US embassy cable - 05ASUNCION1047

C O N F I D E N T I A L SECTION 01 OF 04 ASUNCION 001047 
 
SIPDIS 
 
STATE FOR WHA/BSC, WHA/EPSC, EB/IFD/OIA 
STATE PASS TO USTR FOR LYANG 
USAID FOR AA/LAC ADOLFO FRANCO 
TREASURY FOR OSIA MAUREEN WAFER 
COMMERCE ITA SARA COOK 
NSC FOR MIKE DEMPSEY AND SUE CRONIN 
SOUTHCOM FOR POOLAD DAN JOHNSON 
 
E.O. 12958: DECL: 08/19/2015 
TAGS: ECON, EINV, EFIN, PREL, PA 
SUBJECT: PARAGUAY: EXPROPRIATION CASE A SETBACK FOR 
BUSINESS CLIMATE 
 
Classified By: Ambassador John F. Keane for reasons 1.4 (b) and (d). 
 
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Summary 
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1. (U) In a blow to Paraguay,s business climate, the Senate 
passed a bill on August 4 calling for the expropriation of 
52,000 hectares (130,000 acres) of land owned by Reverend Sun 
Myung Moon,s Korea-based Unification Church in Paraguay,s 
northern Chaco region.  It now must get through the Chamber 
of Deputies and GOP President Duarte before becoming law. 
Victoria S.A., a firm contracted by the Unification Church, 
manages the land that, according to politicians, will be 
given to local farmers and used for sustainable agrarian 
projects.  The Korean Government has expressed its concern 
over the bill and Victoria S.A. has said it will permanently 
leave Paraguay if its land is taken away.  It has already 
temporarily ceased operations and has terminated hundreds of 
temporary workers.  Local press reports speculate that the 
expropriated land will be given to over 850 people, some of 
whom are family members and friends of the involved 
politicians.  The Senate,s action, and President Duarte,s 
public support for the expropriation, undermines efforts to 
improve Paraguay,s reputation as a risky destination for 
capital investment.  That said, the expropriation appears to 
be progressing legally, and it will not be the first time 
land has been expropriated in Paraguay.  End Summary. 
 
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The Current Situation 
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2. (U) In early June, Congress introduced a bill calling for 
the expropriation of over 52,000 hectares (130,000 acres) 
from the company Victoria S.A., controlled by Reverend Sun 
Myung Moon,s Korea-based Unification Church.  The Senate 
passed the bill on August 4, and it will next be considered 
by the Chamber of Deputies. 
 
3. (U) President Nicanor Duarte Frutos originally said that 
he was not in favor of the bill because &it will send a 
negative message for foreign investment.8  Shortly before 
the bill was approved, though, the President adopted a 
different take on the issue, claiming local residents lived 
in a &semi-feudal8 arrangement and accusing Victoria, S.A. 
of not investing in the land.  He stated publicly that the 
government supports &private property that is productive, is 
utilized and that generates wealth.8  He claimed that 
Paraguay,s constitution sets forth the goal of avoiding the 
accumulation of unproductive large estates and conveyed 
concern about such large tract of land being owned by foreign 
interests.  President Duarte also implied in his remarks that 
Paraguay didn,t need foreign investment so much as the 
return of resources held abroad by Paraguayans.  The 
President has said that he will not veto the bill if it is 
approved by both chambers of Congress. 
 
4. (U) Victoria S.A. controls over 600,000 hectares (1.5 
million acres) around Puerto Casado, a town in Paraguay,s 
rural Chaco region.  Supporters of the bill claim that less 
than 1 percent of the property is being &properly8 used, 
and that some of the land would be given back to locals to 
own personal plots of farmland.  The remaining land would 
then be converted into sustainable beekeeping, cattle 
ranching, and milk producing operations as per Victoria 
S.A.,s original plans. 
 
5. (U) A similar bill proposing the expropriation of around 
160,000 hectares (400,000 acres) was pulled from the 
legislative agenda in early June, supposedly after Victoria 
S.A. agreed to donate a portion of the land to the town. 
Ultimately, no donation was made and the new bill was 
proposed only a day after the first one was removed. 
Following the passage of the bill by the Senate, Chamber of 
Deputies President Victor Bogado suggested that perhaps a 
&magical thought8 would lead the firm to donate some land 
before it is expropriated. 
 
