Paraguay

Paraguay is a principal money laundering center and major drug transit country involving the banking  and nonbanking financial sectors. A multi-billion dollar contraband trade occurs in the border region shared with Argentina and Brazil, called the Tri-Border Area, and facilitates much of the money laundering in Paraguay. While the Government of Paraguay (GOP) suspects that proceeds from narcotics trafficking are often laundered in the country, it is difficult to determine what percentage of the total amount of laundered funds is generated from narcotics sales. Weak controls in the financial sector, open borders, bearer shares, casinos, a plethora of exchange houses, lax or non-enforcement of cross border transportation of currency and negotiable instruments, and minimal enforcement activity for financial crimes allow money launderers, possible terrorist financiers, and transnational criminal syndicates to take advantage of Paraguay’s financial system.

Ciudad del Este (CDE), on Paraguay’s border with Brazil and Argentina, represents the heart of Paraguay’s underground or “informal” economy. The area is well known for arms and narcotics trafficking and violations of intellectual property rights—and the illicit proceeds from these crimes are a source of laundered funds. A wide variety of counterfeit goods, including cigarettes, CDs, DVDs, and computer software, are imported from Asia and transported across the border into Brazil, with a smaller amount remaining in Paraguay for sale in the local economy. Some former government officials have been accused of involvement in the smuggling of contraband or pirated goods. Although there are ongoing criminal investigations, to date there have been few convictions for smuggling contraband or pirated goods.

Paraguay is particularly vulnerable to money laundering, as little personal background information is required to open a bank account or to conduct financial transactions. Paraguay is also an attractive financial center for neighboring countries, particularly Brazil. Foreign banks are registered in Paraguay and nonresidents are allowed to hold bank accounts, but current regulations forbid banks from advertising or seeking deposits from outside the country. While offshore banking in Paraguay is illegal, bearer shares are permitted—exposing the country to money laundering risk. A 2008 International Monetary Fund review of the GOP’s anti-money laundering controls noted that a significant portion of corporations issue bearer shares and that no measures are in place to ensure that such entities are not being misused for money laundering. While casinos exist, offshore casinos do not, and Internet gambling is marginal, largely due to limited Internet connectivity throughout the country.  Shell companies and trust funds structures are legal but seldom used and uncommon in the financial system. At present, the financial sector seems to lack the depth and sophistication to use these structures.

The nonbank financial sector operates in a weak regulatory environment with limited supervision.
Credit unions or “cooperatives” are one of the main nonbank agents in the economy, rapidly growing in membership and representing over 20 percent of deposits and 33 percent of loans in the financial system. The organization responsible for regulating and supervising credit unions, the National Institute of Cooperatives (INCOOP), is an independent body that provides regulatory and supervisory guidelines, but lacks the capacity to enforce compliance. Exchange houses are another nonbank sector where enforcement of compliance requirements remains limited. By law, exchange houses need to register with the Central Bank. The Central Bank has the authority to intervene, close, and seize the assets of illegal exchange houses, and the Attorney General’s office has the responsibility to enforce anti-money laundering laws. However, it is estimated that in CDE alone there are more than 100 illegal exchange houses. Unregistered exchange houses are highly susceptible to money laundering activity, and in CDE they are associated with laundering funds from illicit activity.

In July 2008, President Duarte Frutos signed a new penal code that includes enhanced legislation on money laundering. Under the new penal code money laundering is an autonomous crime, punishable by a prison term of up to five years. The new code establishes predicate offenses for money laundering but does not require a conviction for the predicate offense before initiating money laundering charges. The new code also allows the state to charge financial sector officials who negligently permit money laundering to occur. Implementation of the new penal code is expected for mid-2009 to allow time for judge and prosecutor training.

Another bill amending Paraguay’s criminal procedure code is expected in 2009. The proposed amendments to the criminal procedure code would move Paraguay toward a more accusatory system. The reforms would allow criminal investigations to occur without advance notice of the investigation to the subject or the defense attorney, lengthen statutes of limitation, and allow for confrontation and cross examination of witnesses.

Paraguay does not have laws that criminalize terrorist financing or would provide authorities to freeze, seize, or forfeit assets related to the financing of terrorism. Efforts to include such statutes in the new penal code failed. The Ministry of Industry and Commerce’s (MIC) Secretariat to Combat Money Laundering (SEPRELAD) is working on a revised draft of the anti-terrorism finance bill to present to Congress in early 2009. The Egmont Group notified Paraguay about the need to comply with its international commitments regarding anti-terrorism finance legislation. If Paraguay does not show reasonable progress in enacting anti-terrorism finance legislation it could face suspension from the Egmont Group in 2009, which could then be followed ultimately by expulsion.

