Country Security Profile: Brazil

By Francisco Mateo

As the sun once again shines brightly over Brasília and its brand in the concert of nations continues to grow, Security Beyond Borders turns its focus on Brazil, on the eve of a presidential election runoff, which would determine how its course is charted for an undoubted prominent future.  Despite its eminence (economic ascendance) as one of the BRIC (fastest growing emerging markets comprised of Brazil, Russia, India and China) countries, Brazil has deeply rooted security issues driven my social-economic disintegration, which it must confront before the spot light of international events is shown upon it.

Brazil’s population hovers at just under 200 million people. Approximately 88% of the population is concentrated in its urban centers, which in itself explains the dynamics that drive inequality and crime problems. Although this phenomenon is a fixture of all overcrowded cities, it appears to have magnified and galvanized over time.

Economic Overview

To better understand Brazil’s meteoric rise onto the world stage we must look at the key elements that characterize its economy. First off, a large and well-developed agricultural, mining, manufacturing, and service sectors set them apart in the region. Brazil’s economy outweighs that of all other South American countries and it’s expanding its presence in world markets. Since 2003, Brazil has steadily improved macroeconomic stability, building up foreign reserves, reducing its debt profile by shifting its debt burden toward real denominated and domestically held instruments. It has adhered to an inflation target, and committing to fiscal responsibility. To illustrate its economic prowess, Brazil was one of the first emerging markets to begin a recovery. By exploiting vast natural resources and a large labor pool, it has become South America’s leading economic power and a regional leader.

Brazil has in part enjoyed stellar economic growth over last ten years due to its adherence to continuity of economic policy despite political transition from right leaning to clearly leftist political leadership. President Lula Da Silva’s enormous popularity derives from his pragmatic approach to economic policy.

But all the notoriety has far reaching consequences. Its newly minted economic reputation and its maturing role as a regional powerhouse have landed Brazil in thorny world issues recently. Most notable of all have been its mediation of the Honduran political crisis in 2009 and its willingness to establish diplomatic ties with unpopular regimes like Cuba, Iran, and Venezuela, as well as to pursue economic exchange with China and Russia. It is clear that Brazil has aimed at charting an independent path and becoming a geopolitical counterforce in the region and beyond.

Geopolitical Overview

A review of Brazil’s security profile would not be complete without drilling down on the country’s most notable transnational crime problem, which is for the most part concentrated in the unruly region at convergence of Argentina-Brazil-Paraguay borders. This area is a locus of money laundering, smuggling, arms and illegal narcotics trafficking, as well as fundraising for extremist organizations. Other border areas including the States of Amazonas, Acre, Rondônia and Mato Grosso, are high risk due to drug trafficking. Its sheer size (bordering 10 countries) and deep forest areas provide natural defense, but also serve as incubator for the worst of the global illicit economic activities. It would explain why despite government drug control efforts, it remains the second-largest consumer of cocaine in the world. It is also an important transshipment country for Bolivian, Colombian, and Peruvian cocaine headed for Europe.

The International Maritime Bureau reports that the territorial and offshore waters in the Atlantic Ocean present a significant risk for piracy and armed robbery against ships; numerous commercial vessels have been attacked and hijacked both at anchor and while underway; crews have been robbed and stores or cargoes stolen.  Similar socioeconomic factors driving piracy in the Gulf of Aden are at play for the most part in Brazil’s Atlantic coastal waters.

Crime Overview

Serious crime, often involving violence, is high in a number of urban centers, including Rio de Janeiro, São Paulo, Recife, and Salvador. The recent reports of armed drug gang members setting up roadblocks and robbing drivers en masse in the Rio de Janeiro area, prompting the firing of 19 police battalion, is certainly a notable reminder of what lurks just beneath the pristine surface. As the country sets out to host the World Cup in 2014 and the 2016 Olympics it should ponder the right strategy to avoid the Mexicanization of its crime problem.

Crimes and violence in São Paulo can be attributed to street gangs and organized crime groups.  São Paulo is notorious for the brazenness of certain high profile crimes and violent crimes such as murder, rape, and kidnappings.  The most concerning crimes in São Paulo are express kidnappings, carjackings, virtual kidnappings and home invasions.

Crime while on the road remains a problem for both visitors and local residents alike, especially during evening travel and traffic jams. Violent crimes committed in heavily congested roadways is the motivating factor for companies like Truffi or Master Blindagens to produce over 25 bulletproof cars a month, and they’re just 2 of 45 companies in São Paulo by far the biggest market, with Rio de Janeiro a close second.  Brazilians would “much rather trim their appetites for appliances and electronics in the recession, but bulletproofing is one expense they are not giving up easily”. This is an outgrowth of the overall sense of insecurity felt by everyday people.  The general consensus is that if the government can’t keep them safe than they will use their recently acquired prosperity to buy their own security.  As a nation it can certainly do much better than that and there are obvious compelling reasons for doing so.

Other Risk Pressure Points

Natural disasters, mainly flashfloods, remain a considerable risk of social disturbance.  That is because the large communities still living in favelas are most susceptible to these unpredictable events.  Last year’s deadly floods are but an example of the infrastructural fragility of overpopulated cities to deal with large magnitude emergency incidents.

