US embassy cable - 05ASUNCION1167

C O N F I D E N T I A L SECTION 01 OF 04 ASUNCION 001167 
 
SIPDIS 
 
STATE FOR WHA/EPSC 
STATE PASS TO USTR FOR LYANG, MSULLIVAN 
USAID FOR AA/LAC ADOLFO FRANCO 
TREASURY FOR OTA WARFIELD, VAN KOCH, MILLAR, ANTONOVICH 
COMMERCE ITA SARA COOK 
NSC FOR MIKE DEMPSEY, SUE CRONIN 
SOUTHCOM FOR POLAD DAN JOHNSON 
 
E.O. 12958: DECL: 09/14/2015 
TAGS: ECON, ETRD, KMCA, KCRM, SNAR, PA 
SUBJECT: (C) AMBASSADOR URGES STRONGER ACTION ON CUSTOMS BY 
FINANCE MINISTRY 
 
REF: A. ASUNCION 00972 
     B. ASUNCION 00423 
 
Classified By: ECON Chief Patrick O'Reilly for reasons 1.4 (b) and (d). 
 
 ------- 
Summary 
------- 
 
1.  (C) In a meeting requested by the Ambassador, Minister 
Bergen supported the Ambassador,s requests that a new 
investigative unit to be created in Customs fall directly 
under the supervision of the Customs Director, and that 
members of that unit and two others in the Ministry of 
Finance be subject to vetting.  The Ambassador noted the 
significant USG assistance provided to customs and the 
Ministry, both through Treasury,s Office of Technical 
Assistance and possibly through the Threshold Program of the 
Millennium Challenge Account.  Problems within Customs were 
discussed, and Minister Bergen described a labor law he would 
like to propose to allow for the rapid dismissal of customs 
and tax employees.  The Ambassador also raised the draft 
anti-money laundering law that has languished in Congress 
since May 2004.  Bergen suggested that a possible trip with 
10*15 members of Congress to visit the IDB and IMF might be 
able to include meetings on money laundering with USG 
officials.  End Summary. 
 
-------------------------- 
PARAGUAYAN CUSTOMS SERVICE 
-------------------------- 
 
2.  (C) In a meeting requested by the Ambassador, he and 
Finance Minister Bergen recently discussed USG assistance to 
the Paraguayan Customs Service (Direccion Nacional de 
Aduanas, or DNA), which is a part of the Ministry.  The 
Ambassador requested the meeting to underscore the 
significant current and contemplated USG assistance to the 
DNA, to specifically request that a new vetted investigations 
unit be placed under the direct supervision of the customs 
director, and to urge a redoubling of efforts to reduce 
corruption in the customs service.  Econchief and Resident 
Enforcement Advisor (REA -- from Treasury,s Office of 
Technical Assistance) also attended the meeting.  The Vice 
Minister of Economy and the Director of the Tax 
Administration accompanied Minister Bergen. 
 
3.  (C) Despite a courageous Director, Margarita Diaz de 
Vivar, and impressive increases in revenue collections under 
the new government, the DNA is riddled with corruption and is 
the key institution needing reform if the government,s goal 
of formalizing the Paraguayan economy is to be realized. 
Diaz de Vivar has been fighting with some success to reform 
Customs, with the help of the new Customs Code that took 
effect in January 2005, but political pressure from 
individual members of Congress and resistance within the 
ranks of customs has been intense.  Reportedly, both she and 
the Director of the Tax Administration received phone calls 
on a daily basis from members of Paraguay,s Congress 
requesting favors relating to personnel placements, and even, 
at times, received letters on Congressional stationary with 
such requests. 
 
4.  (C) A large segment of Paraguay,s economy has prospered 
from under valuation and the resulting &triangulation8 
where goods are smuggled or imported with under-invoicing 
into Paraguay for re-export (or re-smuggling) to Brazil and 
Argentina.  A French technical advisor provided by the IMF 
fled Paraguay earlier this year after receiving what he 
perceived to be a threat.  Diaz de Vivar travels with 
bodyguards and has received numerous threats against her and 
her family.  Also, an active press campaign to discredit her 
has been ongoing, all of which attests to the robust 
resistance to meaningful reform of the DNA. 
 
