US embassy cable - 05BRASILIA123

UNCLAS SECTION 01 OF 04 BRASILIA 000123 
 
SIPDIS 
 
JUSTICE FOR OIA AND AFMLS 
TREASURY FOR FINCEN 
STATE FOR INL 
 
E.O. 12958: N/A 
TAGS: KCRM, EFIN, PTER, SNAR, KTFN, BR, Money Laundering 
SUBJECT: BRAZIL 2004-2005 INCSR PART II - MONEY LAUNDERING 
AND FINANCIAL CRIMES 
 
REF: A) 04 STATE 254401   B) BRASILIA 61 
 
1.   This cable transmits Embassy Brasilia's submission of 
Part II of the 2004-2005 International Narcotics Control 
Strategy Report (INCSR), on Money Laundering and Financial 
Crimes.  Ref B is post's submission of Part I of the INCSR. 
 
2.   Due to its great size and large economy, Brazil is 
considered a regional financial center, but it is not an 
offshore financial center. Brazil maintains adequate banking 
regulation, retains some controls on capital flows, and 
requires disclosure of the ownership of corporations. 
Brazilian authorities report that money laundering in Brazil 
is primarily a problem of domestic crime, including the 
smuggling of contraband goods and corruption, both of which 
generate funds that may be laundered through the banking 
system, real estate investment or financial asset markets. 
The proceeds of narcotics trafficking and organized criminal 
activities are laundered in a similar fashion. An Inter- 
American Development Bank study of money laundering in the 
region found that Brazil's relatively strong institutions 
helped reduce the incidence of money laundering to well 
below the average for the region. 
 
3.   The GoB adopted and began implementing in 2004 a new 
national strategy document for combating money laundering. 
The strategy includes 32 actions, grouped into six strategic 
goals: 1) better coordinate disparate federal and state 
level anti-money laundering efforts; 2) take advantage of 
computerized databases and public registries to facilitate 
the fight against money laundering; 3) evaluate and improve 
existing mechanisms to combat money laundering; 4) increase 
international cooperation to fight money laundering and 
recover assets; 5) promote an anti-money laundering culture; 
and, 6) to prevent money laundering before its occurrence. 
The first major coordination action taken under the new plan 
was the creation of a new high-level coordination council 
(the GGI-LD), led by the Ministry of Justice's Office for 
Asset Seizure and International Judicial Cooperation.  The 
GGI-LD determines overall strategy and priorities, which are 
then implemented by Brazil's financial intelligence unit, 
the Council for the Control of Financial Activities (COAF), 
which has been strengthened with additional analysts. 
Specific cases are then assigned to law enforcement task 
forces for investigation. 
 
4.   Implementation of much of the strategy is ongoing. 
Among the more ambitious efforts is the drafting of 
legislative changes to facilitate greater law enforcement 
access to financial and banking records during 
investigations, criminalize illicit enrichment, allow 
administrative freezing of assets and facilitate 
prosecutions of money laundering -- and terrorism finance - 
by refining the legal definition of money laundering and de- 
linking it from the current exhaustive list of predicate 
crimes.  The GoB reportedly plans to present to Congress in 
early 2005 a bill enacting these changes.  Creation of a 
unified database of all money laundering investigations and 
a national level registry of real estate, which would aid 
investigators, also is contemplated.  An existing effort to 
create a database of all current accounts in the country, 
updated in real time, is also expected to come to fruition 
in 2005. 
 
5.   Money laundering in Brazil is primarily related to 
drugs, corruption, and trade in contraband. In 2004 the GOB 
continued investigating corrupt public figures, including 
customs inspectors, federal tax authorities, and high- 
ranking politicians, and the use of offshore companies to 
launder money. The COAF has also investigated instances of 
money laundering linked to the sale and purchase of luxury 
automobiles. This market is currently an unregulated sector 
in Brazil. Other schemes involve the purchase of winning 
lottery tickets to justify the increase of funds. Under 
Brazil's anti-money laundering law, the lottery sector must 
notify COAF of the names and data of any winners of three or 
more prizes equal to or higher than 10,000 Reais within a 12- 
month period. According to Brazilian authorities, Brazilian 
institutions do not engage in currency transactions that 
include significant amounts of U.S. currency, currency 
derived from illegal drug sales in the U.S., or that 
otherwise significantly affect the U.S. The authorities 
believe that organized crime groups use the proceeds of 
domestic drug trafficking to purchase weapons from Colombian 
guerrilla groups. 
 