Flooding over several recent years has continued to plague São Paulo State and many other parts of the country. Severe rainstorms in 2006, 2007, 2008 and 2009 resulted in some of the worst flooding in years for São Paulo. Bridges and highways were closed due to flooding and some major roads and highways were submerged underwater. In December 2008, floods in São Paulo left 20,000 residents without potable water, numerous motorists were stranded, and 70 flights were canceled at Congonhas Airport (one of three airports in greater São Paulo). In November 2008, flooding in the southern state of Santa Catarina left nearly 100,000 homeless and claimed over 100 lives. The disaster was one of the worst in the country’s history. In December 2009, the eastside of greater São Paulo was under water due to severe rain storms.  Flooding brought traffic in São Paulo to a standstill, resulting in deaths, destruction of infrastructure and millions of dollars in financial losses for businesses. During a one day period the city received more rain than it would normally see during the entire month.

In closing, it is clear that Brazil is poised to confront its internal security risks head-on.  Its success in creating continuity of economic policy to spur growth should be emulated by the new political leadership, during their transition into power, to bring cohesive socioeconomic growth that would undermine its security shortcomings and continue to drive a downward trend to its most vexing crime problems. It must remain steadfast in this direction as focus on everything Brazil will only spike during the World Cup in 2014 and the 2016 Olympics. They have a short window of time if it aims to capitalize on its successes in eradicating the security weaknesses highlighted herewith.

Global Illicit Economy’s effect on the Real Economy

It is not hard to imagine that counterfeit money would be pumped into the legitimate economy using sophisticated money laundering networks targeting consumer products companies.  Purchasing products destined for export from the US can be done with these fake currencies. By the time the exporting companies realize they have been duped it would be too late to revert the shipment.  The complexity of the shipping network and the way counterfeiters move these funds make it difficult if not impossible to trace back to the original source.  Colombia for its part is one of the world’s hot spot for counterfeiting banknotes. It is no coincidence that some Colombian importers have also relied on sophisticated drug money laundering schemes, whereby they buy and sell products with the proceeds of drug trafficking, pumping the dirty money into US companies’ coffers.  They same channels are used to funnel counterfeit banknotes.  

Colombia Seizes $6.2 Million in Counterfeit Greenbacks

BOGOTA – Agents with Colombia’s DAS security service found a clandestine printing press in a southern Bogota neighborhood on Wednesday, seized a little more than $6 million in counterfeit $100 bills and arrested one person, authorities said.

The fake money was almost ready to be placed on the market and was going to be sold in Ecuador, Peru, Venezuela and the United States, said detectives from the DAS anti-counterfeiting unit.

The printing press was discovered after a raid on a house in the La Fraguita neighborhood, where the DAS found the forged $100 bills to be “of excellent quality.”

Also seized in the raid were assorted other items, including a lithograph, inks, 26 plates with the obverse and reverse of the $100 bill with the series numbers of the original bills, the watermarks and the security filaments.

One of the plates found in the house had the shield of the U.S. Treasury Department on it, DAS said.

On Oct. 7, the DAS seized $6.16 million in counterfeit $100 bills in Soacha, near Bogota, and $3.75 million worth of phony dollars in the southwestern city of Cali, where agents dismantled several illegal printing presses. EFE

http://bit.ly/3nHjet

What Does Money Laundering Means for Multinational Corporations (MNCs)?

“The Black Market Peso Exchange system is the primary money laundering conduit used by Colombian narcotics traffickers in repatriating revenues to Colombia and is the single most efficient and extensive money laundering scheme in the Western Hemisphere…between $3 billion and $6 billion is laundered annually”

Prior to the notable money laundering scandals involving major financial institutions, many in the Multinational Corporation community did not take money laundering seriously or even associated the problem to their operations.  Recent incidents and regulations have forced a major shift in perception about how money laundering can present serious risk to their operations and reputations.   

The methods used by money launderers go as far as their imagination can drive them.  There is really nothing they’re not willing to try to achieve their aims.  According to Michael D. Shepard “MNCs, as well as any export companies are exposed to the risk of money-laundering schemes. Criminally derived funds may already be in the financial system, but that does not make them “clean.” Purchasing goods from a multinational corporation — or any company for that matter — can be considered money laundering if the ultimate source of funds is illegal activity and the requisite intent is present.”  In other words companies must be aware of the sophisticated schemes devised by money launderers disguised as clients in an clever attempt to funnel dirty money from illicit activities.   

One such money laundering system targeting manufacturers and distributors is the Black Market Peso Exchange (BMPE). According to Bonnie Tishchler from the US Customs Service, “The BMPE process starts with a peso broker. For a fee, these brokers arrange the financial transactions necessary to launder the drug cartels’ money. Broker activities include receiving and coordinating orders for money, locating sources of U.S. dollars, arranging pickups and directing placement of funds. Within the broker’s network are others who perform various services for a percentage of the broker’s earnings. Those working for the brokers pick up cash, buy money orders and checks, open checking accounts, transport and smuggle money, among other things.”

