An investigation into a multibillion-dollar First Capital Command (Primeiro Comando da Capital – PCC) money laundering scheme involving chemical imports, fuel distribution, and investment funds has triggered reforms in Brazil’s digital banking sector. But gaps in enforcement mean the gang is likely to keep exploiting digital platforms to launder profits.
Operation Hidden Carbon (Carbono Oculto) was the largest-ever government response to organized crime in Brazil, according to President Luiz Inácio Lula da Silva. Beginning in 2023, it brought together Brazil’s Federal Revenue Service (Receita Federal) and São Paulo’s Special Action Group for the Suppression of Organized Crime (Grupo de Atuação Especial de Repressão ao Crime Organizado de São Paulo – GAECO) and involved around 1,400 security agents and the execution of over 400 court orders.
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The payoff was the detection of a PCC scheme involving the illegal importation of methanol to adulterate fuel and money laundering via investment funds and fintechs — companies that offer digital banking and financial services.
Members of the PCC illegally imported methanol using money from companies linked to the gang and listing false buyers on the receipts, the investigation found. Then, they sent it to fuel blenders that mixed the methanol into the gasoline before passing it on to distributors and gas stations that sold the adulterated fuel to customers. The profits were then transferred back to the PCC using fintechs. Finally, the illicit money was reinvested into investment funds and other businesses.
The use of fintechs in the scheme made it difficult to track transactions, as they are not classified as financial institutions and at that time did not have to follow the same regulations as traditional banks. The investment funds then acted as the point of entry for the untraceable money into the legal economy.
The operation revealed that the PCC had assets of around 30 billion reais (over $5.5 billion) invested in over 40 funds in one of Brazil’s most important financial centers in São Paulo. Among them were funds operated by one of the country’s biggest investment management companies. While some of the funds were exclusive, with the PCC as the sole shareholder, others saw PCC money mixed in with investments by regular account holders.
“There is an actual overlap between the gang and at least some of the involved management firms. It has set up fronts and penetrated parts of the financial market,” João Paulo Gabriel, a police chief at GAECO who was part of the investigation, told InSight Crime.
The scheme involved around 1,000 gas stations across the country, while the PCC reinvested the laundered proceeds to purchase goods such as a port terminal and 1,600 trucks to transport fuel.
Following the operation, Brazil’s Finance Minister Fernando Haddad announced changes in the regulation of fintechs, reclassifying them as financial institutions in an attempt to close down the money laundering pathway used by the PCC in the case. On August 29, fintechs started following the same rules as traditional banks, such as reporting suspicious transactions to Brazil’s Financial Activities Control Council (Conselho de Controle de Atividades Financeiras – Coaf) and being subject to increased monitoring by the Federal Revenue.
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Brazil’s new regulations for fintechs represent an important first step in tackling money laundering through digital banks, which were used to launder 52 billion reais (around $9.5 billion) over the past four years, according to Finance Minister Fernando Haddad. However, weak oversight and enforcement of Brazil’s anti-money laundering mechanisms mean the PCC and other organized crime groups will likely continue to use fintechs as a parallel banking system.
The new regulations will bring fintechs in line with the rules governing traditional banking and financial organizations in Brazil, which must report suspicious operations to Coaf. This, authorities hope, will shine a light on this key element of what has become a shadow economy exploited by the PCC and other criminal networks. “We hope that this regulation will bring benefits in terms of greater control over transactions and enable the state to regain control of the country’s economy. Because, as far as we can see, there is a parallel state now, with a parastatal economic arm,” Ivana David, a judge at São Paulo’s Court of Justice, told InSight Crime.
However, even traditional financial institutions can easily report false values to hide illicit operations, as there is no direct external oversight of the Know Your Customer (KYC) and Anti-Money Laundering (AML) documents that companies should use to flag irregular transactions. And although the reform brings fintechs into the same regulatory framework as traditional banks, these platforms still have a long way to go to meet the regulatory standards of these long-established institutions, and so their implementation of the new requirements is likely to be weak.
“Criminals exploit regulations that exist but are not enforced precisely to launder illicit money,” David said.
Furthermore, in many cases, the PCC can easily manipulate financial reporting, as it has members working on the inside of businesses and financial institutions. This was the case in the adulterated fuel laundering scheme, where alleged PCC member Mohamad Hussein Mourad, alias “Primo,” was a partner at two of the companies involved and stands accused of using his position to coordinate the money laundering.
“A network of service providers for crime took shape [inside financial institutions], and in some cases we are finding that they actually belong to the criminal organization itself,” police chief Gabriel told InSight Crime.
What’s more, even if the fintechs report suspicious transactions to Coaf, there is a high possibility that no further actions will be taken, as only around 3% of such reports lead to an investigation, according to Guilherme Gueiros, a criminal lawyer at Opice Blum, Bruno Advogados, who specializes in cybercrime.
“Today, Coaf does not have the structure, financial, and human resources to handle the work they are tasked with doing, because there is a huge volume of suspicious operations that they must analyze on a daily basis,” he said. “I believe that strengthening Coaf is fundamental to increasing effectiveness. The agency’s new president, Ricardo Saadi, faces a significant challenge, but also brings the skills needed to drive meaningful change.”
Featured image: Brazilian real banknotes in front of a financial market chart. Source: GSA