SCENE-SETTER FOR LT. GEN. SEIP'S VISIT TO PARAGUAY

C O N F I D E N T I A L ASUNCION 000689

SIPDIS

SIPDIS

PASS TO WHA/BSC

E.O. 12958: DECL: 07/26/2017
TAGS: PREL PGOV PTER MARR MASS SNAR PA
SUBJECT: SCENE-SETTER FOR LT. GEN. SEIP'S VISIT TO PARAGUAY

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


1. (C) SUMMARY: Embassy Asuncion warmly welcomes Lt. Gen.
Seip August 21-22. Your visit provides an opportunity to
promote U.S. interests in 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 weakened and much of the body
politic focused on presidential elections scheduled for April

2008. Neighboring governments and segments within Paraguay
routinely call into question important aspects of our
security relationship. Many Paraguayans, however, both
inside and outside the government, support closer U.S. ties
as a political and economic counterbalance to the influence
Brazil wields over Paraguay and in response to concern about
growing cooperation between Venezuela and Bolivia, including
in the military sphere. END SUMMARY.

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The Political Scene
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2. (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, to
revive the economy, and to 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 has also
shifted to the left, formally declaring (to wide desision)
the Colorado Party as "socialist," criticizing President Bush
and stressing greater appreciation for Venezuelan President
Chavez and Venezuela,s "commitment" to the region. It seems
that Duarte has put aside his designs on re-election for now,
and has hand-picked former Minister of Education Blanca
Ovelar to be his successor. Duarte,s unabashedly pro-U.S.
vice president, Luis Castiglioni, will compete with Ovelar
for the Colorado Party,s nomination. Several political
"wild card" candidates have the potential to wreak havoc in
the elections and end 60 years of Colorado Party rule.
Leftist (and resigned priest) Fernando Lugo represents the
opposition's leading candidate, although he faces a potential
legal barrier to office because the constitution bars
religious "ministers" from seeking political office.
Additionally, former coup plotter General Lino Oviedo may
soon be released from prison on conditional parole, and could
be legally enabled to run for the presidency in the coming
months.

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Paraguay's Public Security Challenges
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3. (C) Twelve members of the Free Fatherland Party (PPL) - a
far-left, rural-based political movement - were found guilty
in 2006 for the kidnapping and murder of the daughter of
former president Raul Cubas. The Cubas murder suggested the
emergence of a political movement bent on provoking
instability through violence. A culture of distrust 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 rivals, not partners. The Cubas killing and
evidence of involvement by the Revolutionary Armed Forces of
Colombia (FARC) shocked Paraguay,s leaders and population.
Paraguay has since increased cooperation with Colombia and
the United States on intelligence and other security
measures. Concern over the PPL has died down since the
convictions, but internal security concerns have risen. Of
late, major robberies, including the August theft of USD 1
million at the airport in Asuncion, and kidnappings of an
apparently criminal nature, including that of Hizballah
financier Mohammad Barakat, are on the rise.

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Reforming the Economy, But Growth Insufficient
-------------- --


4. (U) Paraguay's formal economy relies heavily on
agriculture. It features bloated but weak state institutions
and the heavy involvement of state-owned enterprises. There
is also considerable activity involving the trading of
imported contraband and counterfeit products destined for
Brazil or Argentina. On a macroeconomic level, Paraguay,s
economic growth reached four percent in 2006 and inflation
was 12.5 percent. However, while the government succeeded
early on in getting some significant economic reform laws
through Congress, progress over the past three years has
slowed. Conflicts between Congress and the Duarte
administration have all but frozen any reform efforts that
require legislation; the Congress has rejected several IDB,
EU, and Japanese loans and suspended the implementation of a
personal income tax for the next year. Paraguay needs to
sustain annual economic growth rates of at least five
percent, and must also undertake deeper structural reforms.
But as the 2008 presidential election approaches, inadequate
political will exists to take on tough economic reform.

