PARAGUAY: 2006-2007 INTERNATIONAL NARCOTICS

UNCLAS ASUNCION 001151 SIPDIS SIPDIS STATE FOR INL JAMES HIDES E.O. 12958: N/A TAGS: EFIN KCRM KTFN SNAR PA SUBJECT: PARAGUAY: 2006-2007 INTERNATIONAL NARCOTICS CONTROL STRATEGY REPORT (INCSR) PART II, FINANCIAL CRIMES AND MONEY LAUNDERING REF: STATE 157000 ¶1. (U) Paraguay is a principal money laundering center, involving both the banking and non-banking financial sectors. The multi-billion dollar contraband re-export trade that occurs largely on the border shared with Argentina and Brazil the Tri-border Area (TBA) facilitates much of the money laundering in Paraguay. Paraguay is a major drug-transit country. The Government of Paraguay (GOP) suspect that proceeds from narcotics trafficking are often laundered, but it is difficult to determine the percentage of the total amount of laundered funds generated from narcotics sales. Weak controls in the financial sector, an open border, and minimal enforcement activity for financial crimes allow money launderers and terrorist financiers to take advantage of Paraguay,s financial system. The Government of Paraguay (GOP) successfully prosecuted a major money laundering case in 2006 and demonstrated an increased willingness to press money laundering charges against defendants notwithstanding the limitations of the current law. ¶2. (U) Paraguay is particularly vulnerable to money laundering, as little personal background information is required to open a bank account or to make financial transactions in Paraguay. Paraguay is 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. Paraguay is not considered to be an offshore financial center, but the GOP does allow representative offices of offshore banks to maintain a presence in the country. Shell companies are not permitted; trusts, however, are permitted and are regulated by the Central Bank. The Superintendent of Banks audits financial institutions and supervises all banks under the same rules and regulations. However, there are few effective controls over businesses, and a large informal economy exists outside the regulatory scope of the GOP. A number of cooperatives function effectively as financial institutions and may have as much as a 30 percent of financial system assets. These co-ops, as they are known, are not regulated by the Superintendent of Banks and are instead self-regulated. The industry organization charged with oversight - INCOOP - issues guidelines, but does not have regulatory authority to compel compliance with anti-money laundering or prudential measures. ¶3. (U) Money laundering in Paraguay is facilitated by the multi-billion dollar contraband re-export trade that occurs largely in the TBA shared by Paraguay, Argentina, and Brazil. Ciudad del Este (CDE),on the border between Brazil and Paraguay, represents the heart of Paraguay,s informal economy. The area is well known for arms and narcotics trafficking, as well as crimes against intellectual property rights. A wide variety of counterfeit goods, including cigarettes, CDs, DVDs, and computer software, are imported from Asia and transported primarily across the border into Brazil, with a significantly smaller amount remaining in Paraguay for sale in the local economy. Some senior government officials, including members of Congress, have been accused of involvement in the smuggling of contraband or pirated goods. To date, there have been few criminal investigations, much less prosecutions of senior GOP officials, involvement in smuggling contraband or pirated goods. Government officials, in both Paraguay and the United States, also suspect the area to be a source of terrorist financing. Raids in CDE have led to the seizure of extremist Islamic materials and receipts of wire transfers from Paraguay to the Middle East and the United States. ¶4. (U) Paraguay has taken some measures to tackle the "gray" economy and to develop strategies to implement a formal, diversified economy. 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 has effectively opened a number of significant investigations against groups involved in piracy. Despite its low rating on corruption and other indices that prevented Paraguay from qualifying to participate fully in the Millennium Challenge Account (MCA) Compact Program, Paraguay was invited to participate in the MCA,s Threshold Program. In May, Paraguay signed a Threshold Program agreement to receive USD 34.9 million in assistance to address the problems of impunity and informality, both of which hamper law enforcement efforts and contribute to money laundering. ¶5. (U) A new law to improve the effectiveness of Paraguay,s anti-money laundering regime was drafted in late 2003 and was formally introduced to Congress in 2004. This legislation has since been broken down and incorporated into three bills emerging through a multi-institutional legal reform commission. Proposed amendments to Paraguay,s Penal Code, including on money laundering, were introduced to Congress in October 2006. The other two bills addressing procedural reform and administrative structures should be introduced in short order. ¶6. (U) In addition to confirming the Financial Analysis Unit,s (UAF) role as the sole FIU, the latter piece of legislation establishes the Secretariat to Combat Money Laundering (SEPRELAD) as an independent secretariat or agency reporting directly to the Office of the President. The amendments to the Penal Code submitted to Congress in October establish money laundering as an autonomous crime punishable by a prison term up to 8 years, terrorism punishable up to 30 years and terrorism financing up to 15 years. It establishes predicate offenses as any crimes that are punishable by a prison term exceeding six months, and specifically criminalizes money laundering tied to the financing of terrorist groups or acts. The full range of covered institutions will be required to report suspicious transactions to the UAF and to maintain registries of large currency transactions that equal or exceed