6.   The GOB has a comprehensive anti-money laundering 
regulatory regime in place. Law 9.613 of March 3, 1998, 
criminalizes money laundering related to drug trafficking, 
terrorism, arms trafficking, extortion, and organized crime, 
and penalizes offenders with a maximum of 16 years in 
prison. The law expands the GOB's asset seizure and 
forfeiture provisions and exempts "good faith" compliance 
from criminal or civil prosecution. Regulations issued in 
1998 require that individuals transporting more than 10,000 
Reais (then approximately $10,000, now approximately $3,700) 
in cash, checks, or traveler's checks across the Brazilian 
border must fill out a customs declaration that is sent to 
the Central Bank. Financial institutions remitting more than 
10,000 Reais also must make a declaration to the Central 
Bank. On June 11, 2002, then President Cardoso signed Law 
10.467, which modified Law 9.613. The new law put into 
effect Decree 3,678 of November 30, 2000, which penalizes 
active corruption in international commercial transactions 
by foreign public officials. Law 10.467 also added penalties 
for this offense under Chapter II of Law 9.613. 
 
7.   Law 9.613 also created a financial intelligence unit 
(FIU), i.e. the Council for the Control of Financial 
Activities (COAF), which is housed within the Ministry of 
Finance. The COAF includes representatives from regulatory 
and law enforcement agencies, including the Central Bank and 
Federal Police. The COAF regulates those financial sectors 
not already under the jurisdiction of another supervising 
entity. Currently, the COAF has a staff of 28, comprised of 
18 analysts, two international organizations specialists, a 
counterterrorism specialist, and support staff. A new 
director was appointed in February 2004. 
 
8.   Between 1999 and 2001, the COAF issued a series of 
regulations that require customer identification, record 
keeping, and reporting of suspicious transactions to the 
COAF by obligated entities. Entities that fall under the 
regulation of the Central Bank, the Securities Commission 
(CVM), the Private Insurance Superintendence (SUSEP), and 
the Office of Supplemental Pension Plans (PC), file 
suspicious activity reports (SARs) with their respective 
regulator, either in electronic or paper format. The 
regulatory body then electronically submits the SARs to 
COAF. Entities that do not fall under the regulations of the 
above-mentioned bodies, such as real estate brokers, money 
remittance businesses, factoring companies, gaming and 
lotteries, dealers in jewelry and precious metals, bingo, 
credit card companies, commodities trading, and dealers in 
art and antiques, are regulated by the COAF and send SARs 
directly to the FIU either via the Internet or using paper 
forms. All of these regulations include a list of guidelines 
that help institutions identify suspicious transactions. The 
COAF receives roughly 300 to 500 SARs per month, about two 
percent of which lead to investigations by law enforcement. 
 
9.   The Central Bank has established the Department to 
Combat Exchange and Financial Crimes (DECIF) to implement 
anti-money laundering policy, examine entities under the 
supervision of the Central Bank to ensure compliance with 
suspicious transaction reporting, and forward information on 
the nature of the suspect transaction to the COAF.  Since 
the January 2001 passage of Complementary Law No. 105 and 
its implementing Decree No. 3,724, all government 
authorities, including the COAF, have been able to access 
complete bank transaction information during an 
investigation without a court order. On January 11, 2002, 
then President Cardoso signed Brazil's new omnibus drug 
legislation, which allows for the suspension of bank secrecy 
during drug trafficking investigations. 
 
10.  On July 9, 2003, Law 10.701 was passed to modify Law 
9.613 of 1998. Law 10.701 criminalizes terrorist financing 
and makes it a predicate offense for money laundering. The 
law also establishes crimes against foreign governments as a 
predicate offenses, requires the Central Bank to create and 
maintain a registry, expected to come on-line in 2005, of 
information on all bank account holders, and enables the 
COAF to request from all government entities financial 
information on any subject suspected of involvement in 
criminal activity. Other measures enacted in 2003 required 
banks to report cash transactions exceeding 10,000 Reais 
(approximately $3,700) to the Central Bank, established a 
department within the Ministry of Justice to recover 
financial assets, and designated a representative from the 
Ministry of Justice to the COAF. 
 
