Category: The Counterfeit Trail

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| February 23, 2008

You’d think we’d know better after more than a decade of international business travel, but we’ve underestimated the size of Brazil and overestimated the number of appointments a person of flesh and blood can squeeze into a single workday.

By the time we arrive at our hotel in Londrina, it’s 3:30 a.m. Our first appointment will be at 9 a.m., after which we must drive to Foz do Iguaçu.

On the office map, this had looked like a three-hour drive. Our host says it’s closer to eight. It’s easy to forget that Brazil is larger than the continental United States.

It will probably be past midnight again when we arrive at our next destination, the tri-border area.


| February 23, 2008

It's really mine, officer

As we get closer to Foz do Iguaçu, the Brazilian border town facing Ciudad del Este in Paraguay, I am starting to have doubts.

When we first proposed investigating Latin America’s black market, I knew smugglers and counterfeiters would not necessarily welcome a pesky journalist sticking his nose in their lucrative business. But I also knew it would be unlikely that we’d ever actually find one, making it easier to feign bravery.

But nearly everyone we’ve met so far has cautioned us against merely entering Ciudad del Este.

Depending on who you listen to, the city is controlled by the Chinese mafia, Russian organized crime or Islamic radicals ready to detonate themselves at the first sight of a Westerner.

Bizarrely, the cautionary tales seldom include Paraguayans, although one person suggested that the illicit trade is Paraguay’s revenge for a war the country fought against its neighbors in the late 19th century—one that it lost, resulting in a significant loss of territory.

Not knowing whether carrying grudges is a national trait, I put greater stake in the economic explanation: Facing widespread poverty and few opportunities in the formal economy, the profits to be made from smuggling and counterfeiting are simply irresistible to many.

That said, it is still unclear to me whether Paraguay’s overproducing factories themselves are doing anything illegal under Paraguayan law. They could simply be selling to third domestic parties who proclaim to be buying for the domestic market but then turn around and sell the product elsewhere.

And while Brazilian law enforcement has stepped up border controls in recent years, some believe it is afraid to truly crack down because many Brazilians too benefit from the illegal trade.

Some smugglers apparently pay poor people to travel back and forth between Paraguay and Brazil all day, each time bringing their maximum allowance of cigarettes.

As we near Iguaçu we pass several police stations whose parking lots are packed with cars. “Stolen and intercepted en route to Paraguay,” explains our host.

Half of the vehicles on Paraguay’s roads are said to have been stolen in Brazil. Even a former president reportedly owned such a vehicle.

I still plan to enter Ciudad del Este tomorrow. But I will leave my valuables in our (Brazilian) hotel safe and travel by foot.

Staggering numbers

| February 22, 2008

This morning, I received an unsigned e-mail from a person who says he has studied Paraguayan cigarette production.

The writer estimates 2008 cigarette consumption at 2.43 billion cigarettes. There are 50 licensed factories, and based on export activity, the e-mailer suspects that 32 factories are producing on a regular basis.

Paraguay’s total production is around 35 billion cigarettes, according to the author—but the 2007 legal exports registered in the customs system were only 2.7 billion!

He estimates the total volume of Paraguay-made cigarettes smuggled into Brazil at 18 billion cigarettes in 2007.

The incentive is clear: The average price of a master case of cigarettes (50 cartons) at the Brazilian border is $55—11 times cheaper than that of legal products in Brazil.

Can Brazil sustain its integrated system?

| February 21, 2008

While cigarette smuggling primarily affects cigarette manufacturers, Brazilian leaf dealers are facing an entirely different set of challenges.

The U.S. dollar—the currency in which they are paid for their exports—has lost some 20 percent of its value against the Brazilian real in recent years, while the cost of production has gone up.

The exchange rate makes it difficult for exporters to pass on these expenses to their customers.

Leaf merchants say there’s little room to reduce their cost of operation. Consolidation and rationalization initiatives in recent years have made them as lean as they can possibly be.

Some dealers also expressed concern about the future of Brazil’s integrated tobacco production system, in which the buyers supply farmers with inputs and agronomic assistance and recover these expenses when the tobacco is delivered.

“Pinhookers” are damaging the system by buying tobacco from farmers who have been sponsored by other companies.

If trust in the system isn’t restored, they say, Brazilian volumes could start to decline and buyers will lose control over the cleanliness of their tobacco.

Some suggest the dealer’s plight could trigger vertical integration, with one of the major manufacturers—or even the increasingly assertive Chinese tobacco industry—purchasing a leaf merchant to secure its supply.

Chicken feathers

| February 20, 2008

Last night, we had dinner with a representative of a major leaf merchant who was too diplomatic to question our sanity but impressed on us to be very careful as we probe the black market.

Apparently, manufacturing cigarettes is so lucrative that some Paraguayan tobacco executives drive armored cars to protect themselves against kidnapping—not the bulletproof types that protect against small arms fire, but vehicles designed to withstand mine blasts.

Regarding leaf exports, the tobacco trader told us that the Brazilian government years ago tried to cut the supply of Brazilian leaf to Paraguay by implementing a 150 percent tax on tobacco exports.

The Paraguayan government, however, successfully challenged that measure as a violation of the Mercusor free-trade agreement, and the export tax was removed.

But that doesn’t mean the smuggled cigarettes are made from high-quality Brazilian leaf. Rather, they are said to contain “funny ingredients” such as chicken feathers or even sand.

Reality check

| February 20, 2008

I knew Santa Cruz had a sizable population of German heritage, but there’s something bizarre about speaking German with a tanned taxi driver while zipping past palm trees in balmy 32-degrees-Celsius (90 degrees F) weather in a very un-European landscape.

Santa Cruz is said to have the world’s second-largest Octoberfest after Munich.

Too bad it’s only February.