Peru burdened with $2 billion annual black market

Peru's illicit trade in alpacas -- where smugglers sell the animals to wool producers in countries such as Australia, New Zealand and the United States for up to $50,000 each -- has spiraled into a lucrative business that threatens local textile producers and could endanger the species in its native land.

The problem underscores the growth of Peru's $2-billion-a-year contraband and pirated goods trade, which is second only to Bolivia's in Latin America and flourishes because of tax hikes on legal goods and lax border security.

"If the illegal alpaca trade continues, the animals will really suffer. Smugglers only buy pedigrees and that robs Peru of its best genetic stock, debilitating the species and causing wool quality to fall," said Marciel Alvarado, a biologist Peru's National Council of South American Cameloids.

While the traffic of illicit goods, which range from sham toys like "Bod" the builder to software and cigarettes, is a worldwide phenomenon, it is so acute in Peru that everyone from poor alpaca herders to multinational companies such as British American Tobacco Plc is affected.

"It's so rife because more than half Peru's economy is made up of unregulated businesses that do not pay tax. Contraband has become almost normal," said Raul Saldias of the National Society of Industry's anti-contraband commission.

Peru's poor, who make up half the country's 28 million population, say they cannot afford to pay for genuine goods. A pirated music compact disc costs $2 on Peru's streets, while the genuine article costs around $16 in a shop in Lima.

DEADLY MEDICINES

Contraband robs the cash-strapped government of some $400 million in taxes every year, money that could go to pay for badly needed roads, hospitals and schools.

Peru also needs to clamp down on piracy to comply with a free-trade pact with the United States that it hopes to sign later this year. The pact requires that Peru uphold international copyright laws and intellectual property rights.

When oil giant Royal Dutch/Shell sold its gas station business in Peru last year, it cited fuel smuggling from Ecuador as a big factor in its decision to pull out.

Contraband goods -- some smuggled in from tax-free zones in Chile and others from Paraguay and China -- also include drugs, such as anti-impotence pill Viagra, that can be easily bought without a prescription at markets in Lima.

"The medicines can kill because they've passed their expiry date or because they are fakes," said Ruben Trajtman of Peru's consumer protection agency, Indecopi.

Music pirates control 98 percent of the Peruvian compact disc recording market, one of the world's highest rates, according to the U.S-based International Intellectual Property Alliance, which fights to stop piracy worldwide.

Companies such as Sony Corp. <6758.T> have left the music trade in Peru and local legal businesses have shut down.

PUTTING UP A FIGHT

BAT, the world's No. 2 cigarette maker, is holding on in Peru, despite a 23 percent rise in contraband cigarettes sales since 2002 due to tax hikes on tobacco.

This month, the company brought out a five-pack of cigarettes of its Hamilton brand that it says is not possible to falsify. "No one has the machine to do it. We had to build one specially," said BAT's Legal Director Gonzalo de Romana.

U.S. movie rental chain Blockbuster Inc. is also battling to keep open its Peruvian franchise, despite rampant video piracy that has commandeered much of its revenue.

"The switch to DVDs from VHS videos has made it so much easier to pirate Hollywood movies," said Jose Vega, the company's local manager. Blockbuster now offers unlimited films for $10 a month to make renting films more attractive.

At the urging of businesses, the government has begun to attack contraband and made hauls worth $6.5 million last year.

But criminal prosecutions are rare and corruption in the judiciary is a problem. Ernesto Aquilino -- Peru's most wanted smuggler -- was captured in 2003 but later freed as judges said there was not enough evidence to try him.

Business groups demand the government shut down the illegal markets in Lima. Politicians say that could create social unrest, as many poor Peruvians scrape by thanks to contraband.

"We can't stop illicit goods coming into Peru. We need to create tax-free zones to make contraband unattractive," said David Jimenez, president of Peru's southern Puno province.

Some $800 million in contraband enters Peru every year along its 500-mile (800 km) border with Bolivia.

Peru's National Society of Industries estimates the border is monitored by just 50 police. Officials declined to comment.

Source: Reuters Alertnet