Peru: 2005 ATPDEA Eligibility Report

UNCLAS SECTION 01 OF 11 LIMA 001346

SIPDIS

DEPT FOR WHA/AND, WHA/EPSC, EB/IFD/OIA
TREASURY FOR OASIA/INL
COMMERCE FOR 4331/MAC/WH/MCAMERON
DEPT PASS TO USTR - RSMITH

E.O. 12958: N/A
TAGS: EINV EFIN ETRD ELAB KTDB PGOV PE OPIC USTR
SUBJECT: Peru: 2005 ATPDEA Eligibility Report

REF: State 18743


1. The following is Post's submission of Peru's 2005 ATPDEA
Eligibility Report, as requested in reftel.

Effect of the ATPA/ATPDEA
--------------


2. The growing importance of the U.S. market for Peruvian
exporters is reflected by the fact that the U.S. share of
Peru's total exports has almost doubled from about 16.1
percent in 1994 to 29 percent in 2004. Peru became eligible
for preferential trade benefits under Andean Trade Promotion
Act (ATPA) in August 1993 and received renewed and expanded
benefits under ATPDEA in October 2002. Exports under ATPA,
and now the Andean Trade Promotion and Drug Eradication Act
(ATPDEA),have since gained an increasingly important role
in Peru's economy, as exporters have discovered that the
ATPA as amended offers greater advantages than benefits
offered under the Generalized System of Preferences (GSP).
Of the $3.7 billion of goods that Peru exported to the
United States in 2004, $1,603 million worth of goods entered
the United States under ATPA. Between 1997 and 2004,
exports from Peru accounted for 28 percent of all exports
under ATPA.


3. Under original ATPA benefits, four products (copper,
asparagus, jewelry and zinc) of the roughly 5,500 covered
items represented more than 90 percent of the value of ATPA
exports from Peru. In 2004, the United States imported
copper valued at $458 million and asparagus valued at $112
million. Under the ATPDEA, large increases have taken place
in a wide range of non-traditional exports such as apparel,
jewelry and various agricultural products. The Government
of Peru original estimates that Peruvian exports to the
United States would increase by over 13 percent per year
through 2006 (driven by annual gains of more than 17 percent
for non-traditional exports),have proven conservative since
exports under the ATPA-ATPDEA Program more than tripled in
2003 and rose an additional 25 percent in 2004. This
momentum has propelled total Peruvian export increase to the
United States of 24 percent in 2003 and 53 percent in 2004.


4. Peru's textile and apparel sector, a key job-provider,
anticipates continued substantial growth as a result of new
ATPDEA benefits. Prior to the ATPDEA, Peru's apparel
exports entered the United States with tariffs averaging
about 21 percent. With largely duty-free treatment under
the ATPDEA, the National Society of Industries (SNI)
estimates that apparel exports to the United States from
Peru could increase from $400 million in 2002 to $2 billion
in 2006. The Government of Peru estimated that exports of
products made with local alpaca fiber, included under the
ATPDEA, grew by 25 percent in 2004. Industry and government
sources consider that the textile and apparel industry could
generate up to 200,000 new jobs (including in cotton
cultivation) in Peru through 2006 (compared with 270,000 in
2004). Due to the high rate of unemployment and
underemployment, job creation is vital to economic
development in Peru.


5. Increased cotton cultivation in support of Peru's
apparel industry could serve as a new valuable alternative
to illicit coca growing. During the first ten years of the
ATPA, asparagus exports were the most significant direct
alternative development benefit of the program. The
asparagus producers estimate that 60,000 people worked
directly in 2004 in asparagus cultivation and processing.

Expropriations
--------------


6. According to Peru's Constitution, the Government can
only expropriate private property on public interest (such
as for public works projects) or national security grounds.
Any expropriation requires the passage of a specific act of
the Congress. The Government of Peru has expressed its
intention to comply with international standards concerning
expropriations. Adequate payment to owners of agricultural
lands expropriated by the Peruvian Government in the late-
1960s and early-1970s is still at issue. The Government of
Peru has committed to the U.S. Government to resolve
expeditiously one such claim involving an American company.