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International Crime and Counter Terrorism
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5. (SBU) The Tri-Border Area (TBA),where Paraguay, Brazil,
and Argentina meet, is a primary USG concern. The area, with
its loose borders and lax controls, is a hub for
trans-national criminal activity including drug trafficking,
trafficking in persons, arms trafficking, intellectual
piracy, document forgery, contraband, as well as a source of
Hamas and Hizballah financing. Brazil has tightened its
border controls with positive results, but significant money
continues to flow out of the Lebanese community in Ciudad del
Este (CDE) to the Middle East. Paraguay is widely regarded
as the weakest link in combating the illicit activities that
occur in the TBA. Corruption at multiple levels undercuts
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
intellectual property rights (IPR) violations and customs
fraud. The MIC,s Specialized Technical Unit (UTE) has made
many significant seizures of counterfeit products with State
INL and Millennium Challenge Corporation (MCC) Threshold
Program assistance.


6. (SBU) Paraguay's Anti-Money Laundering Secretariat
(SEPRELAD) has also received U.S. technical assistance and
support. The Paraguayan Congress passed a new criminal code
August 9 which includes anti-money laundering provisions, and
should become law within 110 days unless President Duarte
exercises his veto. Although the Chamber of Deputies passed
counter-terrorism (CT) legislation as part of the criminal
code, the Senate - faced with rising public protests fearing
potential abuses - removed it from the final version. Unless
the Chamber acts to reincorporate the bill's CT legislation,
the Senate,s version of the criminal code will stand. A
modern criminal procedures bill will also be presented to
Congress in the near future.


7. (SBU) Paraguay is a major transshipment point for cocaine
and other narcotics from Colombia and Bolivia to Brazil.
Much of the northwestern part of the country is barren and
uninhabited, and the authorities suffer difficulties
enforcing the law due to geography and the political and
judicial power some drug traffickers wield. The Anti-Drug
Secretariat (SENAD),the single-most effective law

SIPDIS
enforcement body in Paraguay, coordinates interdiction
efforts, with significant assistance from the DEA and support
from U.S. Special Forces advisors. Working closely with the
United States, SENAD has effectively targeted Brazilian
trafficking groups based in Pedro Juan Caballero (PJC) on
Paraguay's northern border with Brazil. SENAD has made a
number of significant arms seizures with evidence signaling
links to Brazil,s PCC and Colombia,s FARC in PJC and
Asuncion. Presently, SENAD is hard-pressed to meet
challenges in CDE due to a lack of resources (its national
annual budget is just $2 million). SENAD inaugurated a
helipad in PJC April 11, the second phase of a State
Department-funded project to create a regional SENAD
operational base.


8. (SBU) Despite kidnappings, violent radicals, FARC
activities, and Hezbollah fundraising, Paraguay is reluctant
to take a lead in the war on terrorism beyond its borders due
to pressure from Brazil and fears of terrorist reprisals. In
addition, memories of abuses under the Stroessner
dictatorship (1954-1989) still cast a long shadow. Given
false allegations that the United States wants to establish a
military base in Paraguay, we recommend focusing
interlocutors on attacking corruption and crime as a way to
improve Paraguay's international image.


9. (U) Paraguay and Bolivia signed a security-defense
agreement at the end of March, which included a joint
communique on dengue fever. The agreement aims to improve
communication and information exchange as a way to address
mutual suspicions. It also details plans for the 6th High
Military Command Meeting in Asuncion September 10-12 to
increase military-to-military exchanges and improve ties.

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U.S. Activities
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10. (SBU) USG activities in Paraguay focus 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 behind-the-scenes
over the last three years to assist the Paraguayan government
to add money laundering to the criminal code now awaiting the
president,s signature. Paraguay has expressed interest in
acquiring U.S. technical assistance to develop its National
Security Strategy and National Defense Plan. USAID and the
Peace Corps also have programs in the country. Paraguay
sought to meet entry requirements to join the MCC Millennium
Challenge Account, which focuses on combating impunity and
informality. It did not qualify for full participation in
the program because of its poor record on corruption, but did
qualify for a USD 35 million MCC Threshold Program.


