UNCLAS SECTION 01 OF 03 KINSHASA 001082

SIPDIS

SENSITIVE
SIPDIS
NOT FOR INTERNET DISTRIBUTION

E.O. 12958: N/A
TAGS: ETRD ECON EMIN PGOV CG UG
SUBJECT: ECONOMICS ALONG THE UGANDAN BORDER: ITURI

REF: KINSHASA 818


1. (SBU) Summary. EconOff and PolOff visited the major towns of the
troubled Ituri District in Eastern DRC - Bunia, Aru and Mahagi -
May 6 through 10. As in the Grand Nord region of neighboring North
Kivu, legal and illegal cross-border trade, the absence of national
government control and a strong Ugandan economic influence is
pervasive. The resulting economic environment is thus oriented
toward Uganda rather than the DRC, with militia groups, the
Congolese military and traders profiting from loose border control
and illegal commerce. End summary.

UGANDAN INFLUENCE
--------------


2. (U) The Ugandan economic influence along the Ituri-Uganda border
is identical in many ways to that in the "Grand Nord" (reftel).
(Note: The Grand Nord refers to the northern region of neighboring
North Kivu province. End note.) This influence is most evident in
the near-exclusive use of the Ugandan shilling within a twenty-mile
swath of the border, including nearly all of Aru territory, and in
extensive cross-border trade. Contacts told EconOff that the
shilling makes up as much as ninety percent of the currency in
circulation. Further, the factors that promote Ugandan influence in
Ituri are similar to those in the Grand Nord, including a
debilitated infrastructure, the lack of a manufacturing base,
underpaid or unpaid military and civil servants, inadequate border
control, and geographical proximity.


3. (SBU) As in the Grand Nord, EconOff found that the local
population relies heavily on imports from Uganda and other countries
to meet its consumer and commercial needs, largely because the DRC's
infrastructure does not support the area's own production and
distribution network. SNEL, the DRC national electricity
parastatal, has no regional operations. In Aru, for example, the
UNHCR's diesel generator is the main electricity source. Via a
nearly sixty-year old decrepit hydroelectric plant, the DRC's gold
mining parastatal, OKIMO, supplies about 5 MW to local residents and

businesses in Bunia, plus a few MW to a small OKIMO support facility
and to Mongbwalu, an OKIMO concession. The rusting plant, at which
only two of the four generators are operational, has no security and
is missing part of its roof, which an OKIMO official told EmbOffs
was due to a fire that occurred several years ago.


4. (SBU) Because of this lack of infrastructure, the Ituri-Uganda
border region has no capacity to develop even a small manufacturing
base, unlike that in North Kivu. Business owners told EconOff that
coffee and cotton processing plants were destroyed following the
conflicts of the last ten years, and growers must now export the raw
materials to Uganda.

CROSS-BORDER TRADE
--------------


5. (SBU) In addition to being a major supply route into the DRC,
Uganda is also an open door for the exit of legal, and more often
illegal, goods from the DRC. The FARDC (DRC's armed forces), as
well as Ugandan and Congolese customs officials and business
persons, are believed to participate in this trade. As in North
Kivu, it is widely suggested that some FARDC forces participate in
cross-border smuggling of the DRC's natural resources, motivated in
part by their low pay. The FARDC also profits from this trade
through their increasing control of the borders. (Note: Accounts
vary as to how regularly the troops are paid, although FARDC
soldiers in Bunia were receiving their first payments in several
months during Emboffs' visit. End note.) Several contacts told
Emboffs that some FARDC elements have wrested control of the gold
trade from the militias (see e.g., the 2005 Human Rights Watch
report "Curse of Gold"), because they have blocked the militias'
access to the gold mines in the past year. MONUC officials in Bunia
told Emboffs that high-level military officers participate in the
illegal export, while others in Ituri said that it is lower-level,
extremely low-paid soldiers who do so.


