SCENE SETTER FOR MARCH 5 PCC ON GUATEMALA

C O N F I D E N T I A L SECTION 01 OF 06 GUATEMALA 000504

SIPDIS

E.O. 12958: DECL: 02/23/2014
TAGS: PREL EAID PGOV SNAR CVIS MASS KCOR OVIP PBTS GT
SUBJECT: SCENE SETTER FOR MARCH 5 PCC ON GUATEMALA


Classified By: Ambassador John R. Hamilton, for reason 1.4 (d).


1. (C) Summary and introduction: After only six weeks in
office, the Berger government has generated high expectations
among Guatemalans that it will spur economic growth, reduce
violent crime and investigate and prosecute official
corruption and organized crime. Berger has also told us
privately that he wants to greatly reduce the military and
professionalize what is left. He told the Belizeans he is
committed to resolving the border demarcation with Belize,
and will not send the dispute to the ICJ. Recognizing the
growing economic importance of remittances by Guatemalans in
the US, Berger is also seeking greater protections for the
large community of Guatemalans living out of status in the US.


2. (C) To a large extent, Berger's priorities fit
hand-in-glove with our own, and it is in our interest to take
advantage of his political will and the energy of his capable
team to ensure that our shared goals succeed. The PCC offers
a timely opportunity to review USG engagement in Guatemala.
This cable outlines our thoughts on issues the PCC might wish
to consider. Specifically, we propose:

Short term actions:
-- Supporting quick IDB disbursement of sector adjustment
funds while the new GOG undertakes substantial fiscal reform;
-- Ensuring a high-level reception, ideally with the
President, when Berger visits Washington in May; and
-- Using visa policy actively against corrupt Guatemalans;

Medium term and continuing actions:
-- Reversing planned cuts in AID funding (DA) to help the GOG
build democratic, democratic and accountable institutions and
crack down on corruption;
-- Providing robust support to initiatives against organized
crime and violence (CICIACS and community policing);
-- Encouraging realistic GOG initiatives for dealing with
Guatemalan immigrants in the US; and
-- Including Guatemala early in post-Monterrey initiatives on
facilitating remittances;

Longer term commitments:
-- Providing technical assistance for an ambitious military
downsizing and FMF and IMET support (in FY-06) to those who
remain once the reductions are irreversibly underway; and
-- Restoring momentum to resolving the Belize border dispute,
perhaps beginning with a visit of OAS A/SG Einaudi.

End summary and introduction.

Tackling the Budget Crisis
--------------

3. (SBU) Guatemala is strapped for cash. The Berger
administration came to office with backlogs of unpaid
salaries and bills and a court ruling that eliminated the
"IEMA" asset-based tax that had provided ten percent of total
revenues. Tax reform is necessary and will be a Berger
priority. The administration has begun the process by
resuscitating the Fiscal Pact that had been negotiated after
the Peace Accords with some 650 civil society groups but was
discarded by the Portillo government. The administration
calculates that a renewed Fiscal Pact will provide the
mandate and legitimacy needed to push a 2004 budget and tax
reform plan through an unfocused and politicized Congress.
Until that happens, the government is choosing not to
approach international debt markets or negotiate a new
program with the IMF in order not to be seen as prejudicing
the outcome of the Fiscal Pact discussions. This leaves the
government solely dependent upon austerity measures and a
depleted tax base until the new Fiscal Pact can be agreed and
implemented.


4. (C) In the interim, $80 million of fast-disbursing funds
are potentially available from the IDB under the Financial
Sector Adjustment program. Disbursement is contingent,
however, upon IMF concurrence or compliance with an IMF
program. Guatemala currently is not fully compliant with its
IMF stand-by, for two reasons that are relatively minor: 1) a
law exempting the sale of bank asset portfolios from the
value added tax is still stuck in Congress, and 2) outside
auditors have not been brought in to look into the failed
national mortgage bank (CHN). The IMF stand-by agreement
will likely lapse in mid-March without Guatemala's full
compliance, and the government does not expect to seek
another Fund program until later in the year. Members of the
Berger economic team will be in Washington at the same time
as the PCC seeking the concurrence of the Fund and Treasury
to release the $80 million from the IDB. They will say that
there has been abundant good faith in pursuing banking reform
and that they need funds to stay afloat as they undertake
more fundamental fiscal and governance reforms. We believe
strongly that we should accommodate this request.

