TREASURY DEPUTY SECRETARY KIMMITT MEETS GERMAN

C O N F I D E N T I A L SECTION 01 OF 03 BERLIN 000274 SIPDIS SIPDIS E.O. 12958: DECL: 02/11/2017 TAGS: EFIN ETTC PTER PREL GM IR SUBJECT: TREASURY DEPUTY SECRETARY KIMMITT MEETS GERMAN FINANCE STATE SECRETARY MIROW ON SANCTIONS, SWIFT, AND TRANSATLANTIC ECONOMIC ISSUES Classified By: EMIN Robert F. Cekuta for reason 1.4 (b) and (d) ¶1. (C) Summary. Deputy Secretary of the Treasury Robert Kimmitt met with German Finance Ministry State Secretary Thomas Mirow February 8 to review key bilateral and transatlantic economic issues. Discussing international sanctions on Iran and North Korea, he noted the progress that had been made while pointing to the need for further steps that the EU and its members should take to push Tehran and Pyongyang to end their proliferation activities. Raising SWIFT, Treasury Deputy Secretary Kimmitt noted the levels of protection in place in the U.S. to protect data privacy and the internationally-agreed upon steps authorities need to take to stop terrorists from using the global financial system. Mirow thought a practical approach should be found, but noted the political pressures on the issue coming from the European Parliament. The State Secretary and the Deputy Secretary reviewed the Chancellor's transatlantic economic SIPDIS initiative, including how it fit into Chancellor Merkel's push for deregulation in Germany and the EU. The two senior officials reviewed plans for the February 9-10 G-7 Finance Ministers Meeting in Essen. Deputy Secretary Kimmitt expressed concern about the German Government's plans to restructure the European Recovery Program funds and move a sizable portion of the funds into the KfW, the same bank where the German Government places the shares of government-owned, or formerly government owned companies such as Deutsche Telekom. Responding to Mirow's questions on the Doha Development Round, the Treasury Deputy Secretary stressed the need to move as soon as possible on agriculture. Mirow noted the window of opportunity for Doha is small and pointed to the number of expected changes of Government in Europe. End Summary. Iran ¶2. (C) Deputy Secretary Kimmitt offered his appreciation for Germany's role in the EU implementation of UNSCR 1737, especially with regard to encouraging the Europeans to move beyond the strict letter of the resolution. He highlighted EU willingness to ban financial transactions and freeze the assets of those individuals and organizations covered by the resolution. It is important that the measures taken extend to financial dealings and not cover only exports and visas. Referring to his discussions with German banks, Kimmitt said he advises them that it is almost impossible in Iran to know your customer -- a point on which the U.S., Germany, and other countries agree. UNSCR 1737 has increased the political risk in accessing finance to do business in Iran; export credits should not be used to effectively subsidize costs associated with that risk, or activities in support of the government's illegal conduct. The USG is not calling for a cut-off of all financing activities, rather only those tied to illicit conduct, such as proliferation and terrorism. Nonetheless, we have seen that even the legitimate Iranian business community is beginning to put pressure on the regime for having made it more difficult to access trade finance. ¶3. (C) Mirow responded Germany had taken measures on trade finance by implementing a ceiling on credits such that many requests would not be considered and the focus will be on not making credits available to those covered under UNSCR 1737. Germany is trying to achieve a balance by supporting legitimate trade, but not mitigating the increased political risk caused by Iran. Treasury Deputy Secretary Kimmitt asked that the German Government look not just at what the German company is exporting, but at the other end of the transaction as well to see who the end-user is and ensure that funds do not become commingled with moneys that support proliferation or terrorist activities. Mirow said that they would pay attention to directing German funds to licit commercial and cooperative activities. North Korea ¶4. (C) Deputy Secretary Kimmitt also warned that North Korean entities increasingly look to German banks after being shunned in Asia. In some cases they were being introduced by Iranians. He offered that the Embassy would provide follow-up documentation. UNSCRs 1695 and 1718 set out clear obligations. Kimmitt said that he understood the EU was ready to act on the North Korean resolutions, but an issue had come up with how the resolutions would be enforced in Gibraltar. A dispute over Gibraltar's status as grounds for holding up implementation is unacceptable and would be difficult to defend publicly. (Note: On the margins of the Munich Security Conference on February 10, German MFA State Secretary Silberberg told Treasury Deputy Secretary Kimmitt SIPDIS that the UK and Spain had reached an agreement such that BERLIN 00000274 002 OF 003 implementation of sanctions could move forward, not only on North Korea but also on Iran.) TFTP/SWIFT ¶5. (C) Deputy Secretary Kimmitt noted a bipartisan U.S. privacy commission, Congress, and legal experts had reviewed TFTP/SWIFT's activities. They have asked that the program has exceptional safeguards for balancing the data privacy of individuals against the need to protect Americans from terrorism. The USG wants to reach an understanding with the EU and Deputy Secretary Kimmitt thought that there was little difference on substance, only on form. EU Commissioner Frattini has suggested a formal agreement might be required. However TFTP/SWIFT involves U.S. legal system access to data that is already in the United States, not held outside the country as is the case with PNR, so a formal agreement is not appropriate. An exchange of letters should be sufficient, along the lines of what was done in a different context in the NYSE/Euronext merger. The Treasury Deputy Secretary emphasized that the U.S. wants to finalize this understanding before the April U.S.