6. (U) In June, Carlos Fillizola, the current President of 
the Congress from the socialist Country in Solidarity Party 
(PPS), agreed to form a coalition with the governing Colorado 
Party in exchange for Colorado support for (inter alia) his 
party,s initiative to expropriate Victoria S.A. property. 
Many commentators view the bill adopted by the Senate as 
evidence of the Colorado Party delivering on its promise in 
return for the PPS support for its candidate for Attorney 
General. 
 
7.  (U) When this bill originally went before Congress last 
June, the Korean ambassador expressed serious concern over 
the expropriation, claiming that it violates a bilateral 
investment agreement.  President Duarte,s official visit to 
Seoul in late June was canceled over the issue.  However, 
coming out of a meeting on August 9 with the Vice-President 
and several Congressmen, the Korean Ambassador lowered his 
rhetoric considerably, claiming the matter was for the GOP 
and Victoria S.A. to resolve rather than the Korean 
Government in coordination with the GOP.  The Taiwanese 
ambassador to Paraguay has warned the GOP publicly that the 
expropriation would be a negative sign for foreign investors. 
 
8. (U) Some Puerto Casado residents have vowed to blockade 
the only road into town to press for the expropriation.  A 
community radio station was also destroyed on the eve of the 
Senate debate of the bill, prompting President Duarte to send 
military troops to the area to control the situation. 
 
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History 
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9. (U) In 2000, the Unification Church and Korean national 
Mr. Park Koo-Bai jointly purchased over 600,000 hectares (1.5 
million acres) of land around Puerto Casado, in northern 
Paraguay, from its Argentine owner.  The property remains 
jointly registered to the Unification Church and Mr. Park, 
but Victoria S.A. has a management contract to develop it. 
(Note: Earlier this year, the Unification Church gave Mr. 
Park power of attorney over the entire property.  Mr. Park 
also owns a large company in Uruguay known as ATNIL S.A., 
according to the Korean Ambassador here.  End Note.) 
 
10. (U) There are lingering concerns over the Argentine 
owner,s initial acquisitions of the territory in the late 
19th century.  The initial purchase allegedly violated the 
limits on the sale of property to foreigners at that time, 
and there are reportedly no records of Casado ever paying the 
GOP for the land.  Thus, supporters of the current bill 
contend that the Unification Church and Mr. Park,s 
subsequent purchase of the land from Casado was illegal 
because the original title to the land was fraudulently 
obtained.  (Note: Attempts to seize land based on such doubts 
about purchases over a century ago would cause havoc if 
applied broadly.  There are no attempts to rectify doubtful 
sales even during the more recent Stroessner era.  Applying 
this &Casado Standard8 could undermine titles to literally 
over half the country.  End Note.) 
 
11. (U) The Unification Church and Mr. Park jointly own 
practically all of the land around the village of Puerto 
Casado, with the exception of the few hectares on which the 
town stands.  The stated reason for the purchase was to 
create an &ecological paradise8 in the Chaco region. 
Victoria S.A. employed more than 600 people, around 10% of 
the total population of Puerto Casado.  Before Victoria, the 
town,s primary source of income was a tannin factory that 
shut down in the late 1990s, leaving most of the town,s 
working population unemployed. 
 
12. (U) A statement by Victoria S.A., published in the local 
press after the second expropriation bill was proposed, 
claims that it promotes jobs and sustainable development in 
Puerto Casado.  It also accuses politicians of wanting to 
expropriate the land for personal gain.  Victoria,s owners 
allege to have attempted to contact Senator Carlos Filizzola, 
now the president of the Senate and co-author of the original 
expropriation bill, to discuss the situation, but without 
success. 
 
