Third US-Mongolia TIFA Joint Council, March 12, 2007, Part

UNCLAS SECTION 01 OF 05 ULAANBAATAR 000300

SIPDIS

SENSITIVE
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GENEVA FOR USTR
STATE PASS USTR, USTDA, OPIC, AND EXIMBANK
STATE FOR EAP/CM, EB/CBA, AND EB/IFD/OIA
USAID FOR ANE FOR D. WINSTON
MANILA AND LONDON FOR ADB, EBRD USEDS
TREASURY FOR USEDS TO IMF, WORLD BANK
USDA FAS FOR N. SAKLAH

E.O. 12958: N/A
TAGS: ETRD PREL EAID ECON EFIN PGOV MG
SUBJECT: Third US-Mongolia TIFA Joint Council, March 12, 2007, Part
2 of 3: Disputes and Concerns over Mongolia's Business Climate

Ref: (a) Ulaanbaatar 165; (b) Ulaanbaatar 160; (c) Ulaanbaatar 158;

(d) Ulaanbaatar 157; (e) Ulaanbaatar 125; (f) Ulaanbaatar 123; and
(g) Ulaanbaatar 119; (h) 06 Ulaanbaatar 881

SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION.


1. (SBU) SUMMARY: This cable reports the March 12 Trade and
Investment Framework Agreement (TIFA) talks between the U.S. and
Mongolia which concentrated on specific U.S. concerns about
Mongolia's trade and investment climate. Speaking first with an
advance outline of the U.S. presentation, the Mongolian side
preemptively sought to address U.S. concerns about corruption and
poor banking regulation. While the U.S. delegation cited some
positive steps on IPR protection, Mongolia's state procurement
policies and an alleged abusive tax audit of a U.S. firm were cited
as problems. Assistant U.S. Trade Representative Timothy Stratford
highlighted U.S. concerns about the deteriorating investment climate
in the mining sector, largely due to legislation passed by Mongolia
in 2006. END SUMMARY.

GOM Makes Progress in Fighting IPR Violations
--------------


2. (SBU) Ms. M. Sarnai, Legal Officer at the International Property
Organization of Mongolia (IPOM),reported progress in fighting IPR
violations: a) the 2006 amending of both the Patent and Copyright
laws of Mongolia; b) the creation of a patent and design disputes
board under the IPOM administration; c) the identification by IPOM
of 230 entities and 21 million tugrik (approximately US$18,000)
worth of goods in violation of IPR; and d)the imposition of 57
million tugrik (US$50,000) in fines. They have investigated all
the cases of suspected IPR violations brought to its attention by
the embassy, including a dubious Columbia Sportswear Outlet, a beer
called "Yahoo!," trademark violation of Johnson and Johnson's Vicryl
line of sutures, and the broadcasting of recently released Hollywood
films by Mongolian television stations.


3. (SBU) Ms. Sarnai reported that although the Columbia, "Yahoo!,"
and optical media piracy cases remain open, the Johnson and Johnson
case had been partially resolved. Faced with serious health
implications, IPOM successfully stopped the trademark infringer from
importing substandard medical sutures under the Johnson and Johnson
brand name. However, the IPOM could not prevent the company from
importing these cheap but dangerous knock-offs under a
non-infringing name. The matter is now one of product safety rather
than IPR violation.


4. (SBU) Ms. Sarnai then stated that the IPOM wants to exchange
knowledge and learn more about U.S. laws and government policy that
support scientific research and seeks USG assistance in
strengthening its newly established Information and Training Center
to promote and educate the public on IPR issues. Commoff praised
IPOM's responsiveness to USG requests and urged Mongolia to more
effectively utilize the Global Academy on Intellectual Property
Rights by also sending non-GOM attendees. Ms. Sarnai said that the
IPOM agreed with USG warning that the growing problem of Internet
downloading was hurting the domestic music industry and said rights
holders were aggressive in pursuing violations but lacked the
know-how to best tackle the problem.


5. (U) (Update: Post recently nominated an IPOM Trademark and
Patent Examiner to attend PTO's June 07 Trademark Examination
Seminar in Alexandria, VA. PTO has accepted and has fully funded the
nomination, and the Mongolian official will attend the PTO Academy
in early June.)

Mongolia "Letting Export Possibilities Slip By"

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6. (SBU) S. Otgonbat, Deputy-Chair of the Foreign Investment and
Foreign Trade Agency (FIFTA),addressed trade barriers that the GOM
believes hinder Mongolia's growth in U.S.-Mongolia trade volumes.
He argued that the U.S. and Mongolia should talk "on a micro level"
to create a strategies for dealing with China and said greater
promotion of infrastructure projects should be directed at U.S.
companies. S. Demberel, Co-Chair of the Mongolian National Chamber
of Commerce and Industry (MNCCI),recommended that the U.S. and
Mongolia develop a specific list of actions the U.S. and Mongolia
should take to improve trade. Mongolian producers needed to learn
about Rules of Origin, he said, because the country was letting a
lot of export possibilities slip by. He reported that MNCCI was
working to compile a list of approximately 50 types of products
selected from the GSP's list of 3400 eligible products that can be
exported from Mongolia. Ms. Battsetseg from the National Employers'
Federation pushed for increased direct contacts between U.S. and
Mongolian private entities, professional organizations and hoped to
see more U.S. assistance in improving the legal environment for
small and medium sized businesses (See ref d)

