US embassy cable - 05SANTIAGO1739

UNCLAS SECTION 01 OF 03 SANTIAGO 001739 
 
SIPDIS 
 
STATE FOR WHA/BSC; STATE PLEASE PASS TO TREASURY 
 
E.O. 12958: N/A 
TAGS: SNAR, PGOV, EFIN, PTER, CI, OVIP 
SUBJECT: A/S GLASER'S AUGUST 25-26 VISIT TO CHILE: 
SCENESETTER 
 
REF: SANTIAGO 1712 
 
1. Summary: Following a successful run on the international 
stage, Chile is shifting its focus to domestic issues and its 
December 11 presidential and congressional elections.  Former 
Defense Minister and ruling coalition candidate Michelle 
Bachelet is the favorite to succeed President Lagos.  Chilean 
chief executives are legally barred from seeking re-election. 
 All three main presidential candidates are likely to keep 
the country and our relationship on track.  Chile's economy 
is robust and stable.  In June, a historic, country-wide 
judicial reform went into effect in Santiago, the last of the 
municipalities.  Chile's Financial Intelligence Unit (FIU) 
has taken positive steps to combat money laundering and 
terrorist finance.  However, the Constitutional Court deemed 
laws empowering the FIU unconstitutional in early 2004; new 
legislation designed to restore those powers has been 
submitted to Congress but not passed.  A general lack of 
awareness and, in some instances, denial complicates Chile's 
ability to combat money laundering.  Chile remains on the 
terrorists' least desirable list, but its porous northern 
region provides easy access for terrorism financing and 
narcotics trafficking.  A Department of Treasury team visited 
Chile during the week of July 25-29 to assess Chile's gaming 
industry.  The team will return during the week of September 
12-16 (at Chile's request) to assist the GOC in developing a 
structure to review potential casino vendors.  End summary. 
 
------------------------------------- 
FROM APEC TO COMMUNITY OF DEMOCRACIES 
------------------------------------- 
 
2. Minister of Interior Jose Miguel Insulza's May election as 
OAS Secretary General capped a successful six-month run on 
the international stage for Chile.  During this time, Chile 
hosted two high-level international meetings (APEC Leaders' 
Week and Community of Democracies Ministerial), concluded (in 
December 2004) a productive two-year term on the UNSC, and 
maintained a leadership role in Haiti peacekeeping efforts. 
Throughout, Chile generally proved to be a reliable and 
rational partner for the U.S. 
 
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DOMESTIC SCENE 
-------------- 
 
3. Chile will hold presidential and congressional elections 
on December 11, 2005.  This will be Chile's fourth 
presidential election since the end of the Pinochet era in 
1989.  The previous three elections were judged free and 
fair, and there is no reason to expect otherwise for the 
upcoming one.  There are currently four presidential 
candidates: the Socialist Party's Michelle Bachelet 
(representing the ruling Concertacion coalition); the 
Independent Democratic Union's Joaquin Lavin; the National 
Renewal's Sebastian Pinera; and the Communist Party's Tomas 
Hirsch.  (President Ricardo Lagos, who is riding high in the 
polls, as incumbent is constitutionally barred from serving 
consecutive terms.)  Bachelet, the Concertacion's 
presidential candidate and former defense minister, is 
leading in the polls.  She would become Chile's first female 
president if she wins.  Half the seats in both the Senate and 
the Chamber of Deputies are also up for election on December 
11.  The new president and members of Congress will take 
office on March 11, 2006. 
 
4. In recent years, Chile has taken a number of significant 
steps to strengthen democratic institutions and deal with the 
human rights abuses of the past.  In November 2004, the 
National Commission on Political Prisoners and Torture 
(Valech Commission) issued a landmark report on human rights 
abuses during the Pinochet era, and the judicial system 
continues to investigate and prosecute a number of human 
rights cases.  In June, a historic, country-wide judicial 
reform went into effect in Santiago, the last of the 
municipalities.  In July, Congress passed a number of 
constitutional reforms designed to increase civilian control 
over the military. 
 
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ECONOMY 
------- 
 
5. Chile's economy is the main reason behind President Lagos' 
70 percent approval rating.  The Chilean economy grew at an 
impressive 6.1 percent in 2004 -- almost double the rate in 
2003 -- and may do even better in 2005, due in large measure 
to a boom in global copper prices.  Bilateral trade increased 
over 30 percent during the first year of the U.S.-Chile Free 
Trade Agreement, and related cooperation on labor and 
environmental protection is going well.  Chile's inadequate 
protection of intellectual property rights remains a 
significant sore point, and both sides are anxiously awaiting 
better, new market access for beef and poultry.  The U.S. 
remains Chile's most important source of foreign investment, 
although Spain surpassed us in 2004 as the number one 
provider of foreign direct investment.  Since 1990, U.S. 
firms have invested over USD 16 billion in Chile, with a 
concentration in the energy, telecommunications and mining 
sectors.  U.S. companies generally praise Chile's mostly 
transparent but close-knit business climate. 
 