Arbitral Awards
--------------


7. Peru accepts binding international arbitration of
investment disputes between foreign investors and the state,
in accordance with national legislation or international
treaties signed by the Government. A law permitting
international arbitration of disputes between foreign
investors and the Government or state-controlled firms was
issued by decree during December 1992, and such recourse to
arbitration was provided for in the 1993 Constitution.
Although Peru theoretically accepts binding arbitration, on
several occasions parastatal companies disregarded
unfavorable judgments. Instead, they turned these
arbitration cases over to the judiciary, where they were
bureaucratically delayed until the company conceded the
case. Peru is a party to the 1958 New York Convention on
Recognition and Enforcement of Foreign Arbitral Awards.


8. Peru's adherence to ICSID (International Conference on
Settlement of Investment Disputes) has improved the
Government's ability to conclude bilateral investment
agreements. Disputes between foreign investors and the
state regarding pre-existing contracts must still be
submitted to national courts. However, investors who
conclude a juridical stability agreement for new investment
are permitted to submit contract disputes with the
Government to national or international arbitration by
common agreement.


9. Several private organizations, including the American
Chamber of Commerce and the Lima Chamber of Commerce,
operate private arbitration centers. The quality of these
centers varies, however, and investors should choose a venue
for arbitration carefully. In one 2001 case involving the
Lima Chamber of Commerce's arbitration center, a U.S.
investor discovered irregularities in the way the case had
been handled by the center.


10. The Peruvian government committed to resolve a number
of commercial disputes as a condition of the U.S granting
trade benefits under the ATPDEA in 2002. In April 2004, the
Peruvian government provided USTR with "roadmaps" for the
resolution of several of these investment disputes. As of
December 2004, seven ATPDEA commercial disputes remain, of
which two are in arbitration.

Reverse Preferences
--------------


11. The U.S. Government has no indication that Peru has
granted such preferences to the products of a developed
nation. Furthermore, Peru is a member of the World Trade
Organization (WTO) and, accordingly, is bound by the most-
favored-nation provisions in the WTO Agreements.

Intellectual Property
--------------


12. Protection of intellectual property rights (IPR) in
Peru has improved significantly over the past decade, but
still falls short of U.S. and international standards in
several areas. After two years on the U.S. Government's
"Priority Watch List" under the Special 301 provisions of
the 1988 Trade Act, Peru was moved to the "Watch List" in
2001 in recognition of progress on copyright issues. In
2003 and 2004, Peru remained on the Watch List due to
concerns about the adequacy of Peru's enforcement of its IPR
laws, particularly with respect to the relatively weak
penalties that have been imposed on IPR violators. Although
the Peruvian government in July 2004 increased the minimum
penalty for piracy to four-year's imprisonment, there have
yet to be any convictions under the new law. Other factors
contributing to continued placement on the "Watch List"
include Peru's revocation of second-use patent protection
for pharmaceuticals and a lack of protection for
confidential test data that is submitted for the marketing

SIPDIS
approval of pharmaceutical and agrochemical products.


13. Peru belongs to the World Trade Organization (WTO) and
the World Intellectual Property Organization (WIPO). It is
also a signatory to the Paris Convention, Bern Convention,
Rome Convention, Phonograms Convention, Satellites
Convention, Universal Copyright Convention and the Film
Register Treaty. In December 2001, the Public Ministry
created the first office of a special prosecutor for the
enforcement of IPR. This move has increased the efficiency
and number of IPR enforcement actions. In August 2002, the
Interior Ministry entered into an agreement with the IPR
administrative agency, INDECOPI, to facilitate greater
interagency cooperation on IPR enforcement actions,
including police raids. Nevertheless, concerns remain about
the adequacy of IPR law enforcement, particularly with
respect to the relatively weak penalties that have been
imposed on IPR violators by the criminal justice courts.

