Caribbean & Central America - September 2026

In mid-July Luisa Napolitano, the general manager of Panama’s Colón free trade zone (FTZ), was compelled to publicly deny reports that the FTZ is a centre for contraband trade. Speaking at a press conference after announcing a new US$250m investment to upgrade the FTZ’s facilities, Napolitano said: “They need to stop calling it a smuggling hub. It isn’t one. We’re in control of everything”. Her remarks were in response to a report assessing smuggling in Central America by US-based non-profit Transnational Alliance to Combat Illicit Trade (Tracit) published on 8 July which named the Colón FTZ as a “central vulnerability” in Central America’s efforts to address widespread contraband and smuggling.

Established in 1948, the Colón FTZ is the largest free port in the Americas, located on the Atlantic entrance to the Panama Canal, and one of the largest in the world. A low-tax hub home to numerous multinational corporations, it functions as a major centre for the re-export of commercial goods, mostly to markets in Latin America and the Caribbean, and operates as an autonomous legal entity within Panama. However, according to the Tracit report, titled Assessing Central America’s Performance on the Illicit Trade Index, while Colón represents “a major engine for legitimate commerce” in Panama, it is also “widely used for smuggling, trade-based money laundering, and the distribution of illicit goods”. The report adds that “criminal networks regularly exploit the zone as a hub for concealment, extortion, and regional distribution, with recent operations in early 2026 dismantling multi-million-dollar smuggling rings tied to tobacco and illicit goods, including the arrest of customs officials implicated in facilitating control-evasion schemes”.

The report’s findings have threatened to overshadow Napolitano’s investment announcement, with Panamanian authorities attempting to counter the narrative by spotlighting recent institutional efforts to combat illicit trade within Colón. Speaking at an event hosted by Panama’s main business lobby Cámara de Comercio, Industrias y Agricultura de Panamá (CCIAP) on 15 July, Napolitano struck a defiant tone when addressing the findings of the Tracit report, stating “my hand does not tremble when it comes to defending my country, and I do so with evidence”. She grumbled that “these observations do not reflect the substantial progress” achieved by the FTZ administration over the past two years, saying that “a comprehensive transformation of operating systems has been carried out, with significant investments in technology, strengthening of security and control protocols, and the establishment of strategic alliances with key government entities”. The Tracit report itself, which also acknowledges some more general improvements in Panama aimed at addressing illicit trade, highlights US support for strengthening Panama’s customs capacity, noting for instance that in May 2026, the US and Panama launched “advanced cargo scanners” in the Colón FTZ to target smuggling networks.

• Panama

According to the Tracit report, Panama’s most significant recent regulatory achievement is its removal from the grey list of the Organisation for Economic Co-operation and Development (OECD)’s Financial Action Task Force (FATF) which took place in October 2023, while in March 2024, the European Union also removed Panama from its list of high-risk third countries [SSR-24-06]. The Tracit report singles out among key measures a 2021 law raising anti-money laundering (AML) non-compliance penalties to US$5m and the adoption of a single registry of beneficial owners (RUBF in the Spanish acronym), as per 2020 legislation.

Just days after Napolitano’s statements, on 28 July Panama’s customs authority (ANA) announced a major seizure of contraband cigarettes with a reported commercial value of up to US$16m in an operation named ‘Khaleesi 2.0’. Indeed, the Tracit report describes Panama as the “most critical regional hub and transit point for the illicit cigarette trade in the Western hemisphere”, citing estimates that nearly half of all cigarettes consumed in South America and the Caribbean transit through the country, while domestically illicit cigarettes are estimated to make up to 92% of Panama’s tobacco market. The Tracit report highlights that official corruption inside port and customs authorities also plays a critical role in facilitating illicit trade, as evidenced by the January 2026 arrest of a multimillion dollar smuggling ring whose ranks included three serving and one former ANA official. According to the report, the failure to enforce Panama’s already sophisticated customs and legal frameworks is the principal barrier to combatting illicit trade – with port authorities inspecting only a “small share” of the roughly eight million containers that pass through the country each year.

Regional context

The issues facing Panama with regard to smuggling feature elsewhere in Central America, with the Tracit report underlining “structural conditions and regulatory shortcomings that enable illicit trade” across the sub-region. These include “gaps in supply chain monitoring, the widespread abuse of free trade zones, high levels of informal economic activity, entrenched corruption, and uneven enforcement capacity”.

The report also underlines the “uniquely strategic position” occupied by Central America, as a “critical bridge between South American production zones and North American and global consumer markets” while pointing out that at the same time it has also become “one of the most exposed and structurally vulnerable regions to illicit trade, functioning simultaneously as a transit corridor, redistribution centre, and end-market for a wide range of illicit goods.”

In order to compare the different countries, the report provides an Illicit Trade Index which evaluates and ranks countries on their national resilience and structural capability to guard against illicit trade, with higher scores meaning better defence against illegal trade, while low scores reveal high vulnerability. The index assesses six categories: taxation and economic environment; regulatory framework and enforcement; criminal enablers of illicit trade; trade, customs, and borders; supply chain intermediaries; and sectoral indicators of illicit trade.

The sub-region’s two highest performers are Panama and Costa Rica, reflecting their “relatively more developed institutional frameworks and greater integration into global systems”. Costa Rica scored 51.2 out of 100 while Panama scored 49.6, followed by El Salvador (45.8), Belize (43.9), Guatemala (43.1), Honduras (39.3), and Nicaragua (33.3). However, even Costa Rica lags behind moderate performers at a global level, with Central America trailing all other regional blocs bar Africa. Despite recent achievements, the Tracit report cites estimates by the Costa Rican chamber of commerce that counterfeit trade costs around 2% of the country’s GDP.

• Progress

According to the Tracit report, in recent years Costa Rica has made two notable achievements in improving its capacity to combat illicit trade. First, it joined the Organisation for Economic Co-operation and Development (OECD) as a member in 2021, becoming the first country from Central America to join the organisation. The report also highlights that more recently, in June 2025, Costa Rica became the first country in the Americas to receive an OECD certification for its free trade zones La Lima, which is located in Cartago province, and Coyol, which is located in Alajuela province.

Costa Rica’s score of 51.2 translates to a global ranking of 68^th of 158 countries while Panama’s score of 49.6 places it in 81^st place. El Salvador is considered to occupy a “middle tier”, with its score translating into a global ranking of 96^th while Guatemala, which ranks 106^th, Honduras (129^th), and Nicaragua (149^th), are the most at-risk.

As regards Guatemala for instance, the report highlights that urban markets there are flush with counterfeit pharmaceuticals, fake apparel manufactured in Asia, and illegal alcohol and cigarettes. The report cites estimates that Guatemala has a shadow economy comprising nearly 50% of GDP and valued at roughly US$153bn annually, sustained by a political economy “in which illicit and legitimate commerce have become structurally intertwined”. In Honduras, the Tracit report states that “broader economic estimates (including the shadow economy, historically ~30–40% of GDP in various analyses) [which] highlight the scale relative to Honduras’s ~$37–$38bn billion nominal GDP”. Nicaragua, meanwhile, stands as the region’s worst performer, according to the report, which highlights that, under the authoritarian government led by co-presidents Daniel Ortega and Rosario Murillo, illicit trade is “not merely facilitated but structurally enabled at the highest levels of power” producing what the authors refer to as “an environment of near-total impunity”.