BRAZIL 2004-2005 INCSR PART II - MONEY LAUNDERING

UNCLAS SECTION 01 OF 04 BRASILIA 000123

SIPDIS

JUSTICE FOR OIA AND AFMLS
TREASURY FOR FINCEN
STATE FOR INL

E.O. 12958: N/A
TAGS: KCRM EFIN PTER SNAR KTFN BR
SUBJECT: BRAZIL 2004-2005 INCSR PART II - MONEY LAUNDERING
AND FINANCIAL CRIMES

REF: A) 04 STATE 254401 B) BRASILIA 61


1. This cable transmits Embassy Brasilia's submission of
Part II of the 2004-2005 International Narcotics Control
Strategy Report (INCSR),on Money Laundering and Financial
Crimes. Ref B is post's submission of Part I of the INCSR.


2. Due to its great size and large economy, Brazil is
considered a regional financial center, but it is not an
offshore financial center. Brazil maintains adequate banking
regulation, retains some controls on capital flows, and
requires disclosure of the ownership of corporations.
Brazilian authorities report that money laundering in Brazil
is primarily a problem of domestic crime, including the
smuggling of contraband goods and corruption, both of which
generate funds that may be laundered through the banking
system, real estate investment or financial asset markets.
The proceeds of narcotics trafficking and organized criminal
activities are laundered in a similar fashion. An Inter-
American Development Bank study of money laundering in the
region found that Brazil's relatively strong institutions
helped reduce the incidence of money laundering to well
below the average for the region.


3. The GoB adopted and began implementing in 2004 a new
national strategy document for combating money laundering.
The strategy includes 32 actions, grouped into six strategic
goals: 1) better coordinate disparate federal and state
level anti-money laundering efforts; 2) take advantage of
computerized databases and public registries to facilitate
the fight against money laundering; 3) evaluate and improve
existing mechanisms to combat money laundering; 4) increase
international cooperation to fight money laundering and
recover assets; 5) promote an anti-money laundering culture;
and, 6) to prevent money laundering before its occurrence.
The first major coordination action taken under the new plan
was the creation of a new high-level coordination council
(the GGI-LD),led by the Ministry of Justice's Office for
Asset Seizure and International Judicial Cooperation. The
GGI-LD determines overall strategy and priorities, which are
then implemented by Brazil's financial intelligence unit,
the Council for the Control of Financial Activities (COAF),
which has been strengthened with additional analysts.
Specific cases are then assigned to law enforcement task
forces for investigation.


4. Implementation of much of the strategy is ongoing.
Among the more ambitious efforts is the drafting of
legislative changes to facilitate greater law enforcement
access to financial and banking records during
investigations, criminalize illicit enrichment, allow
administrative freezing of assets and facilitate
prosecutions of money laundering -- and terrorism finance -
by refining the legal definition of money laundering and de-
linking it from the current exhaustive list of predicate
crimes. The GoB reportedly plans to present to Congress in
early 2005 a bill enacting these changes. Creation of a
unified database of all money laundering investigations and
a national level registry of real estate, which would aid
investigators, also is contemplated. An existing effort to
create a database of all current accounts in the country,
updated in real time, is also expected to come to fruition
in 2005.


5. Money laundering in Brazil is primarily related to
drugs, corruption, and trade in contraband. In 2004 the GOB
continued investigating corrupt public figures, including
customs inspectors, federal tax authorities, and high-
ranking politicians, and the use of offshore companies to
launder money. The COAF has also investigated instances of
money laundering linked to the sale and purchase of luxury
automobiles. This market is currently an unregulated sector
in Brazil. Other schemes involve the purchase of winning
lottery tickets to justify the increase of funds. Under
Brazil's anti-money laundering law, the lottery sector must
notify COAF of the names and data of any winners of three or
more prizes equal to or higher than 10,000 Reais within a 12-
month period. According to Brazilian authorities, Brazilian
institutions do not engage in currency transactions that
include significant amounts of U.S. currency, currency
derived from illegal drug sales in the U.S., or that
otherwise significantly affect the U.S. The authorities
believe that organized crime groups use the proceeds of
domestic drug trafficking to purchase weapons from Colombian
guerrilla groups.


