US embassy cable - 05TEGUCIGALPA1317

C O N F I D E N T I A L SECTION 01 OF 02 TEGUCIGALPA 001317 
 
SIPDIS 
 
STATE FOR EB/IFD, WHA/EPSC, AND WHA/CEN 
 
E.O. 12958: DECL: 06/21/2015 
TAGS: EFIN, KJUS, PINR, ETRD, CU, CO, HO, MONY, NT 
SUBJECT: HONDURAN STEEL: A FRONT FOR CUBAN MONEY TRANSFERS? 
 
 
Classified By: ECONOMIC CHIEF PATRICK DUNN FOR REASONS 1.4 (B) AND (D). 
 
1. (C) SUMMARY:  On May 5, 2005, Mr. Antonio Kattn, owner of 
Honduran steel company Aceros Alfa, told ECONOFFS that he is 
facing unfair competition from Cuban government-owned 
competitor, Aceros Centro Caribe.  According to Mr. Kattan, 
Aceros Centro Caribe is importing production inputs (steel 
billets) from ACINOX, its Cuban parent company, at 
below-market prices.  Actual market value of the monthly 
shipments is estimated at $520,000 per month, but they are 
invoiced at only $380,000, implying a $140,000 per month 
profit.  In addition, Kattan believes that Aceros Centro 
illegally avoids paying sales tax on these inputs.  Moreover, 
according to Kattan, Aceros Centro Caribe has not paid its 
monthly invoices of $380,000 since October 2004.  It is not 
clear where these substantial cash revenues are going, or why 
a GOC firm would willingly continue to absorb such losses. 
Kattan said that Acinox maintains another subsidiary in 
Colombia and speculated that there may be narco-trafficking 
connections between the companies.  End Summary. 
 
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Tale of two steel companies 
--------------------------------- 
 
2.  (C) On May 5, Mr. Antonio Kattn, one of two owners of 
Aceros Alfa (one of the largest steel companies in Honduras) 
met with ECONOFFS to discuss "investment of the Cuban 
government in Honduras and its implications," and also a 
possible purchase contract with NUCOR, a Jackson, Mississippi 
steel company.  Kattan,s partner, Jose Lamas (the Cuban-born 
President of gasoline provider Dippsa and Banco Mercantil), 
asked Kattn not to come to the Embassy with the information, 
as he wanted to avoid 8bigger problems with the Cubans.8 
 
3.  (SBU) Aceros Alfa employs 167 people at its San Pedro 
Sula steel reinforcement bar (rebar) mill, and has an 80 
percent share of the Honduran rebar market, as well as 10 
percent of the Salvadoran market and 7 percent of the 
Guatemalan market.  It currently imports $5,000,000 of 
billets per month from Russia, Ukraine, and Brazil, which it 
then converts into various sizes of rebar.  It is currently 
negotiating a contract to source billets from U.S.-based 
supplier, NUCOR. 
 
4.  (SBU) Kattan,s competitor, Aceros Centro Caribe, S.A., 
was founded in May 2000 as a joint venture between Cuban 
government-owned steel company Acinox (which holds its 60 
percent share through an Aruba-based subsidiary, FIMSE, N.V.) 
and 2 Honduran businessmen (sons of Vice-President Lobo).  In 
2003, amidst significant corporate financial difficulties, 
the Hondurans divested their shares.  In 2004, an Italian 
engineer (NFI) working for Cuban parent company Acinox 
received 40 percent ownership in Aceros Centro Caribe in lieu 
of wages owed.  Since October 2004, Aceros Centro Caribe has 
increased its market share significantly and now has 5-6 
percent of the Honduran rebar market. 
 
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Allegations 
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5.  (C) After the Honduran investors divested themselves of 
their shares of Aceros Centro in 2003, the company 
drastically reduced operations for a year and a half, 
importing only 1000 tons of billets every 2-3 months.  Since 
October 2004, Acero Centro,s imports and production have 
grown substantially, and they are currently importing 1800 
tons of billets every month.  The market value of the 
shipment is estimated to be $520,000; however, Aceros Centro 
is reportedly only being invoiced $380,000 per shipment.  Mr. 
Kattan has written a letter to the Honduras Ministry of 
Industry and Commerce, raising these concerns, but has not 
yet received a response. 
 
