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Paraguay's new president, target of undercover US probe, is a millionaire tobacco magnate

The man taking over as Paraguay's new president Thursday has built a family fortune in one of the most unequal places in South America, dominating industries from banking to tobacco to soft drinks to soccer.

The 57-year-old Horacio Cartes also is a political neophyte who never registered to vote before running for president, and he's often faced accusations that his family's fortune was fed by money laundering, cigarette smuggling and drug trafficking.

Paraguayan voters overlooked these allegations, focusing instead on hopes that the boyish-looking businessman from the dominant Colorado Party can help the country reap more benefit from windfall soy profits that are boosting the economy at 10 percent a year.

His Grupo Cartes has grown quickly to include more than two dozen companies employing 3,500 people, and he won April's election with 46 percent support by promising to use his expertise to create more jobs. Inaugural organizers said his most important encounter Thursday would be a lunch with 150 foreign executives eager to improve the economic infrastructure in the country of 6.2 million people, where 39 percent of people live in poverty.

"We have declared war on poverty, and from this government we will call no truce," Cartes said in his victory speech.

His elected predecessor, Fernando Lugo, also promised to combat poverty, and like Lugo, Cartes is a political outsider, having joined the Colorado Party only in 2009.

Otherwise, the divorced tobacco magnate is about as different as can be from the sandal-wearing Lugo, a former Roman Catholic bishop who was impeached last year after losing congressional support.

Smuggling, corruption and tax evasion are endemic in Paraguay, and analysts believe it's difficult for executives not to come in contact with criminals at some point. The corruption watchdog group Transparency International ranks Paraguay 150th worst out of 176 countries. The U.S. Congressional Research Service reported in 2010 that "corruption is a major impediment to consolidating democratic institutions" in Paraguay.

Accusations involving Cartes became widely reported after WikiLeaks published a 2010 U.S. State Department cable that labeled him the head of a drug trafficking and money laundering operation.

He denied this in his only news conference with foreign media during the campaign, saying: "I wouldn't want to be president if I had ties to drug traffickers."

"Go to the courts and check. There's nothing, not a single charge against me. For years I've been a public figure in football, but as soon as I get into politics these kinds of stories pop up, circulated by bad people," he said.

Cartes and his top executives aren't listed by the U.S. Treasury's Office of Foreign Assets Control as people whose assets should be blocked. U.S. citizens are not prohibited from dealing with them.

Cartes did spend 60 days in jail in 1986 during a currency fraud investigation, after allegedly making millions of dollars on a central bank loan that he obtained at a preferential exchange rate and then moved through his money exchange business before buying farm equipment in the U.S. That case was eventually dropped.

The region's well-documented trade in contraband cigarettes, smuggled over borders and resold without paying taxes, also made his tobacco companies a target of congressional and criminal investigations in Brazil, and in Argentina nearly half the cigarettes seized by tax agents recently come from his companies. Cartes said any smuggling is done by others, and dismissed the issue as "a customs problem."

Cartes expanded his currency exchange operations into one of Paraguay's largest private banks, Banco Amambay. He bought vast land holdings along Paraguay's porous border with Brazil, developed tobacco farms into the country's largest cigarette maker, bought Paraguay's largest soft-drink bottler, and purchased its top professional soccer club, Libertad.

He exports Palermo cigarettes to the U.S. and imports Budweiser beer and Cuban cigars. He also leveraged his father's job as Cessna's Paraguay representative into an aviation company which has 80 planes and has trained most of the country's civilian pilots.

His family's total wealth is unknown because Paraguay doesn't enforce transparency laws. Cartes avoided answering tough questions in detail as he campaigned.

But U.S. officials said they were concerned enough to infiltrate his companies with undercover Drug Enforcement Administration agents to disrupt what they believed to be an organized crime operation that banked drug profits made in the Tri-Border Area, or TBA, a smuggling hotbed where Paraguay meets Argentina and Brazil.

"Agents have infiltrated Cartes' money-laundering enterprise, an organization believed to launder large quantities of United States currency generated through illegal means, including the sale of narcotics, from the TBA to the United States," the 2010 U.S. cable said.

Another cable, sent in 2007, reported that Paraguay's anti-drug chief, Hugo Ibarra, had told a U.S. Embassy official that the head of the nation's anti-money-laundering agency, Gabriel Gonzalez, was really working for Cartes and Banco Amambay. Ibarra said Gonzalez told him that "80 percent of money laundering in Paraguay moves through that banking institution," the cable said.

Cartes drew more attention once he began selling Palermo cigarettes across the United States in 2008, at prices 20 percent below the competition.

Representatives from Phillip Morris, British-American, Reynolds and Imperial tobacco companies met with officials from the DEA, the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives and the Justice and Treasury departments in a Panama City hotel in December 2009 to coordinate an undercover attack on Cartes, code-named "Operation Heart of Stone," the 2010 cable said.

Former CIA agent Frank Holder, whose mission included Paraguay, sees Cartes' political career as an insurance policy against U.S. interference.

"He had zero involvement in politics until 2008, when he goes into it in a big way," Holder said. "And that's when the Operation Heart of Stone case, which came out in WikiLeaks, starts going full swing."

Cartes insists he sought the presidency to improve Paraguay's economy, fight poverty and attract more foreign investment.

U.S. Embassy spokesman Christopher Istrati in Asuncion said he can't discuss classified documents or criminal investigations.

Cartes' profile so pleased Colorado Party leaders that they waived rules requiring candidates to have a decade of party membership, and made him their nominee.

"We saw that Cartes was the best option we had for returning to power because he came from outside of politics, with great success in business, and we believe that he can help diminish poverty," party leader Mario Arzamendia said.

Lugo's 2008 victory interrupted more than five decades of Colorado Party rule, which included the 35-year reign of dictator Alfredo Stroessner, but he lacked the money and votes to accomplish much. Cartes, in contrast, is seen as capable of doing anything he sets his mind to.

"Before, you had Lugo who had no support," Holder said. "This guy can say, 'You're in, you're out' and make it stick. This guy will have real power in Paraguay."

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Associated Press writers Pedro Servin in Asuncion, Michael Warren in Buenos Aires, Argentina, and Pete Yost in Washington contributed to this report.