Money Laundering in Brazil

Money Laundering in Brazil

Money laundering (Portuguese: lavagem de dinheiro) is a prominent financial crime in Brazil.  Defined by INTERPOL as “any act or attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources,”[1] money laundering is used by agents of the private and public sector alike to mask illicit financial transactions.  Countries with problems involving money laundering are also prone to actions such as corruption, non-transparent rent-seeking behavior, and organized crime.  Recent intelligence suggests links to transnational terrorist networks as well, in particular Hezbollah.  These actions threaten domestic and economic security throughout the world by means of stretching the capacity of law enforcement and discouraging investment, respectively.

In conducting research on money laundering, my plan is to examine the institutional sources of the practice, and see who actually does it.  I will divide it into public and private sector categories, as well as observe the motivations behind each category.  Secondly, I will see what Brazilian and international authorities are doing to combat it, as well as highlight a few prominent cases detailing what law enforcement did to combat the perpetrators.  Finally, I will examine implications for the future, and how law enforcement can learn from the Brazilian example.

Money Laundering in the Private Sector

Private sector money laundering manifests itself in two forms, not always mutually exclusive:  wealth and drugs.  Rich Brazilians concerned with finding ways, legal and illegal, to obtain new wealth are just as concerned with finding ways to hide and re-introduce that wealth into the market, once it is safe to do so.   The weakness of the Brazilian financial regulatory system, paired with a judicial system that allows defendants to appeal multiple levels before ever serving time for a conviction, increases the chances and lowers the costs of money laundering.  I will discuss later some actions the Brazilian government has taken to tighten up the system.

Money laundering can generally be understood as a three-phase process:  first, the launderer will take the illegal money and inject it in small, less conspicuous amounts into the financial system.  An example would be putting small deposits in local banks throughout Brazil, through a network of accomplices.  Second, the launderer will spread the money and assets across the globe, focusing particularly on countries that do not cooperate as strongly with the international community on anti-money laundering policies (Brazil used to be one).  Third, the launderer will introduce the money back into the economy legitimately.[2]  Two recent cases, those of Paulo Maluf and Daniel Dantas, illustrate well how the private sector can work to conceal the origin and the direction of money.

Paulo Maluf is a businessman/politician from the state of São Paulo, descended from a powerful family of Lebanese origin.  He served as the governor of the state of São Paulo (1979-1982) and as the mayor the city of São Paulo twice (1969-1971; 1993-1996).  He gained much of his popularity from successes in securing a series of public works contracts that modernized São Paulo’s city infrastructure, both inside and outside public office.  His appeal, however, does not come without criticism or inquiry.  Since 2003, Maluf has been involved in an extensive federal investigation, in which he and his family are accused of funneling millions of dollars into bank accounts on the British Channel island of Jersey.  He was convicted in 2012 and ordered to pay back nearly $11 million to the city of São Paulo.[3]  Maluf has also attracted the eye of the United States:  in 2007, U.S. investigators pursued Maluf after finding irregularities with one of his family’s bank accounts in Manhattan.  He is alleged to have stolen $11.6 million from a series of public works contracts totaling around $140 million.  As Brazil does not extradite nationals, Maluf will not face these charges unless he goes to the United States.[4]  Paulo Maluf also carries a “Red notice” through Interpol, which means that he is to be arrested on site at any international airport outside of Brazil.

Daniel Dantas, on the other hand, is a Brazilian banker who took advantage of the privatization of the Brazilian economy in the 1990s.  An engineer by trade, but also trained in economics through the well-known Getúlio Vargas Foundation (FGV), Dantas was a key technocrat involved in the Fernando Henrique Cardoso administration (1995-2003).  Dantas founded Opportunity Asset Management in 1994, which by 1998 bought up millions of shares of the Brazilian telecom industry.  This access and power transferred into the administration of Luiz Inácio Lula da Silva (2003-2011), and Dantas served as an economic advisor to the newly-formed Workers’ Party government.  He was convicted in 2008 after evidence linked him to paying off federal police investigators as part of Operation Satiagraha (Operação Satiagraha), which sought the origin of assets Opportunity owned in the Cayman Islands.[5]^;[6]  He was sentenced to ten years in prison; however, Dantas has yet to go to prison, as his attorneys have appealed on multiple levels the quality of evidence and witnesses.[7]

There are also recent concerns that money laundering in Brazil could be linked to prominent Middle Eastern terrorist organizations, such as Hezbollah.  As Iran has found allies in Latin America, particularly in Venezuela and Bolivia, evidence suggests that Iranian and Lebanese nationals have made their way to these countries, as well as to South America’s Southern Cone.  The Tri-Border area, which separates Brazil, Paraguay and Argentina, is known to be an area prone to the presence of drug traffickers and domestic terrorists, and the Brazilian government has tried since the late-1990s to strengthen security measures on its side of the border.[8]  More research and intelligence work must be done to analyze this phenomenon; however, it has come to the attention of United States House of Representatives, and minutes from the House Subcommittee on Counterterrorism and Intelligence in 2011 acknowledge the threat and increasing demand for cooperation with the Brazilian government.[9]

Money Laundering in the Public Sector

Money laundering is also common in the public sector in Brazil, as prominent politicians have gained notoriety for using the practice to gain personal tips (Portuguese:  propinas).  Similar to what is done in the private sector, public sector-related money laundering involves government officials conspiring with those in the private sector to gain wealth through agreements on contracts, particularly related to public works.

