PARAGUAY SCENESETTER FOR WHA A/S THOMAS SHANNON

C O N F I D E N T I A L ASUNCION 000338

SIPDIS

SIPDIS

WHA FOR THOMAS SHANNON

E.O. 12958: DECL: 04/20/2027
TAGS: PREL PTER KCRM SNAR PA
SUBJECT: PARAGUAY SCENESETTER FOR WHA A/S THOMAS SHANNON

Classified By: MICHAEL J. FITZPATRICK; REASONS 1.4 (b),(d)


1. (C) Assistant Secretary Shannon, Embassy Asuncion warmly
welcomes your visit as an opportunity to strengthen our
relationship with Paraguay and promote U.S. interests focused
on strengthening democratic institutions, promoting sound
economic policies and good governance, disrupting criminal
organizations, and combating terrorist financing. You come
at a particularly sensitive time, with President Duarte
tilting leftward in his search for greater support -- both
domestically and internationally -- and much of the body
politic focused on Presidential Elections in April 2008.
Governments in the region and segments within Paraguay
routinely call into question important aspects of our
relationship. Many Paraguayans - inside and outside the
government - however, support closer U.S. ties, in particular
as a political and economic counterbalance to the influence
Brazil wields over Paraguay and in response to concern about
growing cooperation between Venezuela-Bolivia, including in
the military sphere.


2. (SBU) An overview of the current situation in Paraguay
follows, highlighting key issues which may come up in your
scheduled meetings.

Your Program in Asuncion


3. (U) Post is pleased to have this opportunity to host your
visit to Paraguay. You will meet with the Ambassador first
and then with the Country Team to obtain a brief on the
overall situation in Paraguay before meeting with Embassy
Staff to provide Washington's view of Paraguay and the
broader region. We have arranged for you to visit with the
Foreign Minister, Presidential Advisor Carlos Walde and the
MCA team, business and NGO leaders, the Director of
Paraguay's Anti-Drug Unit (SENAD) and the directors of a
number of Paraguayan investigation units. We are waiting to
hear about whether President Duarte will meet with you. The
Foreign Minister will host a small dinner for you; we are
planning to host a large reception to which we would invite
key political and economic leaders. The press will be
invited to a number of events including a Peace Corps signing
in ceremony, a meeting with students and teachers
participating in our English language instruction program
with the Paraguayan-American Cultural Center (CCPA),and your
visit with some merchants benefiting from USAID's export
promotion program. Separately, we are arranging an
off-the-record meeting with a number of key press editors and
on-the-record interviews with Paraguay's leading daily
newspaper and radio.

The Political Scene


4. (C) Your visit comes four years into the five-year
presidency of Nicanor Duarte Frutos. In that time, Duarte
has taken steps to deal with a pressing fiscal crisis, revive
the economy, and fight corruption. In the last year,
however, political support for Duarte has sagged with polls
indicating the general population is not satisfied his
government has taken adequate measures to create jobs,
improve the economy and tackle corruption. Duarte tilted
left, criticizing President Bush and stressing greater
appreciation for Venezuelan President Chavez, and his
"commitment" to the region. Duarte still holds on the hope
he can secure a Constitutional amendment allowing for his
reelection. However, that drive likely will come to an end
on April 28 -- the day you depart Paraguay -- when the
Colorado Party will hold a convention to elect members to its
Party Election Tribunal but where the real discussion will
revolve around choosing Duarte's successor. President Duarte
presently favors his Education Minister Blanca Ovelar over
Vice President Castiglioni to succeed him. Vice President
Castiglioni formally declared his own intention to seek the
Colorado nomination March 28, essentially cutting his
remaining ties to NDF and the "Official" wing of the party.
Acting Party President Alberto Alderete announced April 19 he
will not run as vice-president on a ticket with Ovelar (he
prefers the top slot),signaling a rupture with the President
and his own interest in making a run at the Party's
nomination for president. Leftist priest Fernando Lugo is the
leading candidate on the opposition side though he faces a
potential legal challenge himself as the Constitution bars
"ministers" from seeking political office. While he and the
opposition parties give lip service to the need for a united
front behind one candidate, they have yet to decide on how
they will determine who that candidate will be -- either
through a political agreement amongst political leaders or an
open election.