11.  Brazil has established systems for identifying, 
tracing, freezing, seizing, and forfeiting narcotics-related 
assets. The COAF and the Ministry of Justice manage these 
systems jointly. Police authorities and the customs and 
revenue services are responsible for tracing and seizing 
assets, and have adequate police powers and resources to 
perform such activities. The judicial system has the 
authority to forfeit seized assets. Brazilian law permits 
the sharing of forfeited assets with other countries. 
Traffickers have not taken any retaliatory actions related 
to money laundering investigations, government cooperation 
with the U.S. Government, or the seizure of assets. 
 
12.  Brazil has some ability to employ advanced law 
enforcement techniques such as undercover operations, 
controlled delivery, and use of electronic evidence and task 
force investigations that are critical to the successful 
investigation of complex crimes, such as money laundering. 
Generally such techniques can be used only for information 
purposes, and are not admissible in court. In 2003, 
Brazilian courts handed down their first criminal conviction 
for money laundering. The case involved illegal transfers of 
money overseas through a currency exchange in Foz do Iguacu. 
A flood of new investigations (1,043 in 2003, up from 345 in 
2002) has led to a sharp spike in the number of money 
laundering cases going to court (132 in 2003, up from 34 in 
2002). To improve the ability of the judicial system to deal 
with money laundering crimes, Brazilian authorities have 
created seven special federal-level money-laundering courts, 
one in each federal judicial district, and expect to create 
one more. The judges in these courts generally have received 
some specialized training to deal with money laundering 
cases. 
 
13.  Investigations into the scandal involving Banestado, 
the state bank of Parana, continued in 2004. In 1995, five 
banks in the tri-border region of Brazil, Paraguay, and 
Argentina, including Banestado, were authorized to open 
currency exchange accounts, known as CC-5 accounts. CC-5 
accounts quickly became used as a means of laundering money. 
Moneychangers opened hundreds of fake CC-5 accounts, into 
which criminals deposited millions of Reais. The money was 
then wired in dollars to the Banestado branch in New York 
City and from there to other banks, usually in countries 
considered to be tax havens. The moneychangers and Banestado 
officials took cuts from each transaction. Over 250 phony CC- 
5 accounts have been identified and it is suspected that as 
much as $30 billion passed through CC-5 Banestado accounts 
in the U.S. between 1996 and 1999, a portion of which was 
likely laundered.  A separate and sometimes politicized 
Congressional inquiry into the Banestado case was closed at 
end-2004; its final report recommended that law enforcement 
agencies indict several prominent figures in the case. 
 
14.  The COAF has responded to U.S. Government efforts to 
identify and block terrorist-related funds. Since September 
11, 2001, COAF has run inquiries and searched its financial 
records for entities and individuals on the UN 1267 
Sanctions Committee's consolidated list. None of the 
individuals and entities on the consolidated list were found 
to be operating or executing financial transactions in 
Brazil, and the GOB insists there is no evidence of 
terrorist financing in the country. The USG remains 
concerned, however, that the tri-border area with Argentina 
and Paraguay,  -- infamous for contraband of all kinds, 
including arms, drugs and pirated goods -- lacks adequate 
enforcement of currency controls and cross-border reporting 
requirements and may be a source of terrorist financing. In 
November 2003, the GOB extradited an alleged financier to 
Paraguay on charges of tax evasion. 
 
15.  The GOB has signed, but not yet ratified, the UN 
International Convention for the Suppression of the 
Financing of Terrorism and the OAS Inter-American Convention 
on Terrorism. In 2000 Brazil became a full member of the 
Financial Action Task Force (FATF), and a founding member of 
GAFISUD, the FATF for South America, and has sought to 
comply with the FATF Eight Special Recommendations on 
Terrorist Financing. Brazil is a party to the 1988 UN Drug 
Convention and has signed, but not ratified, the UN 
Convention against Transnational Organized Crime, which 
entered into force on September 29, 2003. On December 9, 
2003, the GOB signed the UN Convention Against Corruption, 
which is not yet in force internationally; Brazil also is a 
member of the OECD anti-bribery convention. Brazil is also a 
member of the Organization of American States Inter-American 
Drug Abuse Control Commission (OAS/CICAD) Experts Group to 
Control Money Laundering. The COAF has been a member of the 
Egmont Group since 1999. In February 2001, the Mutual Legal 
Assistance Treaty between Brazil and the United States 
entered into force.  The Brazilian Senate ratified in 2004 a 
bilateral Customs Mutual Assistance Agreement with the U.S. 
 
CHICOLA