USD 10,000. ¶7. (U) Other provisions of the draft bills include penalties for failure to file or falsification of reports, "know your client provisions," and standardized record keeping for a minimum of five years. The UAF will continue to refer cases as appropriate for further consideration by Paraguay,s Anti-Drug Secretariat (SENAD) and to the Attorney General,s Office for prosecution. It will also serve as the central entity for related information exchanges with other concerned foreign entities. The bills further specify that the financial crimes investigative unit of SENAD is the principal authority for carrying out all counter narcotics and other financial investigations, including money laundering, and will also have the authority to initiate investigations on its own. ¶8. (U) There are other challenges, however, that the new money laundering legislation, when passed, will not address. With only eight positions available for prosecutors dedicated to financial crimes, of which only six are filled, Paraguay currently has limited resources to investigate and prosecute money laundering and 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, affording the ruling party an opportunity to manipulate the justice system to its advantage. ¶9. (U) Moreover, unless the new legislation is enacted, most judges have little incentive to receive money laundering cases because many believe that sentencing on predicate offenses is sufficient punishment. As it is, those individuals implicated in money laundering are typically prosecuted on tax evasion charges. For example, in May 2004, Assad Barakat - widely alleged to be involved in money laundering - was convicted of tax evasion and sentenced to six and one-half years in prison. In late 2004, prosecutors began investigating several tax evasion cases involving suspected money laundering by both authorized and unauthorized money exchange offices in Ciudad del Este. A case against Lebanese businessman Kassem Hijazi, suspected of having laundered proceeds from illicit activities in the Tri-border Area and sending a portion of those funds to support Lebanese Hizbollah activities, is on-going on the basis on tax evasion charges, not money laundering. ¶10. (U) On a positive note, Daniel Fretes Ventre, a former Inspector General under President Wasmosy in the 1990s, was sentenced by an Appeals Court October 24 to 12 years in prison and fined USD 68,000, money laundering and other crimes. Several members of his family were convicted on the same charges. Fretes and his accomplices laundered money through a family-established college and three family-owned businesses. In addition to the above-noted penalties, authorities confiscated 11 family-owned properties in Asuncion and Ciudad del Este. This case represents the most significant money laundering conviction - from less than a handful to date - and reinforces the fact that convictions are possible, however difficult under the currently flawed legal framework. Fretes Ventre has appealed this decision to the Supreme Court. ¶11. (U) In cooperation with the U.S. Department of Homeland Security,s Office of Immigration and Customs Enforcement (ICE),Paraguay is in the process of developing a prototype Trade Transparency Unit (TTU) that will examine discrepancies in trade data that could be indicative of customs fraud or trade-based money laundering. The development of such a unit constitutes a positive step with respect to Special Recommendation VI of the Financial Action Task Force (FATF) on the use of alternative remittance systems. Trade-based systems such as hawala and black market exchanges often use fraudulent trade documents and over and under-invoicing schemes to provide counter valuation in transferring value and settling accounts. ¶12. (U) Paraguay,s Millennium Challenge Account Threshold Program supports the continued development of the "maquila" sector, which comprises businesses operating for export (of either goods or services) that enjoy special tax advantages. Since the GOP stepped up promotion beginning in 2004, the sector has experienced rapid growth. The largest maquila to date, a synthetic rubber factory, is Brazilian-owned and located just outside of Ciudad del Este. The company has invested USD 18 million in the project, one of the largest foreign investments in the Paraguayan economy. The GOP seeks to strengthen its tourism industry by improving its tourism infrastructure. It would like to make the international airport in Asuncion a regional transportation hub for cargo and possibly passenger airlines, although it faces an uphill battle due to small traffic volumes and business climate concerns. The new customs code implemented in early 2004 provides for the creation of formal free trade zones. One zone currently exists in Ciudad del Este and another is planned for the town of Villeta, near Asuncion. Paraguay,s customs agency is responsible for monitoring these zones; however, there is little oversight. As a result, the addition of free trade zones may provide additional venues for money laundering. ¶13. (U) 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 those issued by airlines at the time of entry into Paraguay. Persons transporting USD 10,000 into or out of Paraguay are required to file a customs report, but these reports are often not actually collected or checked. Customs operations at the airports or land ports of entry provide no control of the cross-border movement of cash. The non-bank financial sector, particularly exchange houses, is used to move illegal proceeds both from within and outside of Paraguay into the formal banking system of the United States. Most of these funds move from Brazil through Ciudad del Este to the banking sector. Paraguay exercises a dual monetary system in which most high-priced goods are paid for in U.S. dollars. Large sums of dollars generated from normal commercial activity and suspected illicit commercial activity are transported physically from Paraguay through