The Pandemic Depression
The Global Economy Will Never Be the Same
As a small country of 6.9 million inhabitants, Paraguay rarely draws international attention. Unlike some of its neighbors, it does not face debilitating violence, nor is it overwhelmed by paramilitary or gang activity. In fact, Paraguay has enjoyed economic growth in recent years. But beyond its apparent normalcy, the nation is grappling with pervasive corruption and organized crime.
One particular sector seems to play a significant role in the nation's corruption-related challenges—Paraguay's tobacco industry. According to a 2009 study by Uruguay’s Tobacco Epidemic Research Center (CIET), Paraguay accounts for approximately 11 percent of the world’s supply of contraband cigarettes. Paraguayan cigarette manufacturers produced 68 billion cigarettes in 2006, more than 20 times what the country consumes. Estimates suggest that 90 percent of the nation’s production—worth an estimated $1 billion—disappears every year to the black market.
More recent figures paint a similar picture. In 2013, the International Tax and Investment Center (ITIC) put Paraguay’s illicit production at 65 billion cigarettes per year, many times higher the country’s annual domestic consumption of only 2.5 billion. In other words, Paraguayans are puffing away on less than three percent of the nation’s output. A KPMG study commissioned by British American Tobacco from May 2015 pegged the country’s domestic consumption even lower, at 0.78 billion cigarettes smoked in 2014.
In most cases, smuggled Paraguayan cigarettes head to the black market in Argentina, Brazil, and Uruguay. Some have been found as far away as Colombia, Mexico, Panama, Venezuela, and even Europe. Paraguayan cigarette brands represented 73 percent of the total illicit consumption of tobacco throughout 16 Latin American countries in 2014, adding up to about 33.5 billion smokes.
Behind most of the seized black-market Paraguyan cigarettes is the country’s largest tobacco company, Tabacalera del Este (commonly known as Tabesa). Tabesa produces six of Mexico’s top selling contraband cigarette brands. And in Colombia, Tabesa has been cited as the nation’s main source of illegal cigarettes. Tabesa and its main distributor, Tabacos del Paraguay, have long dominated Paraguay’s tobacco industry, enjoying an estimated 50 to 58.1 percent market share. Both companies are part of Grupo Cartes, one of Paraguay’s largest business conglomerates and the family operation of current Paraguayan President, Horacio Cartes. Although Cartes has reportedly left the company’s management team, he remains one of the group’s main shareholders. His father, Ramón T. Cartes, was the company’s founder. His sister, Sarah Cartes, now runs it. Since its conception, the Cartes Group has gained control of over 25 Paraguayan companies through various sectors, and even includes the Club Libertad soccer team.
Allegedly, beyond their legal production, the Cartes Group intentionally produces cigarettes solely for smuggling purposes. Some even claim that the company produces brands specifically for this purpose. Cartes has defended Grupo Cartes from these allegations, however, saying, “[…] contraband is a customs problem. We don’t do any of it; we have a clear conscience.” And yet, the illegal trade of Paraguayan cigarettes has placed Cartes under the regional media spotlight in the past few years. Brazilian newspapers have named him “The Tobacco Lord,” and a team of investigative journalists from Colombia and Brazil has led an investigation into Cartes and Paraguay’s illicit tobacco trade at large.
Paraguay’s tobacco industry exploded in the 2000s: Cigarette production increased by 2,592 percent between 2000 and 2010, and the number of cigarette companies registered with the country’s Ministry of Industry and Commerce grew from three in 1993 to 35 in 2007. The number of registered cigarette brands in Paraguay now exceeds 2,600. In 2013, the ITIC stated that Paraguay holds “approximately 30 manufacturing sites, of which 12 are currently active, with an estimated capacity of 100 billion cigarettes.” Meanwhile, internal tobacco consumption is actually declining, and legal exports only account for a small portion of the country’s cigarette production. Although official data on the Paraguayan tobacco industry is unavailable, data on related industries (such as the imports of filter paper and raw tobacco leaf) has been used to estimate actual production. Data from employment statistics has revealed that only 11 out of the 35 registered companies in 2007 had any employees, and 86 percent of the workforce was concentrated in only four companies. This casts doubt on the legitimacy of the market. Worse yet, it supports the notion that the country could be operating a significant clandestine production operation.
Four main factors can help explain Paraguay’s cigarette smuggling boom. The first is geography. The triple frontier between Argentina, Brazil, and Paraguay has traditionally been a contraband transit zone for goods of all sorts, including the trafficking of cocaine and cannabis to Argentina and Brazil (with Paraguay being South America’s largest marijuana producer). These distribution networks were put in place for other goods, and existed long before Paraguay’s tobacco industry took off. From a tobacco company’s perspective, Paraguay is ideally situated at the edge of South America’s southern cone, a region that has higher smoking rates than northern portions of the continent. And for its part, Paraguay’s tobacco industry benefits from its proximity to Argentina and Brazil, South America’s main producers of tobacco leaf. According to the United Nations Food and Agriculture Organization (FAO), Brazil is indeed the second largest cultivator of tobacco in the world after China, and is the world’s largest exporter. Its evolution has mirrored Paraguay’s cigarette sector, providing Brazil with a 94 percent increase in tobacco production from 1990 to 2013.