The most prominent example of public sector money laundering in Brazilian history was the Mensalão scandal, which rocked the administration of former President Lula.  The case dates back to 2005, when a disgruntled former member of the Lula coalition, Roberto Jefferson, told the São Paulo newspaper Folha that he and other politicians had received monthly bribes from José Dirceu, then Lula’s Chief of Staff, to support key pieces of legislation in the Chamber of Deputies.  The Mensalão scandal implicated Dirceu, known for his campaigns against the former military dictatorship, as well as José Genoíno, then President of the Chamber of Deputies.  All of the funding was linked to Marcos Valério, a Minas Gerais-based advertising executive and Workers’ Party supporter.  Valério laundered money through his advertising agency to help the Workers’ Party bosses pay the federal deputies.  The case was finally decided in October of 2012, and 38 defendants were convicted.  Their penalties range from fines to nearly seven years in prison for Valério.  Again, however, none have gone to prison yet, as defense attorneys prepare to argue irregularities and technicalities in appeals in the near future.[10]

Brazilian Government Actions

The Brazilian government since the 1990s has introduced measures to combat the practice of money laundering.  In 2003, the government established the National Combat Strategy towards Corruption and Money Laundering (Estratégia Nacional de Combate à Corrupção e à Lavagem de Dinheiro, or ENCCLA).  The entire effort is administered by the federal Justice Department (Ministério da Justiça).  The ENCCLA integrate over 60 law enforcement and public administrative bodies, and it produces yearly reports, accessible online.  In 2012 it produced a report in which it outlined fourteen actions and gave four recommendations:  among the recommendations, ENCCLA recommended that the Brazilian government compose a list of all individuals connected to public office who have been convicted of financial crimes and make a special classification for actions done to finance terrorist activities.  In the wake of the Mensalão scandal and connections with the Brazilian financial sector to Hezbollah, the ENCCLA is a step in the right direction towards combating money laundering.[11]

In 2012, the Brazilian government launched a new law to combat money laundering.  This particular legislation is a revision of a 1998 law which stated that the only cases in which the courts could pursue money laundering charges were ones in which the money was used to fund illegal activities.  Under the new law, any money in which the holder cannot identify its origin is subject to potential prosecution.  Fines and prison sentences have also been amplified; for example, the maximum fine rose from around $100,000 to $10 million.[12] Judges also have the right to hold assets in question while a case is being processed, and sell the assets on the open market to maintain their value.  If the defendant is acquitted, he receives full value of the goods upon release.  If convicted, the government seizes the money.[13]These actions, if implemented correctly, could help Brazil move into the 21^st century in terms of combating organized crime.

Conclusion and Recommendations

Brazil is a country poised to become one of the world’s most prosperous.  It has a young population and a low level of domestic unemployment.  Millions have risen out of poverty in the past ten years, and are consuming at levels similar to their counterparts in the United States.  There is still much progress to be made, however, in the delivery of financial and administrative services, and this lack of institutional strength leads to corruption and the laundering of ill-gotten gains.  Brazil must continue to implement legislation that combats money laundering at the core:  at the same time, however, there must be someone or something present to watch the watchmen.  Reciprocal accountability is crucial to public administrative reform in Brasília, São Paulo, Belo Horizonte, Rio de Janeiro and all major Brazilian cities, and a cleaner public sector will help the government to clean up the dirt in the private sector.  Transparency is an essential pillar:  the work of the ENCCLA must be taken further into consideration, as public administrative transactions need to be accessible for the citizens to see.  If Brazil can implement reforms in a transparent manner, with careful eye on both stakeholders and policymakers, it will successfully reduce the level of financial crimes with which it currently struggles.

Author’s Note

Richard Hill is a first-year master’s candidate at the University of Pittsburgh Graduate School of Public and International Affairs, specializing in international political economy. During the spring semester of 2013, he conducted media monitoring services for Crowder Publications, headquartered in Phoenix, Arizona. The assignment covered a wide variety of issues of interest with a focus on law enforcement, including drug and human trafficking, environmental crime, domestic violence, and financial crimes. The author’s undergraduate interests include political science and political corruption. A majority of time during the internship was spent covering Portuguese-language Brazilian news and locating links between corruption and financial crimes. This report/analysis was prepared over a window of 72 hours of research based on open-source intelligence and media monitoring. Most of the websites are translated from the original language if not in English. This work was submitted to Crowder Publications on May 6, 2013.