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

UNCLAS SECTION 01 OF 05 ULAANBAATAR 000300 SIPDIS SENSITIVE SIPDIS 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" ULAANBAATA 00000300 002 OF 005 -------------- -- ¶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 SIPDIS 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 ULAANBAATA 00000300 003 OF 005 -------------- - ¶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 ULAANBAATA 00000300 004 OF 005 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. ULAANBAATA 00000300 005 OF 005 ¶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