Uruguay to banking centers in the United States. The GOP is only just beginning to recognize and address the problem of the international transportation of currency and monetary instruments derived from illegal sources. Recently, though, the commercial banks operating in Paraguay have dropped exchange houses as clients based on pressure from either their home offices or correspondent banks in the United States, which have told them that they would sever the relationship if the banks maintained accounts of exchange houses. The principal state-owned bank was also forced to drop the accounts of the exchange houses rather than lose its correspondent relationship with a US bank. In March, the U.S. Immigration and Customs Enforcement Agency sponsored a seminar for law enforcement officials including prosecutors, judges, and customs officials in detecting, investigating and prosecuting bulk cash movements. ¶14. (U) Bank fraud, which has led to several bank failures, and other financial crimes related to corruption, are serious problems in Paraguay. Following bank failures in 2002 and 2003, Paraguay continues to experience problems in the banking industry. In 2004, Citibank decided to end its participation in small-consumer banking in Paraguay, and subsequently closed almost all of its branches nationwide. The GOP worked with the U.S. Treasury and Justice Departments to trace, account for, and seek the return of the USD 16 million diverted in 2002 to private accounts linked to the family of former President Luis Gonzalez Macchi. In September, Citibank agreed to pay a fine of USD 7.5 million in connection to charges it had laundered funds originating in the TBA and received from a bank in Uruguay. ¶15. (U) Money laundering is a criminal offense under Paraguay,s two anti-money laundering statutes, Law 1015 of 1996 and Article 196 of Paraguay,s Criminal Code, adopted in ¶1997. The existence of the two laws has led to substantial confusion due to overlapping provisions. Under Article 196, the scope of predicate offenses includes only offenses that carry a maximum penalty of five years or more; Law 1015 includes additional offenses. Article 196 also establishes a maximum penalty of five years for money laundering offenses, while Law 1015 carries a prison term of two to ten years. This is particularly significant because, under the proposed Criminal Code and Criminal Procedure Code, defendants who accept charges that carry a maximum penalty of five years or less are automatically entitled to a suspended sentence and a fine instead of jail time, at least for the first offense. Since a defendant cannot be charged with money laundering unless he or she has first been convicted of the predicate offense, many judges are apparently reluctant to prosecute any defendant on money laundering charges because a sentence has already been issued for a predicate offense. ¶16. (U) Law 1015 of 1996 also contains "due diligence" and "banker negligence" provisions and applies money laundering controls to non-banking financial institutions, such as exchange houses. Bank secrecy laws do not prevent banks and financial institutions from disclosing information to bank supervisors and law enforcement entities. Under Paraguay,s Commercial Law 1023 and Law 1015, banks are required to maintain account records for five years, but there is little government enforcement of this regulation. However, bankers and others are protected under the anti-money laundering law with respect to their cooperation with law enforcement agencies. Additional provisions of Law 1015 require banks and financial institutions to know and record the identity of customers engaging in significant currency transactions and to report those, as well as suspicious activities, to Paraguay,s financial intelligence unit (FIU),the Unidad de Anlisis Financiera (UAF). ¶17. (U) The UAF began operating in 1997 within the Secretary for the Prevention of Money Laundering (SEPRELAD),under the auspices of the Ministry of Industry and Commerce (MIC). In recent years, the GOP has made significant efforts to strengthen SEPRELAD, which for years had suffered from a burdensome bureaucratic structure, lack of financial support, and the inability to keep trained personnel. As a result, cooperation between SEPRELAD and other government agencies on anti-money laundering issues has improved recently. Initially reluctant to seek SEPRELAD,s assistance due to past weaknesses, most government entities are increasingly prepared to work with SEPRELAD. Reporting from obligated entities has also increased, with the UAF receiving over 3,000 suspicious activity reports in 2006. SEPRELAD has signed several agreements with other government entities to strengthen interagency cooperation, including memoranda of understanding with the Public Ministry and the Superintendent of Banks. ¶18. (U) The UAF and the Superintendent of Banks have also improved cooperation between their two entities, which had been strained by the creation of a second FIU in the Superintendence in 2001. In 2003, the "Risk Control Division" was created to replace the Superintendent of Banks, FIU and eliminate its duplicative function with the UAF. The Risk Control Division has the primary responsibility of reviewing the records of national financial institutions for suspected terrorist activity and is empowered to coordinate information exchange with the Central Banks of other MERCOSUR countries. According to SEPRELAD officials, cooperation between the UAF and the Risk Control Division has improved significantly over recent years. The two groups signed a memorandum of understanding (MOU) in 2005, laying out the provisions for increased cooperation. The MOU includes provisions for SEPRELAD to issue regulations for the banking industry, including the designations of a compliance officer and utilizing due diligence and "know your customer" policies. The UAF has since issued these regulations in Resolution 233 of 2005. ¶19. (U) The UAF is seeking to