Response: After you win a Power challenge, choose any gold or influence producing location controlled by an opponent, and take control of that location.

It appears that this could be exploited in such a way that Player A could take a dive on a challenge so that Player B can take control of a location from Player C, who had no possibility to defend against the attack. This is equivalent to Brazil attacking France and gaining control of Australia. Is this how the card is meant to be played?

Pretty much, usually the cards specify if the attacker/defender is the specific target and this says an opponent so as far as i know feel free to steal Argentina, although the reprisals may be dire

lord_darkseid said:

"Response: After you win a challenge by 4 or more total STR, choose a non-unique character controlled by the losing opponent. Take control of that character. Limit 1 per phase."

All sorts of shenanigans are possible when losing/attacking/defining is not defined on the card.