6. The GOB has a comprehensive anti-money laundering
regulatory regime in place. Law 9.613 of March 3, 1998,
criminalizes money laundering related to drug trafficking,
terrorism, arms trafficking, extortion, and organized crime,
and penalizes offenders with a maximum of 16 years in
prison. The law expands the GOB's asset seizure and
forfeiture provisions and exempts "good faith" compliance
from criminal or civil prosecution. Regulations issued in
1998 require that individuals transporting more than 10,000
Reais (then approximately $10,000, now approximately $3,700)
in cash, checks, or traveler's checks across the Brazilian
border must fill out a customs declaration that is sent to
the Central Bank. Financial institutions remitting more than
10,000 Reais also must make a declaration to the Central
Bank. On June 11, 2002, then President Cardoso signed Law
10.467, which modified Law 9.613. The new law put into
effect Decree 3,678 of November 30, 2000, which penalizes
active corruption in international commercial transactions
by foreign public officials. Law 10.467 also added penalties
for this offense under Chapter II of Law 9.613.


7. Law 9.613 also created a financial intelligence unit
(FIU),i.e. the Council for the Control of Financial
Activities (COAF),which is housed within the Ministry of
Finance. The COAF includes representatives from regulatory
and law enforcement agencies, including the Central Bank and
Federal Police. The COAF regulates those financial sectors
not already under the jurisdiction of another supervising
entity. Currently, the COAF has a staff of 28, comprised of
18 analysts, two international organizations specialists, a
counterterrorism specialist, and support staff. A new
director was appointed in February 2004.


8. Between 1999 and 2001, the COAF issued a series of
regulations that require customer identification, record
keeping, and reporting of suspicious transactions to the
COAF by obligated entities. Entities that fall under the
regulation of the Central Bank, the Securities Commission
(CVM),the Private Insurance Superintendence (SUSEP),and
the Office of Supplemental Pension Plans (PC),file
suspicious activity reports (SARs) with their respective
regulator, either in electronic or paper format. The
regulatory body then electronically submits the SARs to
COAF. Entities that do not fall under the regulations of the
above-mentioned bodies, such as real estate brokers, money
remittance businesses, factoring companies, gaming and
lotteries, dealers in jewelry and precious metals, bingo,
credit card companies, commodities trading, and dealers in
art and antiques, are regulated by the COAF and send SARs
directly to the FIU either via the Internet or using paper
forms. All of these regulations include a list of guidelines
that help institutions identify suspicious transactions. The
COAF receives roughly 300 to 500 SARs per month, about two
percent of which lead to investigations by law enforcement.


9. The Central Bank has established the Department to
Combat Exchange and Financial Crimes (DECIF) to implement
anti-money laundering policy, examine entities under the
supervision of the Central Bank to ensure compliance with
suspicious transaction reporting, and forward information on
the nature of the suspect transaction to the COAF. Since
the January 2001 passage of Complementary Law No. 105 and
its implementing Decree No. 3,724, all government
authorities, including the COAF, have been able to access
complete bank transaction information during an
investigation without a court order. On January 11, 2002,
then President Cardoso signed Brazil's new omnibus drug
legislation, which allows for the suspension of bank secrecy
during drug trafficking investigations.


10. On July 9, 2003, Law 10.701 was passed to modify Law
9.613 of 1998. Law 10.701 criminalizes terrorist financing
and makes it a predicate offense for money laundering. The
law also establishes crimes against foreign governments as a
predicate offenses, requires the Central Bank to create and
maintain a registry, expected to come on-line in 2005, of
information on all bank account holders, and enables the
COAF to request from all government entities financial
information on any subject suspected of involvement in
criminal activity. Other measures enacted in 2003 required
banks to report cash transactions exceeding 10,000 Reais
(approximately $3,700) to the Central Bank, established a
department within the Ministry of Justice to recover
financial assets, and designated a representative from the
Ministry of Justice to the COAF.


