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Biden’s Anti-Corruption Agenda Finds Its Test Case: Paraguay

A deeply corrupt South American country has entered the White House’s sights.

By , a senior fellow at the Foundation for Defense of Democracies.
A demonstrator walks past police during a protest demanding the impeachment of Paraguayan President Mario Abdo Benítez in Asunción, Paraguay, on Aug. 19, 2020.
A demonstrator walks past police during a protest demanding the impeachment of Paraguayan President Mario Abdo Benítez in Asunción, Paraguay, on Aug. 19, 2020.
A demonstrator walks past police during a protest demanding the impeachment of Paraguayan President Mario Abdo Benítez in Asunción, Paraguay, on Aug. 19, 2020. NORBERTO DUARTE/AFP via Getty Images

U.S. President Joe Biden has defined the fight against global corruption as a “core United States national security interest” and made it an official priority for his administration. Now, he is turning Paraguay into a test case for his policy.

On July 22, the U.S. ambassador to Paraguay shocked the country’s political establishment by announcing at a live, televised press conference that the U.S. State Department was sanctioning former Paraguayan President Horacio Cartes, along with his adult children, for their involvement in “significant corruption.” Less than a month later, the Biden administration doubled down by imposing sanctions for corruption on Paraguay’s sitting vice president, Hugo Velázquez, along with his close advisor and associate, Juan Carlos Duarte, and their spouses and children. Cartes, Velázquez, Duarte, and their families will no longer be able to obtain a visa and travel to the United States. A stunned Velázquez—who, until then, was arguably Paraguay’s power behind the throne and a serious contender in next year’s presidential elections—quit the race that same day.

U.S. authorities have targeted former leaders on corruption grounds before, not to mention a plethora of lower-ranking figures. This February, for example, the State Department designated former Honduran President Juan Orlando Hernández. But for the United States to go after the sitting vice president of a friendly country is unprecedented. It is a clear message to Paraguay’s leaders as well as their regional counterparts: Washington will no longer take a passive approach to corruption.

U.S. President Joe Biden has defined the fight against global corruption as a “core United States national security interest” and made it an official priority for his administration. Now, he is turning Paraguay into a test case for his policy.

On July 22, the U.S. ambassador to Paraguay shocked the country’s political establishment by announcing at a live, televised press conference that the U.S. State Department was sanctioning former Paraguayan President Horacio Cartes, along with his adult children, for their involvement in “significant corruption.” Less than a month later, the Biden administration doubled down by imposing sanctions for corruption on Paraguay’s sitting vice president, Hugo Velázquez, along with his close advisor and associate, Juan Carlos Duarte, and their spouses and children. Cartes, Velázquez, Duarte, and their families will no longer be able to obtain a visa and travel to the United States. A stunned Velázquez—who, until then, was arguably Paraguay’s power behind the throne and a serious contender in next year’s presidential elections—quit the race that same day.

U.S. authorities have targeted former leaders on corruption grounds before, not to mention a plethora of lower-ranking figures. This February, for example, the State Department designated former Honduran President Juan Orlando Hernández. But for the United States to go after the sitting vice president of a friendly country is unprecedented. It is a clear message to Paraguay’s leaders as well as their regional counterparts: Washington will no longer take a passive approach to corruption.

Although the country’s elites have formally embraced democracy since the 1989 overthrow of then-fascist dictator Alfredo Stroessner, they have nonetheless benefited from Stroessner’s legacy: a corrupt power structure complicit with a gargantuan shadow economy estimated to be worth almost half the country’s GDP as well as trafficking in every sort of contraband. Cross-border cigarette smuggling is big business in Paraguay, and brands owned by Tabacalera del Este—known as Tabesa, a manufacturer controlled by the Cartes family—are frequently seized in Brazil. Off-the-books contraband also extends to consumer goods, agricultural products, alcohol, tires, and even pesticides. In an operation last month, Brazilian police seized $190 million worth of goods. All told, the estimated value of goods smuggled from Paraguay is $5 billion annually.

More than 30 years after Stroessner’s departure, Paraguay still ranks among the most corrupt countries in the world. Organized crime and terrorism organizations have converged on its territory, turning its porous borderlands into key hubs for money laundering, drug trafficking, and terrorism finance. Paraguayan businesses and the front companies they establish in the United States engage in commodities trading to launder proceeds from these criminal activities. The financial flows frequently go through U.S. banks.

Biden has defined the fight against global corruption as a core U.S. national security interest and made it an official priority for his administration.

Washington’s action on Paraguay is a warning to corrupt leaders everywhere. Biden’s anti-corruption message is a strong and welcome step—and his administration should follow up with further U.S. action. The most hotly debated question in Paraguay now is whether sanctions, like those on Honduras’ former president, will be followed by U.S. criminal indictments and extradition requests. Paraguay’s public response to the designations after the initial shock has also been focused on whether the United States will stop with the current sanctioned politicians or go after even more. The administration should leave no room for doubt: Corruption in Paraguay goes deep and wide, and Cartes, Duarte, and Velázquez should not be the only people on Washington’s list.

In the past, Paraguay’s leaders had impunity as long as they were politically aligned with the United States. Biden’s predecessors, whether Democrats or Republicans, were well aware of Paraguay’s corruption pandemic yet treaded carefully with its leaders amid mounting evidence of corruption in the highest reaches of the country’s power structure. U.S. investigations into Cartes’s suspected role in smuggling predate his 2013 election as president, but they were likely cast aside as part of a diplomatic deal, according to conversations FP had with a former Paraguayan official close to Cartes and a former U.S. official familiar with the U.S. investigation.

