyzing the transition period of the ban by FIFA, along with the strict rules on the validity of TPO agreements, clubs that were intimately dependent on this type of financial operations had a very short time to adapt themselves and seek other financial instruments to capitalize in the meantime.

On the other hand, richer and bigger clubs in Brazil also faced – and are still facing – financial difficulties, but several of them are taking advantage of the TPO ban to gain control over their players’ economic rights. In practical terms, Brazilian clubs have been anticipating the renewal of hundreds of employment agreements with players, especially those who had economic rights distributed to different third parties.

By adopting this strategy and under the CBF Transfer Regulations and FIFA RSTP, clubs tend to recover the entirety of players’ economic rights and, thus, wait until the next sale in order to maximize their profits.

Football Players

In view of the broad definition of third party under the FIFA RSTP, even players are now considered as a third party – despite of disagreements in the sports law community – along with their relatives.

In view of the current ban and regulatory framework, players tend to bargain more during negotiations for higher salaries, bonuses and signing fees. Given that they are not entitled to carry any percentage of their own economic rights, the negotiations tend to be more intense and demanding, which naturally pressures the clubs to offer a better compensation to players. Moreover, players that were previously transferred among clubs with the financial support of third parties now find difficulties in reaching top division clubs.

Investors and Intermediaries

The National Transfer Regulations and the FIFA RSTP, especially in view of the TPO agreements that were valid when the ban was implemented, have also affected investors and Intermediaries.

Actually, due to the massive practice of TPO in Brazil, there was no longer a clear distinction between investors and agents, since the latters were conducting their activities in exchange of economic rights rather than percentages calculated over the annual income or remuneration of their clients as established by the former FIFA Player’s Agents Regulations and the current FIFA Regulations on Working with Intermediaries.

Investors have now put their activities on hold waiting for a clearer and more favorable scenario or are acquiring smaller “host-clubs” to be used as a bridge to subsequent transfers based in the CAS award 2014/A/3536 Racing Club Asociación Civil v. FIFA.

It is important to highlight that despite FIFA’s TMS best efforts to rule the matter, the CAS Panel considered that it is “undisputed that the present case involves a transfer structure which, […], is to be considered as a “bridge transfer”, the Panel considers that Racing Club could not ignore that it was involved in a bridge transfer and was not acting in good faith when arguing that the transfer via Institución was conducted exclusively on the basis of a sporting interest. However, this does not imply per se that Racing acted in bad faith as far as the TMS registration of the Player’s transfer from Institución to Racing is concerned. Indeed, FIFA had to satisfy its burden of proof and demonstrate to the comfortable satisfaction of the Panel that Racing Club had entered untrue or false data and/or misused the TMS for illegitimate purposes. In this regard, the Panel finds that “insufficient evidence is available to prove that the Appellant must be assumed not to have acted in good faith in connection with Player’s transfer registration in the TMS”, as “it has not been proven that the Appellant has registered misleading or false information in the TMS”.[4]

Therefore, the definition of “bridge transfers” and “host clubs” is still pending and cannot be viewed, at least at this stage, as illegal or illegitimate in light of the current FIFA regulations.

On the other hand, agents and intermediaries are back to the original scope of the representation activity and are now working for basic remuneration.

IV. TPO and its First Disciplinary Case in Brazil: Iago Maidana’s “Saga”

Recently, the Brazilian player Iago Justen Maidana Martins (“Player”) and the clubs Criciúma Esporte Clube (“Criciúma”), Monte Cristo Esporte Clube (“Monte Cristo”), and São Paulo Futebol Clube (“São Paulo FC”) have been accused of violating the CBF Transfer Regulations, the Intermediary Regulations, along with specific provisions of the Brazilian Sports Law Code. The prosecutor of the Brazilian Football Sports Justice Tribunal (“TJD Prosecutor”) has opened a disciplinary investigation and a decision has recently been rendered on a first instance.

In order to clarify the core phases of this polemic transfer, which resulted in the Player’s transfer from Criciúma to Monte Cristo and then to São Paulo FC in less then ten days, the following steps are highlighted.

First Phase:

The Player and Criciúma had initially signed an Employment Agreement (“Employment Agreement n.1”) that was valid until 30 June 2016. Such contract specified an indemnification clause of R$1.600.000,00 (one million six hundred thousand reais) in case of early termination of the employment agreement.

On 04 September 2015 the company “GA – Gestão de Patrimonio Ltda.” (“GA”) , owner of all of the Player’s economic rights and Criciúma’s partner since 2012, determined the termination of the Employment Agreement n.1. On this same date, GA received from another company, i.e. Itaquerão Soccer Ltda., the total amount of R$400.000,00 (four hundred thousand reais) regarding the termination of the Employment Agreement n.1.