Copyrights
--------------


14. Peru's 1996 Copyright Law is generally consistent with
the TRIPS Agreement. However, sound recordings, textbooks,
books on technical subjects, motion picture videos and
software are widely pirated. While the government, in
coordination with the private sector, has conducted numerous
raids over the last few years on large-scale distributors
and users of pirated goods and has increased other types of
enforcement, piracy continues to be a significant problem
for legitimate owners of copyrights. Peru signed the WIPO
Copyright Treaty in July 2001 and the Performances and
Phonograms Treaty in February 2002. Progress is being made
on the government's legalization of computer software; the
Government of Peru published a decree in February 2003,
requiring all government entities to use legal software and
establish effective controls to ensure such legal use
between now and March 31, 2005.

Patents and Trademarks
--------------


15. Peru's 1996 Industrial Property Rights Law provides the
framework for effective protection for patents and moves
Peru closer to conformity with international obligations.
In 1997, based on an agreement reached with the U.S.
Government, Peru resolved several inconsistencies with the
TRIPS Agreement provisions on patent protection and most-
favored nation treatment for patents. However, U.S.
companies continue to have concerns about Peru's protection
of patents, as counterfeiting of trademarks and imports of
pirated merchandise remain widespread.


16. U.S. drug manufacturers are concerned that Peru does
not provide sufficient protection for data submitted to
regulatory authorities in connection with marketing approval
for pharmaceutical products. The Government of Peru does
not provide for a fixed period of data exclusivity for
pharmaceutical producers. Peru's health regulatory agency
provides sanitary registrations to copies of innovative
pharmaceutical products despite WTO TRIPS Article 39.3,
which requires governments to prohibit the "unfair
commercial use" of confidential test data. Peru also does
not provide adequate patent protection to "second-use"
innovations. The U.S. Government believes that qualifying
"second use" inventions are entitled to patent protection
under international obligations.

Extradition
--------------


17. A new extradition treaty entered into force in August,

2004. It specifies a list of extraditable offenses and
permits the extradition of nationals.

Workers' Rights
--------------


18. The Constitution and the law provide for the right of
association. About five percent of the formal sector
workforce of 5 million belongs to organized labor unions.
Peru's 2004 total workforce totaled 13 million.
Approximately 8.3 million (62 percent) work in the informal
sector, with 5 million workers employed in the formal
sector. About 91 percent of the economically active
population has some kind of employment, but 57 percent work
less than 35 hours a week or earn less than the minimum
household consumption basket.


19. Labor regulations provide that workers may form unions
on the basis of their occupation, employer affiliation or
geographic territory. Workers are not required to seek
authorization prior to forming a trade union, nor may
employers legally condition employment on union membership
or non-membership.


20. In the past, labor advocates asserted that laws
promulgated by the Fujimori administration in the 1990's, as
well as provisions in the 1993 Constitution, failed to
protect the rights of workers to form unions and bargain
collectively. In January 2003, President Toledo signed into
law legislation that addresses some of the International
Labor Organization's (ILO) primary objections to the
Peruvian labor code. The 2003 labor law includes provisions
to allow apprentices to join unions, reduces to 20 the
number of individuals required to form a union, recognizes
the right to strike and allows for collective bargaining by
sector.


21. In recent years, the ILO criticized a provision that
permitted businesses to employ up to 30 percent of their
workers between the ages of 16 to 25 in apprenticeship-type
jobs; workers in this age bracket were precluded from union
membership and participation. To address this complaint, a
2001 law reduced this number to 10 percent, and the 2003
labor reforms allow apprentices to join unions and
participate in union activities.


22. The 2003 labor reforms remedied some of the ILO's long-
standing concerns over Peruvian law in the areas of
collective bargaining and the right to strike. The new law
allows unions to bargain collectively at both the firm and
sector levels, and removes a 1992 requirement that a
majority of workers in an enterprise, regardless of union
membership, must vote in favor of any strike. A second
decision by the Supreme Court in March 2004 guaranteed the
right of industry-wide collective bargaining by workers in
the civil construction industry.