Matching USG Assistance to Improved Opportunities
-------------- --------------

5. (SBU) The climate for promoting change in Guatemala
improved across the board with the inauguration of the Berger
government, but AID has planned a 60% cut in DA levels
between FY03 and FY05. We understand that the cut is being
reconsidered and it could be restored. We would use restored
DA levels to support rural economic growth through trade
capacity building, improved competitiveness, and
decentralization. ESF as well as DA are needed to support
the GOG's national anti-corruption campaign and to respond to
its specific request for internal vulnerability assessments
of major GOG institutions. ESF and INL funding is needed for
a community policing program and to support the UN-sponsored
CICIACS initiative against organized crime. Guatemala
received about $10 million of DA annually during the Portillo
years, comparable to what was given less populous neighbors
Honduras, Nicaragua, and Salvador. We should be willing to
invest that much and more now that we have a government
attuned to our interests.

Supporting A New, Greatly Reduced Guatemalan Military
-------------- --------------

6. (C) President Berger has made military reform a central
part of his opening agenda. His plan, centered on a 50% cut
in the size of the Army and the shedding of excess
infrastructure, envisions a smaller, better trained, and more
operationally capable Guatemalan Army. His proposal would
put an end once and for all to the war-time military that
grew out of control during the internal conflict, and was
poorly managed by post-conflict governments until now. We
have in hand a perhaps one-time opportunity to partner with
the Berger administration to positively influence the future
of one of hemisphere's most insular and stodgy militaries.
Although pockets of high-level corruption and a culture
resistant to reform still exist within the force, Berger's
determination to dramatically downsize the institution
appears to have finally galvanized serious planning efforts
within the institution, including focusing on missions
previously shunned by "ground-centric" forces such as
maritime operations under our recently signed bilateral
agreement. Lack of local civil-military technical expertise
on defense transformation, however, and unimaginative
military planning mean we need move quickly to help sustain
the momentum of the President's reform agenda. We must also
be alert for signs of resistance or even rebellion from the
military, a concern that Berger raised with the Ambassador on
February 25. We should use opportunities such as the
upcoming visit of the Commander, U.S. Army South, to remind
Guatemala's military that we have no tolerance for
insubordination to civilian command.


7. (C) Under Portillo, progress was achieved on most
benchmarks for military reform outlined in the 1996 Peace
Accords, and some of our benchmarks for restoring a regular
military assistance relationship. The infamous Estado Mayor
Presidencial (EMP) was finally disbanded. Military support
to national civil police and USG law enforcement on
counter-narcotics operations has been excellent and was
unquestionably pivotal in achieving 2004 narcotics
certification benchmarks (military support was a contributing
factor in nearly 90% of the nearly nine metric tons of
cocaine seized). Navy assistance with operations aimed at
containing ship-bound alien smuggling is pivotal to the
repatriation of hundreds of illegal aliens each year who
might otherwise reach the U.S. Human rights training and
reporting systems were instituted throughout the Army, with
reports of military human rights abuses falling to near zero.
The first Defense White Paper was published last year; it
laid out unequivocal benchmarks on civilian control of the
military, including the requirement to maintain a culture of
respect for human rights within the armed forces, and defined
roles and missions for the military in the 21st century.
Work remains on other benchmarks, however, including seeking
greater military budget oversight by congress, naming a
civilian Minister of Defense, and accounting for abuses
committed during the war. We expect progress on the first
two, but are frankly pessimistic on the third.


8. (C) The Portillo government fell short in several other
areas too, choosing not (or unable) to reign in corrupt
high-level military officers or take costly and unpopular
steps needed to rid the force of a hugely bloated officer
corps. Portillo used the military budget, shielded by archaic
wartime secrecy laws, to launder large amounts of "off the
books" money, leaving the impression of large increases in
military spending, when in fact the institution was
progressively starved of resources. The unattended issue of
the size and salaries of the senior officer ranks, and the
high costs of retiring them under the current self-funded
pension system, stymied the most urgent of all reforms --
downsizing the force. Berger inherited the most expensive
military in Central America, but one without any significant
operational capability and no modernization plan -- an
untenable situation for both the military and the incoming
Berger government. President Berger was recently briefed by
the military that it would take $200 million to draw down the
force by 16,000.


