(C) AMBASSADOR URGES STRONGER ACTION ON CUSTOMS BY

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).

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Summary
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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.

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PARAGUAYAN CUSTOMS SERVICE
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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.

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USG ASSISTANCE TO PARAGUAYAN CUSTOMS
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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.

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Finance Minister,s Plans for Reform
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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.

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MONEY LAUNDERING LAW
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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.

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COMMENT
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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