BUSINESSWEEK ONLINE : FEBRUARY 26, 2001 ISSUE
INTERNATIONAL -- LATIN AMERICAN BUSINESS

Brazil's Thriving Gray Market for the Greenback (int'l edition)
Its crackdown on tax cheats gives dollar dealers a boost

Glance at the front page of most Brazilian newspapers, and you'll see a column listing rates of exchange for the Brazilian real against the U.S. dollar. There's the commercial rate: the rate at which a bank will exchange reals for greenbacks. There's the tourist rate: the slightly less favorable rate a visitor will get from a currency exchange booth. And there's the parallel rate. Er...the what?

The parallel rate is the one offered by Brazil's doleiros--individual currency dealers who don't represent banks, don't work the tourist trade, and who apply a certain amount of discretion to their craft. It's a comparatively small market: There are no hard figures, but currency traders reckon it turns over some $20 million a day, compared with about $3.5 billion on the commercial market. Yet the parallel market, or paralelo, plays a key role in depriving the Brazilian treasury of precious tax revenue.

Here's how the paralelo works. A doleiro exchanges reals for dollars and, at the customers' request, deposits the greenbacks into an overseas account--with no questions asked. When a customer wants to bring the money back into Brazil, the doleiro turns the dollars back into reals and deposits them in a local account. To facilitate business--and escape scrutiny--doleiros maintain scores of bank accounts in Brazil as well as abroad, usually in New York, Miami, or Switzerland. And their clients run the gamut from drug traffickers to foreign executives stationed in Brazil.

The doleiros thrived in the years when inflation raged at 2,000% a year and Brazilians did not trust their money or their banks. The relative price and currency stability Brazil has enjoyed since 1994 has forced many doleiros to close down shop. Off the record, the dealers will tell you they miss the good old days. ''I'm not doing much exchange any more,'' says one who turned over $6 million a day during the boom years.

TAX DODGERS. But the doleiros who have hung on are suddenly seeing a pickup in business. A crackdown on tax evasion has sent Brazilian companies and individuals with income to hide scurrying to the paralelo. The surging demand for grey-market greenbacks explains the widening gap between the parallel and commercial exchange rates since December. At one point in early February, the parallel rate reached 2.15 reals per dollar, while the commercial rate stood at 2.00.

For tax dodgers, the paralelo is a useful tool. While Brazil's big--and closely audited--companies tend to play it straight, small and midsize companies often keep two sets of accounts--one factual, one doctored. ''Almost everybody has some off-book sales,'' says a partner at an international auditing firm in Sao Paulo. To conceal their profits from the tax man, companies convert reals into dollars through the paralelo and transfer the money overseas.

Brazil's tax authorities want that money back in Brazil. Everardo Maciel, who heads the Federal Revenue Secretariat, will not hazard a guess on how much revenue is lost through tax evasion each year. But he does know this: Among the 11.7 million individuals who failed to submit income tax returns for 1998, a mere 139 were responsible for bank transactions totaling $58 billion during the year. ''They're mostly doleiros,'' he says.

The current crackdown on tax evasion may give Brazil's doleiros a short-term boost. But it poses a threat over the long term to the paralelo. Thanks to laws introduced in January, tax inspectors can now identify individuals and companies that are moving amounts of money through the banking system not in proportion to their declared income. So trying to hide income through the paralelo may grow increasingly difficult.

The doleiros are defiant. ''This market will never die,'' says one. After all, he and his brethren provide a much-needed service.

By Jonathan Wheatley in Sao Paulo

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