Paraguay's Public Security Challenges

5. (C) Twelve members of the Free Fatherland Party (PPL) - a
far-left, rural-based political movement - were found guilty
in 2006 for the 2004-5 kidnapping and murder of Cecilia
Cubas, the daughter of former president Raul Cubas.
Argentina, Brazil and Bolivia have yet to extradite others
implicated who took refuge abroad. Evidence ties the PPL to
the Revolutionary Armed Forces of Colombia (FARC). The Cubas
kidnapping proved to be one in a series of events over recent
years to suggest the emergence of a political movement bent
on provoking instability through violence. A culture of
distrust, allowing for little inter-institutional
cooperation, hampers the ability of Paraguay's law
enforcement community and military to tackle rising concerns
about public security; Paraguay's National Police are widely
disparaged by the general population as incompetent and
corrupt, and the police and military are generally rivals,
not partners. The Cubas killing and clear evidence of FARC
involvement shocked Paraguay's leaders and population.
Increased cooperation with Colombia and the U.S. and the
realization of the need for better intelligence and other
security measures were positive, if ironic, results of the
Cubas case. Concern over the PPL has died down since the
convictions while internal security concerns have risen.
Major robberies and kidnappings of an apparently criminal
nature, including the kidnapping of terrorist financier
Mohammad Barakat and the Japanese leader of the Unification
Church, are on the rise in 2007, particularly in Ciudad del
Este.

Reforming the Economy, But Growth Insufficient


6. (U) Paraguay's economy relies heavily on agriculture. It
features bloated but weak state institutions and the heavy
involvement of state-owned enterprises. There is
considerable activity involving the trading of imported
legitimate goods, contraband and counterfeit products, most
of which are destined for Brazil or Argentina. President
Duarte inherited a weak economy in 2003 and promised to
attack widespread corruption and reform the economy. He
named a non-partisan, technocratic economic cabinet and has
supported their efforts. On a macroeconomic level,
Paraguay's performance has been strong: economic growth
reached 4 percent in 2006 although inflation reached 12.5
percent. While the government succeeded early on in getting
some significant economic reform laws through Congress,
progress over the past three years has been slow. The
confrontation between Congress and the Executive has all but
frozen any reform efforts that require legislation; the
Congress has rejected several loans (from the IDB, EU, the
World Bank, and Japan) and suspended for one year the
application of the previously authorized personal income tax.
For Paraguay to escape from the poverty affecting roughly
half of its population, the country needs to increase
productivity by attracting capital and raising annual growth
rates to at least 5 or 6 percent -- and sustaining them
there. Success will require the government to stay the
course on macroeconomic stability and undertake deeper
structural reforms. But as the political class now gears up
for a bruising 2008 fight over government control, there is
no sign of the political will.

International Crime and Counter Terrorism


7. (U) U.S. Treasury estimates $100 million leaves Paraguay
every month and never returns. The Tri-Border Area (TBA),
the region of Paraguay that meets Brazil and Argentina near
the city of Ciudad del Este, is a primary USG concern. The
area, with its loose borders and lax controls, is a a hub for
transnational criminal activity including drug trafficking,
trafficking in persons, arms trafficking, intellectual
piracy, document forgery, and contraband. Brazil has
tightened its border controls, but the effort has produced
more a diversion of smugglied goods (particularly to other
towns on Paraguay's border, Pedro Juan Caballero and Salto
del Guaira) than a disruption of the flow. Significant
amounts of money continue to flow out of CDE to the Middle
East.