11. Brazil has established systems for identifying,
tracing, freezing, seizing, and forfeiting narcotics-related
assets. The COAF and the Ministry of Justice manage these
systems jointly. Police authorities and the customs and
revenue services are responsible for tracing and seizing
assets, and have adequate police powers and resources to
perform such activities. The judicial system has the
authority to forfeit seized assets. Brazilian law permits
the sharing of forfeited assets with other countries.
Traffickers have not taken any retaliatory actions related
to money laundering investigations, government cooperation
with the U.S. Government, or the seizure of assets.


12. Brazil has some ability to employ advanced law
enforcement techniques such as undercover operations,
controlled delivery, and use of electronic evidence and task
force investigations that are critical to the successful
investigation of complex crimes, such as money laundering.
Generally such techniques can be used only for information
purposes, and are not admissible in court. In 2003,
Brazilian courts handed down their first criminal conviction
for money laundering. The case involved illegal transfers of
money overseas through a currency exchange in Foz do Iguacu.
A flood of new investigations (1,043 in 2003, up from 345 in
2002) has led to a sharp spike in the number of money
laundering cases going to court (132 in 2003, up from 34 in
2002). To improve the ability of the judicial system to deal
with money laundering crimes, Brazilian authorities have
created seven special federal-level money-laundering courts,
one in each federal judicial district, and expect to create
one more. The judges in these courts generally have received
some specialized training to deal with money laundering
cases.


13. Investigations into the scandal involving Banestado,
the state bank of Parana, continued in 2004. In 1995, five
banks in the tri-border region of Brazil, Paraguay, and
Argentina, including Banestado, were authorized to open
currency exchange accounts, known as CC-5 accounts. CC-5
accounts quickly became used as a means of laundering money.
Moneychangers opened hundreds of fake CC-5 accounts, into
which criminals deposited millions of Reais. The money was
then wired in dollars to the Banestado branch in New York
City and from there to other banks, usually in countries
considered to be tax havens. The moneychangers and Banestado
officials took cuts from each transaction. Over 250 phony CC-
5 accounts have been identified and it is suspected that as
much as $30 billion passed through CC-5 Banestado accounts
in the U.S. between 1996 and 1999, a portion of which was
likely laundered. A separate and sometimes politicized
Congressional inquiry into the Banestado case was closed at
end-2004; its final report recommended that law enforcement
agencies indict several prominent figures in the case.


14. The COAF has responded to U.S. Government efforts to
identify and block terrorist-related funds. Since September
11, 2001, COAF has run inquiries and searched its financial
records for entities and individuals on the UN 1267
Sanctions Committee's consolidated list. None of the
individuals and entities on the consolidated list were found
to be operating or executing financial transactions in
Brazil, and the GOB insists there is no evidence of
terrorist financing in the country. The USG remains
concerned, however, that the tri-border area with Argentina
and Paraguay, -- infamous for contraband of all kinds,
including arms, drugs and pirated goods -- lacks adequate
enforcement of currency controls and cross-border reporting
requirements and may be a source of terrorist financing. In
November 2003, the GOB extradited an alleged financier to
Paraguay on charges of tax evasion.


15. The GOB has signed, but not yet ratified, the UN
International Convention for the Suppression of the
Financing of Terrorism and the OAS Inter-American Convention
on Terrorism. In 2000 Brazil became a full member of the
Financial Action Task Force (FATF),and a founding member of
GAFISUD, the FATF for South America, and has sought to
comply with the FATF Eight Special Recommendations on
Terrorist Financing. Brazil is a party to the 1988 UN Drug
Convention and has signed, but not ratified, the UN
Convention against Transnational Organized Crime, which
entered into force on September 29, 2003. On December 9,
2003, the GOB signed the UN Convention Against Corruption,
which is not yet in force internationally; Brazil also is a
member of the OECD anti-bribery convention. Brazil is also a
member of the Organization of American States Inter-American
Drug Abuse Control Commission (OAS/CICAD) Experts Group to
Control Money Laundering. The COAF has been a member of the
Egmont Group since 1999. In February 2001, the Mutual Legal
Assistance Treaty between Brazil and the United States
entered into force. The Brazilian Senate ratified in 2004 a
bilateral Customs Mutual Assistance Agreement with the U.S.

CHICOLA