Posted on 18 Nov 2014

The daily comings and goings across the Ponte de Amizade (“Friendship Bridge”), which connects the cities of Ciudad del Este, Paraguay, and Foz do Iguaçu, Brazil, give a new meaning to the term “free trade.” Spanning the River Paraná some 14 kilometers south of the world’s largest hydroelectric dam, the bridge provides a direct connection between the cheap labor and soybean fields of Paraguay and the 200 million consumers of Brazil. As much as $5 billion worth of goods cross the Ponte de Amizade or the nearby riverbanks every year, which, given that Paraguay’s total GDP amounts to barely $30 billion, is a fairly alarming amount. Alarming, that is, because essentially none of it is legal.

Ciudad del Este (literally, “City of the East”) has long been the engine of the Paraguayan economy, which has spent most of the last century and a half trying to recover from a catastrophic defeat in the War of the Triple Alliance. Two factors account for Ciudad del Este’s relative prosperity. The first, and more recent, is water. The Itaipu hydroelectric dam, completed in 1984, produces 75% of Paraguay’s electricity and 17% of Brazil’s, with Brazil paying Paraguay some $360 million per year for its share. The construction and operation of the dam have created thousands of jobs in the area and paved the way for the creation of industrial parks and other commercial ventures. In addition, the nearby Iguaçu Falls, which can be accessed from Paraguay, Brazil, and Argentina, draw tourists from all over the world to all three sides of the triple border.

But electricity’s contribution to Ciudad del Este, and to Paraguay as a whole, is dwarfed by the second driver of the city’s economy: smuggling and trafficking, on the biggest and the smallest of scales. Ciudad del Este is Paraguay’s second-largest city, and Foz do Iguaçu is the largest Brazilian city on the Paraguayan border, making the crossing a natural choice for overland trade. Brazil, however, has notoriously high tariff barriers to imported goods. In addition to the official imposto sobre importação (import tax), which can range from 0-35%, imports are subject to state sales taxes (17-19%), federal excise taxes (up to 300%), and several other smaller fees and charges. Faced with such high monetary costs and miles of red tape, most Esteño (as city residents are known) traders decide to smuggle their goods across the border instead.

At the least complicated end of the Esteño smuggling spectrum are tens of thousands of small-time traders. Known as sacoleiros, thanks to their ubiquitous overstuffed shopping bags (saco means “bag” in Portuguese), they account for the majority of the 30-40,000 people who cross the Ponte da Amizade every day. Paraguay’s import duties are far lower than Brazil’s, and Ciudad del Este’s airport receives enormous amounts of cargo from Asia ultimately destined for Brazil. Many sacoleiros earn a living through illicit international arbitrage, buying low in Paraguay and selling high(er) in Foz do Iguaçu. Ordinary Brazilians flock to the border in large numbers as well, regularly flouting the official $300-per-month duty-free allowance to buy foreign goods in bulk.

Most sacoleiros work on a small scale, but there are also larger criminal enterprises at work in the Triple Frontier. Some of them are sent to Ciudad del Este from Brazilian cities thousands of kilometers away to fulfill transactions placed on the internet, charging a commission of 10-15% for their travel time and the risk of capture by the police. There have even been instances in which these long-distance sacoleiros have formed convoys of hundreds of buses in order to increase their odds of making it safely past the police.

Above the sacoleiros, there are some truly vast criminal networks operating in the Triple Frontier area. One of their biggest activities is the smuggling of cigarettes from Paraguay into Brazil. Paraguayan cigarettes make up some 30% of the market in Brazil, and 60% in the Brazilian state of Paraná, which includes Foz do Iguaçu, despite the fact that Brazil does not legally import a single cigarette from Paraguay. Speaking in 2009, the chief of the Brazilian customs service in Foz do Iguaçu estimated that 20-30 billion cigarettes are smuggled from Paraguay into Brazil every year, with a market value of some R$4.5 billion (US$1.88 billion). It is not clear where the profits from the contraband are going, but there is evidence that smuggled Paraguayan cigarettes have been used to fund insurgents and criminal groups in other countries, such as the Colombian FARC rebels.

Many of the cigarettes smuggled into Brazil are produced at the Tabacalera del Este factory, operated by a company called Tabesa and located just north of Ciudad del Este in the city of Hernandarias. The factory can produce 18 billion cigarettes per year, or an astonishing 579 per second. Many of these cigarettes are boxed up and put onto boats that cross the River Paraná or nearby Lake Itaipu, in order to avoid the increased risk of detection on the Ponte de Amizade.

