FOZ DO IGUAÇU, Brazil (Reuters) - On a chilly morning, with a breeze blowing in from Paraguay, customs officials occasionally stop and search vehicles crossing Brazil’s busiest border point, looking for contraband.

A guard locks a gate at the media entrance to the Olympics Aquatics Stadium during a security alert REUTERS/Vasily Fedosenko FOR EDITORIAL USE ONLY. NOT FOR SALE FOR MARKETING OR ADVERTISING CAMPAIGNS.

Most passengers are poor Brazilians, carrying electronics they were commissioned to buy duty-free over the river in Paraguay’s Ciudad del Este, but there is a more dangerous trade too.

“It’s not unusual to find drugs or arms,” said Leonardo, a tall Brazilian customs official with a few day’s stubble who has been working the bridge for two years. “You start to get an eye for it,” he said, watching cars crawl across the open border.

With just days to go before the Olympics start in Rio de Janeiro, Brazilian security forces have shifted their gaze to an even more amorphous crime: terrorism.

They have increased checks at this border post - where tens of thousands of people cross back and forth every day - and have set up a control room with access to dozens of cameras watching different points of the frontier.

Intelligence officials have long pointed to this border region, home to a sizable Muslim community, as a weak point in Brazilian security.

With an estimated 500,000 foreigners descending on Rio for the Olympics and recent attacks on European cities raising security concerns, the daunting task of monitoring and controlling the border area between Brazil, Paraguay and Argentina has come back into focus.

Last month, Brazilian authorities arrested 12 people on suspicion of supporting Islamic State and discussing an attack during the Games.

It was the first time the government has admitted potential terrorist activity within its borders.

Police say they are monitoring a further 100 people with possible links to Islamic extremism, most of them here in the tri-border area, or TBA as it is known in security circles.

The point where Foz do Iguaçu in Brazil, Ciudad del Este in Paraguay and Puerto Iguazu in Argentina meet, is a popular tourist spot to access the thundering Iguazu Falls. It is also a major smuggling route.

In the labyrinth of market stalls lining the feet of high-rise shopping malls, where hookah smoke fuses with the smell of new sneakers and money changers swap wads of currency beside men offering guns for sale, the imagination can run riot.

The reality, however, is hard to pin down.

The only clear link between the 12 plotters arrested and this area is an alleged attempt by one of the group to buy an AK-47 rifle online from a shop in Ciudad del Este. Given the ease of acquiring weapons in Brazil’s major cities, the connection was dismissed by many as a greater sign of the group’s amateurism than the dangers of the tri-border area.

But police sources on the border admit the region is fertile ground for extremist movements.

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“There’s no doubt the situation suits a would-be terrorist,” one police source told Reuters. “Criminal activity, the flow of people, guns, and a well-established but closed Muslim community are all here.”

‘OFFICIALLY, NO TERRORISM’

Concern over the area as a potential fund-raising and access point for militants started after intelligence agencies traced attacks in Buenos Aires on the Israeli embassy in 1992 and the AMIA Jewish community centre in 1994 back to the region.

Those attacks, which killed 114 people, were blamed on the Lebanese militant political group Hezbollah.

U.S. intelligence officials drew links to the sizable Lebanese community in the tri-border area and money raised from certain shopping malls in Ciudad del Este.

Diplomatic cables published by Wikileaks from that period showed U.S. frustration.

“Officially, Brazil does not have terrorism inside its border,” read a message sent in October 2009 from the U.S. embassy in Brasilia. “In reality, several Islamic groups with known or suspected ties to extremist organizations have branches in Brazil and are suspected of carrying out financing activities.”

Another cable, from January 2008, said Brazil “remains highly sensitive” to claims “the TBA is a hotbed of terrorist activity.”

Such sensitivity appears to have been based on a desire not to hurt tourism in the region and a fear of stigmatizing Brazil’s Muslim community of about 1 million people, mainly in Sao Paulo, Foz do Iguaçu and the southern city of Curitiba.

The arrests in the run up to the Olympics, all carried out under a new anti-terrorism law passed in March, mark a significant shift in Brazil’s approach.

“The law facilitates greatly the sharing of information between police and intelligence services of different countries,” said Marcos Josegrei da Silva, the judge overseeing the investigation.

The prosecutor in the case, Rafael Brum Miron, summed it up even more simply: “If I’d had the same evidence six months ago, I would not have been able to do anything.”

Abdo Nasser Elkhatib, the imam of Foz do Iguaçu’s bright white mosque, also stressed cooperation and integration, saying he would alert the police if he suspected a member of his congregation of extremism.

But at the bridge, or on the river below, it is a different story. Logistical difficulties, corruption and a lack of resources compromise efforts to improve security.

10 MINUTE WALK TO HARDSHIP

Paraguay is a tricky neighbour. South America’s second poorest country behind Bolivia, legal and illegal commerce with Brazil is the lifeblood of Ciudad del Este.

Attempts to increase security by checking more people and cargo would slow the flow of goods and sound a death knell for Paraguay’s eastern border zone.

Despite being a 10 minute walk from Brazil, Ciudad del Este is considered a hardship posting for Brazilian diplomats. Its manic streets can feel lawless despite a heavy police presence.

On one visit, a fight broke out between motorbike taxi riders, who swarm on yellow bikes across the bridge like bees. One rider ripped off his helmet and smashed it repeatedly over the other’s helmeted head. Police and passersby watched with drowsy curiosity.

“It’s very difficult to manage the border,” said Angel Ibarra Mendoza, head of migration on the Paraguayan side, struggling to open his eyes as he walked out of the dark, sleepy migration office.

He pointed to a new white truck sitting idle in a parking spot. “That’s to help us with security for the Olympics.”

Brazilian officers are quick in private to discuss their own flaws. The federal police in Foz have put their own mayor under house arrest on charges of embezzling public funds.

Beyond corruption, there’s the problem of resources.

Out on patrol with the police in a seized smuggling boat, officers point at clandestine ports that line the Parana River. Wearing bullet-resistant vests against the occasional gunfire that comes from Paraguay, they motor past poor communities set along the river’s edge where smuggling has been the livelihood for generations.

“We’d need 10 times the personnel to really be able to police this border,” one officer says.