23. In the area of illegal dismissals for union activity,
the main union confederations criticized the Employment
Promotion Act, amended in 1995 and 1996, for restricting the
rights of workers. Unions complained that the law
eliminated the right of dismissed workers to compulsory
reinstatement if they prove that employers dismissed them
unjustly. In practice, companies sometimes offered
financial compensation instead of reinstatement as the
legislation allows. Although the law prohibits companies
from firing workers solely for involvement in union
activities, this provision was not enforced rigidly. In
November 2000, the ILO's Committee of Freedom of Association
recommended that the Government enforce legislation
protecting workers from dismissal on account of membership
in a union or participation in union activities. In the
first such action by the judiciary, in September 2002 the
Constitutional Tribunal ruled that a major company,
Telefonica, had to rehire over 400 workers suspected of
being fired for their union affiliation.


24. In July 2002 Congress passed a law regarding collective
dismissals that reinstated workers' rights in this area.
During 2003 and 2004 over fourteen thousand former state
workers received some form of compensation for dismissals
during the Fujimori era, including payments, reinstatement
into their old jobs or reassignment to other jobs in the
state sector. At the end of 2004, the GOP was considering
petitions from other workers who claimed coverage under the
2002 law. The workers were among those deemed to have been
fired unjustly during the Fujimori Administration.


25. There are no restrictions on the affiliation of labor
unions with international bodies. Several major unions and
labor confederations belong to international labor
organizations such as the ICFTU, the international trade
secretariats, and regional bodies.

SIPDIS


26. The Constitution recognizes the right of public and
private sector workers to organize and bargain collectively;
however, it specifies that this right must be exercised in
harmony with broader social objectives. Labor regulations
provide that workers may form unions on the basis of their
occupation, employer affiliation or geographic territory.
The law does not prohibit temporary employees from joining a
union, but they may not join the same union as permanent
workers.


27. The Constitution prohibits forced or bonded labor, and
there were no reports of forced labor during 2002. The law
specifically prohibits forced or bonded labor by children.
Forced labor previously was found in the gold mining
industry in the Madre de Dios area; however, the changing
nature of the industry and government efforts to regulate it
have at least partly addressed the problem.


28. The Constitution provides that the State promote social
and economic progress and occupational education. It states
that workers should receive a "just and sufficient" wage to
be determined by the Government in consultation with labor
and business representatives, as well as "adequate
protection against arbitrary dismissal."


29. In September 2003, the Government raised the statutory
minimum wage from $124 (410 soles) a month to $153 (460
soles). The Ministry of Labor employs approximately 170
labor inspectors.


30. The Constitution provides for a 48-hour workweek, a
weekly day of rest, and an annual vacation. As of February
2002, a law requires companies to pay overtime to employees
who work more than 8 hours, to provide additional
compensation for work at night, and to provide a 45-minute
meal break to employees during their 8-hour shift.


31. While occupational health and safety standards exist,
labor advocates argue that the Government dedicates
insufficient resources to enforce existing legislation. The
Ministry of Labor receives worker complaints and intervenes
in cases. When firms are found to be in violation of the
law, the Government sanctions them with fines or, in some
cases, closure. In cases of industrial accidents, the level
of compensation awarded to the injured employee usually is
determined by agreement between the employer and the
individual involved. The worker does not need to prove an
employer's culpability in order to obtain compensation for
work- related injuries. No provisions exist in the law for
workers to remove themselves from potentially dangerous work
situations without jeopardizing their continued employment.