In Paraguay, political meddling to protect the culprits has stalled the investigation of the so-called megalavado case, the largest-ever money laundering case in the country, allegedly worth $1.2 billion. For six years now, the investigation has been hampered with periodic changes of prosecutors, sometimes ordered by Paraguay’s attorney general’s office. Each time, the investigation is set back—and there is no end in sight. Other large investigations into money laundering schemes have also failed to yield indictments or convictions. That was the case with Liz Paola Doldán González, whom the U.S. Treasury Department eventually sanctioned in 2021 for corruption. Doldán was implicated in a tax evasion and money laundering scheme worth more than $500 million. Paraguayan authorities slapped her on the wrist with a tax fine despite the staggering losses Paraguay’s treasury incurred. Of the two other businesspeople also sanctioned in the case, cousins Kassem and Khalil Hijazi, only the former has been extradited to the United States, while no legal action is pending against the latter.

For years, Washington buried any acknowledgement of Paraguay’s corruption in annual State Department reports, diligently flagging Paraguay’s deficient anti-money laundering controls and weak judicial system. The department’s annual International Narcotics Control Strategy Report routinely described Paraguay’s corruption as “pervasive.” Yet nothing of consequence happened despite periodic alarms about criminal organizations laundering proceeds from smuggling with the complicity of corrupt officials. U.S. investments in anti-corruption training, capacity-building, mutual assistance, and gentle pressure contributed to much legislative reform as well as to successful investigations, raids, arrests, and extraditions. But the bottom line remained the same: Despite “results in terms of arrests and modest progress toward implementation of new legislation … convictions remain rare.”

Observing corruption was not enough as long as Paraguayan politicians believed their loyalty to Washington insulated them from the duty to govern honestly and transparently. U.S. policy still seemed to reflect the old Cold War-era practice of aligning with unsavory regimes as long as they supported U.S. foreign-policy goals. In September 2019, merely three years before facing sanctions, Velázquez received the red carpet treatment in Washington, where he met members of Congress and visited the U.S. Justice, State, and Treasury departments as well as the CIA. Washington threw its weight behind Cartes when he ran for president in 2013 despite having earlier investigated his alleged criminal activities, including by infiltrating his business with an eye toward prosecuting him.

Given how extensive corruption is across the political spectrum among Latin America’s ruling classes, doing business with criminals seemed to be the only way to get things done with those in power. Their opponents, so this logic goes, are just as bad. Paraguay’s pervasive corruption has shown that this approach has not worked.

After Biden took office, there were clues that patience in the White House was running thin. In April 2021, the Biden administration slapped sanctions on a Paraguayan politician and his wife, and in August 2021, it issued sanctions on three businesspeople, Doldán and the Hijazis, for their corrupt practices. Kassem was even arrested and recently extradited to the United States. But despite this progress, corruption remains rampant, and government efforts to combat it continue to be underwhelming. Investigations have suffered setbacks; judicial processes have languished; transnational criminal activities in Paraguay have spiked; and, most dramatically, there was the recent assassination of a top prosecutor spearheading cases against criminal networks, corrupt politicians, and financiers of terrorism.

Even as the Biden administration has now homed in on Paraguay to showcase its fight against global corruption, the country’s ruling elites are likely still hoping the worst that can happen to them is losing their visas to the United States. The White House needs to show them they’re wrong.

The financial flows from Paraguayan corruption frequently go through U.S. banks.

The Biden administration, which clearly aims to tackle corruption well beyond the confines of Paraguay or even Latin America, should not lose sight of the shock-and-awe impact of its summer measures. Relentless, continued focus on Paraguay is therefore essential. Too often in the past, U.S. sanctions, once promulgated, gradually lost their grit as sanctioned foreign nationals were able to adjust and resume their activities as soon as the United States’ Eye of Sauron moved its gaze elsewhere. Velázquez presumably banks on that: After announcing he would end his electoral campaign and resign as vice president, he retracted the latter decision and now plans to serve his full term, which ends in August 2023. Even as a diminished leader, he can hunker down and, for the remaining months of his term, leverage his patronage network to his own benefit. The White House needs to disabuse him of his complacency.

The designations of Cartes, Velázquez, and Duarte offer a clue on where to start. According to the State Department, Cartes “obstructed a major international investigation into transnational crime in order to protect himself and his criminal associate from potential prosecution and political damage.” Duarte, Velázquez’s close associate, “offered a bribe to a Paraguayan public official in order to obstruct an investigation that threatened the Vice President and his financial interests.” Washington needs to ensure that authorities in Asunción pursue serious investigations of these alleged crimes. At the moment, there are still no pending Paraguayan indictments against Cartes, Duarte, or Velázquez.

If the Justice Department can assert jurisdiction, it should. If the evidence for sanctions is sufficient to prosecute Cartes, Velázquez, and Duarte in U.S. courts, indictments should be drafted and extradition requests filed. Sanctions should also target the bribers, not just those on the receiving end. The former’s impunity is equally responsible for systemic corruption, and it is their crimes the politicians seek to conceal.

For far too long, Paraguay’s corruption has sabotaged the course of justice—not least because of Washington’s indifference to its consequences. The Biden administration’s commitment to combat corruption may have just changed that. Let’s hope it stay the course.

Emanuele Ottolenghi is a senior fellow at the Foundation for Defense of Democracies. Twitter: @eottolenghi

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