SÃO PAULO/BRASILIA, 5 Jun (Reuters) – The designation by the United States of Brazil’s largest criminal groups as Foreign Terrorist Organizations (FTOs), starting this Friday, will likely increase the risks and costs of doing business in a country where factions have had years to penetrate the formal economy.
The two largest Brazilian criminal groups, the Comando Vermelho (CV) and the Primeiro Comando da Capital (PCC), began as prison gangs in the late 1970s and early 1990s, respectively. Since then, they have come to dominate the drug trade across South America, with money laundering operations spreading to the farthest corners of Brazil’s conventional economy.
Recently, investigators discovered that the two groups delved into sectors such as fuel distribution, real estate and finance, generating fraud as they laundered billions in drug profits.
The terrorism designation for the factions, announced in Washington last week and rejected by the Brazilian government, opens the door to heavy US sanctions, criminal investigations and civil liability even for companies that deal indirectly with the groups.
Asset freezes, banking restrictions and greater regulatory scrutiny are also on the table, Brazilian law firm Pinheiro Neto Advogados said in a note.
US policy ‘internationalizes a risk that the Brazilian financial sector already had the obligation to manage’, said Rodrigo Caldas de Carvalho Borges, partner at law firm CBA Advogados. ‘The most immediate impact will be the deepening of due diligence processes and increased demands from international partners.’
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The risks — and compliance costs — extend far beyond financial services. From logistics and infrastructure to mining, agribusiness, gambling and big-money consumer franchises, few sectors of the Brazilian economy have escaped gang money laundering schemes.
For example, a major police operation in August revealed a scheme that moved around 52 billion reais through gas stations and fuel distributors controlled by the PCC from 2020 to 2024.
Another phase of investigations last week uncovered around 10 billion reais of money laundering in four years through fintechs and investment funds based on the prestigious Avenida Faria Lima, in São Paulo, the heart of Brazilian finance.
Lower barriers to entry and laxer oversight for Brazil’s fintech startups have made them a tempting conduit for laundering drug money in recent years. This could mean that large lenders with tighter governance controls can avoid the worst.
In Mexico, where U.S. terrorist designations for drug traffickers last year also led to scrutiny of money laundering operations, Washington closed only two smaller commercial banks and one brokerage because of their ties to cartels.
But the small market share and limited presence of affected institutions, along with a swift regulatory response, helped limit the risk of a broader market disruption, Fitch Ratings said of Mexico at the time.