Other challenges slow Paraguay’s progress in combating money laundering. Paraguay added three financial crimes prosecutors in 2007, bringing the total number to 11, but prosecutors still face resource constraints that limit their ability to investigate and prosecute financial crimes. New criteria were issued in 2005 for the selection of judges, prosecutors and public defenders; however, the process remains one that is largely based on politics, nepotism and influence peddling. Now that the new anti-money laundering legislation has been passed as part of the new penal code, it is critical to Paraguay’s future prosecutorial successes that judges and prosecutors enhance their knowledge regarding the successful prosecution and adjudication of money laundering cases.

There are no effective controls or laws that regulate the amount of currency that can be brought into or out of Paraguay. Cross-border reporting requirements are limited to customs declaration forms issued by airlines at the time of entry into Paraguay. Persons transporting $10,000 into or out of Paraguay are required to file a customs report, but these reports are not collected or checked. Customs operations at the airports or land ports of entry provide no control of cross-border cash movements. The nonbank financial sector (particularly exchange houses) is used to move illicit proceeds both from within and outside of Paraguay into the U.S. banking system.

Most high-priced goods are paid for in U.S. dollars, and cross-border bulk cash smuggling is a major concern. Large sums of dollars generated from normal commercial activity and suspected illicit commercial activity are transported physically from Paraguay through Uruguay and Brazil to banking centers in the United States. The GOP is only beginning to recognize and address the problem of the international transportation of currency and monetary instruments derived from illegal sources.

Bank secrecy laws in Paraguay do not prevent banks and financial institutions from disclosing information to bank supervisors and law enforcement entities. Bankers and others, however, are protected under the anti-money laundering law with respect to their cooperation with law enforcement agencies. Banks, finance companies, insurance companies, exchange houses, stock exchanges and securities dealers, investment companies, trust companies, mutual and pension funds administrators, credit and consumer cooperatives, gaming entities, real estate brokers, nongovernmental organizations, pawn shops, and dealers in precious stones, metals, art, and antiques are required to know and record the identity of customers engaging in significant currency transactions. These entities must also report suspicious activities to Paraguay’s financial intelligence unit (FIU), the Unidad de Análisis Financiera (UAF) within SEPRELAD. The Superintendence of Banks enforces these reporting obligations for banks, but they are not enforced for other financial institutions. In November 2007, the MIC issued new regulations that define reporting requirements and sanctions for noncompliance for the insurance industry and credit unions.

The government of Paraguay made significant efforts to strengthen SEPRELAD. Former Central Bank president Gabriel Gonzalez managed SEPRELAD until early August 2008. Director Gonzalez’s efforts improved SEPRELAD’s response time and operational structure, eliminating the backlog of suspicious activity reports (SARs). He also hired and trained additional UAF staff, strengthening the unit’s analytical capacity. President Fernando Lugo’s new administration designated in mid-August Oscar Boidanich, a banking supervision and anti-money laundering veteran from the Central Bank, as SEPRELAD’s new Director. Director Boidanich has worked to improve the quality of reported information in the SARs, and streamlined the information exchange processes with reporting institutions. In three months, SEPRELAD processed 276 SARs and sent 22 cases to the Attorney General’s office, which represents a 20 percent increase over the same period in previous years.

SEPRELAD is hampered by a lack of effective inter-agency cooperation, as there is no formal mechanism for sharing sensitive information. Pursuant to a money-laundering vulnerability assessment performed in mid-2008 by the South America Financial Action Task Force (GAFISUD) and the International Monetary Fund (IMF), Director Boidanich is seeking to modify SEPRELAD’s organizational structure to make it an independent secretariat with administrative and logistical support from the Central Bank with the aim of improving information-sharing mechanisms among the government’s law enforcement agencies. SEPRELAD has drafted a bill, not yet pending before Congress, which would make it an independent secretariat reporting directly to the president. SEPRELAD is also seeking to strengthen its relationships with international counterpart financial intelligence units. Though Paraguay had long been in arrears with GAFISUD, it fully paid its outstanding dues in early 2008 and included the annual payment into its future budget requests. Paraguay has taken some measures to tackle illicit commerce and trade in the informal economy and to develop strategies to implement a formal, diversified economy.

Paraguay submitted a proposal for a second phase of the Millennium Challenge Corporation’s Threshold Program to address corruption problems of impunity and informality, both of which hamper law enforcement efforts and contribute to money laundering. The Ministry of Industry and Commerce’s Specialized Technical Unit (UTE), working in close coordination with the Attorney General’s Trademarks and Intellectual Property Unit, seized $55 million worth of pirated goods during the first ten months of 2008. In cooperation with the U.S. Department of Homeland Security’s Immigration and Customs Enforcement (ICE), the GOP continues to operate a Trade Transparency Unit (TTU) that examines discrepancies in trade data that could be indicative of customs or tax fraud, trade-based money laundering, or the financing of terrorism.

