Guaíra sits on the edge of the sluggish, muddy, mile-wide Paraná River that cuts a natural border between Brazil and Paraguay. Here the soil is red, the terrain is flat with ample soybean and mate leaf plantations. On its face, Guaíra is a well-kept Western Brazilian city of 30,000. Men chatter among themselves sitting in small plazas and barber shops. The streets downtown are clean, the houses are freshly painted and pay phones are decorated with natural motifs — you can call from the gut of a fish or the chest of a parrot.

Beneath this surface, however, the city shows a more disturbing element.

Last September, Guaíra made headlines across Brazil when 15 people were murdered at a makeshift riverside warehouse. The killings were the result of a vendetta among drug smugglers and, officials here say, they weren’t all that unusual. Just 150 miles north from the notorious Tri-Border Area, where Brazil, Paraguay and Argentina meet, Guaíra is today a major weapons and drugs corridor in the region. But no product, police say, is more widely smuggled through this city, and more profitable to smugglers, than Paraguayan cigarettes.

Dozens of motor boats crammed with tobacco cross the Paraná River daily from the neighboring Paraguayan city of Salto del Guairá. The smugglers feed an illicit trade that injects billions of cigarettes into Sao Paulo, Rio de Janeiro, and other large Brazilian cities, where the cheap, untaxed Paraguayan sticks account for 20 percent of the entire cigarette market. Guaíra sits at the heart of this trade, a strategic gateway and a place where many residents — up to half its population, locals say — rely directly or indirectly on smuggling for their livelihood. A few reap millions from the illicit trade. Guaíra’s most famous criminal son, Roque Fabiano Silveira, made a fortune and a name, trafficking Paraguayan cigarettes thousands of miles away.

Roque SilveiraSilveira, 44, nicknamed Zero Um (“The Kingpin”), is a larger-than-life border boss who fled to Paraguay after being charged in Guaíra with orchestrating the 1996 murder of a businessman. In Paraguay his cigarette business took off, and in 1999 he opened a sizable cigarette factory on the outskirts of the country’s capital, Asunción, which soon became the operational base for a smuggling network that spanned two continents and reached deep into the United States. Starting in 2003, Silveira cut deals with tobacco traders in Arizona and smoke shop owners in Indian reservations in Washington state to smuggle millions of Paraguayan-made contraband cigarettes through the ports of Miami, Norfolk, and Baltimore. The sticks were then distributed across the country and the profits were laundered to bank accounts in Paraguay and the United States. Silveira not only manufactured the cigarettes, U.S. prosecutors said, but also greased political and law enforcement hands in South America that guaranteed swift passage north for the cargoes. His former associates describe him as smart and cold, with an eye for fine suits.

The tale of Roque Silveira is emblematic of the criminal nature and global reach of the teeming Paraguayan cigarette industry, one that experts and law enforcement officials say is, largely, set up for and devoted to transnational smuggling. Fifteen years ago cigarette manufacturing was minimal in Paraguay, one of South America’s poorest countries and a place notorious for corruption and trading in counterfeit goods. Today Paraguay, a landlocked, California-sized country, ranks among the world’s top producers of contraband cigarettes, responsible for 10 percent of the world’s contraband tobacco, experts estimate.

Paraguay’s factories churned out 68 billion cigarettes in 2006, more than 20 times what the country consumes, according to a study by the Centro de Investigación de la Epidemia de Tabaquismo (CIET), a Uruguay-based NGO that tracks the economics of the region’s tobacco market. The vast majority of the cigarettes — up to 90 percent of production, worth an estimated $1 billion — disappears in the black market, law enforcement officials say. The cigarettes are flooding Brazil and Argentina, where taxes are much higher than in Paraguay, and have turned up as far away as Ireland.