6.  (C) Kattan also alleged that Aceros Centro is illegally 
benefiting under a GOH Temporary Import Regime.  This 
program, managed by the Ministry of Industry and Commerce, 
allows Honduran exporters to temporarily import inputs, 
incorporate them into the production process, and then 
re-export the finished good without having to pay the 12% 
sales tax typically due on imported goods.  Although Aceros 
Centro exports none of their product, they are importing 
their inputs without paying taxes due. 
 
7.  (C) The alleged transfer-pricing scheme would yield up to 
$140,000 in profits to the importer.  Additionally,  Kattan 
told EconOff that he had seen (and had access to) documents 
in the Dominican Republic proving that Aceros Centro has not 
paid even the discounted invoices due to Acinox.    It is 
unclear, therefore, where these substantial cash revenues are 
going, or why the GOC parent company would willingly continue 
to absorb such losses. 
 
8.  (C) Kattan alleges that the Cuban parent company 
maintains a similarly structured subsidiary in Colombia. 
When EconOff noted Honduran recent press reports of FARC 
connections between Colombia and Honduras, Kattan said that 
his instincts tell him that the Aceros Centro financial 
arrangement is related.  He also noted that there are several 
Chavez-affiliated organizations supported by the Venezuelan 
government operating both overtly and covertly in San Pedro 
Sula, and suggested that there may be a Cuban connection to 
these organizations.  EconOff pursued the point, asking why a 
GOC firm would absorb such losses, when generally the GOC is 
hungry for hard currency inflows.  Kattan told EconOff that 
he suspects the Cuban government could be using the alleged 
transfer pricing and payments arrears schemes to mask large 
transfers of funds to these leftist groups within Honduras, 
without having to use formal channels.  Kattan, however, 
could offer no proof nor cite examples of this. 
 
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Other considerations 
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9.  (C) Asked about his sources, Kattan said, "Every rebar 
that comes or goes in this country, I know about."  He said 
he must know his business and that's what he pays people to 
do.  He also said that within the last week, he had hired 
away one of 6 Cubans working for Aceros Centro. 
 
10.  (C) Kattan said his reasons for approaching the U.S. 
Embassy were two-fold.  First, while he described his own 
company's market-share position as solid, he admitted that he 
was unable to compete with Aceros Centro on rebar pricing, 
which is consistently 5 percent below what Kattn considers 
market price.  He therefore has a strong economic incentive 
to enlist our help in countering what he considers unfair 
competition.  Second, he expressed concern that the funds 
generated by these companies are supporting subversive 
elements of Honduran society, and as a businessman and 
citizen, he wants to see Honduras remain a stable home for 
his business and family. 
 
11.  (C) Comment:  Post has requested but not yet received a 
copy of the documentary evidence of the under invoicing 
alleged by Kattan.  We do not discount Kattan,s allegations, 
and will seek additional information on Aceros Centro and its 
activities.  That said, Kattan has clear personal economic 
interests in convincing us that his business competitors are 
a threat to USG or GOH national security, and we remain 
appropriately skeptical of his claims.  In addition to 
speculation of possible narco-trafficing connections between 
his competitor and Colombia, Mr. Kattn also speculated that 
the missing funds might support Chavista elements active both 
overtly and covertly in San Pedro Sula, Honduras, industrial 
capital.  All investigations have indicated that this is 
false and that no such groups exist.  Thus, this allegation 
detracts from Mr. Kattn,s credibility.  Mr. Kattn was 
eager to mention any possible hot button that might rouse 
U.S. ire.  Even if the transfer pricing, market dumping, and 
tax evasion allegations prove true, they could merely be the 
result of workaday corruption in Honduras.  Corruption runs 
rampant in Honduras corporate dealings, and corrupt practices 
in pricing and invoicing would not surprise us.  Moreover, 
Honduran public and private sector officials have in the past 
played on U.S. fears (communism, terrorism, and most 
recently, gangs) through exaggeration or even fabrication of 
alleged threats to advance their own agendas.  End Comment. 
Palmer