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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