Despite Efforts, Corruption Persists
--------------


7. (SBU) VMT Sodbaatar reiterated GOM commitments to create a
transparent legal environment and listed GOM efforts to fight
corruption, including signing the UN Convention on Anti-Corruption,
passage of the Anti-Corruption law, and creation of the
Anti-Corruption Agency. AUSTR Stratford praised these achievements,
but then pointed to Transparency International's recent downgrading
of Mongolia on its Corruption Index, from last year's ranking of
85th among countries for corruption -- itself hardly a figure of
pride -- to this year's disappointing 99. Sodbaatar reluctantly
concluded that Mongolia was perceived of as a state that has a
growing problem with corruption.

Concerns over Bank Regulation and Supervision
--------------


8. (SBU) Responding to U.S. concerns about the slow pace of bringing
the recently established Financial Investigative Unit up to speed,
Acting FIU Chair Tumurbat said the GOM wanted to ensure the FIU
functioned with the proper legal underpinning (internal rules and
guidelines for staff etc.) to conduct inspections and ensure proper
confidentiality procedures were followed. He reported the FIU has

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been seeking donor assistance for secure software and that the Unit
should start proper operations by July 2007.


9. (SBU) In background materials sent to the GOM in advance of the
TIFA session, the USG noted it had raised concerns during the 2006
TIFA Talks about the ability and willingness of the banking sector
regulator, the Bank of Mongolia (BOM),to discipline and supervise
the 17 banks under its control. These concerns had remained
unanswered and have grown more pressing over the intervening year.
The materials raised concerns about the sale of Trade and
Development Bank (TDB),the bank with the largest holding of foreign
currency accounts, to new owners under murky circumstances See ref
h). During the TIFA, USTR asked the BOM about these concerns, and
BOM Representative G. Togtokhbayar said the BOM could not provide
information outside of an official request.


10. (SBU) (Update: Recently the BOM approved the sale. However,
concerns about the both the identity of beneficial owners and their
funding sources persist.)

Concerns about the state procurement practices

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11. (SBU) USTR's Tim Wineland noted that recent amendments to
Mongolia's Law on State Procurements (ref b) excluded foreign
participation in state procurements of less than 10 billion
Tugriks(approx US$8.6 million),a higher threshold than the US$7.9
million yardstick of the WTO's General Procurement Agreement (GPA),
of which Mongolia is an official observer. Mr. Wineland noted that
this threshold seemed at variance with Mongolia's FTA aspirations.
Ministry of Finance Representative Mr. Munkh-Orgil responded that
the 10 billion tugrik threshold set by Mongolia's Parliament was not
egregiously higher than the standard set by the GPA, an agreement to
which the GOM is not a signatory in any event.


12. (SBU) Regarding disputed tenders in the energy field and for
health care products, GOM officials reported that the Ministry of
Fuel and Energy (MFE) had released the first tranche of funds for a
solar power tender, but were concerned that the contractor would
fail to honor the terms of the agreement. However, the MFE committed
to meeting with the different sides to resolve the issue.


13. (SBU) (Update: In an effort to move both the GOM and the
contractor to resolve existing disputes, post organized a meeting
among the stakeholders to the dispute, as MFE had agreed to do
during the TIFA. This meeting revealed that GOM failings aside, the
contractor may have failed to follow through on commitments.
Consequently, after reviewing the contractor's assembly facilities
in South Korea and ascertaining the contractor would not be able to
meet the contracted deadlines, the GOM officially terminated the
tender. The contractor disputes this termination and promises legal
action in a court of international arbitration, as is their right
under the terms of the now cancelled tender. See ref e.)


14. (SBU) The GOM Ministry of Finance official said that he had no
knowledge of the disputed healthcare tender in which the distributor
of Johnson and Johnson Vicryl sutures claimed that the winner of the
tender had provided product that could not meet Ministry of Health
minimum quality standards at the price offered. The official
promised to look into these claims.


15. (SBU) (Update: So far the GOM has issued no formal or informal
response.)

Concerns over the tax system
--------------


16. (SBU) USTR's Wineland noted that the U.S. Embassy had informally
complained to the GOM about an abusive, predatory tax audit against
Wagner Asia, the local Caterpillar and Ford dealer and the largest
U.S. direct investor in Mongolia (see ref c). The Embassy presented
Wagner's public claims that the senior supervising auditor had
attempted to extract a bribe of some US$250,000 to make a US$2.5
million tax bill go away. Without disputing the Mongolian Tax
Authority's (MTA) legal right and obligation to review any entities'
tax records for compliance and assess both civil and criminal
penalties for non-compliance, the USG insisted that so far the
process undertaken by the MTA seemed highly irregular and
inconsistent with both Mongolian law and international best
practices to which the MTA claims to subscribe.