Fidel, Hamlet, and Opus Dei

Once dominated by multinational tobacco companies, the global illicit cigarette trade today involves an array of crime syndicates which, much like the Silveira network, rob governments of billions of dollars in much-needed tax money, fuel organized crime, and help spread addiction by placing cheap cigarettes in the world’s black markets. The steep growth of Paraguay’s cigarette industry alarms law enforcement agencies and health officials alike, who fear that the South American nation could become be the next nightmare in global cigarette trafficking. Industry sources say manufacturing cigarettes in Paraguay today is cheaper than in China — the top producer of contraband smokes — while the quality of the product is far superior.

“There is a real danger that this situation could escalate very rapidly,” says Austin Rowan, head of the anti-tobacco smuggling operations at the European Union’s Anti-Fraud Office (OLAF). What’s distinctive about Paraguay, investigators say, is the massive number of obscure, cheap brands its factories produce — more than 2,600 brands have been registered with the Ministry of Industry and Commerce, including the likes of “Dirty,” “Fidel,” “Hamlet,” and “Opus Dei” — which makes it harder for investigators to track the trade. In contrast, only a handful of local brands are sold in the domestic market, where smokers pay some of the lowest cigarette taxes in the world.

Multinational tobacco firms are alarmed at the size and speed at which the Paraguayans have built up an off-the-books industry. Investigators for Big Tobacco say Paraguayan cigarettes are shipped to known Caribbean smuggling hubs like Aruba and Panama, where they believe the shipments enter the black market. In 2006 Irish customs seized a container loaded with five million Paraguayan cigarettes concealed in bales of plywood. While making inquiries about the case among his EU peers, David Godwin of Irish Customs says he was told: ‘If you think you have problems with China, the Middle East, and the rest, brace yourself because you haven’t seen anything. … The capacity is just endless in South America.’”

Tobacco factories in Paraguay range from sprawling, state-of-the-art manufacturing plants that boast cutting-edge technology to miniature “mobile” factories — also called submarines — which are assembled inside of trucks. Paraguayan government officials say that if all cigarette-making machines in Paraguay were to work at maximum output, the country could produce up to 100 billion sticks annually — enough to supply about two-thirds of the Brazilian market.

Smuggling is made easy in Paraguay, officials confide. There is virtually no industry regulation, and illegal manufacturers and traffickers are often insulated from prosecution by those in power. Bankers, politicians, and soccer club barons are themselves involved in the business and make hefty campaign contributions. Although the administration of President Fernando Lugo — a former Catholic bishop who in 2008 unseated the powerful Colorado Party after more than 60 years in power — has pledged to change the country’s reputation as a smuggling haven, there already have been some mishaps. In February, the president named a convicted cigarette smuggler as his Air Force intelligence chief. Lugo later backed off amidst intense criticism.

A smuggler's paradise

Cigarettes are just another commodity peddled through Paraguay’s decades-old underground economy, which flourished during the 35-year dictatorship of Alfredo Stroessner. Before he was forced from power in 1989 in a military coup, Stroessner made the country a sanctuary for Nazi war criminals, deposed dictators, and smugglers.

The Tri-Border Area of Paraguay, Brazil, and Argentina is the epicenter of this contraband culture. A corridor for drugs, weapons, stolen cars, and any imaginable knock-off — from CDs to Viagra — this region of thick, green rainforests and spectacular waterfalls has also become the backdrop for the booming trade in smuggled and counterfeit cigarettes made in Paraguay.

“The only thing that flourishes here is illegality,” says Humberto Rosetti, a prosecutor in Ciudad del Este, the commercial center of the Tri-Border Area, often regarded as one of the most lawless places on earth. The city’s downtown is a bustling labyrinth of narrow streets cluttered with thousands of street stands, money exchange houses and shops, where anything from exotic pets to AK-47s can be obtained with almost equal ease. Late-model Mercedes and BMWs sporting polarized windows rush by and scores of motor scooters, some of them transporting entire families, weave through the ubiquitous traffic jams. In the Calle de los Cigarrilleros, as locals have christened one of the city streets, boxes of Eight, Te, Rodeo, Calvert — the smugglers’ favorite brands — are stacked high along the sidewalk. “Our hands are pretty much tied,” says Rosetti, who has directed several cigarette seizures in recent months, only to see judges and customs officials promptly return the loads to smugglers.