Economic Conditions
--------------


32. Over the past decade, Peru has been transformed by
market-oriented economic reforms and privatizations that
generated many of the conditions for long-term growth.
Peru's dynamic economic performance in 2004 contrasted
sharply with turmoil elsewhere in South America. The
country led the hemisphere with 5.1 percent real growth,
driven by investment, domestic demand and exports. GDP in
2004 reached $67.1 billion. Inflation was 3.5 percent, the
currency appreciated 5.5 percent over the year and Lima
unemployment fell to 8.8 percent. GDP per capita reached
$2,440, up significantly from $2,100 in 2001. Fiscal
accounts were under control, though the deficit hit 1.1
percent of foreign reserves closed the year at $12.6
billion. External debt was 45.2 percent of GDP. Banking
and retail services, mining, manufacturing, agriculture and
fishing are key economic sectors.


33. Peruvian exports reached $12.5 billion in 2004, with
imports of $9.8 billion, producing a trade surplus of $2.7
billion. ATPDEA benefits may propel exports above $13.8
billion in 2005 (provided the Peruvian Government continues
to improve the investment climate). Peru's major trading
partners are the United States, China, European Union,
Japan, Colombia, Brazil and Venezuela. Approximately 29
percent of Peruvian exports are destined for the United
States and 20 percent of Peruvian imports come from the
United States. Exports include fishmeal, copper, zinc,
gold, petroleum, coffee, sugar and textiles and apparel.
Imports include machinery, vehicles, processed food,
petroleum and steel. Peru belongs to APEC and the WTO and
actively participates in FTAA negotiations. Peru's stock of
foreign direct investment (FDI) was over $12.9 billion in
2004, with the United States, Spain and Britain the leading
investors. FDI is concentrated in privatized sectors such
as mining, electricity, telecommunications, and finance.


34. Peru's economy is one of the better-managed in Latin
America, but challenges remain. Growth should be near 5
percent in 2005, driven by construction, investment,
domestic demand and ATPDEA-related exports, with inflation
of 2.5 percent. Tax collections are currently 13.4 percent
of GDP. The Peruvian Government still faces strong social
pressures to reduce high poverty (52 percent) and both
unemployment and underemployment (56 percent). Maintaining
long-term growth will require improving the investment
climate, reducing corruption and completing other reforms.

Market Access
--------------


35. Tariffs apply to virtually all goods exported from the
United States to Peru, although rates have been lowered over
the past few years. The government maintains some
"temporary" tariff surcharges on agricultural goods in an
effort to protect local production, assure fiscal revenues,
and promote domestic investment in the sector. Under the
current system, a 12 percent tariff applies to 45 percent of
the products imported into Peru; four percent and seven
percent tariffs apply to about 23 percent and 15 percent of
goods, respectively; and 17 percent and 20 percent tariffs
apply to most of the rest. A few products, mostly
agricultural, are assessed rates (because of the additional
"temporary" tariffs) of 5 percent. In March 2002 the tariff
rate for most capital goods was reduced from 20 percent and
12 percent to 7 percent. On December 31, 2003, the Ministry
of Economy and Finance announced the reduction of tariffs
from seven percent to four percent for more than one
thousand capital goods, which account for 95 percent of the
items previously set at the seven percent level.

36. In theory, Peru has a two-tier import tariff system (12
and 20 percent),but in reality it has four levels for
agricultural imports: 4, 12, 17 and 25 percent.
Additionally, all products are subject to a value added tax
(VAT) of 19 percent, although discounts have been granted to
local production in some cases. Most products of interest
to U.S. agricultural exporters are subject to high import
duties. Meats, offal, dairy products, ice cream, processed
potatoes, beans, fruit and vegetables (fresh and processed),
rice, wheat, confectionery, chocolate, pasta and pastry are
assessed an import duty of 25 percent. Malt, wine and
beverages are assessed a 17 percent import duty, while
yellow corn, 12 percent. Inputs such as seeds, cattle for
reproduction, semen and fertilizers are imported into the
country duty free. Peru's bound levels for agricultural
products under the WTO are quite high, from 80 percent to
141 percent.


