Financial Transparency Coalition

The Tri-Border Area (TBA) between Argentina, Paraguay, and Brazil is comprised of three cities: Puerto Iguazu (Argentina), Ciudad del Este (Paraguay), and Foz do Iguacu (Brazil). The area is well known as a haven for illicit activities ranging from counterfeiting to intellectual property theft to money laundering, and has been pointed to as a central point for the laundering of funds from drug trafficking and for the funding of terrorist organizations (believed to come from supporters within the large Arab population in the region). Specializing in financial crime, the area is known as the “largest illicit economy in the Western Hemisphere.” A Federal Research Division, Library of Congress report notes that while estimates of the amount of money laundered in the TBA vary greatly, the amount was reported to average 12 billion USD per year as of 2000-01.

The same Federal Research Division report states that:

Brazilian authorities have estimated that more than US$6 billion a year in illegal funds is laundered in the TBA. Every evening, a dozen armored trucks loaded with laundered money leave Ciudad del Este for Foz do Iguaçu, the Brazilian town on the opposite side of the border.

An MSNBC report finds that some smugglers cross the border up to 20 times in one day, and the situation is complicated by the economic interdependence of the three countries.

The Tri-Border Region

United States officials have expressed concerns that both illegal activity and commerce in the area fund Hezbollah and Hamas. One way in which this occurs is that individuals linked to Hamas and Hezbollah launder drug funds by smuggling duty free products from Central America, supplying the Colombian population with foreign goods. Walt Purdy of Washington’s Terrorism Research Center notes that the illegal activities taking place in the TBA range from, “the counterfeiting of all kinds of goods to drugs to weapons to terrorist fund-raising to money laundering,” and that “[e]verybody from Hezbollah to people who are connected to al Qaeda,” have used the region both for fundraising and as a safe haven.

The ability to launder money out of the region makes the area particularly appealing to these illicit actors. Indeed, Jeffrey Fields from the Monterey Institute of International Studies notes that:

The tri-border’s most attractive feature to a terrorist cell may be the relative ease with which money is laundered and transferred to and from regions overseas. Evidence linking al-Qai’da financial and operational activity to the tri-border region is sparse at best, yet this small corner of South America possesses all the characteristics necessary for an al-Qai’da lair. Law enforcement and intelligence agencies are quite certain that money is being raised for Hizballah in the tri-border region, giving…purported links between al-Qai’da and Hizballah even greater import.

Tom Cash, who formerly oversaw Latin America for the Drug Enforcement Administration and now works with Kroll Inc., called the area a terrorist’s paradise, noting the importance of actors’ ability to act anonymously in the region – “the idea here is accessibility with no records. Anonymity at all costs.”

Officials in Paraguay have also made the link between Ciudad del Este and terrorist funding, with Carlos Altemberger, speaking as chief of Paraguay’s antiterrorist unit, asserting that dollars remitted from Ciudad del Este to the Middle East partially finance terrorist operations. Paraguay proves an appealing country for money laundering, with Ciudad del Este alone home to close to 55 different banks and foreign exchange shops despite having a population of only 300,000. A Federal Research Division report, “Terrorist and Organized Crime Groups in the Tri-Border Area (TBA) of South America” finds that:

Narcotics trafficking generates an estimated 40 percent of money laundering in Paraguay….[and that] A minimum of US$5 billion, equivalent to 50 percent of Paraguay’s gross domestic product, is reportedly laundered annually in Paraguay, practically all of it in Ciudad del Este.[225]

An MSNBC News report quotes a State Department “Patterns of Global Terrorism” report stating that its “judicial system remains severely hampered by a lack of strong anti-money laundering and counter-terrorism legislation,” while CBS evening news noted that Paraguay’s money-laundering laws are rarely enforced, with scarce interest in where the money ends up. An International Narcotics Control Strategy Report calls Paraguay “a principle money laundering center and major drug transit country involving the banking and nonbanking financial sectors,” with the contraband trade in the TBA facilitating “much of the money laundering,” that occurs. The report also finds that:

Paraguay is particularly vulnerable to money laundering, as little personal background information is required to open a bank account or to conduct financial transactions…While offshore banking in Paraguay is illegal, bearer shares are permitted – exposing the country to money laundering risk.

And that:

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.

In addition, cash smuggling across the border is noted as a significant problem, deriving both from normal commercial activity and illicit commercial activity and often ending up in US banks after being moved through Uruguay and Brazil.

Argentina also faces significant challenges, and the 2009 International Narcotics Control Strategy Report finds that:

Transactions conducted through nonbank sectors and professions, such as the insurance industry, financial advisors, accountants, notaries, trusts, and companies, real or shell, remain viable mechanisms to launder illicit funds. Tax evasion is the predicate crime in the majority of Argentine money laundering investigations.

Money laundering in Argentina is connected to narcotics and terrorism, and persists despite recent regulation passed by the Argentine government.

In a CRS Report for Congress, Mark Sullivan notes that in general there exists a nexus between terrorism, drug trafficking, and money laundering, such that combating either drug trafficking or money laundering in the region would cut off sources of revenue for terrorist organizations. In this way, the TBA undoubtedly provides a clear example links between terrorist financing and illicit flows of money derived from the international criminal economy.

In 2003, an OAS conference recognized this phenomenon, identifying one threat in the adopted Declaration on Security in the Americas as, “terrorism, transnational organized crime, the global drug problem, corruption, asset laundering, illicit trafficking in weapons and the connections among these activities.[5]” The TBA provides a clear example of the intersection of illegal and terrorist actors with the tools and mechanisms used globally to launder money and to evade taxes, shedding light on the potential dangers caused by a lack of transparency and comprehensive regulation of the global financial system.

What should be done? A good place to start would be with three recommendations made by GFI director Raymond Baker in his recent testimony before the Financial Services Committee of the US House of Representatives on the issue of corruption in developing countries and the role of Western institutions:

First, we should harmonize predicate offenses under the anti-money laundering laws of all countries cooperating with the Financial Action Task Force (FATF) in Paris.

Second, strengthened Know Your Customer regulations as they apply to foreign account holders need to be implemented. Presently, KYC policies vary widely across financial institutions and even among account officers within financial institutions. KYC has been treated as recommendations rather than requirements. This needs to change. Adding a specific point on Suspicious Activity Reports for corruption is required. Again, the FATF in Paris should adopt comprehensive norms for KYC policies and survey and report on their adherence in cooperating countries.

Third, lists of Politically Exposed Persons—PEPs—should be available for all countries receiving development assistance, and use of PEP lists should be required by financial institutions. In the fight against corruption there is no better expenditure of aid money than this. Where reporting bodies in countries do not exist, they should be created and funded by bilateral aid agencies cooperating with each other and with developing countries. It is unacceptable that, following the corruption of Mobuto, Marcos, Suharto, Abacha, and others, we should today be confronted with the corruption of a new crop of leaders and family members robbing their countries, leaving misery and deprivation in their wakes, yet transferring their ill-gotten gains into willing Western accounts, properties, and assets.

The steps outlined here will be key to any strategy seeking to reduce the global security risks posed by the Tri-Border Area.