9. (C) While we have stated unambiguously that USG funding
for retiring excess officers is not possible, we believe
targeted and phased assistance and advice designed to assist
Guatemalan efforts to modernize and increase operational
effectiveness would serve to shore up the military during
this time of uncertainty and transformation -- including
preparing a battalion-sized unit for international
peacekeeping duty. First, we propose providing Berger
technical advice on how to best approach the defense
transformation. We already have E-IMET scheduled visits by
the Center for Civil Military Relations and the Defense
Resource Management Institute which we will use to lay
groundwork, but dedicated expert assistance on executing a
large personnel draw down and how to profitably dispose of
resulting excess bases and facilities could conceivably save
the GOG tens of millions of dollars.


10. (C) After consulting with various supporting
institutions, we are confident we can effectively use more
current year E-IMET funds to support this effort should
additional funds due to ASPA reallocations become available.
Starting in FY-06 and beyond )- and assuming that military
reform proves real -- restoration of IMET and FMF eligibility
would allow for the carefully targeted release of $3.2
million in currently frozen MAP and FMF funds. Also, the
quick transfer of Excess Defense Articles (for which
Guatemala is eligible) is an additional low-cost method to
support Guatemalan military transformation. Excess equipment
and parts could be targeted to improving Guatemalan Air Force
rotary and fixed wing transportation and surveillance
capabilities used in the war on drugs. Also, INCLE funds can
and should be used to support fuel and limited parts support
to bolster Guatemalan Military counter narcotics support to
the national civil police.


11. (C) Spare parts and fuel are issues with a moral
dimension as well. Under the implicit threat of
decertification, we are pushing the Guatemalans to a greatly
increased tempo of counter narcotics operation, in helos and
fixed wing aircraft where airworthiness is open to question.
We understand the reluctance to violate the spirit of
Congressional intent inherent in FMF and IMET prohibitions,
but believe denial of funds for aircraft spare parts and fuel
to be too purist. Similarly, visits by USCG Training Ship
Gentian (Caribbean Support Tender) would serve to greatly
improve Guatemalan Navy's abilities to patrol territorial
waters. Together, these targeted assistance initiatives
would improve Berger's ability to plan for a historic defense
transformation, boost Guatemala's capability to participate
in international peacekeeping, enforce territorial
sovereignty, and reclaim ungoverned spaces, which in turn
improve regional stability and support U.S. Homeland defense.

Helping Berger Reach Out to Guatemalan Immigrants
-------------- --------------

12. (SBU) The status of Guatemalans in the U.S. is a
high-priority item for the new GOG, to which we need to be as
responsive as possible, in the interest of keeping the
bilateral dynamic as positive as it is right now. We should
look for ways to help the new government develop a realistic
approach for this issue. Berger traveled to the U.S. during
his campaign to seek the support of expat Guatemalans and to
express his government's commitment to address their
concerns. The legal and illegal Guatemalan community in the
U.S. numbers about 1 million persons and sends an estimated
$2 billion in remittances annually to Guatemala. They have a
growing, direct economic and indirect political effect on
Guatemalan voters, particularly in economically depressed
rural towns and cities, where they support large extended
families. A recent IOM survey concluded that nearly one of
every three persons in Guatemala depends on remittances from
the U.S. to meet their basic needs.


13. (SBU) The GOG would like to help regularize the status of
illegal Guatemalans. The GOG perceives recent extensions of
TPS for Salvadorans and Hondurans less as a function of the
devastation caused by Hurricane Mitch in 1998 than as
effective lobbying by their governments. We have told Berger
that the President's immigration proposal clearly indicates
that any new non-emergency TPS or other unilateral
immigration remedies are not in the cards and have encouraged
his government instead to work through its embassy and
consulates to support the President's proposal. We need to
remind the GOG periodically that immigration reform is an
enduring issue in the U.S. and that they need to follow and
participate in the public debate. Meanwhile, and as a
palliative, we have suggested that the GOG might initiate a
search for U.S. employers needing Guatemalan farm workers
under the H2A visa program. There would be no direct role
for the USG in this effort. We have pointed out that a
number of workers have failed to return under our current H2B
visa program for other unskilled workers.

14. (SBU) The GOG would also like to reduce, as possible,
the cost of remittances and find ways to use them to help
fund basic infrastructure and services in rural areas. Vice
President Eduardo Stein is particularly interested in this
issue. He was an IOM consultant before joining the Berger
campaign, and he was personally involved in exploring with
banks various mechanisms for facilitating remittances to
individuals or community associations. He is aware of the
language on remittances from the Monterrey Summit, and we can
expect that he will ask periodically if any progress has been
made. Guatemala would be an excellent target or test bed for
any new initiatives Washington may be considering, and we
would encourage that Guatemala be given priority attention as
initiatives emerge.