6. (SBU) FARDC officials, though, claim the military has no
involvement in illegal trade. The then-FARDC Ituri Commander,
General Bob Ngoie, told Emboffs that FARDC elements previously
participated in illicit trade but do so no longer. FARDC commanders
in Aru also denied any involvement beyond a few isolated cases.
Conversely, customs officials told Emboffs that FARDC elements do
participate in customs fraud, although all said that the degree to
which it occurs has decreased since 2003. (Comment: It is not clear
how credible customs officials' claims are that FARDC involvement in
customs fraud has decreased. It is instead possible that customs
officials' involvement in the schemes has grown. It is also likely

KINSHASA 00001082 002 OF 003


local officials are complicit with the FARDC in abetting illegal
trade. End comment.)


7. (SBU) Customs officials were more forthcoming than their
counterparts in North Kivu in admitting the extent of customs fraud
at the borders with Uganda. They offered EconOff a variety of
explanations for the high frequency of fraud, including the GDRC's
failure to provide adequate resources to the customs agencies, the
several-mile gap in some locations between the actual frontier and
the collections stations, excess Congolese border taxes, relatively
higher Ugandan import taxes, and an ingrained culture of tax
evasion. These interconnected conditions, officials say, create the
incentives for traders and government officials to smuggle.


8. (SBU) Customs authorities claimed they are underpaid and lack the
tools needed to do their jobs. The bare offices in Mahagi
demonstrated the lack of central government financial support for
customs officials, as did accounts of months of salary arrears. The
head of Mahagi's OFIDA office (DRC's customs agency) said January
was the first month for which the DRC has paid him since before

1997. He also said that his office has just one copy of the DRC's
customs schedules, so officials do not know the correct amounts to
collect. The head of the DGRAD office (DRC's administrative
collection agency) in Aru told EconOff that he and his staff have
not been paid in three months.


9. (SBU) Facing what they say are inadequate salaries, Congolese
customs officials take their income where they can find it. The head
of Aru's DGI (DRC's income tax collection agency) estimated that
area tax and customs agencies remit only about one-twelfth of their
receipts to the national government, retaining the rest for salaries
and other purposes. (Comment: This fraud and the GDRC's failure to
provide adequate resources may be a chicken-or- egg issue. The GDRC
may refrain in part from providing resources if it believes that the
collections services can support themselves through local revenues.
End comment.)


10. (U) As a result of the collection services' real and perceived
lack of resources, GDRC agencies impose on traders a multiplicity of
taxes and fees at the borders to raise income. A MONUC officer in
Bunia told Emboffs that as many as 27 agencies collect at the
border. Some of the fees and taxes levied are entirely unauthorized,
while others have a legal basis but no direct connection with import
activities, such as taxes paid to the Ministries of Energy and
Environment.


11. (U) The imposition of excessive border fees further encourages
an already ingrained habit of customs fraud. The DRC experienced
what was essentially a 40-year tax holiday, beginning in the Mobutu
era, when few if any citizens paid taxes to the GDRC. This habit
grew during the DRC's civil war from 1997-2003, when militias
controlled the borders and thus facilitated a sort of "free trade
zone." The OFIDA director in Mahagi told EconOff that goods crossed
the borders tax-free, with customs officials complying either
voluntarily or under militia threat. The Mahagi DGI director said
Ugandan traders still import goods tax-free to markets along the
border, disadvantaging Congolese traders who must pay import duties.
During this period, no revenues made their way back to Kinshasa nor
did the GDRC pay salaries or provide any other financial support to
the province. According to Mahagi's DGI director, this tax evasion
became the modus operandi throughout much of eastern Congo.


12. (U) This habit is proving hard to break, as even the GDRC's
post-rebellion financial support for Ituri territorial governments
is reportedly only nominal. For example, the Aru Administrator told
EmbOffs that his territory has received only 9000 USD in
retrocessions from Kinshasa since 2003. With minimal support for
the region, local officials and business persons see little
incentive to pay taxes. Finally, the potential for fraud is also
present, because no established banking system exists in Aru or
Mahagi. Hence, banks do not serve as a collection agent of customs
revenues, as they do in Boma and Matadi. Customs officials can
easily put the cash revenues into their pockets rather than into
official coffers, particularly as they must take the money to
distant Bunia or elsewhere to deposit it in a commercial bank.