--------------- 
Regional Issues 
--------------- 
 
6. Chile has been increasingly willing to assume leadership 
roles in recent years.  Former Minister of Interior Jose 
Miguel Insulza was elected OAS secretary general in May.  In 
Haiti, Chile responded positively to the USG's request for 
support in February 2004, and self-deployed a battalion to 
Haiti within 48 hours.  Chile currently has approximately 600 
troops deployed there as part of the UN Mission, and a 
Chilean civilian serves as UN Special Representative.  In 
May, the Chilean Congress voted to extend Chile's troop 
deployment for six months to December 2005, with a provision 
that the Government can extend the deployment for an 
additional six months to June 1, 2006.  On Venezuela, despite 
its center-left political orientation, the governing 
Concertacion coalition is wary of President Chavez.  The GOC 
shares our frustrations with the Venezuelan leader's 
behavior, particularly his non-democratic ways, and is 
concerned that his rhetoric and actions (especially regarding 
Bolivia) could prove destabilizing for the region.  FM Walker 
met with the Venezuelan opposition group SUMATE in Santiago 
on August 9 (reftel). 
 
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MONEY LAUNDERING 
---------------- 
 
7. Money laundering is a criminal offense in Chile.  In 
December 2003, Congress passed a law calling for the creation 
of Chile's Financial Intelligence Unit (FIU), in part due to 
Chile's past failure to meet the international Egmont 
Standards.  The law requires that annual reporting of 
suspicious transactions by the financial sector become 
mandatory.  All cash transactions exceeding USD 12,000 must 
be recorded, and Chilean customs requires declaration of cash 
in excess of USD 10,000.  The law also expanded the 
definition of money laundering beyond narcotics-related 
activity to include any act of terrorism, illegal arms 
trafficking, fraud, corruption and prostitution.  Oversight 
of non-financial sector entities, such as money exchange 
houses and the gaming sector, was not included in the law. 
 
8. In early 2004, Chile's Constitutional Court deemed 
unconstitutional several aspects of the law.  This adversely 
impacted the FIU's ability to obtain information, lift bank 
secrecy provisions, freeze assets, and impose sanctions. 
Chile's stringent bank secrecy laws and deference to privacy 
appear to have been motivating factors behind the ruling. 
 
--------------------------- 
FINANCIAL INTELLIGENCE UNIT 
--------------------------- 
 
9. The FIU opened its doors in April 2004 under the direction 
of Victor Ossa, a former postal executive, and began 
receiving Suspicious Transaction Reports (STRs) from the 
formal banking center.  Six months later, 25 STRs had been 
submitted.  In October 2004, FINCEN representatives deemed 
the FIU as fully functional and in compliance with the Egmont 
definition of an FIU.  Today, a staff of 12 receives 
approximately 10 STRs per month. 
 
10. The laws governing the FIU do not specify a number of 
STRs to be received.  Nor do they explain what constitutes a 
suspicious activity, or provide sanctioning capability for 
reporting or not reporting suspicious activities.  With the 
country-wide implementation of judicial reform, any 
suspicious case involving money laundering requiring 
additional investigation is referred to the Public Ministry. 
The FIU has neither investigative powers nor powers to obtain 
court orders.  Nor can it obtain information from banks other 
than through an STR, which is initiated by the bank at its 
discretion.  Since the FIU's inception, no criminal cases 
have been opened.  Legislation that restores sanctioning 
powers, eases bank secrecy laws during investigations, and 
allows access to third party information is needed for the 
FIU to become fully functional. 
 
----------------------------------- 
COUNTER-TERRORISM/COUNTER-NARCOTICS 
----------------------------------- 
12. Chile remains on the terrorists "least desirable" list in 
the hemisphere.  The GOC has been supportive of U.S. 
counter-terrorism policies, particularly during its time on 
the UNSC.  Chile is a signatory to all 12 UN anti-terrorism 
conventions and protocols, and the UN International 
Convention for the Suppression of the Financing of Terrorism. 
 
 
13. The northern area of Chile is a focal point in the area 
of terrorism financing and narcotics trafficking.  This is 
due in part to Chile's border with Peru and Bolivia and the 
free-trade zone in Iquique, Chile.  Arica and Iquique, 
Chile's principal northern cities, are the main points of 
entry for the bulk of the cocaine which enters Chile from 
Peru and Bolivia through the land ports as well as by 
maritime traffic.  Chilean police estimates have two tons of 
cocaine being stockpiled in Arica on a monthly basis.  Money 
(generally euros or pesos) also takes advantage of the porous 
northern region, and is frequently trafficked along the same 
drug routes or sent directly to Santiago. 
 
14. Iquique is home to the Iquique Free Trade Zone (ZOFRI), 
which is known for its cheap products made primarily in China 
and Taiwan, as well as the importation and sale of used cars 
and car parts.  The bulk of these products are sold and 
exported to Peru, Bolivia, and the tri-border areas of 
Paraguay, Brazil and Argentina.  There is a growing Pakistani 
and Lebanese population in Iquique with business ties to the 
Free Trade Zone. 
KELLY