CORRECTED COPY: HONDURAS CASHIERS ITS TAX MAN;

C O N F I D E N T I A L SECTION 01 OF 02 TEGUCIGALPA 002426

SIPDIS

STATE FOR EB/IFD, WHA/EPSC, AND WHA/CEN
TREASURY FOR DDOUGLASS, RWARFIELD
STATE PASS AID FOR LAC/CAM

E.O. 12958: DECL: 10/28/2014
TAGS: EFIN ECON EINV ETRD PGOV PINR KMCA HO
SUBJECT: CORRECTED COPY: HONDURAS CASHIERS ITS TAX MAN;
FINANCE MINISTER,S COMMENTS ON THE REVENUE SERVICE SHAKE-UP
AND REORGANIZATION

REF: A. (A) TEGUCIGALPA 2289


B. (B) TEGUCIGALPA 1741

Classified By: Classified By: Economic Chief Patrick Dunn for reasons 1
.4 (b) and (d).


1. (C) Summary: On October 15, it was reported that Mario
Duarte, head of the Executive Revenue Directorate (DEI, the
GOH equivalent of the USG,s Internal Revenue Service) will
be moved out of his position effective November 1. Duarte
will become the new Director of the National Ports Company.
Duarte will be replaced by Jose Manuel Carcamo, previously a
former DEI tax lawyer and a partner with Minister Chong in an
accounting consultancy. In an October 19 meeting, Minister
of Finance Chong explained his reasons for the sweeping
changes -- improved efficiency and personnel reform chief
among them. Chong expressed continued support for the
Treasury technical assistance program to the DEI and
encouraged Post to work closely with the new Director.
Carcamo is thus far an unknown quantity, but Post is
encouraged by Chong,s strong professed support for
anti-corruption, institutional reform, and especially for
continuing Treasury,s technical assistance efforts. End
Summary.


2. (C) On October 15, it was reported that Mario Duarte,
former head of the Executive Revenue Directorate (DEI, the
GOH equivalent of the USG,s Internal Revenue Service),will
be moved out of his position and will instead become the new
Director of the National Ports Company. This follows the
September 30 announcement (ref A) that the DEI would be moved
back into the Ministry of Finance (MOF). Post reported at
that time that previous tensions between new Minister of
Finance William Chong Wong and Duarte made his continued
tenure at MOF uncertain. (Note: Chong assumed office on
September 1, ref B.) Current Ports Director Fernando Alvarez
told Post that he was surprised Duarte received the posting,
since there are powerful political and business interests
active in the port that dislike him.


3. (C) The National Ports Directorship is a relatively
high-profile position, and Puerto Cortes has become
increasingly important following its security certification
by the U.S. Coast Guard (one of the first in the world to be
certified) and its role as the anchor of the proposed
logistical corridor infrastructure project -- the largest
component of Honduras' USD 257 million proposal to the
Millennium Challenge Account. Duarte, in his public remarks,
indicated that a key focus of his tenure would be full
consideration of both the pros and cons of port
privatization. In our October 19 meeting, Minister of
Finance Chong scoffed at Duarte,s remarks, noting that the
issue of port privatization will be decided by Minister of
the Presidency Luis Cosenza, Minister for Social Policy Mauro
Membreno, and the President, not by Duarte. While the move
to Ports could be viewed as plum for Duarte, it appears
designed to move Duarte aside as the new Minister
consolidates his hold, particularly over the revenue
functions within MOF. Of more concern, outgoing Ports
Director Alvarez told Post that one reason he chose to resign
was increasing pressure from the National Party to squeeze
additional funds out of the port to fill party coffers
heading into the February 2005 primaries and November 2005
national elections. In our view, Duarte is no more likely to
succeed at rebuffing these pressures.


4. (C) Duarte will be replaced as of November 1 at MOF by
Jose Manuel Carcamo, previously a former DEI tax lawyer and a
partner with Minister Chong in an accounting consultancy.
Minister for Investment Camilo Atala told Post that most
recently Carcamo established a private practice and has been
practicing financial law as an advisor to several major
banks. EconChief and Treasury representative met with Chong
on October 19 to ask about the motives for and likely impacts
of the DEI reorganization and leadership change. Chong told
us that Carcamo is a legal expert with experience in both the
DEI and the private sector (Ernst and Young),but admitted
that his lack of administrative experience could be &a
handicap.8 Nevertheless, he said, it is easier, in his
opinion, to find a tax expert and teach him to manage than to
find a manager and teach him tax law. In contrast, he said,
former DEI Director Duarte spent the first year of his tenure
getting up to speed on the substance of his portfolio.


5. (C) Asked about the impetus for such a sweeping
reorganization effort, Chong pointed to the October 13
Congressional decree incorporating DEI into the MOF and
giving DEI four months to restructure and improve its
efficiency. Chong said the DEI had become inefficient and
poorly organized and in need of re-engineering. In
particular, he pointed to the need to reform the auditing arm
of DEI, which investigates as few as one case per
investigator, can take as long as ten months to complete an
audit that a private firm could do in just one month, and too
frequently generates no revenues (implying that the auditors
are paid-off to close the case.) Anyone involved in
corruption, Chong emphasized, will be fired. To motivate
those merely underperforming, Chong has proposed performance
bonuses in lieu of some portion of formerly guaranteed
raises. Chong expressed continued support for the Treasury
technical assistance program to the DEI and encouraged Post
to work closely with the new Director.


6. (C) Chong also said the need to bring the DEI workforce
into the Civil Service system was a key factor in the
restructuring. Under the CS law, Chong seeks to define
career ladders, position descriptions, and salary scales for
DEI employees, to replace the current ad-hoc system. The
DEI, he said, is overstaffed and full of political
appointees. EconChief noted that other ministries were
seeking ways to remove their employees from the civil service
system to improve hiring and retention and better protect
them from political pressures. (Note: Minister of Trade and
Industry Norman Garcia, for example, recently raised this
issue with us. He is seeking to follow the Central Bank,s
personnel model, which is not under the CS system, in order
to create a core group of technical experts in trade that can
remain in place beyond the next elections to implement CAFTA.
End Note.) Chong replied that it was &a first class lie8
to say that CS positions are more politicized than those in
the autonomous agencies. He strongly defended the DEI move
into Finance as a step to depoliticizing the service.


7. (C) It was also announced that the second Vice Minister
position, vacant since Chong left it on September 1 to become
Minister, was filled on October 19 by German Donald Dubon
Trochez, seconded to MOF from the Honduran Central Bank
(BCH). Dubon, an accountant with a master,s degree in
business financial administration, was formerly the Chief of
the Accounting and Controls Division at the BCH. Vice
Minister Ralph Oberholzer will remain in his current position
as the other Vice Minister, responsible for debt and finance
issues.


8. (C) Comment: Carcamo is thus far an unknown quantity, but
his previous association with Chong has led some to allege
implication in helping tax offenders evade justice. Post has
no evidence that this is the case, but will keep a close eye
on this as it develops. Post is encouraged by Chong,s
strong professed support for anti-corruption, institutional
reform, and specifically for continuing Treasury,s technical
assistance efforts to improve collections practices at the
DEI. Post will discuss the Treasury program with
Director-designate Carcamo at the earliest opportunity, and
will continue to monitor any impacts the shake-up could have
on that program. End Comment.

Palmer
Palmer