------------------------------------ 
USG ASSISTANCE TO PARAGUAYAN CUSTOMS 
------------------------------------ 
 
5.  (C) The Ambassador noted that the US government has 
already invested resources in the DNA, primarily through 
training and other technical assistance provided by REA and 
other advisors from Treasury.  He also pointed out that the 
USG would probably invest much more.  One project currently 
part of Paraguay,s draft Threshold Country Plan to be 
submitted to the Millennium Challenge Corporation involves 
significant assistance to the DNA.  Also, the Department of 
Homeland Security has selected the DNA as the second 
recipient of a Trade Transparency Unit, through which the US 
and Paraguay would share container-level customs information 
to identify patterns of trade-based money laundering, pending 
confirmation of funding (ref B).  The TTU will operate within 
a vetted customs investigations unit in the process of being 
established with the help of REA. 
 
6.  (C) REA has been working to set up several investigations 
units, along the lines of the IPR-related Specialized 
Technical Unit within the Ministry of Industry and Commerce 
(ref A) and the anti-drug unit, SENAD, both of which are 
supported by INL funds.  REA and other Treasury advisors are 
assisting with the creation of an internal investigations 
unit within the Ministry of Finance, a tax crimes 
investigative unit with the Tax Administration, and the 
customs investigative unit.  Approximately 50 existing 
members and new candidates for the units underwent polygraph 
examinations in early August. 
 
7.  (C) Since negative information was developed during the 
polygraph examination of the customs official nominated by 
the Customs Director to head the investigative unit, the 
Ambassador requested that the DNA investigative unit report 
directly to the Customs Director, and that the tentative 
leader of the new unit not be involved.  The Ambassador also 
urged Minister Bergen to redouble efforts within the DNA to 
combat corruption, to include making sure that the Customs 
Director has the political backing from the Executive to 
remove or transfer personnel as well as to resist pressures 
to take on new people linked to special interests.  The 
Ambassador suggested that more be done to increase 
inspections of the various ports of entry, both open and 
undercover, to root out corrupt officials.  Finally, the 
Ambassador requested that Minister Bergen support routine 
polygraph vetting of members of the three units under his 
jurisdiction. 
 
----------------------------------- 
Finance Minister,s Plans for Reform 
----------------------------------- 
 
8.  (C) Minister Bergen agreed with the need to combat 
corruption within customs, in particular by pursuing court 
cases that result in real sanctions against corrupt 
officials.  He emphasized that President Duarte has given 
explicit guidance that no one should be protected in the face 
of clear evidence of wrongdoing.  Both Bergen and Andreas 
Neufeld, the Director of the Tax Administration, noted how 
difficult it is to sanction or remove corrupt or ineffective 
employees given Paraguay,s antiquated and overly protective 
civil service code.  The only option many times is to place 
employees in what is referred to as &the freezer8 ) often 
a large room where disfavored employees report to work with 
no duties to perform.  While such employees are removed from 
the direct operations of the ministry or agency, they are 
usually still in the same building allowing them to disrupt 
and plot, and the Ministry must continue to pay them. 
 
9.  (C) To create the opportunity to truly manage the 
employees of the Ministry of Finance (to include tax and 
customs), Minister Bergen wants to propose, at the right 
opportunity, new legislation to increase the DNA,s 
independence and to convert all positions in tax and customs 
into &positions of confidence,8 which would give the 
Minister the power to dismiss problem employees without 
resorting to the judicial system as is the case now, and 
would provide the flexibility to increase the salaries of a 
presumably smaller workforce.  The plan would require a large 
sum up front because any workers dismissed under the plan 
would have to be paid sizable indemnity packages. 
 