8. (SBU) Paraguay is widely regarded as the weakest link in
combating the wide range of illicit activities that occur in
the TBA. Corruption at multiple levels undercuts serious law
enforcement efforts. Nevertheless, Paraguay has taken
serious steps to address its institutional deficiencies by
creating special units, principally in Customs and the
Ministry of Industry and Commerce (MIC) to investigate IPR
violations and customs fraud. The MIC's Specialized
Technical Unit (UTE),in particular, has made a number of
significant seizures of counterfeit products. These units
receive significant assistance from the USG in the form of
INL funds or the MCC Threshold Program.

9. (SBU) Paraguay's Anti-Money Laundering Secretariat
(SEPRELAD) has also received technical assistance and
equipment from the U.S. Paraguay has subscribed to all 12 UN
counter-terror conventions but its anti-money laundering law
does not allow for prosecution of money laundering as an
autonomous crime. Nor does Paraguay yet have counter
terrorism legislation. Paraguay seeks to meet its
international obligations through provisions in a series of
three bills. UNCTC Executive Ruperez approved of the draft
legislation text when he visited in July 2006. The first
bill establishing money laundering and terrorist financing as
crimes and setting out the consequent penalties was delivered
to Congress this October; on April 19, the Congress voted to
suspend consideration of the bill for another 15 days. The
bill on procedural tools for the prosecution of these crimes
remains under arduous debate before a Legislative Reform
Commission and could face much of the same when submitted to
Congress. The law establishing SEPRELAD's regulatory
authorities has been drafted but not yet submitted to
Congress pending movement on the first bill. Paraguay's
SEPRELAD could face suspension from the Egmont Group should
this bill not be adopted before June; we have presently
suspended relations with SEPRELAD over concerns about the
effectiveness and trustworthiness of its director. In
December, Treasury designated nine individuals and two
entities from the TBA for involvement in terrorist financing.
Publicly, Paraguay subscribes to the Brazilian line that
terrorist financing is not a problem. However, on a
constructive note, in the absence of an effective money
laundering law, Paraguay has prosecuted three alleged
Hizballah terrorist financiers for tax evasion.


10. (SBU) Paraguay is a significant transit point for the
transportation of cocaine by air from Colombia and Bolivia to
Brazil. Paraguay grows much of the marajuana consumed in
Brazil and The Southern Cone. Paraguay lacks radar coverage
over much of the national territory and any air response
capability. Much of the northwestern part of the country is
barren and uninhabited, and the GOP has difficulties in
enforcing the law due to geography and the political (and
judicial) power some drug traffickers wield. Paraguay's
Anti-Drug Secretariat (SENAD),the single-most effective law
enforcement body in Paraguay, coordinates GOP interdiction
efforts, with significant assistance from the DEA and support
from US Special Forces advisors.


11. (SBU) In 2004, Paraguay and Brazil collaborated in a
joint operation, with DEA assistance the seizure of over 260
kilograms of cocaine and Brazilian drug kingpin Ivan Carlos
Mendes Mesquita, wanted in the U.S. on drug trafficking
charges. Paraguay cooperated with the USG extradition
request and Mendes Mesquita was taken into U.S. custody in
2005, a dramatic and unprecedented step. Working closely
with the U.S., SENAD has effectively targeted Brazilian
trafficking groups that are run mostly out of Pedro Juan
Caballero (PJC) on Paraguay's northern border with Brazil.
Within the past year, SENAD has made a number of significant
arms seizures with evidence signaling links to Brazil's PCC
and Colombia's FARC. While these weapons were seized in PJC
and Asuncion, arms and drug trafficking also occur out of
CDE. Presently, SENAD is hard-pressed to meet challenges in
that region for lack of resources (its national annual budget
is just USD 2 million). SENAD inaugurated a helipad in PJC
on April 11, the second phase of State Department funded (USD
500,000) project, creating a SENAD facility in the region and
a potential base from which to launch operations -- if it
receives the GOP funds it needs for fuel.