Depriving Corrupt Former Officials of Safehaven in the U.S.
-------------- --------------

15. (SBU) Growing press accounts of corruption during the
Portillo administration have renewed calls for prosecuting
corrupt officials. Since 2001, consular officers have been
working closely with other Embassy offices, primarily at
monthly Visas Viper meetings, to gather information and
review the continued visa eligibility of these individuals.
These efforts have resulted in findings that many influential
people were ineligible to retain their non-immigrant visas
(NIVs),and the visas have been revoked. The Embassy's
actions have attracted heavy media coverage and received
widespread support from the Guatemalan public.


16. (SBU) Since 2001, we have revoked the visas of 170
high-profile individuals. The majority of these 170 cases
were revoked under Section 214(b),which prohibits visas for
intending immigrants. Our reasoning is that many of these
individuals are flight risks because they are under
investigation or indictment by Guatemalan authorities with
judicial orders prohibiting departure ("arraigos").


17. (C) Press reports in the US and Guatemala about an
ongoing US criminal investigation into money laundering
activities of high-level Portillo administration persons and
an associated Grand Jury in Miami are essentially accurate.
Although the investigation is not all-inclusive of the fraud
purportedly committed by GOG functionaries in recent years,
it does focus on four main areas, consolidated in two cases.
The first case deals with the National Mortgage Bank (CHN)
fraud and Caso Panama issues; the second covers the looting
of the Social Security Institute (IGSS) and the Military
Retirement Fund (IPM). There is some overlap among these
cases as well as with other fraud and thefts reported in the
press over the last few years; however, in these listed
cases, the apparently ill-gotten gains have at least passed
through the U.S., making it a violation of US law. These
cases involve private individuals, past GOG officials and
institutions within and out of Guatemala. Many of the
persons investigating, including two assigned Assistant U.S.
Attorneys, also were active in the U.S. case against former
President Aleman of Nicaragua.


18. (C) The targets of the US investigation include, on the
high end, former President Alfonso Portillo, former VP Juan
Francisco Reyes Lopez, former private secretary to Portillo
Julio Giron, and some of their family members and associates.
Evidence and statements are still being collected, but the
indicators are strong for substantial fraud and money
laundering activities having been committed by those under
investigation. As the cases have progressed, persons
knowledgeable in the criminal actions of the targets, many
due to participation, have come forward to offer testimony in
place of prosecution. Regrettably, the current lack of
confidence and trust in the GOG Public Ministry (prosecutor)
has not allowed US investigators to cooperate with local
judicial authorities to share information. This element of
the investigation makes providing an anticipated time-line
for action in the US cases difficult to do; however, the
rising public pressure on both the Public Ministry and the
targets (including the revocation of US visas when doing so
is appropriate) is anticipated to create investigative
opportunities.


19. (C) The ongoing investigation by a South Florida grand
jury and new local revelations of Portillo-era corruption are
contributing to a case for revoking the visas of these former
officials, some of whom have already fled the country. The
Embassy has now forwarded a recommendation. Visa revocations
would not only appropriately apply US law, but would also
send a strong message to officials of the new government that
corrupt officials will never again be welcome in the United
States, whether or not they escape prosecution in Guatemala.

Combating Organized Crime and the Growth of Violent Common
Crime
-------------- --------------

20. (SBU) The power of organized crime and clandestine groups
in Guatemala has risen to the point where local police and
prosecutors are overwhelmed. Narco-traffickers and corrupt
officials have operated with virtual impunity; combined with
the gang violence spawned by street level drug distribution
organizations, this has created the public perception that
crime has grown beyond the capacity of democratic government
to control. This problem has to be attacked at both the
organized crime and the street level if democracy and the
rule of law are to be sustained in Guatemala.


21. (SBU) CICIACS -- the proposal for a U.N. investigative
and (possibly) prosecutorial mission -- presents an
innovative plan to marshal international assistance against
organized criminal enterprises in Guatemala. A two- to
three-year mission, CICIACS will empower experienced
international investigators and prosecutors to work (at least
initially) independently of the police and Public Ministry,
but under Guatemalan law. By pursuing emblematic cases
through the Guatemalan courts, CICIACS will strengthen, not
supplant, national institutions while remaining insulated
from their weaknesses. A competent, credible, and
incorruptible international investigative capability is
perhaps the only way to successfully prosecute the heads of
Guatemala's entrenched criminal organizations. A U.S.
contribution of relatively modest resources (several hundred
thousand in FY-04, $2 to 3 million in FY-05 and $5 million in
FY-06 an 07) could well avoid the necessity of a "Plan
Colombia" for Guatemala five years hence. We submit this as
an instance of seeing around the corner and acting
accordingly.