-EU Summit. ¶6. (C) State Secretary Mirow noted that the Commission has the lead on SWIFT, but no decision has been reached on the form of an understanding. In late February, representatives of the German Ministries of Finance and Interior, the European Commission, and the Council Secretariat will embark on a fact-finding mission to the U.S. for an in-depth examination of the issues surrounding TFTP/SWIFT. Afterwards they will make recommendations. Mirow thought it would be useless to impose one's privacy system on another, but a practical approach is necessary. The European Parliament keenly follows this issue and is pressing the German Presidency to balance privacy with the need to combat terrorism. Deputy Treasury Secretary Kimmitt welcomed the fact-finding mission and said he would like to see greater attention given to the existing authorities that proscribe using the banking system for terrorist purposes. There are a number of international obligations affecting terrorist financing as is also the case with data privacy. Chancellor Merkel's Transatlantic Initiative ¶7. (U) Deputy Secretary Kimmitt said the President strongly supports, and has instructed that the USG move forward with, the Chancellor Merkel's initiative. He noted we need both clear results to announce for the Summit and a process that will continue afterward. He thought the initiative blended well with Germany's efforts to adopt a deregulatory approach in other areas. Of the four areas highlighted in the Chancellor's initiative, the financial area has the best existing set of structures, such as the Financial Markets Regulatory Dialogue. The Treasury Deputy Secretary thought a Summit statement could reference some of the progress already taking place; other areas, such as accounting standards, would require more time to achieve results. ¶8. (U) Mirow agreed we should not duplicate existing efforts; the financial "basket" was somewhat special in what was already underway as compared to where things stand in the other three areas. Finance Ministry Deputy DG for International Financial and Currency Policy Wenzel suggested that the Finance Ministry should contribute to the initiative and would likely seek a political-level endorsement of accounting standards and delisting measures. Hedge funds are off the agenda as they will be covered in the G-7. Treasury Deputy Secretary Kimmitt said he would like to see something in the Summit statement opposing investment barriers, which he sees as an emerging international economic problem. Treasury will host a capital markets competitiveness conference in March to which it will invite European representatives; some of the conclusions might be integrated into the discussion of Chancellor Merkel's transatlantic initiative. The President's Working Group in Financial Markets may provide some initial conclusions of its financial markets' review in March. Essen G-7 Meeting ¶9. (U) Mirow elaborated German plans for the February 9-10 G-7 ministerial in Essen. An initial exchange on hedge funds would be used to try to reach an agreement on facts and a common notion of risk. Germany hoped the G-7 could agree on a work in progress, that could carry through to the Potsdam meeting and the Heiligendamm Summit in June. Germany seeks a way that the seven governments can delve deeper into the subject of hedge funds. Mirow's suggestion is to perhaps give the FSF a new mandate, asking them to present a report BERLIN 00000274 003 OF 003 to members next year. Mirow expected hedge funds to be mentioned in a G-7 statement, but mostly in a procedural way. ¶10. (SBU) Mirow thought it would be more difficult to discuss the undervaluation of the yen, since the U.S. and Japan see the issue differently from the EU. The Europeans have two concerns: the financial stability risk if there were a sharp reversal to the yen carry trade and the effect of the devalued yen on exports. With autos, for instance, this gives the Japanese a two to three thousand euro exchange rate advantage per car over the Germans. Deputy Secretary Kimmitt emphasized that U.S. comments on the yen were in response to questions and not affirmative statements, and were consistent with what the U.S. says about any openly-traded currency. Mirow said it is hard to judge whether the Japanese were manipulating their currency. Germany did not share the same concerns about the Chinese yuan; Japan was more of a direct competitor to Germany for exports. But from an EU-wide perspective, undervalued exports from China are an issue. European Recovery Program Funds ¶11. (U) Deputy Secretary Kimmitt expressed concerns about Germany's planned Economic Recovery Program (ERP) Fund restructuring, saying that the ERP has been historically popular and politically noncontroversial, but might not remain so if it is added to the equity of the Kreditanstalt fuer Wiederaufbau (KfW). The KfW holds shares in state-owned, or formerly state-owned companies such as Deutsche Telekom, Deutsche Post and, more recently, EADS, holdings that have raised U.S. concerns about anti-competitive practices. Even if there were no plans to commingle ERP with other funds, the added leverage to KfW's balance sheet might create opportunities for controversial uses, Kimmitt noted. Mirow responded that the German Government is still working out the details and welcomes expert scrutiny. The Ministry of Economy is restructuring ERP so as to more efficiently support SME lending. The intent is not to cast ERP in a bad light. Doha Trade Talks ¶12. (U) In response to Mirow's request for a prognosis on Doha, Deputy Secretary Kimmitt replied that the U.S. accords top priority to this effort but that the window for concrete progress is tight. The U.S. and the EU need an understanding on agriculture as early as possible so that an agreement can be worked out with the emerging economies on other sectors such as services. Mirow agreed the window for progress is tight. He outlined some of the obstacles making consensus difficult for the Europeans involving elections and likely changes of government in France, the UK, and smaller countries. ¶13. (U) Treasury Deputy Secretary Kimmitt has cleared this message. TIMKEN JR