The American move to classify the two largest Brazilian drug gangs, “Primeiro Comando da Capital” and “Comando Vermelho,” as terrorist organizations does not appear to be just a passing security measure. Rather, it may result in a legal and financial crisis affecting large sectors of the largest economy in Latin America.
In a country where organized crime overlaps with transportation networks, real estate, informal services, money laundering, and cross-border trade, the impact of the classification may not be limited to the two gangs themselves, but rather extends to banks, companies, foreign investors, and sectors linked to supply chains, contractors, or areas of influence controlled by these groups.
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In this context, Brazilian Finance Minister Dario Durigan warned that the American decision may harm the Brazilian economy on several levels, including exposing foreign investments to risk, noting that this classification creates a new risk to investment in Brazil that did not exist before.
The Brazilian government tried to avoid this classification due to fears that it would pave the way for imposing sanctions on Brazilian banks that might unintendedly engage in transactions with members of the two gangs.
Economics of crime
The sensitivity of the decision stems from the fact that the two gangs do not operate solely as drug smuggling networks, but rather have parallel economic systems that control land, population, services, and informal markets. “Primeiro Comando da Capital” and “Comando Vermelho” originated inside Brazilian prisons, before they turned into two cross-border forces working in drugs, weapons, money laundering, illegal gold trade, and theft of shipments.
Security estimates indicate that these networks have become present or influential in at least 28 countries, benefiting from control over logistical corridors linking drug production areas in Bolivia, Peru, and Colombia to global export ports, especially through the Amazon Basin and the Solimões River.
According to a study by researcher on organized crime in Latin America, Henry M. Rodriguez, revenues from illegal activities estimated at about $273 billion annually provide criminal groups with huge financial resources that enable them to expand their economic and political influence within the countries of the region.
A recent study prepared by the Esfera Brasil Foundation in cooperation with the Brazilian Forum for Public Security reinforces fears of the expanding economic footprint of organized crime within the country. According to the study, major gangs are no longer limited to traditional illegal activities, but have succeeded in infiltrating vital economic sectors that include mining, real estate, fuel trade, public transportation, and other legal activities that are sometimes used to launder money or hide the proceeds of crimes.
The study estimates that criminal organizations generate revenues amounting to about 335 billion Brazilian reals (about 60.4 billion dollars) annually from the cocaine trade alone, which is equivalent to about 4% of Brazil’s gross domestic product. The researchers also monitored at least 21 legal and illegal activities through which illicit money flows inside and outside the country, through networks extending to countries in South and North America, Europe, Asia, Africa and Oceania.
The study showed the presence of 72 criminal organizations in Brazil, including two cross-border groups: “Primeiro Comando da Capital” and “Comando Vermelho.” The first is spread in 23 Brazilian states, with a strong influence on the borders with Paraguay and Bolivia, while the second is active in 20 states, especially in the north and northeast of the country.
Legal expert Pierpaolo Bottini, who participated in preparing the study, believes that the real economic danger lies in the expansion of these groups within legal activities, explaining that they no longer operate only in illegal markets, but rather are exploiting legal sectors to recycle money and hide the proceeds of crime.
He adds that combating these networks requires tracking funding sources and money laundering paths, and not being limited to traditional security prosecutions.
Another study issued by the Brazilian Forum for Public Security indicates that the country’s organized crime business model has undergone a significant shift in recent years. After investments in companies and legal activities were mainly used to launder drug money, these same sectors have become a major source of profits.
According to the study, the value of economic activities related to organized crime in the fuel, gold, cigarettes, and beverage markets amounted to about 146.8 billion Brazilian reals (about 26.5 billion dollars) in 2022, compared to only about 15 billion reals (about 2.7 billion dollars) estimated by the study for the cocaine trade in the same period.
This is the first study in Brazil that attempts to measure the impact of organized crime on the formal economy, and its results indicate that some legal activities have become more profitable for gangs than the drug trade itself.
In this context, Public Prosecutor Lincoln Gakia, who specializes in combating organized crime in the state of São Paulo, says that the “Primero Comando da Capital” gang has succeeded in infiltrating at least 13 economic sectors, as it invests in gas stations, car companies, real estate, construction companies, exchange companies, digital banks, financial technology companies, and investment funds, in addition to cryptocurrencies, mining, bus companies, waste management companies, betting companies, and even some football-related activities.
