By Emanuele Ottolengh
February 16, 2019
The U.S. Department of Justice last year designated Hezbollah, a Lebanese political party and militant group, as a transnational criminal organization, thanks to its long-standing and well-documented partnership with Latin American drug cartels. A focal point of Hezbollah operations in the Western Hemisphere is the Tri-Border Area of Argentina, Brazil, and Paraguay, a sanctuary for all sorts of organized crime. Numerous terrorism financing, money laundering, and drug trafficking cases in U.S. courts involve Hezbollah-aligned Lebanese nationals who operate there. Argentina and Brazil have shown an increased readiness to take action against Hezbollah, but Paraguay, the country where Hezbollah is most vulnerable to action, is the most reluctant to recognize the challenge.
Paraguay’s president, Mario Abdo Benítez, in power since last August, is under pressure to change that. Despite a promising start, his administration remains plagued by the same problems his predecessors could not overcome, and a reckoning is coming. This year, the Financial Action Task Force, an intergovernmental organization, will evaluate Paraguay to assess the effectiveness of Asunción’s anti-money laundering and counterterrorism finance systems, for which the task force sets global standards. Countries that do not measure up, such as Iran and North Korea, have to contend with cumbersome restrictions that inhibit trade and investment.
Paraguay is now considering a legislative package to improve its anti-money laundering and counterterrorism financing regime. Regardless, its main challenge remains one of implementation. Asunción has known for a long time it needs to improve its record. Now it must do so—or face the consequences.
The Trump administration, unlike its predecessors, has given Paraguay due attention.
The first Latin America trip by a senior U.S. official after Trump’s election was to Paraguay. While many ambassadorial positions in Latin America remain vacant, Washington quickly appointed a senior career diplomat to be the U.S. envoy in Asunción. U.S. Treasury officials also visited Paraguay last month to deliver a clear message: Those who finance terrorism and launder money for organized crime will bear a heavy price. Paraguay needs to do its part.
Despite a stated desire to work with the United States, Paraguay’s leaders have since sought to downplay the threat of Hezbollah’s presence in their country. The foreign minister, Luis Castiglioni, expressed doubts and publicly asked for evidence. The intelligence minister echoed his denial, suggesting the main challenge is tax evasion, not money laundering. The interior minister downplayed the issue. Even the Supreme Court’s president weighed in, saying he had no evidence that Hezbollah was financing terrorism.
Then, as if to compound the problem, Abdo sought to market his country as a tax haven, boasting about its low tax rates at the 2019 World Economic Forum in Davos, Switzerland. “It’s almost a fiscal paradise,” he said.
He is right. Paraguay fits the Organization for Economic Cooperation and Development’s definition of a tax haven: “a country which imposes a low or no tax, and is used by corporations to avoid tax which otherwise would be payable in a high-tax country.” Tax havens have “no or only nominal taxes; lack of effective exchange of information; lack of transparency in the operation of the legislative, legal or administrative provisions.”
Unsurprisingly, tax havens are increasingly attracting organized crime, sanctions evaders, and corrupt oligarchs plundering their countries’ resources, alongside companies and wealthy individuals seeking tax avoidance. Part of the reason Hezbollah’s illicit finance networks operate in the Tri-Border Area is that Paraguay lacks transparency. Information about corporate ownership is virtually inaccessible, while the practice of beneficial ownership—enjoying the benefits without appearing on the company records—is widespread. Corruption is rampant, even by Latin American standards; the country’s political class is beset with conflicts of interest; and the judicial system remains prone to corruption and nepotism.
According to the just-released Transparency International Corruption Perceptions Index 2018, Paraguay only fares better than Venezuela (and is on a par with Bolivia) among South American nations. It ranks 132 out of 180 countries assessed. There are good reasons for that.
For starters, the elites running the country risk their economic interests coming into conflict with their political responsibilities, for the simple reason that they are not required to divest their assets or lock them in blind trusts once they enter public service. María Epifanía González, who heads the country’s financial intelligence unit after a distinguished career at the Central Bank of Paraguay, is married to a board member of one of Paraguay’s largest banks. This is not an isolated case. Supreme Court minister Antonio Fretes has an important stake in another bank, formally held in his son’s name. The list goes on.
When confronted such concerns, Paraguayan leaders appear baffled. They claim not to understand what the problem is. Yet in a country where money laundering, counterfeiting, drug trafficking, and cigarette smuggling constitute a significant part of the economy, those in charge of combating financial crime should be irreproachable. That is of particular concern in light of three U.S. court cases alleging counterfeiting, money laundering, and drug trafficking links between the Tri-Border Area and the United States—with possible ties to Hezbollah and South American cartels. These cases point to local banks and currency exchange houses as the conduits for illicit financial flows. Even if the banks themselves are not knowingly complicit, the ease with which organized crime and financers of terrorism take advantage of the Paraguayan financial system reveals structural deficiencies in the fields of due diligence, know-your-customer practices, and anti-money laundering measures.