Regional Concerns


12. (SBU) The political situation in Bolivia is on the radar
screen in Paraguay but not in a major way. Some commentators
have conveyed concern that instability in Bolivia could lend
itself to a higher flow of drugs or other illicit activity
from that country. Some Paraguayan military officials have
conveyed to Post a concern about lingering irredentist claims
within some segments of the Bolivian military to territory in
the Chaco -- the vast region in Western Paraguay that borders
Bolivia and served as the site of a war with Paraguay in the
1930s -- that could stir controversy and tension should
Bolivia suffer an extended period of instability. Reported
discoveries of potential commercially significant natural gas
resources near the Bolivian border could add fuel to such
concerns. Lastly, Brazil and Paraguay rely on Bolivian
infrastructure for land traffic extending to the Pacific
coast that could be jeopardized in the event of instability
in Bolivia. Some Bolivian commentators, including political
officials, have signaled concern that the U.S. sought to
establish a military base in the Chaco for the purpose of
monitoring activities in Bolivia or attempting to control
energy resources in the Bolivian and Paraguayan Chaco region.
All things considered, however, Bolivia does not figure
large in Paraguay's foreign relations -- or vice versa -- and
most Paraguayan decision makers devote fleeting attention to
developments in Bolivia.


13. (SBU) Despite preoccupation with close-to-home terrorism
issues including kidnappings, local violent radicals, the
FARC, and fund-raising for Hizbollah; Paraguay is reluctant
to take a lead in the war on terrorism beyond its borders.
This is due to pressure from Brazil as well as domestic
concerns that an aggressive anti-terrorism policy (e.g.,
vis-a-vis the Middle East) will draw terrorist reprisals. In
addition, memories of abuses under the Stroessner
dictatorship (1954-1989) still cast a long shadow. President
Duarte received JCS Chairman General Myers in 2004, but then
made a public show of announcing that Paraguay would not send
a contingent to Iraq despite having volunteered to do so to
President Bush a year earlier. Given false allegations the
U.S. wants to establish a military base in Paraguay, we
recommend tailoring any public remarks about Paraguay's role
in the GWOT in a way that will not lend fuel to these false
claims. It is perhaps best to focus interlocutors on
attacking corruption and the facilitation of international
crime as a way to improve Paraguay's international image.


14. (U) Paraguay and Bolivia signed a security/defense
agreement at the end of March, which included a joint
communiqu on dengue fever. The agreement aims to improve
communication and information exchange as a way to address as
a way to address mutual suspicions. It also details plans for
the 6th High Military Command Meeting in Asuncion to increase
military-to-military exchanges and ties. Admiral Stavridis'
early April visit here, however, have made little substantive
progress - and no media coverage.

U.S. Activities


15. (SBU) U.S. activities in Paraguay are focused on
strengthening democratic institutions, promoting sound
economic policies and good governance, disrupting criminal
organizations, and combating terrorist financing. Post
maintains bilateral assistance programs dealing with
combating narcotics trafficking, money laundering,
intellectual property violations, and trafficking in persons.
A Department of Justice Resident Legal Advisor and advisors
from Treasury's Office of Technical Assistance have worked
quietly behind the scenes over the last three years to assist
the Paraguayan Government in developing appropriate money
laundering and counter-terror legislation. Diplomatic
Security's Anti-Terrorism Assistance program also continues
to provide a wide variety of training to local police and
prosecutors. In the wake of the Cubas kidnapping, Vice
President Castiglioni traveled to the U.S. for meetings with
VP Cheney, former SECDEF Rumsfeld, and other key officials to
discuss a comprehensive approach to Paraguay's security
challenges, including a high-level seminar sponsored by the
Center for Hemispheric Defense Studies (CHDS) that was held
in 2005. SECDEF Rumsfeld visited Paraguay in 2005. At the
end of 2006, CHDS followed-up with comprehensive meetings on
transformation and reformation of the military. Paraguay has
expressed interest in acquiring technical assistance in
development of its National Security Strategy and National
Defense Plan. USAID and the Peace Corps also have programs
in the country, specifically focused on strengthening
democratic and judicial institutions as well as
anti-corruption. Paraguay began to implement a USD 35
million Millennium Challenge Account Threshold Program in May
2006; its poor historical record on corruption was the major
reason it did not qualify for full participation in the
program. The Threshold Program focuses on combating impunity
and informality.


