US embassy cable - 05GUATEMALA2653

C O N F I D E N T I A L SECTION 01 OF 03 GUATEMALA 002653 
 
SIPDIS 
 
TREASURY FOR OTA BOB WARFIELD 
 
E.O. 12958: DECL: 11/14/2010 
TAGS: ETRD, EFIN, BEXP, ETTC, KCOR, KCRM, KIPR, PGOV, PM, PINR, ASEC, SNAR, GT 
SUBJECT: CONTRABAND, CUSTOMS REFORM AND THE INFORMAL ECONOMY 
 
 
Classified By: Economic Counselor Oliver Griffith for reason 1.5(d) 
 
1.  (C) Contraband poses an ongoing threat to Guatemala's 
economic development, undermining growth in the formal sector 
and diminishing the government's ability to collect taxes. 
The potential nexus with organized crime, human and drug 
smuggling, along with the incentive to corrupt and undermine 
law enforcement makes it a threat to Guatemala's national 
security as well.  Contraband, with its roots in tariff 
evasion, boomed under the previous FRG administration, which 
had direct links with smuggling and organized crime.  Many in 
the business sector fear that, although the Berger government 
is no longer directly involved, it is not taking forceful 
enough action to control contraband, which continues to grow. 
 Recent initiatives undertaken by tax and customs authorities 
(SAT), as well as the Interior Ministry, show good will on 
the part of the GOG, but progress remains limited.  End 
summary. 
 
Business Committee Frustrated by Lack of GOG Progress 
--------------------------------------------- -------- 
 
2.  (SBU) On November 10, EconOffs met with the private 
sector's anti-contraband committee.  The committee, chaired 
by an AmCham representative, covers most sectors of the 
formal economy, with a focus on areas such as poultry, 
liquor, rice, sugar, and others that face a variety of import 
costs and taxes which increase the potential competitive 
damage from contraband.  Some of these sectors have obvious 
incentives for smugglers, including higher "sin" taxes on 
alcohol and tobacco.  Staple food items such as poultry, rice 
and sugar face higher tariffs, as well as various production 
and distribution subsidies in Mexico, making cross-border 
smuggling more attractive.  However, avoiding the 12% value 
added tax (IVA) alone is incentive enough for many smugglers 
in a country where the potential risks and added costs of 
running an illicit operation are low. 
 
3.  (C) The committee voiced their frustration with what they 
describe as a generally well-intentioned government, but one 
that lacks top-level political will and is saddled by 
working-level corruption.  Overall, they claim to have lost 
up to 40% market share to contraband in some sectors, with 
liquor and tobacco facing 60% illicit competition due to 
their higher taxes.  They claim significant damage under the 
previous FRG administration, making reference to the cozy 
relationship between major smugglers and that party's 
leadership, as well as connections to Arzu's PAN 
administration, which preceded the FRG.  With Berger, they 
started off optimistic and supported the creation of a 
government/private sector Contraband Commission.  However, 
that commission has only met twice, with limited 
participation.  They expressed increasing disappointment with 
the SAT, which they view as well-meaning but ineffective in 
reform efforts.  They were more critical of the Attorney 
General's office, where they alleged that a mixture of 
incompetence and corruption prevents successful prosecutions, 
and complained of lower officials tipping off smugglers to 
pending investigations. 
 
Contraband - The Methods 
------------------------ 
 
4.  (SBU) A favorite, particularly for foodstuffs, has been 
crossing the poorly controlled border with Mexico.  A visitor 
to the largest legitimate crossing point, the bridge at Tecun 
Uman, would witness the constant flow of migrants and 
contraband crossing the river.  A flotilla of rafts and 
barges supply everything from individuals loading their sacks 
to permanent bays and warehouses loading trucks.  Many 
smaller illicit crossing points and marketplaces can be found 
along the border between Mexico and Guatemala. 
 
5.  (SBU) For larger shipments, it is reportedly easy to buy 
your way across the formal border, paying a customs agent to 
look the other way or to accept false documents .  This 
method is also common in Guatemala's three main ports, where 
containers are said to "fly," as they somehow get over port 
walls without ever passing through customs.  Those that pass 
through legitimate procedures can under-invoice, undervalue 
or mislabel contents.  A third method for crossing legitimate 
points of entry is to fake the re-export of goods, claiming 
an export exemption from the IVA.  Illegitimate domestic 
producers also fake export to avoid IVA payment and undercut 
their legitimate, tax-paying competitors.  Of course, many 
local producers simply never register with any authorities 
and conduct their business beyond the reach of tax officials. 
 