Ciudad del EsteU.S. officials regard Paraguay as a principal money laundering center for the proceeds of drugs, arms, and cigarette trafficking in South America — and Ciudad del Este sits at the core of that trade. Cigarette factories are often linked to money exchange houses where profits of the contraband are laundered, according to former factory managers and court records. So impenetrable is Ciudad del Este’s financial system that American undercover agents who infiltrated Roque Silveira’s U.S. smuggling ring were unable to find the money they helped the group launder. “We tried to track the proceeds,” says Assistant U.S. Attorney James Warwick. “Did we succeed? No.”

Several Paraguayan cigarette firms have conveniently built factories in Ciudad del Este and nearby Hernandarias. From there, cigarettes for years were smuggled to Brazil in vans, trucks, and buses through the shabby Friendship Bridge that connects Ciudad del Este with its Brazilian counterpart, the city of Foz do Iguaçu. Brazilians stepped up controls at the border in 2005, so smugglers switched from the road to the water. Starting at dusk, motor boats leave through any of the more than 300 makeshift piers fashioned along the nearby Lake Itaipú, formed by the dam of one of the world’s largest hydrological power plants, built on the Paraná River. To reach some of these illicit piers, one must navigate a maze of tortuous and narrow red-dirt paths through dense underbrush. One afternoon in March, ICIJ reporters visiting the seemingly deserted Codorso Pier came across a government worker smoothing out the smugglers’ trail with the help of his tractor. Reporters were told the smugglers were taking the day off to mourn one of their own, a former policeman, who had died in a car accident the day before.

“We close one pier, and two more pop up overnight,” says Gilberto Tragancin, chief of Brazil customs service in Foz do Iguaçu. With a shoreline of nearly 1,000 miles, Lake Itaipú is almost impossible to patrol in its entirety, Tragancin explains. A few yards outside of Tragancin’s office, a ‘cigarette trashing’ machine was in motion. The loud contraption pulverizes about 500,000 seized cigarette packs every day — the remains of which are used in fertilizers and to build roads. The flow of Paraguayan contraband cigarettes to Brazil is 20-30 billion sticks annually, experts estimate. In contrast, says Tragancin, legal exports of cigarettes to Brazil are zero.

Besides the public health threat it poses, cigarette smuggling is also bolstering violent organized crime groups that operate complex networks along the border with Brazil. Tragancin says these groups are now using the cigarette smuggling channels to supply weapons and munitions to some of Brazil’s most dangerous syndicates, including the First Command of the Capital (PCC), the leading criminal gang in Sao Paulo prisons.

The trade goes global

International smugglers quickly spotted an opportunity in the booming Paraguayan illicit tobacco trade. Washington state-based cigarette wholesaler Stormmy Paul, a Tulalip Indian, flew to Paraguay in 2003 to cut a deal. He had been buying Chinese cigarettes, including counterfeit Marlboros, and re-selling them tax-free to smoke shops in his state, but he wanted a better combination of price and quality. A business partner from Brazil offered to make some introductions south of the border.

Tulalip Indian Stormmy PaulIn Paraguay, Paul visited a handful of cigarette factories. One facility stood out: the heavily guarded Tabacalera Central in the outskirts of Asunción. The visitors were greeted by owner Roque Silveira and feted with a lavish barbecue. By the time dinner was completed an agreement had been sealed. Paul would pay $2 for each carton of cigarettes manufactured at Silveira’s facility and an additional $2 per carton to a middleman in Maryland who altered customs forms to avoid controls, and taxes, at U.S. ports. The deal still left Paul a $2 per-carton profit.

“I loved it down there,” said Paul, an enterprising, voluble fellow who leads a weekly ritual at a sweat lodge on the Tulalip reservation, north of Seattle. He found Silveira impressive. “He is a really sharp business guy,” said Paul of Silveira. “There is a certain class about him — Roque looks successful.”