Paraguayan authorities need to do a better job patrolling their country’s financial system. For that to happen, Paraguayan officials in charge of investigating financial crimes should resolve conflicts of interests so they can carry out their mission without fear or favor.
Judicial insecurity compounds the problem even further. Large investigations into alleged money laundering schemes with possible terrorist financing connections frequently fail to go to trial. In November, Paraguayan newspaper ABC Color tied to Hezbollah the 2016 “megalavado” (“mega-wash”) investigation, which uncovered the largest money-laundering scheme in the country’s history. It remains to be seen whether the alleged scheme benefited the terror group. Regardless, the U.S. State Department flagged the case as a sign of Paraguay’s failure to fight money laundering. It has been more than two years since Paraguayan authorities conducted raids against the suspected perpetrators. The prosecutors in charge of the case have been replaced several times—including, most recently, over the Christmas holiday. There have been neither indictments nor exonerations.
Another case, “megaevasión” (“mega-evasion”), involving 285 companies accused of defrauding the state, has been waiting for a judicial outcome even longer. The only progress, if one can call it that, in an otherwise stalled investigation has been the recent attempt by a judge—now removed from his role—to exonerate some of the suspects.
Stalled cases frequently lead to the release of suspects. Some of them meet the rough justice of the organized crime world. That was the case with a Tri-Border Area-based drug trafficking ring linked to Hezbollah, exposed between August 2016 and May 2018 by Paraguayan security forces working with the U.S. Drug Enforcement Administration. Paraguayan officials routinely tout the operation as a sign of success as well as proof of their seriousness about combating organized crime. In fact, the opposite is true. Of the five individuals arrested, only one, Ali Issa Chamas, was extradited to the United States and eventually sentenced. By contrast, of the four who remained in Paraguay, only one, Georges Rahme, remains in custody. Two escaped from jail, likely aided by corrupt local officials, in December 2017. A fourth, Akram Abd Ali Kachmar, was released from jail soon after his arrest and never prosecuted. Two weeks ago, he was found dead in his apartment in what looked like it could have been a hit job. The coroner quickly dismissed it as a heart attack.
President Abdo will understandably argue that it is not his job to interfere with the course of justice. He is right—the executive should not interfere. But all too frequently, it does.
Abdo’s vice president, Hugo Velázquez Moreno—himself a former prosecutor—just sidedwith a jailed member of parliament implicated in a high-profile organized crime case, publicly pressuring prosecutors. During the last days in office of Abdo’s predecessor, Horacio Cartes, Interpol issued an international arrest warrant on Brazil’s behalf against a close friend of Cartes, Darío Messer. Believed to be hiding in Paraguay, Messer is under investigation as the linchpin of another multibillion-dollar money laundering scheme. Yet it took days for Paraguayan authorities to enforce the warrant, giving him ample time to vanish. He is still at large.
This is not to say that everyone is above the law. The attorney general’s office has launched many high-profile cases targeting corrupt politicians in recent months—including against the former attorney general. Yet there is no guarantee that these cases will reach the verdict stage. Meanwhile, prosecutors are subject to intimidation and political pressure.
The United States should take concrete steps to push Paraguay in the right direction. Since it holds the Financial Action Task Force presidency until June 30, Washington will play a leading role in the money laundering watchdog’s upcoming evaluation of the country. Promises of legislative reform aside, Paraguay needs to improve its performance in critical areas to ensure a positive outcome to the evaluation—a near-impossible task in such short time.
At a minimum, the United States should make clear the consequences Paraguay would face if it fails to show progress in prosecuting suspected money laundering and terrorism financing cases.
Asunción must tackle the lack of transparency, not just by combating pervasive corruption and strengthening the rule of law but also by addressing problems such as beneficial ownership of companies, requiring transparency from political appointees, establishing clear rules to minimize conflicts of interest, and insulating prosecutors from political pressures.
Washington, meanwhile, should not wait for Paraguay to match its words of commitment with actions that it should have taken long ago. Instead, it should take a page from the Obama administration playbook in the 2011 Lebanese Canadian Bank case, which involved a vast global network run by the Hezbollah facilitator Ayman Joumaa to launder money for Colombian and Mexican drug cartels. Then, the Treasury Department designated the bank as an entity of primary money laundering concern under Section 311 of the Patriot Act. The combined blows of that designation and U.S. criminal prosecutions ultimately forced the bank out of business.
The same strategy could work with Paraguay. The U.S. Treasury could target specific financial institutions. It could also signal that such designations are just the beginning, with the entire financial system of Paraguay at risk of being designated. Prosecutions of Paraguay-linked criminal cases in U.S. courts, meanwhile, would expose the scale of the problem and add pressure on Asunción. This approach would hurt even more than the prospect of a negative evaluation.
Paraguay must choose: Being a fiscal paradise comes with a price. Until now, Asunción has managed to defer payment. Now its time is up.