The Cost of Contraband 
---------------------- 
 
6. (SBU) A large portion of Guatemala's informal economy, 
estimated at around 30% of GDP, is comprised of small 
businesses put off by the expense and bureaucratic hassle of 
formalizing operations and paying taxes.  However, it also 
includes major illicit businessmen evading taxes.  This has 
the obvious negative impact on legitimate businesses, 
undercut by illegal competitors who benefit from and 
encourage corruption of the system.  It also complicates 
fiscal reform, fueling the mantra of the business community 
that they will not accept new taxes until the existing tax 
laws are fairly enforced.  At around 10% of GDP, Guatemala's 
inadequate tax collection is a long-standing impediment to 
development. 
 
7.  (C) The precise links with drug and people smuggling are 
not entirely clear.  However, a significant portion of 
economic smuggling is managed by major organized crime, which 
thrives in the chaotic environment of Guatemala's ports and 
borders.  Guatemala cannot successfully combat trafficking of 
drugs or people if it does not get a handle on illegal 
economic activity at borders, ports and elsewhere.  All 
require establishing rule of law. 
 
SAT Reform: Potential Success Story with Gasoline 
--------------------------------------------- ---- 
 
8.  (C) Notably absent from the anti-contraband committee, 
the chamber of petroleum importers and distributors has been 
working their issue somewhat successfully directly with the 
Embassy, President Berger and the SAT.  The chamber estimates 
that up to 60% of gasoline sold in Guatemala in recent years 
was contraband.  The smuggling method of choice involves 
export zones, where gasoline is brought in tax-free through 
the ports and stored to await re-export.  Export documents 
are falsified, with the gasoline sold on local markets 
avoiding IVA, import, and road use taxes.  Former VP Reyes 
has long been rumored to profit from the illicit trade using 
his fleet of trucks and ties to corrupt former SAT Director 
Abadio to smuggle product out.  In a meeting with the 
Ambassador, current SAT Director Roca described the 
two-for-one "happy hour" in the export zones, where two 
trucks would leave the zone, with taxes paid on only one. 
Roca, with USG and industry assistance, is developing 
legislative, administrative and technological reforms to 
better trace gasoline sales to prevent future fraud.  She has 
also put together several major criminal cases that are 
currently with the Attorney General's office, including one 
for $800 million, hoping to collect much-needed revenue and 
make an example out of these smugglers.  The gasoline issue 
is being watched closely as a test-case for broader reforms 
in the SAT. 
 
SAT Reform: Slow Progress in Customs 
------------------------------------ 
 
9.  (C) Customs has proven the most difficult part of SAT to 
clean up.  Years of fraud and mismanagement by former SAT 
Director Abadio (currently in jail) left customs almost 
ungovernable, allowing organized crime to strengthen its ties 
to the organization.  Current SAT Director Roca admits that 
she has little control over agents stationed at border posts 
and ports where organized crime is strongest.  Roca complains 
that she has had difficulty filling positions with 
trustworthy people.  The woman she appointed to head up 
operations in Puerto Quetzal returned after one week and 
refused to go back, citing threats against her family.  In a 
meeting with the Ambassador, Roca mentioned that personal 
security was a major concern for her and the organization. 
She also brought up the case of Pacheco, her former head of 
customs, whom she fired shortly after her arrival.  As an 
example of her autonomy, she pointed out that even though he 
was close to President Berger, he respected her decision to 
remove him.  Unfortunately, he was widely suspected of 
running his own smuggling ring from within the SAT, further 
complicating reform efforts under this administration.  Roca 
is working with international donors to develop the kind of 
institutional checks and balances that take discretion away 
from customs agents, hopefully making them less attractive 
targets for bribes or threats.  The Embassy has long pushed 
for implementation of transparent inspection criteria, and 
coordinated inter-agency inspections.  However, results have 
been frustrating.  The slow pace has drawn increasing 
criticism from the business community, who appreciate Roca's 
integrity but lament her lack of progress. 
10.  (C) Taking control of the borders and slowing contraband 
will require significant SAT reform, but also support from 
other GOG security and port authorities.  Minister of the 
Interior Vielman recently announced the recall of all 90 
police assigned to support customs at the borders.  This is 
the third major recall of security personnel from the borders 
since Berger took office.  Vielman also supported the USG 
investigation that led to the recent arrest of three top 
anti-drug police (SAIA) officials, including the director of 
the service and the head at Puerto Santo Tomas.  It shows the 
administration's will to confront the problem, but also the 
difficulties in implementing the institutional reforms and 
safeguards needed for long-term success. 
 
Comment 
------- 
 
11.  (C) The Berger administration made a promising start and 
has shown a real interest in tackling the conundrum of 
customs, contraband and related illegal activities.  However, 
in spite of several operational successes going after certain 
corrupt individuals, it has not been successful in 
implementing the institutional reforms necessary to be 
successful.  Of interest to the business community, the GOG 
has not been able to mount a coordinated law enforcement 
effort to disrupt any of the major contraband and smuggling 
organizations.  Contraband will continue to be a major 
impediment to Guatemalan development, with its effects on the 
market share of legitimate businesses, tax collections, 
fiscal reform, and its connection to organized crime and 
corruption. 
DERHAM