Starting in late 2003, the ring of 11 people, most of them American tobacco traders, smuggled into the United States more than 120 million Paraguayan cigarettes, for distribution from California to North Carolina, according to court records. The ring was brought down in spring 2005 as the smugglers convened in Las Vegas. Silveira, Paul, and the others were indicted on a total of 50 counts of conspiracy, smuggling, trafficking, and money laundering. U.S. officials jailed Silveira for two months after his arrest at the Miami airport, but the Brazilian pledged to cooperate with authorities and was handed a probationary sentence. Silveira paid a fine and, to the amazement of Paraguayans, was let go.

River of the dead

Around the same time the Americans gave Silveira a slap on the wrist, Brazilian prosecutors indicted him in one of the largest-ever cigarette smuggling investigations in that country. Codenamed Operation Fireball, the sting rounded up more than 90 people in 11 Brazilian states. In the indictment for the case, Silveira was fingered as a major supplier of contraband cigarettes who allegedly controlled three different networks that delivered the sticks to the populous Rio Grande do Sul state. Silveira managed to evade the law simply by staying in Paraguay, where, Brazilian prosecutors alleged, he has “a vast network of contacts and the financial capability to live underground.”

Silveira had become the top dog in the traffic of cigarettes from Paraguay to Brazil following the 2003 arrest and subsequent conviction of legendary cigarette smuggler Roberto Eleuterio “Lobão” Da Silva, a Brazilian who wore plenty of bling and looked like Mr. T, Brazilian police say. From that point on, in smuggling parlance, Silveira “owned” the routes that led to millions of smokers in Brazil’s largest cities.

Two weeks after Operation Fireball, a Brazilian customs agent was murdered in a bleak, sparsely populated region of the border called Rio do Morte — River of the Dead. An anonymous caller tipped local police to a burned-out SUV on the road. So charred was the corpse in the passenger’s seat that police couldn’t readily identify the victim, who had been burned alive. Forensic experts eventually said the dead man was Carlos Renato Zamo, a resident of Mundo Novo, a city just north of Guaíra. He was one of thousands of customs agents working Brazil’s porous borders. Throughout the years, however, Zamo reportedly had grown far richer than most on a typical border agent’s salary. He accumulated real state investments in Sao Paulo and Mato Grosso do Sul. He even owned a plane.

Brazilian police discovered that Zamo had worked for Silveira and other cigarette smugglers, who allegedly paid the agent $8,000 a month to assure their cigarette cargoes passed uninspected through border checkpoints. But Zamo had begun to fear discovery and finally backed out of the ring, police said. In a meeting, the smugglers allegedly offered to raise his payment, but he refused and tipped off customs about the group’s shipments, according to Brazilian police.

Four men were eventually arrested in connection to Zamo’s murder, but not Silveira, who was wanted by Brazilian authorities but remained at large in Paraguay. The day police officials announced the arrests, they addressed Silveira directly, calling him “the big head” of cigarette smuggling in the region. “Everything happens under his orders,” they said.

Through his attorney in Asunción, Silveira declined to comment for this article.

Filling Big Tobacco's shoes

Paraguayan cigarette manufacturers like to point out that they are just filling a void created by large multinational tobacco companies. In the 1990s, British American Tobacco and Philip Morris ran independent schemes in which their subsidiaries in Brazil and Argentina legally exported billions of cigarettes to Paraguay. The sticks were then smuggled back to these two higher-tax countries and sold on the black market. The practice ended in 1999 when the Brazilian government raised the cigarette export taxes dramatically to discourage the illegal trade. Following the tax increase, dozens of cigarette factories opened in Paraguay, many of them owned fully or in part by Brazilians. Within three years, Paraguay was home to more than 30 cigarette manufacturing plants, some of which counterfeited well-known international brands.

The local counterfeiting business has dropped markedly in recent years as cigarette makers realized that there was a market — in Brazil and around the world — for the cheap Paraguayan brands. The practice also carries less risk of being pursued by Big Tobacco companies for trademark violation. Today the number of manufacturing facilities has more than halved, but not so production.