11. (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 temporarily suspended, teams of Special Forces trainers
are resident, developing the skills of Paraguayan
counterparts throughout the year. This subject is sensitive,
and we do not trumpet it in public. We continue to negotiate
the terms of a new SOFA but are not optimistic about
prospects for progress prior to the April 2008 elections. As
a stop-gap measure, we concluded a 505 Assurance Agreement
with the government through an exchange of notes with the
Foreign Ministry. This agreement enabled us to proceed with
disbursement of USD 1.1 million for GPOI funds. We also
provided Paraguay with some of the USD 3.5 million in 1208
funds allocated for weapons and other equipment.

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The Military's Mission
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12. (SBU) Paraguay's military is a small force struggling to
redefine its mission despite insufficient funding and
intermittent scandals. The Army is the largest of the three
services (6,000),followed by the Navy (2,000) and Air Force
(1,200). The military's primary missions are to protect
Paraguay's territorial integrity, defend the legitimate
authorities in accordance with the constitution, and
cooperate in civil defense. It does not play a leading role
in counter drug operations, although the military provides a
specialized tactical unit to support SENAD. The military's
Special Forces unit is in the process of organizing a
company-size counter-terrorism unit, and the Presidential
Guard Unit has a specialized counter-terrorist platoon. More
recently, Paraguay has attempted to increase its presence in
international peacekeeping operations. Brazil supports
Paraguay's deployment of 33 troops to Haiti.


13. (U) Military infrastructure and equipment is old,
obsolete and in desperate need of repair or replacement.
Paraguay's total 2007 defense budget, USD 72 million,
represents approximately three percent of the USD 2.8 billion
national budget. Ninety percent of the budget is used to pay
salaries, and five percent is used for sustaining conscripts,
leaving only five percent for operations, maintenance and
training. Budget problems are not expected to go away in the
near future due to a lack of Congressional support and
lingering memories of the Stroessner dictatorship. Despite
these challenges, the military has remained subordinate to
civilian authority - especially so under the determinably
apolitical leadership of FFAA Commanding General Bernardino
Soto. When called, the military has supported law
enforcement activities, public health campaigns and provided
transportation assistance for farmers to bring their products
to market. The military is still seen as the first line of
defense in a crisis, and many Paraguayans feel safer when the
military is out on the streets. The president called upon
the military to support the police in November 2004 in the
wake of the Cubas kidnapping and ensuing sense of insecurity;
the military remains on the streets today.

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Strong Record of Military Cooperation
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14. (U) Post's Office of Defense Cooperation (ODC) has
provided U.S. Special Operations Forces financial and
manpower support to Paraguay 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 facilitated the training of over
1,081 observers and peacekeepers and the deployment of
approximately 101 Paraguayans in support of peacekeeping
operations in the Western Hemisphere and Africa. The ODC
also launched an outreach program, in conjunction with the
State Partnership Program, to encourage the military to build
institutional links with legislators, in part through joint
visits by members of Congress and Joint Staff and Ministry of
Defense Flag officers with their counterparts in the United
States. The partnership with the Massachusetts National
Guard (MANG) is robust, and MANG,s designation of a
full-time TCA coordinator has helped enhance this
relationship. We do not have an Article 98 agreement with
Paraguay.

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The Impact of Your Visit
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15. (SBU) When meeting with Paraguayan interlocutors, you
should express gratitude for Paraguay's active cooperation in
the fight against terrorism and participation in the "3 plus
1" mechanism designed to counter terrorist financing. You
should encourage Paraguay to continue its efforts to train
and support its contingent of UN peacekeepers, and offer
continued U.S. assistance via seminars, conferences,
orientation visits, advisory and instructional activities for
the Armed Forces of Paraguay.
CASON