He added that companies run by gangs are no longer just front companies, as was the case years ago, but have become real companies that provide services and make profits within the formal economy, which makes it more difficult to track illegal money or separate it from legal economic activities.
The data shows that the largest sources of illegal revenue came from:
- The fuel and lubricants sector, worth 61.5 billion Brazilian reals (about 11.1 billion dollars).
- It was followed by the alcoholic beverages sector at about 56.9 billion riyals (about 10.3 billion dollars).
- Then gold extraction and production activities worth 18.2 billion riyals (about 3.3 billion dollars).
- The cigarette market is worth about 10.3 billion riyals (about 1.9 billion dollars).
Informal sector
The state of Rio de Janeiro is a clear example of the size of the parallel economy that could be affected by any widespread financial or security tightening. The state provides – according to 2019 data – about 5.7 million jobs, equivalent to 6% of the total jobs in Brazil, but the informal economy in it may add about 2.8 million more jobs.
This reflects the expanding size of the informal economy in Rio de Janeiro, as a large portion of commercial and service activities operate outside official tax frameworks, and in some cases within areas subject to the influence of gangs or militias.
It is estimated that about one in three jobs in the state are in the informal economy, compared to an average of one in four jobs in other Brazilian cities.
According to estimates based on the assumption that the average income of a worker in the informal economy is equivalent to half the minimum wage, that is, about 706 Brazilian reals (about 114 dollars) per month, the total wages circulating within this sector in Rio de Janeiro alone may amount to about 24 billion Brazilian reals (about 4 billion dollars) annually.
This number reflects the volume of economic activity that takes place outside the scope of full tax supervision and regulation, depriving the state of an important portion of revenues and complicating efforts to track financial flows.
Analysts at the Insight Crime website, which specializes in organized crime in Latin America, believe that the potential impact of the US classification may extend to companies and financial institutions that are not directly linked to criminal activity, but operate in sectors or regions where there are suspected links with criminal networks, which may raise compliance costs and increase scrutiny of financial and investment transactions.
Real estate and money laundering
The real estate sector is no less sensitive than the financial sector. In large areas of Rio de Janeiro, militias and gangs took advantage of the weakness of the state and the scarcity of affordable housing to build illegal neighborhoods and housing projects, before some of them were later legalized.
Data from the Municipal Secretariat for Urban Development and Licensing in Rio de Janeiro indicate that more than 8,000 urban development projects were legalized between 2009 and 2020.
Research institutions believe that criminal gangs may be responsible for more than 25% of these projects, which reveals a gradual transition from the extortion and protection model to a more profitable economic model.
This overlap, according to the “Insight Crime” website, makes real estate one of the most important points of risk if US sanctions turn into a careful examination of financial flows, real ownership, contractors and payment chains. Real estate companies, construction companies or services that have dealt with parties linked to gangs may face scrutiny from correspondent banks, investors or American parties, and they are not even aware of these connections.
The risks increase with the estimates of the Brazilian federal revenue authorities, which linked Primeiro Comando da Capital alone to assets and investment funds of about 52 billion Brazilian reals (about 10 billion dollars), distributed among sectors such as agriculture, construction, logistics and real estate.
Banks are under pressure
The danger of the American classification is that its impact does not stop at criminalizing the two gangs. Rather, it may open the door to broad financial penalties if the step is coupled with American rules to combat terrorist financing. Once the dollar or the American financial system enters any transaction, companies and banks become more vulnerable to scrutiny.
According to the analysis of the “Insight Crime” website, the Brazilian economy depends to a large extent on financing and trade channels denominated in dollars, which makes correspondent banks and international institutions more sensitive to any suspicion of association with entities classified as terrorist.
This may result in slower remittances, higher compliance costs, greater scrutiny of beneficial ownership, and some foreign banks may withdraw from dealing with high-risk Brazilian institutions.
These concerns recall the previous experience of Latin America, when correspondent banking relationships in the region declined by about 30% between 2011 and 2018 due to waves of risk reduction.
