When cracking down seems impossible

Paraguay's corruption fuels a criminal economy

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Paraguay’s Customs chief, Carlos Rios, knew he would get a lot of heat from the tobacco industry, but he decided to move forward with the raid regardless. After all, he was part of a new administration that had pledged to end the country’s deeply rooted smuggling culture. So on February 6, 2009, Rios coordinated the largest cigarette bust in Paraguay’s history: 46 million "sticks," stored in a shabby, illegal warehouse located one block away from the border with Brazil, in the desolate area of Pindoty Porã. As officers burst onto the scene, seven cigarette-laden trucks idled, preparing to cross into Brazil. Police opened fire as one driver revved his engine and sped across the border.

It was an enforcement operation that wouldn’t raise eyebrows in most countries. But the raid proved an exceptional event in Paraguay, a country that for decades has been branded paraíso de contrabandistas — a smugglers’ paradise. Cigarette seizures rarely occur in Paraguay, where tobacco factories are owned by the some of the country’s richest and most influential. The country produces far more than the 3 billion cigarettes its residents consume; 68 billion cigarettes were manufactured in 2006, the bulk of which ended up smuggled to neighboring countries and beyond, according to law enforcement officials. After the Pindoty Porã seizure, even President Fernando Lugo — a former Catholic bishop who in 2008 was elected on a reform platform — congratulated the customs agents who took part in it.

The celebrations did not last long. As the press coverage faded, Rios quietly replaced the core of the anti-contraband unit that had conducted the cigarette raid, a section of Paraguayan customs that receives financial assistance from the U.S. government. He scrambled to explain that the agents had not effectively stopped the influx of contraband seeping into Paraguay from neighboring countries. Meanwhile, a vociferous chorus of prominent cigarette manufacturers — whose smokes were caught in the seizure — worked behind the scenes, enlisting influential politicians to lobby for their products’ return. In May, after a local wholesaler paid a bond of almost $300,000, customs returned all 46 million seized cigarettes.

An Unaccountable Industry

The raid had reaffirmed a precedent for an industry accustomed to minimal accountability. “The seizure was a media show,” said José Ortiz, CEO of Tabacalera del Este (Tabesa), the top cigarette factory in Paraguay. Tabesa is reportedly owned by Horacio Manuel Cartes, a high-powered businessman whose holdings include a soccer club. The company’s cigarettes are routinely seized from smugglers in Argentina and Brazil, according to customs officials in those countries. But the cigarettes in Pindoty Porã were legal, Ortiz said, as long as local cigarette taxes had been paid and the sticks were on the Paraguayan side of the border.

The investigation remains open and customs may ultimately fine the wholesaler for attempted smuggling. But the case illustrates the virtually impossible task of cracking down on crime and contraband in a country where law often takes a back seat to power and cash. Paraguay ranked near the bottom — 138th among 180 countries — of Transparency International’s 2007 Corruption Perception Index.

The tobacco industry in Paraguay is virtually unregulated. Government agencies involved in its oversight cannot even seem to agree on the number of factories operating in the country. The minister of taxation, Gerónimo Bellasai, told ICIJ that tax evasion by tobacco factories is “very high,” but in March his team was still trying to figure out how to track company sales. A basic step to improve traceability, officials say, is to update the country’s arcane cigarette tax stamp system. Currently tax stamps — square pieces of white paper that are easily photocopied — are affixed on master cases of 10,000 cigarettes rather than on individual packs. But even this can be hard to accomplish. “When there’s a lot of money on the other side, the tax authority always loses,” Bellasai said.

Back in customs headquarters overlooking the Paraguay River, Rios, the customs chief, spoke of his daily “titanic fight” for resources to run his agency. Paraguay operates only 10 check-points along more than 800 miles of border with Brazil, he said. And for customs agents who earn as little as $300 a month the temptation to accept bribes is overwhelming. “We are defenseless,” he said. Rios has been criticized by the media, however, for not using the resources he does have, including a fleet of speedboats donated last year by the United States, some of them reportedly kept for months at the manufacturer’s plant while smuggling soared.

In a country where the cigarette industry carries such clout, those who actively pursue smugglers can find themselves out of a job. Prosecutor Eber Ovelar was suspended in March from his post, and he said he had no doubt the move was politically motivated, linked to his anti-contraband work. During his tenure, sentences for counterfeiting and contraband in Ciudad del Este — a commercial city at the heart of the notorious Tri-Border Area of Paraguay, Argentina and Brazil — increased six fold, Ovelar said. More often than not, the prosecutor said, customs officials refused to classify smuggling cases as a crime, opting instead for the lesser category of infraction. To Ovelar’s dismay, local judges often sided with customs when he attempted to prosecute smugglers. “Today cigarette [makers] in Ciudad del Este have become the pressure and money group,” said the prosecutor. In contrast, he added, traffickers of narcotics have never personally applied pressure to him.

No Lone Rangers

Former prosecutor Eduardo Petta got a taste of the politics behind cigarette smuggling back in 2005, while pursuing contraband cases in the southern city of Encarnación. One morning he saw suspects in a small plane preparing to take off from a municipal runway. Acting without police backup Petta drove his car across the airstrip and blocked the airplane’s way. Inside the plane, Petta reportedly found 8 million contraband cigarettes. Lacking equipment to search for drugs in the aircraft, he requested assistance from Argentine border agents, who provided a drug-sniffing dog. Shortly after the seizure, Petta was accused by his superiors of having violated Paraguay’s sovereignty by seeking help from the Argentine officials, and he was removed from his post by a judicial review board. He later told reporters that he had no doubt the tobacco industry had urged his dismissal. “You can’t play lone ranger,” Petta told the Argentine newspaper La Nueva Provincia.

Brazilian and Argentine customs and police officials say they are frustrated by Paraguay’s lack of commitment to stop cigarette smuggling. But they also acknowledge faults in their own governments’ enforcement. Trucks loaded with Paraguayan cigarettes are supposed to pass through several Brazilian check-points along their more than 600-mile journey to Sao Paulo and other large cities. “There’s no [political] will to combat this sort of crime,” said Érico Saconato, the head of the Brazilian federal police in the border city of Guaíra, which in recent years has become a major corridor for the smuggling of cigarettes from Paraguay. “We know smuggling is one of the sources for campaign financing in Brazil. So, there’s not much interest in messing with it,” added Saconato.

Meanwhile, Paraguayan cigarette manufacturers are earning stunning profits while denying any involvement in smuggling or counterfeiting (Brazilian law enforcement officials, however, link the Paraguayan factories directly to the illicit trade). Those who pursue civil charges against factory owners face endless judicial battles. British American Tobacco has repeatedly sued a tobacco company owned by former presidential candidate Osvaldo Domínguez Dibb for counterfeiting several of its brands. Some lawsuits have slogged though courtrooms for as long as 11 years.

Tabesa’s CEO Ortiz was blunt when asked about Paraguay’s quid pro quo: “We give them money,” he said of politicians during election time. “And all we ask is to be left alone.”

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