13. (U) Supporters of the current bill have long accused the 
Unification Church, through Victoria S.A., of wanting to 
control the world,s largest clean water aquifer, over which 
its property lies.  This is a stock xenophobic charge also 
recently leveled by opponents of small US military exercises 
here.  Local politicians have also openly accused them of 
drug and arms trafficking because of their close proximity to 
the Brazilian border.  None of these accusations have been 
formally investigated or proven, and there is no evidence to 
support them. 
 
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Land for Poor Farmers? 
---------------------- 
 
14. (U) Several weeks after the proposal of the new bill, 
local news sources published a list of over 850 recipients of 
the proposed expropriated land.  Some of the names are from 
Puerto Casado, but the list also included many who do not 
even live near the town.  News reports showed these to 
include family members of politicians as well as wealthy 
businessmen. 
 
15. (U) Local press recently accused the mayor of Puerto 
Casado of failing to report 75 percent of his town,s tax 
revenue in 2003.  Although not yet convicted of any crime, it 
is cause for concern that he is one of the major local 
political supporters of the expropriation bill.  He also has 
14 family members that would receive property in the case of 
expropriation, only one of whom currently resides in Puerto 
Casado. 
 
16. (U) Hundreds of Puerto Casado residents recently traveled 
to Asuncin to pressure politicians into voting for the 
expropriation.  They met with the President of Congress and 
the head of the Supreme Court, confirming their support for 
the cause.  Post understands that the demonstrators were paid 
a small sum of money to make the trip to Asuncion, and that 
many of the protestors were actually from elsewhere, 
including Asuncion.  The president of the Paraguayan 
Episcopal Conference and members of the Catholic Church have 
also expressed strong support for the expropriation.  Church 
leaders argue that expropriation favors the poor and 
addresses alleged loss of sovereignty and inroads by a 
foreign religious sect. 
 
17. (U) Not all Puerto Casado citizens are in favor of the 
expropriation.  Some of them, mostly employees of Victoria 
S.A., also traveled to Asuncin, albeit to protest the bill. 
They argue that their jobs would be taken away if Victoria 
S.A. left Paraguay and that the expropriation would 
ultimately benefit the sponsoring politicians rather than 
local citizens.  Victoria management has backed up those 
fears and temporarily shut down their factory for an 
unspecified period of time, also laying off hundreds of part 
time employees.  Victoria has been the only consistent 
sources of work for people in Puerto Casado since the local 
tannin factory closed down. 
 
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Comment 
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18. (C) President Duarte,s public comments supporting 
expropriation of Victoria-controlled land send an unhelpful 
signal about the state of Paraguay,s investment climate. 
Perhaps worse are comments by legislators about land 
donations that look a lot like extortion, and arguments that 
much of Paraguay,s land could be up for grabs if enough 
politicians support it.  What is bad for international 
investors is bad for wealthy Paraguayans with their money 
outside the country and for all supporters of reform. 
 
19. (C) There have been hundreds of cases of land 
expropriation in Paraguay, a number of them involving 
thousands of acres.  According to the Paraguay constitution, 
expropriation is legal and this matter appears to be 
proceeding in a manner consistent with Paraguayan law, 
notwithstanding little serious study of the matter on the 
part of the Congress.  That lack of study, and the evidence 
that this expropriation is almost solely due to a political 
pact between the governing party and three minor parties to 
seize control of both houses of Congress, are the fuel behind 
the polarizing controversy.  There has been talk that 
Victoria S.A. would be compensated, but so far no details 
have been provided.  The Korean Ambassador has told us he is 
concerned that Paraguay will violate a bilateral treaty which 
calls for effective, prompt, fair value compensation in cash 
for any expropriation, because Paraguay,s constitution 
carries loopholes for expropriation of so-called 
&unproductive8 property. 
 
20. (C) While there have been a number of large investments 
(particularly in the cellular telephone industry) announced 
in the last six months, one can only wonder how many 
investment opportunities are lost due to the government,s 
cavalier approach to private property.  Since reversing 
himself last year, President Duarte has strongly opposed land 
invasions and promoted investment.  One hopes that this move, 
demoralizing as it is, will prove an exception tied to 
Paraguay,s bizarre political culture and very immature 
democracy. 
 
KEANE 
KEANE