10.  (C) Minister Bergen acknowledged that such a plan would 
be hard to sell to Congress, but he mused that perhaps he 
could sell it to the public by noting that the employees of 
the Tax Administration and Customs represent less than two 
percent of the total GOP workforce of about 180,000. 
Minister Bergen told us that the local World Bank 
representative expressed concern that making it easy to 
dismiss employees would also make it easy to reinsert 
objectionable employees in the future.  Bergen noted that it 
would be a simple law, but would require resources, and he 
wondered whether it might be prudent to link such a law to 
one of the IFI programs. 
 
11.  (C) The Ambassador suggested that the International 
Financial Institutions (IFIs) might have in-house expertise 
to help with such a project.  He also noted that starting 
small, with small vetted units could be successful, with the 
counter-drug agency SENAD a clear example.  Tax Administrator 
Neufeld agreed, and asked if we could help him identify 
experts with experience in how other tax administrations have 
successfully reformed to minimize corruption and improve 
efficiency.  REA explained the on-going work with the various 
investigative units, to include the four-week investigator 
training course taking place in September/October, and 
reinforced the need for political will to make the units 
successful. 
 
-------------------- 
MONEY LAUNDERING LAW 
-------------------- 
 
12.  (C) The Ambassador raised our concerns about the lack of 
Congressional action on the draft anti-money laundering law 
presented to Congress in May 2004, and the lack of clear GOP 
leadership to push for passage.  He argued that President 
Duarte would need to make a priority and publicly say so to 
spur Congressional action.  Minister Bergen expressed support 
for the law and wondered whether it might be a good idea to 
include the law as a performance criterion or benchmark in 
the follow-on IMF program currently under negotiation.  He 
noted that former Minister Borda had done a good job of 
explaining the importance of the IMF to Congress.  The 
Ambassador responded that while involving the IMF would be 
fine, Paraguay needs to improve its anti-money laundering 
regime based on its international commitments. 
 
13.  (C) Vice Minister von Horoch noted that some resistance 
exists to the law from the financial sector, which is 
concerned the law might give excessive power to prosecutors, 
and that it might involve duplicative reporting requirements. 
 He also noted that many in the business community are 
fearful of the interaction between the law and the prevailing 
practice of under-valuation of 
imports ) selling items for $10 that were imported with 
valuations of only $1 might look like money laundering. 
 
14.  (C) Minister Bergen said that he was in discussion with 
the InterAmerican Development Bank (IDB) to arrange a visit 
by 10 to 15 members of Congress to Washington to learn more 
about the IDB and the IMF.  He suggested that perhaps some 
visits with USG experts on money laundering might be useful 
to help convince them of the need to pass the law.  The trip 
would take place in late October or November. 
 
15.  (C) In a subsequent meeting, REA and the Director of the 
Tax Administration discussed the investigative unit with the 
Customs Director, Margarita Diaz de Vivar, who was very 
supportive of our suggestions.  She said she would issue an 
internal decree to officially create the investigative unit 
reporting directly to her, and that she fully supports 
regular polygraph examinations.  In addition, she agreed to 
placing the border control unit she is proposing as part of 
the MCA Threshold Program under the vetted investigative 
unit, and subjecting the border control unit to polygraphs as 
well.  REA agreed to help Diaz de Vivar identify recruits for 
the new unit using input from trusted members of the other 
units, which are farther along in terms of development. 
 
------- 
COMMENT 
------- 
 
16.  (C) Minister Bergen was very receptive to the 
Ambassador,s suggestions and demonstrated the same business 
person,s sensibilities and preference for rapid action that 
he displayed when he was the Minister of Industry and 
Commerce.  While his idea for a new labor law for the tax 
administration and customs might prove to be unrealistic, 
Bergen was willing to support more focused action in the 
short-term.  He appears increasingly comfortable in his 
relatively new role as Finance Minister and determined to 
stay the course on reform. 
KEANE