strengthen its relationship with other financial intelligence units and has signed agreements for information exchange with regional financial intelligence units. In 2005, the UAF and the U.S. financial intelligence unit, the Financial Crimes Enforcement Network (FinCEN),signed an MOU to resume information exchange following a four-year suspension. The sharing of financial information between the two units had been suspended by FinCEN in May 2001 following an unauthorized disclosure of FinCEN information by the GOP. Information exchange was resumed following an evaluation of the progress made by the UAF and the strengthening of internal procedures for disseminating financial information. The UAF also increased its role in regional and international anti-money laundering groups, including the Egmont Group and the Financial Action Task Force for South America (GAFISUD). The UAF,s director participates in the GAFISUD FIU Working Group and a committee within the Egmont Group, further expanding Paraguay,s role in these organizations. GAFISUD conducted its second mutual evaluation of Paraguay in 2005 finding Paraguay,s legal framework for investigating cases deficient. ¶20. (U) Under the current interpretation of laws, the GOP has limited authority to seize, or forfeit assets of suspected money launderers. In most cases, assets that the GOP is permitted to, seize, or forfeit are limited to transport vehicles, such as planes and cars, and normally do not include bank accounts. However, authorities may not auction off these assets until a conviction is announced by the judicial system. At best, the GOP 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 liability of the suspect to the government. More recently, SENAD has been permitted to use on a temporary basis assets seized on cases not yet decided provided it pays no maintenance or repair costs. The new anti-money laundering legislation will, when passed, allow prosecutors to recommend that judges seize or confiscate assets connected to money laundering and its predicate offenses. The draft law also provides for the creation of a special asset forfeiture fund to be administered by a consortium of national governmental agencies, which will support programs for crime prevention and suppression, including combating money laundering, and related training. ¶21. (U) The GOP currently has no authority to freeze, seize, or forfeit assets related to the financing of terrorism. The financing of terrorism is not criminalized under current Paraguayan law. However, the Ministry of Foreign Affairs often provides the Central Bank and other government entities with the names of suspected terrorists and terrorist organizations on the UNSCR 1267 Sanctions Committee consolidated list. Through 2006, the GOP has not identified, seized, or forfeited any such assets linked to these groups or individuals. The current law also does not provide any measures for thwarting the misuse of charitable or non-profit entities that can be used as conduits for the financing of terrorism. Following the submission of the draft anti-money laundering law to Congress in May 2004, a working group began drafting legislation to address terrorism, terrorist association and terrorist financing. This draft legislation, also incorporated into the legal reform package discussed earlier,will allow the GOP to conform to international standards on the suppression of terrorist financing. The draft anti-money laundering provisions also specifically criminalize money laundering tied to the financing of terrorist groups or acts. ¶22. (U) The GOP ratified the UN International Convention for the Suppression of the Financing of Terrorism in November 2004 and the Inter-American Convention on Terrorism in January 2005. In June 2005, Paraguay ratified the UN Convention against Corruption. Paraguay is also a party to the UN Convention against Transnational Organized Crime, which it ratified in September 2004, as well as the 1988 UN Drug Convention. The GOP participates in Summit of the Americas and Inter-American Drug Abuse Control Commission (CICAD)-related meetings on money laundering, and is a member of the South American Financial Action Task Force (GAFISUD), the Egmont Group, and the "3 Plus 1" Security Group between the United States and the Tri-border Area countries. ¶23. (U) While the Government of Paraguay took a number of positive steps in 2006, there are other initiatives that should be pursued to increase the effectiveness of Paraguay,s efforts to combat money laundering and terrorist financing. Most important is enactment of legislation that meets international standards and enables law enforcement authorities to more effectively investigate and prosecute money laundering cases. Uneven political support for the money laundering legislation has hindered progress to date in Congress. Paraguay also needs to continue its efforts to combat corruption and increase information sharing among concerned agencies when and if the corruption issues are resolved. Paraguay does not have a counterterrorism law or a law criminalizing terrorist financing; while the new money laundering law would increase the GOP,s abilities to combat terrorist financing, it should also take steps as quickly as possible to ensure that comprehensive counterterrorism legislation is passed in the context of the reform of the penal and procedural code reform process. Further reforms in the selection of judges, prosecutors and public defenders are needed. Reforms to the customs agency are also necessary in order to allow for increased inspections and interdictions at ports of entry and to develop strategies targeting the physical movement of bulk cash. It is essential that the Unidad de Anlisis Financiera (UAF) continue to receive the financial and human resources necessary to operate as an effective, fully functioning financial intelligence unit capable of effectively combating money laundering, terrorist financing, and other financial crimes. CASON