An investigation uncovered "a complex and multi-million-dollar illicit firearms trafficking network from Europe to South America," Brazil's federal police said.
According to officials in Paraguay, a business there was responsible for importing the weapons from Croatia, Slovenia and the Czech Republic.
Through connections with Paraguay's military weapons directorate DIMABEL, the company would receive speedy authorizations to move the arms, Paraguay's National Anti-Drug Secretariat said.
Authorities raided the DIMABEL headquarters on Tuesday and arrested its former director, a high-ranking military official. The former head of Paraguay's Air Force was also detained. Investigators allege both were in direct contact with the arms traffickers. The two were not immediately reachable for comment.
The president of the company at the center of the alleged trafficking network, an Argentine, and his wife, an ex-model, were sought by authorities but have not yet been arrested.
Officials say the company, after importing the guns, would then shave off their serial numbers and resell them to intermediaries on the border between Paraguay and Brazil.
Those third parties would then resell the weapons to some of Brazil's largest gangs, they added.
The company moved an estimated 43,000 weapons to Paraguay worth around 1.2 billion reais ($242.21 million) over three years, Brazil's federal police said.
Paraguayan authorities said a raid had also been carried out in the U.S. state of Kansas. Those involved in the weapons trafficking would send money back and forth between Paraguay and the U.S. to "break up" large sums of money, they added.
($1 = 4.9544 reais)
(Reporting by Daniela Desantis and Kylie Madry)