37. Imports of "sensitive" products, including corn, rice,
sugar and powder milk, plus scores of related products, are
subject to a price band. This levy is the difference
between the minimum import price and an international
reference price plus an adjustment for insurance, freight
and other factors. On September 27, 2002, the Government of
Peru increased the number of products related to these for
categories of "sensitive" products. This new law
principally affects U.S. import of dairy products, and in
September 2002, import duties on sugar were raised from 40
to 100 percent.


38. In the second half of 2002, the five member countries
of the Andean Community started to negotiate a common
external tariff and initially reached agreement on 62
percent of tariff items. If implemented, this harmonization
will have the effect of increasing Peru's tariffs on a
number of products, particularly with respect to consumer
goods.


39. Some non-U.S. exporters to Peru have preferential
access to the Peruvian market because of Peru's bilateral
tariff reduction agreements. A top U.S. agricultural market
access priority is the elimination of the price band system.

WTO Agreements
--------------


40. Peru was a founding member of the WTO and was a
contracting party to the GATT beginning in 1948. The U.S.
Government has raised concerns regarding Peru's failure to
provide adequate protection for confidential test data as
required by WTO TRIPS Article 39.3. The U.S. Government has
also pressed for increased cooperation between INDECOPI, the
administrative agency that handles patents, and DIGEMID, the
health agency that licenses pharmaceutical products.

FTAA Participation
--------------


41. Peru is an active participant in FTAA negotiations.
Peru hosted an FTAA vice ministerial meeting in 2001.

Subsidies or Other Requirements
that Distort International Trade
--------------


42. Almost all non-tariff barriers, including subsidies,
import licensing requirements, import prohibitions and
quantitative restrictions have been eliminated. However,
the following imports are banned for a variety of reasons:
several insecticides, fireworks, used clothing, used shoes,
used tires, radioactive waste, cars over five years old and
trucks over eight years old. Used cars and trucks that are
permitted to be imported must pay a 45 percent excise tax -
compared to 20 percent for a new car - unless they are
refurbished in an industrial center in the south of the
country upon entry, in which case they are exempted entirely
from the excise tax. Import licenses are required for
firearms, munitions and explosives, chemical precursors
(since these can be diverted to illegal narcotics
production),ammonium nitrate fertilizer, wild plant and
animal species, and some radio and communications equipment.


43. There are still significant trade barriers imposed by
SENASA, the Government of Peru's sanitary regulatory agency,
on agricultural products including poultry, live animals,
animal genetic material and plant products. The result has
been an effective ban on the import of certain agricultural
products (for example, paddy rice).


44. Imports are also assessed a 19 percent value-added tax
on top of any tariffs; domestically-produced goods generally
pay the same tax as well. The Government of Peru exempts
certain domestic agricultural products from the tax.

Trade Policies that Revitalize the Region
--------------


45. Peru has been a member of the Andean Community (and its
predecessor Andean Pact) since 1969. In 1992, Peru
suspended its participation in the Andean Community's
integration process because it was reluctant to abandon its
two-level tariff structure for the four-tiered common
external tariff (CET) favored by the other members. In
1997, Peru agreed to be fully and gradually incorporated
into the Community's free trade area by December 2005. At
the Andean President's Council meeting on January 31, 2002,
the five member countries of the Andean Community agreed to
establish an Andean free trade zone, a common external
tariff (CET),and a customs harmonization policy by January

2004. Peru received an exception for petroleum and fuels
until the end of 2003 and for agricultural products until
the end of 2005.


46. The CET agreement established a unified tariff schedule
that became effective at the end of 2003. In the second
half of 2002, the Andean members started to negotiate the
CET in order to provide initial offers for the FTAA, and
reached agreement on 62 percent of tariff items. Peruvian
industry representatives and economists raised concerns that
negotiations of a CET on the remaining 38 percent of items
could lead to increased tariffs on several consumer products
and lower competitiveness. As a result, finalization of
negotiations on the CET with Andean neighbors will be
difficult to achieve.