Under current laws, enforcement agencies in Paraguay have limited authority to seize or forfeit assets of suspected money launderers. In most cases, assets seized or forfeited are limited to transport vehicles, such as planes and cars, and normally do not include bank accounts. However, law enforcement authorities may not auction off these assets until a defendant is convicted. At best, they can establish a “preventative seizure” (which has the same effect as freezing) against assets of persons under investigation for a crime in which the state risks loss of revenue from furtherance of a criminal act, such as tax evasion. However, in those cases the limit of the seizure is set as the amount of the suspect’s liability to the government. In the past few years, Paraguay’s anti-narcotics agency, SENAD, has been permitted on a temporary basis to use assets seized in pending cases, but SENAD cannot fully use such assets because the law does not permit the assets to be maintained or repaired. New asset forfeiture legislation is required to make improvements in this regard.

The law enforcement agencies have no authority to freeze, seize, or forfeit assets related to the financing of terrorism, which is not a criminal offense under Paraguayan law. The current law also does not provide any measures for thwarting the misuse of charitable or nonprofit entities that could be used as conduits for the financing of terrorism. However, the Ministry of Foreign Affairs provides the Central Bank and other government entities with the names of suspected terrorists on the UNSCR 1267 Sanctions Committee list.

The GOP has been slow to recognize terrorist financing within its borders. In December 2006, the U.S. Department of Treasury designated nine individuals and two companies operating in the Tri-Border Area as entities that provide financial and logistical support to Hezbollah. The nine individuals have all provided financial support and other services for Specially Designated Global Terrorist Assad Ahmad Barakat, who was designated by the U.S. Treasury in June 2004 for his support to Hezbollah leadership. The two companies, Galeria Page and Casa Hamze, are located in Ciudad del Este and are used to generate or move terrorist funds. The GOP publicly disagrees with the designations, stating that the U.S. has not provided any new information that would prove terrorist financing activity occurs in the Tri-Border Area.

In spite of limitations in prosecuting suspected terrorist financiers such as Assad Ahmad Barakat and
Kassem Hijazi, who were charged with tax evasion rather than terrorist financing or money laundering, the GOP is making improvements in its ability to successfully investigate and prosecute some money laundering cases. Leoncio Mareco was sentenced to 20 years in prison on August 14, 2007, for drug trafficking and money laundering. His wife, Zulma Rios de Mareco, was sentenced to 10 years in prison for money laundering. According to GOP authorities, the General Attorney’s office has processed 40 money laundering cases, 15 of which resulted in convictions. These cases reinforce the fact that convictions are possible, although difficult, under the current legal framework.

Paraguay and the United States do not have a mutual legal assistance agreement; however, Paraguay is a party to the Inter-American Convention on Mutual Legal Assistance in Criminal Matters. Paraguay is a party to the 1988 UN Drug Convention, the UN Convention for the Suppression of the Financing of Terrorism, the UN Convention against Corruption, and the UN Convention against Transnational Organized Crime. Paraguay is a member of the “3 Plus 1” Security Group with the United States and the Tri-Border Area countries. Paraguay is a member of GAFISUD, and SEPRELAD is a member of the Egmont Group.

The GOP took a number of positive steps in 2008 to combat money laundering, particularly with the passage of the new penal code and the money laundering convictions. However, it should continue to pursue other initiatives to increase its effectiveness in combating money laundering and terrorist financing. The GOP should enact legislation and issue regulations that comport with all international standards relating to its poorly regulated financial sector, and that enable law enforcement authorities to more effectively investigate and prosecute money laundering and terrorist financing cases. Paraguay should take steps to ensure that the penal and procedural code reforms are expeditiously approved and implemented, allowing for a more effective anti-money laundering regime. Paraguay does not have a counterterrorism law or a law criminalizing terrorist financing, and it should take steps as quickly as possible to ensure that comprehensive counterterrorism and counterterrorist financing legislation is introduced and adopted. It should also take the necessary steps to ensure that its TTU is comprised of vetted employees from all relevant agencies, including SEPRELAD. Further reforms in the selection of, and accountability by, judges, prosecutors and public defenders are needed, as are reforms to the customs agency to allow for increased inspections and interdictions at ports of entry and to develop strategies targeting the physical movement of bulk cash. Additionally, Paraguay should reform its asset forfeiture regime, including the management of seized and forfeited assets.