Once in Brazil, the cigarettes are loaded into trucks. Smugglers commonly hide the cigarettes among other cargo—common ruses include concealing them amongst boxes of corn or putting them in cold-storage cases normally used for meat or chicken. The BR-227, the main road leading from Foz do Iguaçu towards the rest of Brazil, is heavily patrolled by police, so the cigarette traffic heads southeast instead, along the Paraguayan and Argentine borders and eventually to the state of Rio Grande do Sul, the southernmost state in Brazil. Between 2012 and 2013, the illegal cigarette trade in Rio Grande do Sul increased by 54%, becoming even more lucrative than the drug trade there.

Attempts to combat cross-border smuggling by the two governments have met with mixed results. On the positive side, although there are still billions of dollars’ worth of business done in cash in Ciudad del Este every year, most of which is illicit, it has fallen some way from the period in the 1990s in which it ranked third worldwide in cash transactions, behind only Hong Kong and Miami. Another factor that has helped to curb the flow is the Regime de Tributação Unificada (RTU; “Unified Tax Regime”), introduced in 2012. The RTU implemented a simplified tax scheme for small businesses conducting cross-border transactions in electronics, household appliances, and other technological goods. Since the RTU’s introduction, electronics smuggling in the Triple Frontier region has dropped precipitously.

But as events like the seizure on 15 August 2014 of R$100 million (US$41.8 million) worth of contraband alcohol, weapons, and medicines, captured in a hotel parking lot in Foz do Iguaçu, clearly demonstrate, the authorities have a long way to go. Part of the problem has to do with manpower. The Brazilian side of the border is not the issue. According to Eduardo,* a logistics officer with the Brazilian army stationed near the country’s southern frontier, a large majority of the country’s armed forces are stationed within 150 kilometers of the border with Paraguay, Argentina, or Uruguay. Moreover, within that 150-kilometer zone, the army actively supports the federal and/or local police forces whenever the latter requests assistance.

In Paraguay, however, it is a different story. As of March 2010, the Paraguayan government had allotted merely eight anti-narcotics special agents and two anti-drugs prosecutors for the entirety of the Alto Paraná department, which includes Ciudad del Este, with a single vehicle among them. Despite being landlocked, Paraguay maintains a navy to patrol its rivers and lakes; there is even a naval office in Ciudad del Este, but it has no boats. According to Eduardo, this lack of resources hampers what enforcement efforts do exist, especially regarding the smuggling of cigarettes and narcotics: “if you come from Ciudad del Este to Brazil, and the cops stop you on the bridge [to Brazil], [you] just throw the cigarettes off the bridge, and there’s someone in a boat who catches them, and they just bring them into Brazil again.”

Lurking behind these stories of rampant smuggling and impotent law enforcement is one final piece of the area’s puzzle. Ciudad del Este is home to some 20,000-30,000 Muslims, most of whom are heavily involved in the city’s cash-based illicit economy. For more than a decade, there have been persistent rumors that these merchants fund Hezbollah and other terrorist groups, and that Hezbollah even maintains operational bases and training facilities in the Triple Frontier. In 2008, members of the Bush Administration told American media that they believed that Hezbollah was responsible for the 1994 bombing of the Jewish Community Center in Buenos Aires, and that the group had planned its attack in Paraguay. The RAND Corporation estimated in 2009 that Hezbollah earns US$20 million annually in and around Ciudad del Este.

All of the above accusations remain quite controversial. Argentina’s government has accused Hezbollah of carrying out the 1994 bombing, but investigations have been inconclusive. Even when links have been more firmly established, such as the 2013 arrest of Hamzi Ahmad Barakat, a Lebanese citizen who ran a business in the Triple Frontier region, reality often fails to match the accusations and expectations. Mr. Barakat was accused of trafficking arms, drugs, and explosives, but the only charges pressed against him were for fraud in the clothing business. For his part, Eduardo expressed skepticism regarding the Hezbollah accusations. “We all hear rumors about this subject in Brazil,” he said, “but we don’t see anyone doing anything wrong. We [don’t] see them training; if they come inside Brazil or next to the frontier, we would know.” He agreed that there are large numbers of Muslims in and around Ciudad del Este, and that many of them have connections to Gaza, Syria, and other conflict areas, but stressed that they are nothing more than “normal people.”

With or without Hezbollah, Ciudad del Este and Foz do Iguaçu form the nexus of local, regional, and global networks of organized criminals, which, if left unchecked, will continue to pose a threat to the safety and security of hundreds of millions of people in Brazil and elsewhere.

* Name changed to preserve anonymity; Photo credit: Renato Alvez da Costa, Brazil