Tabacalera del Este, Paraguay’s largest cigarette factory features state-of –the-art machinery imported from Germany. Photo: Marina Walker GuevaraTabacalera del Este (Tabesa) Paraguay’s top cigarette factory, a modern, sprawling 183,000 square-foot facility that can pump out up to 1.5 billion cigarettes a month — or 579 cigarettes per second. The factory, located a short drive north from Ciudad del Este in the city of Hernandarias, supplies almost half of the Paraguayan market with its two flagship brands, Kentucky and Palermo. But at the same time as it serves a legitimate market, the company allegedly supplies large quantities of cigarettes that end up smuggled to Brazil and Argentina. Customs officials in those two countries told ICIJ they seize more contraband cigarettes from Tabesa than any other Paraguayan company. In 2006, Tabesa was mentioned in Operation Fireball as one of the factories whose cigarettes were allegedly smuggled to Brazil.

Paraguayan businessman Horacio Manuel Cartes is widely reported to be the owner of Tabesa, and is listed as a top shareholder and director by Informconf, a Paraguay business database. Cartes started as a cigarette distributor two decades ago. Since then he has built an empire that includes a bank, a soccer club, and several agricultural ventures — some of these formally owned by family members and business associates.

Tabesa’s CEO José Ortiz talked to ICIJ reporters about the company’s business.

“We don’t know where our cigarettes are consumed, and it’s not our problem,” said Ortiz when asked about the presence of Tabesa’s cigarettes in Brazil and Argentina, two markets to which the company does not legally export. “We sell our products in Paraguay and pay all local taxes,” he added, sitting in his office at Tabesa’s manufacturing plant, which features high-end German cigarette machinery. What happens once the cigarettes leave the factory is not Tabesa’s responsibility, said Ortiz, a view shared by other cigarette makers in Paraguay. “My job is to supply the market.”

Ortiz said that Tabesa does not sell directly to vendors but rather to four or five wholesale distributors. He named two wholesale firms, one of which, Tabacos del Paraguay, is affiliated with Tabesa. “The rest, I don’t remember,” he said, reclining on his large black leather office chair and switching the focus to multinational tobacco companies: “They are the parents and the grandparents of the creature,” said Ortiz of BAT and Philip Morris’ smuggling in the 1990s. “We are replacing that market they abandoned.”

Last year, the company broke into the U.S. market with its Palermo brand and is now certified to sell in at least eight states, including Maryland and California . Palermo is also available online through websites selling cigarettes from Indian reservations in New York, but Ortiz denied that Tabesa is selling to Native Americans directly. U.S. officials have identified New York reservations as major hubs for cigarette smuggling.

Guaíra: No Man's Land

Brazilian prosecutors and police place the Paraguayan factories at the top of the “criminal enterprise,” which they say runs high-volume cigarette smuggling in the region. Érico Saconato, head of the Brazilian federal police in Guaíra, said that the factories work hand in hand with “managers” on both sides of the border who acquire trucks and boats, bribe public servants, and hire scores of youths, fishermen, and farmers to transport the cigarette loads. In one of the cases involving Silveira, prosecutors said in court documents that the ring acquired large quantities of contraband cigarettes “directly from the Paraguayan factories” for distribution in Rio Grande do Sul and border cities of Argentina.

The sluggish, muddy Paraná River is widely used by smugglers to move contraband cigarettes from Paraguay to Brazil. Marina Walker Guevara“All the smugglers, big-time traffickers, in this region are businessmen and politicians, who have good lawyers, fancy cars, family,” says Saconato. “Some even are leaders of evangelical churches.”

Roque Silveira’s hometown of Guaíra gained prominence in the cigarette trade when controls tightened in the Tri-Border Area, starting in 2005. Today large portions of the population there, Guaíra officials say, rely on smuggling for their livelihood, whether it’s renting space in their homes for the smugglers to store their loads, working as lookouts, or passing cigarettes across the Paraná River. The “paseros,” or crossers, make about $300 a week, one and a half times the minimum monthly wage in Brazil.