16. (C) Notwithstanding, President Duarte's decision last
October not to extend SOFA protections to U.S. military
personnel, U.S. military cooperation with Paraguay has
continued, albeit under a lower profile. While MEDRETES have
been suspended, teams of Special Forces advisors -- unarmed
since the President has not submitted for Senate approval for
the entry of "troops" as required by the Constitution --
engage periodically in-country with their Paraguayan
counterparts. A team of 13 SF trainees entered Paraguay in
March to complete training of the "CT" company - which is
making superb progress. This subject is sensitive and we
have not yet spoken to it in public. We continue to
negotiate the terms of a new SOFA but are not optimistic
about prospects for progress before May 2008 elections.
Separately, we are pleased to announce that a 505 Assurance
Agreement with Paraguay was signed through an exchange of
notes with the Foreign Ministry on April 12. This agreement
will enable us to proceed with disbursement of USD 1.1
million for GPOI funds. We are also providing Paraguay with
some USD 3.5 million in 1208 funds for weapons and other
equipment. Post is actively coordinating training of
Paraguayan military and civilian efforts with their Colombian
counterparts in counter-terrorism and counter-narcotics
activities.

Strong Record of Military Cooperation


17. (U) Post's Office of Defense Cooperation (ODC) has
developed a robust JCET/CNT program, second to only that of
Colombia in the region, and implemented the Counter Terrorism
Fellowship Program contributing significantly toward
establishment of host nation CT capability, including
designation and creation of a Paraguayan Tier 1 unit.
Funding from the Enhanced International Peacekeeping
Cooperation (EIPC) program has facilitated the training of
over one thousand observers and peacekeepers and the
deployment of approximately one hundred Paraguayans in
support of peacekeeping operations in this hemisphere and
Africa. Separately, ODC has also launched an outreach
program, leveraging the State Partnership Program, designed
to encourage the military to build institutional links with
legislators in part through visits by Paraguayan Congressmen
as well as Flag officers from the Joint Staff and Ministry of
Defense with their counterparts in the U.S. The partnership
with the Massachusetts National Guard (MANG) is robust; the
MANG designation of a full time Traditional CINC Activities
coordinator from MANG has greatly promoted an improved
relationship.

Personal Security and Crime


18. (U) Political Violence-Terrorism: There are no political
groups or parties currently active in Paraguay that
specifically target U.S. interests. Because of reports
indicating the presence of members of, and support for,
extremist terrorist groups in the tri-border region (Alto
Parana and Itapua Departments),visitors here cannot discount
the possibility of terrorist activity, to include random acts
of anti-American violence. Small, armed groups have also
been reported to be operating in the Concepcion and San Pedro
Departments.


19. (U) Crime: Paraguay is a high-threat post for crime.
Petty street crime in the cities of Asuncion and Ciudad del
Este continues to be a problem for residents and visitors
alike. Visitors to both cities should be aware of problems
with pickpockets or purse snatchers on the street or on
public transportation. Until recently, most crime affecting
visitors has been non-violent; aggravated robberies,
shootings, etc., while not completely unheard of in Asuncion,
were nonetheless uncommon. However, incidents of armed
robberies of businesses and residences by criminal groups are
occurring with greater frequency, and as a result, it is
recommended that due caution be exercised when traveling
about the city.

The Impact of Your Visit


20. (U) You will represent the highest-level Department of
State Official to visit Paraguay since 2004 and the highest
USG official to visit since SECDEF Rumsfeld and FBI Director
Mueller visited in 2006 -- visits that drew significant
attention and commentary. You are likely to encounter
significant press on conclusion of several of your meetings
and, as noted, we have invited the press to a number of your
events. Paraguayan journalists are generally friendly. Even
if you have no time between meetings, it is better to stop
and answer a question or two than to refuse questions. As
when you refuse, offended reporters may spur rumors of
"secret meetings and agreements." Post will provide you with
suggested talking points upon your arrival.
CASON