PARAGUAY: EXPROPRIATION CASE A SETBACK FOR

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?
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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