Revealed: The South American Connection (Terrorists)

A lawless frontier is helping to finance Arab extremists. Philip Sherwell reports from Ciudad del Este, Paraguay

They work from dawn until dusk on the traffic-clogged Friendship Bridge that runs across the Parana River between the seedy Paraguayan city of Ciudad del Este and its neighbour, Foz do Iguacu in Brazil.

By foot, bicycle and motorcycle or packed into cars, vans and buses, the people known as "ants" criss-cross the bridge several times a day with sacks and boxes laden with counterfeit cigarettes, pirated CDs and computer software and fake designer clothes.

For each run, they earn about $1 (62p), their share of one of the world's least regulated and most lucrative trading free-for-alls. The zone is known as the Triple Frontier, where Paraguay, Brazil and Argentina meet at a bend in the Parana near the horseshoe waterfalls of Iguacu. There are 80,000 journeys across the bridge each day.

To the north, on the man-made lake behind the Itaipu dam, smugglers skirt occasional Brazilian police vessels as they carry marijuana and cocaine by boat from Paraguay to Brazil and ship stolen vehicles back in the opposite direction. The money generated is near-impossible to calculate. Argentine officials believe that the figure for all cross-border transactions in the area could be $70 million (£44 million) each day.

Much of the business - legal and illegal - is controlled by a population of 30,000, mainly Shia Muslim Arabs who fled the Lebanese civil war. They run their enterprises from the shabby shopping malls and chaotic streets of Ciudad del Este but usually live in the more affluent Foz. Among them is a small but dedicated hardcore of militant Muslims. For years, often under the guise of charitable donations, millions of dollars have flowed from the Triple Frontier to Hizbollah, the Iranian-backed militant Lebanese Shi'ite faction. Money was also raised for Hamas, the Palestinian extremist group.

Despite a limited crackdown and handful of arrests by the Paraguayan authorities, David Aufhauser, the outgoing United States Treasury Department official on terrorist funding, last month described the Triple Frontier zone as home to a "rich marriage of drugs and terror". A senior US State Department official said: "In terms of terrorist financing, the area is a black hole."

The money trail is complex and difficult to trace but The Telegraph has learnt that American intelligence officials have electronically monitored cash transfers via banks in Sao Paulo and North America to a web of accounts in the Middle East linked to Hizbollah and Hamas. They also disclosed that the US has been using satellites to monitor telephone conversations in the area after learning that Middle East terror suspects were dialling so-called switching stations in Foz or Ciudad del Este and giving a password to have their calls re-routed to their destination.

The procedure made calls impossible to trace and avoided triggering interception mechanisms. More than a dozen switching stations have been found and closed down in recent months. To the frustration of the US, cracking down on the terror financing operations has been much more difficult, especially as Paraguay and Brazil want to resuscitate tourism at the falls and to avoid losing the Arabs' business acumen.

Corruption is rampant and financial controls have been lax for so long that they verge on the non-existent. Money-laundering is conducted through myriad front companies, under-invoicing is endemic and the plethora of foreign exchange offices, money-wiring companies and commercial banks offer ample scope for moving large sums unnoticed.

A recent Brazilian customs investigation indicated the scale of illicit financial movements through the Triple Frontier. It concluded that between 1996 and 2000, an estimated $35 billion (£22 billion) had been moved illegally from Brazilian accounts held in Foz via a Paraguayan bank in neighbouring Ciudad del Este to New York. "It is easy to understand Ciudad del Este," said a lawyer there. "All you need to know is that everyone here is a bandit."

US and local intelligence have also traced visits by several terrorist leaders to the Triple Frontier and believe that it was used as a staging post in the attacks on Jewish targets in Buenos Aires in the early 1990s. Al-Qaeda has contacts in the region. Tourist posters of the waterfalls were found in safe houses in Afghanistan but reports of terrorist training camps in the jungle have been widely dismissed.

In the Paraguayan capital of Asuncion, Sobhi Fayad is serving six-and-a-half years for tax evasion, a hefty punishment in a country where financial crimes are a way of life. The Lebanese trader from Ciudad del Este is a shabby figure with a wheezing cough who looks a decade older than his 36 years. His true offence, according to US intelligence and Paraguayan prosecutors, is a leading role in collecting funds for Hizbollah from other Lebanese businessmen but the country has no anti-terrorism laws so Fayad was prosecuted for tax evasion - the same tactic used by the American authorities finally to jail the mobster Al Capone.

Although Fayad denies the allegations, claiming that he was framed by a Lebanese business rival, the Paraguayans say he moved $1.8 million (£1.1 million) to foreign bank accounts and recovered a certificate of thanks for his donations from Hassan Nasrallah, the Hizbollah leader. "The Americans just wanted scapegoats after the September 11 attack," he told me during a brief meeting. "I was one of the unlucky ones."

Ciudad del Este's Arabs deny that they are harbouring terrorist supporters - although, in any case, Hizbollah is widely regarded as a legitimate political and military force. Fayad is a friend and former business associate of Assad Barakat, the alleged head of the Hizbollah fund-raising wing who is in jail in Brazil fighting extradition to Paraguay. The two men ran their computer games businesses from the Page Gallery in the heart of Ciudad del Este. When we visited it last week, we were quickly escorted off the premises by armed security guards.

Outside the nearby Islamic cultural centre, however, Tony Barakat was keen to defend his uncle. He said that he also had been framed, but then acknowledged that he had made "charitable" donations to Hizbollah. "Yes, some people here support the work of Hizbollah. We have to have guns, otherwise the Israelis would wipe us out. It is no crime that my uncle helped the orphans and widows of martyrs."

Just across the border in Argentina, Roberto Ontiveros, head of the anti-terrorism unit, dismisses such remarks. "Millions of dollars are going to these so-called charities," he said. "Just how many crutches and bandages can you buy?"

This little triangle in South America has a lot of the people down there very concerned. This is an excellent post and we need to be made more aware of the full extent of the penetration down there and what it means to our interests.

This is only half the story. Every year for twenty years a column appears in an American paper outlining the corruption in Ciudad del Este, Paraguay. However, in Foz de Iguassu, Brazil you will find a huge, private, Libyan country-club which is open to every Middle East gangster in South America, and a beautiful mosque has been constructed in Foz. Most importantly, the old Christian Syrian/Lebanese families who settled the Argentina-Brazil-Paraguay tri-border region and initiated commerce there in the early twentieth century have been forced out of business by Muslim Arab merchants who have bought off the governments of the three nations.

On numerous occasions the United States embassies have complained of the presence of known Hizbollah agents in the region, but they have become as welcome there as the expatriate Nazis were after WWII. (Among other things, the Assad family of Syria is involved in the trade of hashish for South American cocain.) It is a dangerous place that should receive more reporting than it gets.

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