Narcotics Cooperation
--------------


47. On March 1, 2005, Peru received full certification for
its cooperation with the United States on counter-narcotics
issues under the Foreign Assistance Act. Peru is the second
largest cocaine producer in the world and a major exporter
of high purity cocaine and cocaine base to markets in South
America, Mexico, the United States and Europe.


48. About 90 percent of the coca leaf harvested in Peru is
used to produce cocaine or its intermediate products. The
remainder is used by the local population or for legal
medical and commercial consumption in the United States and
Europe. Dense coca cultivation is increasing in new areas
outside the traditional source zones. With USG support,
Peru eradicated almost 10,000 hectares of coca in 2004:
alternative development programs supported legal productive
activities on almost 20,000 hectares. Opium latex seizures
are one indication of an upward trend in poppy cultivation
along Peru's Andean ridge. Although the GOP has not been
able to measure the size of the opium poppy crop, Peruvian
National police eradicated almost 100 hectares of opium
poppy in 2004.

49. Drug traffickers continue to move coca products out of
Peru by land, air, and sea, as well as opium latex and
morphine across northern land borders, to U.S., South
American and European markets. Mexican trafficking
organizations are implicated in using Peru as a primary
source of cocaine base and HCl. Maritime smuggling of
larger cocaine shipments is the primary method of
transporting multi-ton loads of cocaine base and cocaine
hydrochloride (HCl). Law enforcement efforts in 2004
focused on maritime and port investigations/interdictions
that produced record-breaking cocaine seizures. In 2004,
approximately 5.7 metric tons of cocaine base and 7.11
metric tons of cocaine HCl were seized. The USG and GOP
have cooperated to improve port security and to address
increased maritime smuggling at key Peruvian port locations.
Importantly, the fledgling National Port Authority (APN)
made very significant advances in promoting the timely
attainment of International Ship and Port Security (ISPS)
requirements. The USG is continuing to work with the GOP to
enhance their capability to identify and inspect suspect
cargo shipments.


50. In a positive move, Peru's Congress passed a new law in
July 2004 to strengthen controls over precursor chemicals
used in cocaine processing. This will go into effect in
early 2005. Less positive is the increased support by
members of Congress for cocalero demands for more permissive
coca laws. In July, the U.S. Government designated Fernando
Zevallos as a drug kingpin and froze his assets in the
United States, including those of his airline
Aerocontinente, which has since gone out of business. The
United States and Peru brought into force a new extradition
treaty in August 2003. In 2004, Peruvian authorities
approved requests to extradite two narcotraffickers from
Peru to the United States.


51. Although Peru is not a major financial haven, money
laundering is endemic. Drug organizations transport million-
dollar cash proceeds from the U.S., Mexico, Colombia, and
other Central/South American countries to Peru. Recently
amended anti-money laundering legislation has broadened the
definition of money laundering; however, procedural
implementation, key currency reporting requirements, and
asset forfeiture provisions are still lacking.

Anti-Corruption
--------------


52. It is illegal in Peru for a public official or employee
to accept any type of outside remuneration for the
performance of his or her official duties. Peru has
ratified both the UN Convention Against Corruption and the
Organization of American States' Inter-American Convention
Against Corruption. Peru is not a member of the
Organization of Economic Cooperation and Development, and
has not signed the OECD Convention on Combating Bribery.


53. Peru is one of four nations worldwide participating as
a pilot country in the G8 anti-corruption and transparency
initiative. The U.S. has worked vigorously to help the
Peruvian government prepare a detailed action plan, in
coordination with other G8 partners and NGOs, of activities
it will pursue under the initiative. The plan envisions
activities in six areas: a) citizen information/internet
connectivity; b) improving central government fiscal
transparency; c) development of GOP procurement systems; d)
improving regional/local government transparency and
management; e) improvement of transparency of extractive
industry revenues; and f) development of asset forfeiture
systems and legislation. Total project expenditure under
the initiative is expected to be $40 million in 2005-06,
with the U.S. already funding some projects.