17. (SBU) In response to our questions, senior auditor Gansukh
delivered a blistering denial of all accusations of bribe
solicitation and charged Wagner of violating a long list of
Mongolian tax laws. (Comment: Gansukh's venomous ardor was no
doubt fueled by the fact that he is the auditor Wagner Asia accused
of trying to solicit a bribe.) He claimed that the Mongolian
National Police were considering arresting corporate officials at

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Wagner. Embassy representatives responded to this claim that
reliable information indicated that the police had dismissed all
criminal complaints for tax evasion lodged by the Gansukh at against
the company. Mr. Gansukh did not respond.


18. (SBU) (Update: The audit remains unresolved. Mr. Gansukh
continues to threaten both Wagner Asia and all accountants, internal
and external, who work for Wagner with criminal prosecutions,
revocation of licenses, and all matter of fines. To our knowledge
nothing has come from his threats to date.)


19. (SBU) In background materials sent to the GOM in advance of the
2007 TIFA session, the USG noted that it had raised concerns during
the 2006 TIFA talks about the Mongolian Railway's (MTZ) failure to
honor contractual obligations to General Electric Corporation for
the purchase of locomotive kits made the TIFA agenda for the second
straight year. During March 12 TIFA round, USTR noted that MTZ has
since paid 25% of the balance due, but commented that failure to
satisfy its entire obligation raises concerns that the GOM will fail
to act in good faith on its contractual obligations, causing U.S.
commercial and governmental entities to hesitate to enter into
arrangements with the GOM. Ministry of Roads, Transport, and
Tourism Representative Mr. Nyamdavaa pointed to the MTZ's 25%
payment as a sign of good faith, and said that MTZ's income had
dropped dramatically over the past year because of the temporary
cessation of oil transshipments from Russia. However, the MTZ hoped
for some movement at the next MTZ Board of Directors meeting.


20. (SBU) (Update: This meeting and another have come and gone,
producing no final resolution. However, the MTZ did pay an
outstanding but not past due bill for GE spare parts. The matter
remains unresolved with MTZ begging GE and the USG to be patient.)

Negative Mining Sector Vibes Threaten All Investment
-------------- --------------


21. (SBU) AUSTR Timothy Stratford critiqued amendments to the mining
law that gave broad discretionary powers to GOM officials to issue
minerals exploration and mining licenses without any apparent checks
and balances on those powers (see refs f and g). He explained that
the legislative process that had brought the Windfall Profits Tax
into being was too quick and utterly lacking in any public comment
and review with affected parties. He noted that foreign and
domestic mining businesses had complained about such abuses in
formal letters to senior government officials. He concluded by
noting that GOM actions had severely damaged investor confidence in
Mongolia.


22. (SBU) He drove this point home by citing the recent Fraser
Institute survey of Mining Executives that rated Mongolia 62nd out
of 65 nations as destinations for mining sector investment.
Mongolia had dropped below 29 other nations, just beating out
Venezuela and Zimbabwe. AUSTR Stratford warned that now businesses
had reason to look at 61 other investment locales before they would
look at Mongolia. Stratford hoped that by next year's TIFA meeting
Mongolia would have regained or bettered its former rank of 33rd.


23. (SBU) AUSTR Stratford then connected the results of the Fraser
study with Transparency International's recent finding that Mongolia
had slipped in TI's corruption index some 14 places from 85th to
99th. Stratford said that transparency was important for U.S.
investors and businesses, all of whom pride themselves on being good
corporate citizens and taxpayers. Without the proper transparent
underpinning, he said, U.S. business would not be comfortable coming
to Mongolia. The Mongolians accepted these critiques without
argument, noting that they were taking unspecified steps to improve
their international profile.

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24. (SBU) (Update: Since the TIFA meeting, the GOM has undertaken
several steps to improve the business environment for mining. The
GOM has: a) committed to compensating private rights holders for any
share the GOM may wish to take in mining ventures; b) moved to clean
up the process for registering exploration and mining license
rights; and c) moved to complete an important mining deal with
international mining giant Rio Tinto and Canadian Junior miner
Ivanhoe on the world class Oyu Tolgoi copper-gold deposit in the
South Gobi. All these steps are meant to signal to the
international business community that Mongolia is back on track.
The business community, domestic and international, has reacted to
these steps positively but waits to see if these improvements prove
permanent.)

"We Value Our Relationship with Mongolia"
--------------


25. (SBU) In closing remarks, AUSTR Stratford promised to respond
within two months with a concrete step Mongolia could take to deepen
its trade relations with the U.S. He hoped that Mongolia's rank in
the Fraser and TI surveys would improve before next year's TIFA
meeting. He wished Mongolia well in its continued reform efforts
and finished by saying the U.S. highly valued its relationship with
Mongolia.


26. (SBU) Closing TIFA 2007, VMT Sodbaatar noted that he was glad
that the establishment of steps toward an FTA was also important for
the USG. He said responses to the USTR's six questions on the GOM's
cashmere waiver request to the WTO would soon be sent, and he looked
forward to a successful conclusion to the MCC process by this time
next year.


27. (U) This cable was cleared by USTR.

Goldbeck