13. (U) The absence of goods inspection and revenue collecting
stations at some border crossings may also facilitate customs fraud.
For example, the Aru customs agencies are about four miles from the
Ugandan border, permitting both agency sub-office authorities and
traders to benefit. An Aru MONUC officer said the sub-offices at
the border only inspect import-export documents (papers that might
not be accurate), not the goods. Traders therefore have the
opportunity to onload or offload goods between the border and the
customs post and possibly even alter documents. OFIDA's director in

KINSHASA 00001082 003 OF 003


Mahagi told EconOff that this situation exists because OFIDA's
headquarters in Kinshasa will not authorize moving the main office
closer to the border crossing.


14. (SBU) The DRC's primary exports from Ituri are wood, coffee,
cotton, tobacco, fish, gold and coltan (columbite-tantalite). As
stated above, though, the region must import most of its consumer
goods, as well as petroleum products, vehicles and equipment. Most
of the exported wood reportedly comes from Aru and territories
neighboring Mahagi, such as Fardje, and it is widely believed that a
great deal of it is smuggled into Uganda. As in North Kivu, FARDC
commanders denied involvement in this illegal trade, but local media
reports and Emboff contacts, including the Aru territory
administrator and a MONUC officer in Aru, said some FARDC troops
likely facilitate transport.


15. (U) Emboffs' contacts generally admit that the smuggling of
precious metals out of the DRC - gold, diamonds and coltan - is
widespread. As discussed above, MONUC officers, customs officials
and business owners told Emboffs that militia involvement in
smuggling has significantly decreased because joint MONUC-FARDC
operations have disrupted trade routes, particularly surrounding
some gold mines. However, it is difficult to know whether illegal
export has decreased overall. (Note: Both private and public sector
contacts told EconOff that price decreases have reduced coltan
exportation. End note.) Many contacts told EconOff that gold is
smuggled into Uganda, although almost none could estimate amounts,
stating that it is easily concealed in small bags. A MONUC officer
in Bunia estimated that at Mongbwalu, a major mine about 93 miles
from Bunia, ten times as much gold is smuggled as is legally
exported. (Comment: Essentially all gold is artisanally mined,
making illegal exports even easier. If industrial joint-venture
mining operations in OKIMO's concessions can launch production,
illegal exports should decrease. End comment.)


16. (U) The illegal export of coffee, fish and other natural
resources is also supposedly widespread, particularly via the
largely uncontrolled Lake Albert. A business owner told EconOff
that, while disease has not affected Ituri's coffee crop, there are
no domestic factories to process the coffee. Hence, much
Congolese-grown coffee is smuggled into Uganda, where processing
factories exist. The Mahagi representative of a forwarding company
told EconOff that he estimates that annually about 3,500 tons of
coffee are illegally exported from Mahagi territory - twice the
amount the National Coffee office told him is officially exported.
The Mahagi territory administrator said he believes that half of
what Uganda exports as its own coffee is actually of Congolese
origin.


17. (U) Petroleum is also traded across the Ugandan border, imported
into the DRC after coming from Kenya, since the region has no
alternative source. While some is sold domestically, some is
smuggled back into Uganda through a duty-avoidance scheme. A MONUC
official in Aru told Emboffs that traders avoid Uganda's higher
import taxes by importing petroleum into the DRC through Uganda,
paying only transit duties in Uganda. Some of the petroleum is then
smuggled back into Uganda, thereby avoiding higher Ugandan import
fees.

Comment
--------------


18. (SBU) To reintegrate fully the Ituri-Ugandan border region, the
GDRC must continue to focus on activities that will capture
increased revenue in the region. In the short term, these
activities can include regularly paying the military and public
employees. In the medium-to long-term, while the list is long,
priorities should include the GDRC developing plans to replace
current customs and border officials with non-Iturians, as well as
increasing border control, particularly along porous areas such as
Lake Albert. In these efforts, the GDRC should seek the support,
advice and cooperation of MONUC, World Bank and bi-lateral donors as
well as the Government of Uganda - to the extent practical. End
comment.

Meece