54. Transparency International in 2004 ranked Peru number
74 (out of 145) in its 2004 Corruption Perception Index.
(In the same study, Chile was ranked 20, Brazil was number
59, Colombia was ranked 60 and Argentina was ranked 108.)
U.S. firms have reported only a small number of problems
directly resulting from corruption, especially in government
procurement processes and in the judicial sector, but the
revelation in late 2000 of a broad and deep corruption ring
organized by former presidential advisor Vladimiro
Montesinos has heightened awareness of the problem. While
anti-corruption efforts have been a stated priority of the
Toledo Government, in practice most resources are directed
at investigating Fujimori-era corruption. In 2001,
President Toledo appointed an anti-corruption "czar" to lead
government efforts, but this official resigned in 2002 and
has yet to be replaced. Private sector groups have
increased efforts to combat corruption through a new
cooperative effort called "ProEtica."

Government Procurement
--------------


55. There is no limitation on foreign participation in
government solicitations. In 2000, however, in an effort to
support national companies, the government began adding 15
points (on its rating scale of 100) to Peruvian firms
bidding on government procurement contracts. In January
2002, the government raised the point preference an
additional five points, for a total of 20, until 2005. U.S.
pharmaceutical firms have raised concerns about this
practice with regard to bidding on the Health Ministry's
pharmaceutical purchases. U.S. firms contend that the 20
percent margin is excessive, giving unfair advantage to
Peruvian competitors that would otherwise lose these bids on
cost or technical grounds. Peru is not a signatory to the
WTO Agreement on Government Procurement.

Counter-Terrorism
--------------


56. Peru is taking action against both international and
domestic terrorism. For the second year in a row,
President Toledo featured combating terrorism in his state-
of-the-nation speech, and he has committed the GOP to
increased funding for projects in areas where Sendero
Luminoso (SL) still operates on a limited basis. This
action is deemed necessary because of growing indications
that SL is allying itself with coca producers and narcotics
traffickers, and is attempting to rebuild its base through
expanding its influence in universities throughout Peru.
The new National Defense and Security fund will provide $40
million to the police and military in 2005; some of this
money will be used to support counterterrorism interests.
The Peruvian Congress has created a national security system
designed to improve intergovernmental cooperation and
strengthen terrorism prosecutors. The National Police (PNP)
Directorate of Counterterrorism works closely with the
Embassy in counterterrorism activities. The PNP continues
to break up SL camps and capture leaders. Peru aggressively
prosecutes terrorist suspects. After the Constitutional
Tribunal overturned numerous provisions in Fujimori-era
terrorism laws in 2003, President Toledo issued new decree
legislation and established the procedures for reviewing and
retrying terrorism cases. Around 750 cases are being
retried in 2005. The trial was set to begin in the first
quarter of 2005 for eight SL members accused of the March
2002 bombing across the street from the U.S. Embassy that
killed 10 people. Peru is a party to all 12 of the
international conventions and protocols relating to
terrorism. Peru, Colombia and Brazil recently signed a
border cooperation agreement that addresses terrorism and
arms trafficking, along with other issues.


57. A June 2002 law passed by Congress allows prosecution
of money laundering related to terrorism and also created
the Financial Intelligence Unit (FIU) as a means to identify
money-laundering. Peru further strengthened its anti-money
laundering legislation in July 2004. The law included anti-
terrorist finance activities among the FIU's functions;
greatly expanded the FIU's capacity to engage in joint
investigations and information-sharing with foreign FIU's;
enhanced the FIU's capacity to exchange information and
pursue joint cases with other agencies of the Peruvian
government; and requires that individuals and entities
transporting more than $10,000 in currency or monetary
instruments into or out of Peru file reports with Customs.
The FIU may have access to these reports upon request. This
legislation moves the country closer to fulfilling UNSCR

1383.

STRUBLE