Second Phase:

Five days later, on 09 September 2015 the Athlete signed a new employment agreement with Monte Cristo (“Employment Agreement n.2”), which would be the new owner of the Athlete’s economic rights. Employment Agreement n.2 would be valid until 31 January 2016 and it contained an indemnification clause of R$50.000,00 (fifty thousand reais) in case of early termination. However, only two days after the Employment Agreement n.2 had been signed, it was terminated.

Third Phase:

Following the transfer of the Player to São Paulo FC. Consequently, the Player signed a new employment agreement (“Employment Agreement n.3”) with São Paulo FC.

São Paulo FC agreed to pay Monte Cristo the total amount of R$ 2.000.000,00 (two million reais) in order to obtain 60% of the Player’s economic rights while Monte Cristo would keep the remaining 40%.

Naturally, this significant transfer fee alarmed the Brazilian authorities and CBF, once São Paulo FC paid an indemnification fee much higher than the contractual stipulation under the Employment Agreement n.2, i.e. R$ 50.000,00 (fifty thousand reais) in order to obtain only 60% of the Player’s economic rights. In any event, from São Paulo FC’s point of view, such transfer operation made no sense, once it could have initially obtained the Player’s economic rights from Criciúma for the value of R$1.600.000,00, as stipulated in the indemnification clause of the Employment Agreement n.1.

In view of the foregoing, the TJD Prosecutor understood the Parties violated CBF’s Regulations and the Brazilian Code of Sports Law.

Violation of the CBF Intermediaries Regulations

Firstly, the three clubs and the Player were accused of using an unregistered intermediary (Itaquerão Soccer Ltda.) in order to conclude the Player’s transfer (art. 38 of the National Regulation of Intermediaries).

Secondly, the parties failed to inform CBF of said transfer operation, which also constituted a violation of the CBF Intermediaries Regulations. (art. 13 of the National Regulation of Intermediaries).

Furthermore, a third party, i.e. GA (Criciuma’s partner), was involved in the termination of the Employment Agreement n.1, which is expressly forbidden not only by CBF but also by FIFA (art. 10 of the National Regulation of Registration and Transfer of Football Athletes; art. 18 bis of the FIFA RSTP and art. 27-B of the Law n° 9.615/98).

Violation of the CBF Transfer Regulations

On 26 October 2015, the STJD finally ruled on this case and held Monte Cristo liable for contributing to the termination of the Employment Agreement n.1, once it acted as a “bridge club” between Criciúma and São Paulo, with the sole purpose to profit, once it still had 40% of the Player’s economic rights.

Consequently, considering that these subsequent transfers comprised the purchase and sale of the Player’s economic rights, said operations are prohibited under the CBF Transfer Regulations. (art. 66 of the National Regulation of Registration and Transfer of Football Athletes). Thus, since CBF’s Transfer Regulations have been violated, Article 191, II, of the Brazilian Code of Sports Law has been applied and the STJD decided to fine the three clubs in the amount of R$100.000,00 (one hundred thousand reais) and the Player in the amount of R$10.000,00 (ten thousand reais).

In light of all above, on 27 October 2015, São Paulo, Criciúma and Monte Cristo were sanctioned in first instance with a fine of R$100.000,00 (one hundred thousand reais) while the player was sanctioned with a fine of R$10.000,00 (ten thousand reais). The case is now subject to an appeal before STJD’s Second Instance.

V. Conclusion

It is evident that Brazil suffered and is still suffering with the implementation of the ban on TPO. Brazilian clubs are still struggling to adapt themselves to this new reality, as

The dispute resolution bodies within Brazilian football are also adapting to the prohibition of TPO and enforcement of its new regulatory framework. Iago Maidana’s case shows clearly the abuses that the football market still commits, as well as the disciplinary response that the adjudicatory bodies provide to members who do not comply with the cogent regulations.

The worldwide ban on TPO is approaching its first anniversary and much has been said, thought and discussed. The first clubs have been sanctioned already, such as the Belgian club FC Seraing, and important proceedings are still pending before the European Commission involving the Spanish and Portuguese Football Leagues against FIFA; however, the implementation of this ban is complex, polemic and not yet definitive. This story has – definitely – not ended.

* Marcos Motta, Partner

**Pedro Fida, Partner and former Counsel to the Court of Arbitration for Sport (CAS).

 

Reference List:

[1] ITAÚ BBA Report – Economic & Financial Analysis of Brazilian Clubs – 2014.

[2] Arbitral Award CAS 2004/A/635.

[3] TMS Report – Market Insights: Brazil a key player in the international transfer market (2014).

[4] See http://www.asser.nl/SportsLaw/Blog/post/a-bridge-too-far-bridge-transfers-at-the-court-of-arbitration-for-sport-by-antoine-duval-and-luis-torres