The primary market in Colombia for large blocks of U.S. dollars is Colombian importers. The Colombian government has strict currency controls and the only way to get US dollars in Colombia was to buy them from government banks. These government banks also asked lots of questions about what was being bought with the dollars and whether import tariffs would be paid. So a nascent black market economy flourished with importers eager to get cheap goods circumventing the heavily regulated foreign exchange market, as well as the customs tariffs, and drug traffickers, not the ones to give up an opportunity to turn their dirty dollars into clean pesos.

Together a motley crew of characters has turned some of the most well known MNCs into unwilling participants of their schemes.  The authorities first became aware of the elaborate system by studying trade patterns in the Tobacco Industry, but anti-money laundering (AML) authorities soon began to track drug money to the bank accounts of many of the Largest US MNCs. Companies in the global trade of appliances, cigarettes, liquor and other products are exposed to this mode of money laundering.  A common thread among the products and industries targeted is an apparent appetite for high end products which would normally pay high tariffs in Colombia.

The most likely scenario in which MNCs can fall victims (willing or unwilling) to money laundering is through the payments for goods made with illegitimate funds: The corporation and/or its products may be used by criminals in the process known as “layering” — distancing the ill-gotten gains from the criminal activity by moving it further from the illegitimate source.  

For their part the MNCs have argued in court that they were innocent owners of the drug funds and the government gave the money back. The US Justice Department has taken the tactic that it is better to seize the money, educate companies and try to get their cooperation to fight the black market peso exchange. In some cases, the Justice Department asked companies to sign a “Consent Decree” saying that the company now understood this problem and would never be able to claim innocence if it happened again. 

Thereafter MNCs could be charged with and convicted of money laundering under federal statutes that make it a crime to engage, or attempt to engage, in a financial transaction knowing that the property used in the transaction represents the proceeds of some form of unlawful activity. Furthermore; according to former IRS investigator Michael McDonald, “there’s a legal principle called Willful Blindness, which means if you totally disregard all the facts and circumstances that would lead you to believe and know that this is illegal money, that’s the same as knowing it’s illegal money.”

The costs of a money-laundering conviction can be significant. Penalties can include a fine of $500,000 or up to twice the amount of the criminally derived property involved in the transaction (whichever is greater), and/or imprisonment of up to 20 years. Legal and post-event remediation costs can be staggering. Reputational damage can be incalculable.

Prevention Strategies

Like financial institutions, MNCs should adopt AML programs that include policies and procedures, training and compliance protocols in their mitigation strategies.  More importantly under the Federal Organizational Sentencing Guidelines, implementation of corporate compliance and training programs can help avoid or minimize prosecution and civil money penalties when employees commit wrongdoing in violation of those policies. 

One of the most effective risk mitigation factors in an AML program, especially for MNCs in light of the trade-based schemes often used by money launderers, is a comprehensive and risk-based “Know Your Customer” due diligence program.  When evaluating the risk for money laundering, MNCs should consider at least the following factors when dealing with potential customers, clients, vendors, business partners and even outside sales representatives:

• Who are the owners of the entity?
• Is there any negative news about them or the entity?
• What is the entity’s source of funds?
• Is the entity located or operating in a high-risk area for fraud, corruption, drug trafficking and/or money laundering?
• How long has the entity been in business?
• Does the entity have a physical address?
• What are the entity’s business model, sales volume and revenue?
• Who are the entities customers?
• What is the entity’s level of transparency and willingness to provide information?
• What is the entity’s legal structure?
• Can the entity’s existence be verified through searches of publicly available documentation and databases?

As far as reporting is concern Once KYC due diligence has been performed and documented, monitoring transactional activity will help detect unusual patterns of customer behavior. Questions to consider:

• Is this transaction unusual in and of itself?
• Is this transaction, when aggregated with the customer’s other transactions, unusual or suspicious?
• Is this transaction comparable to transactions for other customers in the same geography?
• Is this transaction comparable to transactions for other customers of the same size/business model?

As for financial institutions, MNCs may be able to use existing systems, create risk-based rules against which to evaluate transactions, generate alert reports showing patterns of activity that should be of interest and develop investigative protocols to determine if the activity is indeed suspicious and possibly tied to money laundering or other illegal activity.

AML programs require a multi-discipline approach, which means a that subject matter experts from legal, finance, security/investigations, compliance as well as sales should be part of a team working under the direction of the executive board.  The working team should have long term objectives, as the risk of money laundering to MNCs don’t simply go away with the stated countermeasures, but morphed into different M.O.’s as organized crime has been notoriously able to do. 

In closing, MNCs may have been caught by surprise by clever money laundering schemes, which are indeed very subtle in their execution.  But once the veil has been lifted, MNCs can no longer claim ignorance and would instead face hefty fines and even criminal prosecution under AML laws, if such regulations are in place in their home countries.  To avoid the eventual damage to their reputation that may result from prosecution MNCs must gain superior knowledge of their organization’s transactions through due diligence and know your customers program.