Police in Guaíra say they feel overwhelmed. Saconato says 700 people were arrested in 2007 in connection with smuggling, yet only two men were convicted. When the district attorney shut down a riverside bar, Tininha’s, which allegedly was widely used by smugglers to plan their business, a federal prosecutor reversed the order and sued the city. That night smugglers celebrated by launching fireworks on the riverside, officials say.

“Guaíra is practically abandoned,” says Saconato, who anticipates record cigarette seizures this year due to the global financial crisis and a recent rise in cigarette taxes in Brazil. In the kiosks of Sao Paulo or Rio de Janeiro, the cheapest Brazilian cigarette pack (valued at roughly $1.50) costs three times as much as the contraband Paraguayan brands.

“A big duty free store”

No policeman in Guaíra has seen Silveira in recent years, Saconato says. He has become a mythical character of sorts, with town residents claiming from time to time to have spotted him. His 1996 murder case is still meandering through Guaíra’s courts. After Operation Fireball, Silveira became a ghost, Brazilian police say, but no one believes he has retired from the cigarette trade. Some of Silveira’s former associates now manage large portions of the smuggling on both sides of the border, according to Brazilian police.

The latest traces of Silveira in Paraguay’s courts are from July 2007, when he beat the legal system again. On that occasion, Paraguay’s Supreme Court denied an extradition request by Brazilian prosecutors who accused him of conspiracy, cigarette smuggling and money laundering.

Just the mention of Silveira’s name in Paraguay’s tobacco circles raises eyebrows and causes interviewees to clear their throats repeatedly before offering a noncommittal “His name sounds familiar,” or “Didn’t he own a cigarette factory around here?”

One man in Salto de Guairá, a Paraguayan city located just across the river from Guaíra, is not hesitant to talk about Silveira. Sidronio Talavera, a professional harpist who once played with one of Paraguay’s most famous bolero bands, sits in a small office from where he manages his cigarette factory, Cosmopolita S.A. The facility is rather old and the cigarette-making machines are housed in a warehouse across a dirt yard from Talavera’s office. A truck was picking up cigarettes at the factory the afternoon ICIJ reporters visited in March. Talavera says he not only knows Silveira, he is also his business associate. “He is one of the nicest people I have ever met,” beams Talavera, who was convicted last year of tax evasion. Paraguayan prosecutors accused Talavera of reporting fake cigarette exports to Brazil in order to avoid paying taxes on imported cigarette manufacturing supplies. He has also been fingered by Paraguayan officials as a counterfeiter, a charge he denies.

Paraguayan manufacturer Sidronio Talavera says he doesn’t care if his cigarettes end up being sold on the black market. “I care that I sell,” he says. Photo: Marina Walker GuevaraTalavera says he sells to anybody who knocks on his factory’s door, and he’s well aware that some of the buyers are smugglers or work with smugglers. “Good for them if they send the cigarettes to Brazil,” he says slapping his hands down on his desk. “If I have too many requirements, I will starve.” Talavera boasts that his Latino cigarettes have found a market as far away as Dubai. He says that wholesalers based in Panama buy from him and then ship the cigarettes overseas. “I don’t know if from Panama they are smuggled elsewhere or re-sold legally, and I don’t care. I care that I sell.”

As for Silveira, Talavera says he is still the trade’s big intermediary, the middleman who acquires large quantities of cigarettes from the Paraguayan factories and arranges the deliveries in Brazil. “He works with everybody!” he says when told that other cigarette makers seem oblivious these days to Silveira’s whereabouts. “He is smart, the Mafioso. He fooled the Americans,” says Talavera.

As things stand, the Paraguayan government, which says it’s determined to bring the cigarette industry under compliance, has its work cut out for it. Ortiz, Tabesa’s CEO, put it simply. “Paraguay is like a big duty free store,” he said. “And it’s a great deal.”