22. (SBU) Community policing offers a proven method to break
the stranglehold that street gangs have gained over poor
neighborhoods in urban and semi-urban areas throughout
Guatemala. These gangs are the street level distribution
network for the cocaine that remains in Guatemala after local
narco-traffickers are paid for assisting the transit of
cocaine on its way to the U.S. A survey sponsored in 2002
by NAS Guatemala indicates that there are between 68,000 and
97,000 Guatemalan youths (ages 12 to 20) who have belonged to
or were then participating in street gangs. With a
population of only 12 million, this is a shocking statistic,
and indicative of a problem that is on the verge of spinning
out of control. Community policing has worked effectively to
control gang crime throughout the U.S. and has had great
results in El Salvador. New ESF (with requisite legal
authority) or INCLE funding of $2 million in FY-05 and $3
million in FY-06 and 07 to support community policing could
have a significant impact on helping the Berger government
control crime.


23. (SBU) Fully funding the original NAS budget request of $5
million for FY-05 (currently, we are funded for only $2.82
million) would allow us to assist efforts of the narcotics
police and special task forces to implement better systems
for tracking, investigating and prosecuting major drug and
corruption cases. It would also enable us to implement
Culture of Lawfulness and precursor chemical control programs.

Getting to "Yes" on Belize
--------------

24. (C) The Berger government has been cautious on its public
statements as to how it proposes to address the border
demarcation dispute with Belize, cognizant that there is no
popular groundswell of support in Guatemala for any solution.
However, Berger told reporters on inauguration day that he
intends to resolve the border dispute through a national
referendum, and told representatives of the Belizean
Government that the OAS facilitators' process remains the
GOG's preference for reaching an agreement. He categorically
ruled out sending the matter to the ICJ, and has since said
that (for fiscal reasons) the GOG will close its Embassy in
The Hague.

25. (C) The next step in resolving this 135-year old dispute
is getting both sides (especially Guatemala) to renew the
OAS-sponsored confidence building measures, which are
scheduled to expire soon. Following that, it will be
important to get the momentum of the facilitators' process
back on track. With the need to impose unpopular fiscal
measures increasingly inevitable, and with the growing cost
in political capital for establishing CICIACS, the Berger
government will not have an excess of political good will to
spend on persuading Guatemalans to approve a referendum on
Belize in the short term. However, it is important that the
momentum be restored. A visit to Guatemala by OAS A/SG
Einaudi, who is widely respected in Guatemala, could go a
long way to reminding the Berger government of the priority
the international community places on resolving once and for
all its disagreements with Belize.

High-level GOG Visits to Washington
--------------

26. (C) President Berger has accepted a Council of the
Americas invitation to speak at an event in Washington on May

3. This visit offers an opportunity for him to meet with
President Bush at a time when such a meeting would convey to
Guatemalans, especially in the military and the opposition,
our support for his program for profound reforms. Greatly
reducing the military, getting CICIACS approved by Congress,
concluding an Article 98 Agreement with us, raising taxes and
addressing the Belize border dispute will all require a
substantial amount of political capital and the good will of
the opposition. A highly publicized meeting in the Oval
Office would give Berger a lift that would strengthen his
hand in carrying out these unpopular measures. It would also
greatly strengthen our ability to secure his support for
issues of importance to us. Berger has conveyed to us his
willingness to stay through May 4 in order to meet with the
President if the May 3 date itself is not convenient for the
White House. We believe this visit would pay dividends for
advancing our bilateral interests throughout the Berger
presidency.


27. (C) Berger wants to send Vice President Eduardo Stein to
Washington in mid-March to meet with senior USG officials and
members of Congress to explain Berger's program of government
and to seek support for specific initiatives. Stein knows us
well and can be a good interpreter for Berger and his team of
US perspectives on Guatemala. We would hope that he could be
received at the highest levels; more on this septel.

Carpe diem
--------------

28. (C) With the inauguration of President Oscar Berger we
have the best chance for significant change in Guatemala
since the restoration of democracy in 1985, and an
unparalleled opportunity to advance a large number of our
highest priority goals in this country that forms the border
with NAFTA. It is important that we be prepared to respond
to these opportunities with the resources -- political and
financial to ensure their success.
HAMILTON