How Ecuador became a safe haven for the world's dirty money

The country is now a washing machine for illegal profits that sprouted a drug trade

US-dollar-foreign-reserves-Reuters Representation image | Reuters

How has Ecuador’s use of the dollar as its official currency inadvertently turned the nation into a prime destination for laundering illicit profits from drug trafficking and other crimes?

Speaking exclusively to THE WEEK, Ecuadorian analyst Raul Portero says it is dollarisation that has allowed billions in dirty cash to enter the country and provided traffickers an ideal place to conceal shady transactions which, in turn, created a narcostate.

Experts agree.

Money laundering now constitutes a serious challenge in Ecuador, with criminal proceeds filtering through all levels of society. Dollarisation and lax oversight provided ideal conditions for large-scale laundering to take root.

By ditching its unstable national currency in 2000 and adopting the dollar instead, Ecuador was able to stabilise its economy and attract investment. But an unintended consequence was opening the floodgates to laundering operations.

With transactions denominated in dollars, restrictions on currency exchange disappeared, allowing dirty cash to readily enter the country. Layers of shell companies mask financial transfers, while weak reporting rules and enforcement provide the prime environment for laundering networks to thrive.

Early on after dollarisation, a flood of traffickers attracted by the ability to launder profits infiltrated the police and armed forces. So much was going on that the traffickers began to pay the police and military with drugs instead of money. That gave birth to a domestic drug trade in a country that has not had a history of cocaine production.

Gathering strength by the newly moneyed corrupt police and military has resulted in deeper penetration of the mechanisms once used to protect against illicit drug trade. As you will read below, this is the cauldron that made Ecuador into a narcostate, with its sovereignty as a country functioning as a front for sophisticated criminal networks who now rule the streets violently.

Government data show most money laundering cases involve foreign individuals, predominantly men, smuggling dollars into Ecuador through airports and seaports. In some reported cases, couriers were caught red-handed with suitcases of cash.

Experts estimate laundered funds now account for between 2.5 per cent to 6.3 per cent of Ecuador’s GDP; translation: up to about $6.30 of every $100 in Ecuador is laundered money.

One common technique involves buying goods and services from “ghost” companies used to justify transfers; these are merely phantom entities used to confuse authorities and obscure the source of the funds.

Ecuador provides an object lesson in how even well-intentioned economic policies can produce damaging criminal side effects. Now ensnared by global drug profits, the nation serves as a conduit between producers in Colombia and Peru and international markets, with deadly spillovers at home.

The left-leaning Center for Strategic Research says illicit deposits spiked after 2017, coinciding with deregulation that boosted bank profits. In its research, the centre employed an innovative methodology analysing discrepancies between money supply growth and economic activity.

The study resonates with more significance in the context of Ecuador's escalating violence, which saw in the last months contract political assassinations, which experts link to laundering.

While dollarisation brought stability, eliminating currency controls opened the floodgates to shady inflows. Suitcases of cash enter via porous borders, says Portero.

Networks of front businesses have sprouted to justify dubious transfers, with lax oversight enabling sophisticated networks to thrive. Funds come from trafficking drugs produced in neighboring Colombia and Peru using Ecuador as a transit point.

Beyond distorted economic data, laundered money raises costs for citizens and boosts cartel power while debilitating institutions. Portero says only a sliver of illicit flows gets detected, much less deterred.

The groups profiting range from corrupt officials to human traffickers, arms dealers, and, most lucratively, drug cartels. Colombia and Peru's heavy cocaine production gave traffickers reason to use neighboring Ecuador as both transit point and washing machine for profits.

The distortions go beyond the criminal underworld. Laundered funds artificially inflate economic output. And injecting billions of dirty dollars into the economy tips markets, drives up costs for regular citizens dependent on imports and promotes damaging policies catering to criminal enterprises.

Ecuador provides cautionary lessons for nations considering dollarisation such as Argentina, the second-largest South American economy and a member of the G20. While stable currency and investment may benefit law-abiding industries, lax regulation and enforcement can allow criminal groups to hijack the system.

Reining in laundering remains difficult despite some regulations, says Portero. Forensic accounting can identify suspect transactions. But ultimately global cooperation is needed to choke off flows of illicit cash and stem the profound public impacts.

To add to the small South American nation's misfortune, it also finds itself enmeshed in the global drug trade and wracked by cartel violence, despite having no domestic production itself.

Speaking from Paris, Portero told THE WEEK that years of serving as a cocaine transit route have allowed money laundering to take root, with deadly consequences now erupting on Ecuador's streets.

Traffickers move the product by land and sea through Ecuador to reach lucrative markets in North America, Europe and Asia aided by the ability to conceal illicit profits due to the dollarized economy, Portero said.

While Ecuador long prided itself as a haven of stability in a turbulent region, "we fear the country is now following the path of Colombia in the 1980s and Mexico in the 1990s," added Portero.

During the presidential campaign, several candidates have warned that the country has been "handed over" to traffickers.

The most chilling sign was the brazen killing of an opposition presidential candidate Fernando Villavicencio, on Quito Street last month. Other politicians have also faced threats and attacks.

While some critics accuse outgoing President Guillermo Lasso for dismantling the system put in place by former president Rafael Correa, others blame Correra, who led Ecuador from 2007 to 2017 of enabling the cartel takeover through corruption and authoritarianism; his allies, however, say he improved social conditions using oil revenues. From his exile in Belgium, Correa keeps a hand in Ecuadorian politics.

In an analysis of the region across time, Ecuador's role as a drug transit point results directly from successes elsewhere.

As Colombia cracked down on cartels in the 1990s, routes shifted west. Located between Colombia and Peru, the world's largest cocaine producers, Ecuador provides a natural corridor — especially via its sprawling port of Guayaquil.

With political instability brought in large part by Lasso himself, the government is accused of having been infiltrated at all levels, including the police, courts and all levels of politics and law enforcement. The US Drug Enforcement Administration has named Ecuador is "one of the most frequented trafficking routes."

Billions in profits need laundering, while homegrown gangs now battle for control. Violence has surged along Ecuador's coast, where criminal factions are locked in fierce turf-battles for supremacy in the cocaine trade.

Notable in the game is the Choneros gang, an offshoot Los Lobos has been linked to the assassination of presidential candidate Villavicencio. Menacingly, these local gangs have joined forces with powerful foreign syndicates, forming alliances with Mexican cartels, Brazilian urban gangs, and La Cosa Nostra. Even Albanian mafia cells have been reported in the country.

Ecuador's crisis presents a microcosm of the costly failures of global drug policy after decades of fighting supply and cartels. With trafficking and violence instead spreading worldwide, Porter said Ecuadorians are going to the poll both scared and hopeful for a new approach.


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