Second, local companies have taken advantage of trade models put in place by the world’s tobacco conglomerates in years past. In other words, Paraguayan cigarette smugglers did not create the nation’s black market: they merely built upon practices that other companies pioneered. There is extensive evidence that transnational cigarette companies have been complicit in smuggling their own products as part of market entry strategies, allowing them to obtain concessions from governments given the extent of the illicit cigarette trade. In Paraguay, BAT and Philip Morris International (PMI) both used subsidiaries in the 1990s to legally export billions of cigarettes into Paraguay, only to smuggle them back into Brazil and Argentina to be sold tax-free on the black markets. When the ICIJ asked then-Tabesa CEO José Ortiz about the company’s role the illicit tobacco trade, he said the company was simply filling the void left by BAT and PMI. Ortiz said, “They are the parents and the grandparents of the creature. […] We are replacing the market they abandoned.” Third, anti-contraband measures introduced in Brazil in the late 1990s that sought to tackle existing export and re-entry schemes have backfired, shifting cigarette production to Paraguay for entry into Brazil’s black market. Despite a 150 percent tax on exported cigarettes and the effective reduction of Brazilian exports to Paraguay by 2000, the illegal tobacco trade has continued. These measures created a market opportunity in Paraguay, increasing local production of cigarettes. Lastly, national, regional, and international authorities have turned a blind eye to Paraguayan cigarette smuggling. Policy makers and law enforcement officers are overburdened with the bigger task of curbing violence and the trafficking of weapons and drugs, giving cigarette smuggling less attention (and financial support) in the process. Since tobacco is a legal product, smuggling operations are seen as a lesser evil compared to cannabis, cocaine, and other drug smuggling schemes. Cigarette smuggling, however, is a key source of income for organized crime. Mexican drug cartels, such as Los Zetas and the Sinaloa cartel, have been involved in the distribution of Paraguayan illicit cigarettes. So too have Colombian organizations such as the Revolutionary Armed Forces of Colombia (FARC) and the Urabeños, which use illicit tobacco for money laundering purposes. Reports from as recently as May 2014 suggest that cigarette trafficking in Brazil may be also linked to criminal groups, such as the Red Command and the First Capital Command (PCC). Cigarette smuggling is often seen as an issue of tax evasion, rather than a public health challenge associated with organized crime. Such misunderstandings allows cartels to exploit the world of black market tobacco, since it is seen to be a low-level crime in the eyes of law enforcement officials, with a high-reward for those in the business. Tobacco price differentials between countries may also provide an incentive for smuggling. In 2013 Paraguay levied an 11 percent tax on cigarettes, the lowest rate in South America by over 50 percentage points. Exploiting this differential provides a financial incentive for smuggling, as profits from cigarette smuggling between Paraguay and Brazil can range from 179 to 231 percent, outranking the profitability of smuggling other goods, such as electronics or clothing, by a long shot. As Paraguay has little control over its borders, low indictment rates for those caught smuggling goods out of the country, and well organized criminal networks, the nation seems to have all the right conditions for tobacco smuggling to continue its growth.
Paraguay’s cigarette industry shows few signs of weakening. Washington’s effort to unearth evidence of Cartes’ role in a vast money laundering operation seems to have stalled after Wikileaks published the plan’s details in 2011. The Cartes administration has stymied investigative journalism in Paraguay and has all but ended research on its cigarette industry. As a result, tobacco control efforts in Paraguay are now more difficult to conduct than ever. According to a former British law enforcement official with first-hand knowledge of the nation’s tobacco sector, after Cartes’ election in April 2013, “all machines to measure [cigarette] production have remained turned off.” According to Yul Francisco Dorado, head of Corporate Accountability International for Latin America, the few NGOs working on tobacco control in Paraguay have now stopped their operations. And as funding charities have moved their resources toward smoking prevention, there is no reliable, independent data on the Paraguayan industry to evaluate the situation. Transnational tobacco companies have become the primary patrons of research on illicit trade in the region, providing them with greater influence on policy and taxation decisions.
There is hope, however, that the international community can influence change from the outside. In November 2012, the Parties to the WHO Framework Convention on Tobacco Control (WHO FCTC) adopted the Protocol to Eliminate Illicit Trade in Tobacco Products, which aims at “combating illegal trade in tobacco products through control of the supply chain and international cooperation.” If successful, the initiative will notably use global tracking to reduce illicit trade. Argentina, Brazil, and Paraguay have yet to sign the protocol, however.
But even if international measures promise more than they can deliver, the Paraguayan government has recently demonstrated its willingness to tackle corruption, organized crime, and money laundering. The nation’s Inter-Institutional Unit of Combat and Repression Against Contraband (UIC) initiative has seized of $260 million in contraband as of May 2015. Since September 2014, Paraguayan authorities have arrested nine high-ranking officials on corruption, narcotics, and trafficking charges. President Cartes himself is trying to portray himself as an anti-corruption chief. In an impassioned speech last month, Cartes mandated that any officials found to be corrupt would have their hands “cut off.” And yet, these official announcements have not resulted in any substantial progress. Paraguayan Vice-Minister for Industry Pablo Cuevas has said that contraband in the nation is an “uncontainable avalanche,” and that authorities do not have enough resources to tackle the problem. Paraguay only has one judge responsible for handling contraband cases. And to date, no such cases have even reached the trial stage.
Meanwhile, Tabesa and Tabacos del Paraguay continue to expand. The Cartes Group’s tobacco business is well respected in Paraguay as one of the nation’s largest employers. The official Tabesa website suggests its global aspirations: “Tabacos (Tabacos del Paraguay) does not neglect the necessary steps to export to Europe and Asia, nor does it lose its interest in partnering with a multinational corporation via franchise or other forms of alliance in order to expand its brands in the rest of the world.” Left unchecked by local media investigations, and independent research organizations, or pressure from the international community, Paraguayan cigarette smuggling is likely to grow in its reach and scale. All the while, the consequences of cigarette smuggling on public health, security, and regional economies will remain obscured.
This research is part of the project “Tobacco Companies, Public Policy and Global Health,” funded by the U.S. National Cancer Institute, Grant No. R01-CA091021, and led by Simon Fraser University, B.C., Canada.