BULGARIA, FEELING THE HEAT, WILL CLOSE DUTY-FREE

C O N F I D E N T I A L SECTION 01 OF 03 SOFIA 000122

SIPDIS

SENSITIVE
SIPDIS

FOR EUR/NCE
DEPARTMENT PASS TO USAID
DOJ FOR OPDAT

E.O. 12958: DECL: 02/22/2017
TAGS: PGOV PREL ECON BU
SUBJECT: BULGARIA, FEELING THE HEAT, WILL CLOSE DUTY-FREE
SHOPS

Classified By: Amb. J. Beyrle for reasons 1.4 (b) and (d).


1. (C) SUMMARY: In response to a pressure campaign
organized by the Embassy (abetted by the EU and Bulgarian
NGOs) the government announced on February 10 that it will
close duty-free shops and gas stations on external borders,
long acknowledged as a notorious source of "protected
smuggling" here. The announcement comes on the heels of the
Parliament's decision to rescind tax breaks for casinos,
again in response to Embassy/NGO pressure. We are pushing
the government to implement its decision in the face of
mounting pressure from the Duty Free Operators Association --
the front men for the criminal groups that control the
duty-free trade, who have enjoyed political protection until
now. And we are stepping up efforts on our next agenda item
-- bringing greater transparency to cash transactions by
closing a loophole in anti-money laundering legislation. END
SUMMARY.

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DUTY-FREE SHOPS FUNDING GRAY ECONOMY
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2. (SBU) Duty free trade-related smuggling of excise goods
(particularly cigarettes, alcohol, and petrol) has been a
major funding source for the gray economy for the last
fifteen years. Attempts to close down or regulate and
collect taxes from duty-free shops and gas stations operating
at Bulgaria's land borders have repeatedly been stymied by
political opposition tied to pressure from well-connected
"businessmen." Bulgaria's January 2007 EU accession mandated
the country close duty-free shops and gas stations operating
at Bulgaria's borders with neighboring EU countries. In 2006
the Bulgarian Parliament granted permanent licenses for
duty-free trade to all existing operators, and allowed them
to relocate businesses to Bulgaria's external non-EU borders.
A substantial portion of excise goods sold at duty-free
shops and gas stations stays within the country, however, and
avoids taxation. A Bulgarian think-tank describes this
scheme as "protected smuggling," which results in significant
losses for the state budget, and unfair competition for
legitimate businesses. It is widely believed that the
network of duty-free shops in Bulgaria facilitates other
crimes, including fuel smuggling, forced prostitution, the
illicit drug trade, and human trafficking. There are also
credible allegations that profits from duty-free sales feed
political party coffers, and that the ultimate ownership of
the shops is concentrated in a few, well-connected hands.


3. (SBU) During a December 12 NGO-sponsored public event on
organized crime, Ambassador Beyrle singled out duty-free
shops and gas stations as a funding source of political
corruption and organized crime -- urging other Missions,
private Bulgarians, civil society experts, and government
officials to join forces to bring them into compliance with
EU norms. Embassy officials stepped up the pressure on
duty-free shops through op-eds, TV appearances, and public
statements, in pre-arranged collaboration with local NGOs,
and other Western European Embassies to bolster public
support. The Ambassador also personally raised the issue
with Prime Minister Stanishev twice, giving him data showing
the duty-free trade was costing the country over $250 million
annually.

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SPURRING THE GOVERNMENT TO ACTION
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4. (SBU) The results of this pressure campaign began to
show just prior to the release of the EC's highly critical
monitoring report. Interior Minister Rumen Petkov told the
press January 27 that he was in favor of eliminating all
duty-free shops except those at the airports. On February 3,
tipped off about the coming EC report's critique, European
Affairs Minister Gergana Grancharova also took a firm public
stance against the duty-free shops. The February 4 report
criticized Bulgaria's lackluster efforts in curbing

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corruption and organized crime, and identified duty-free
shops as "a focal point" for these problems. The report
spurred further debate in the Bulgarian media and government
over the shops and stations. In the face of mounting media
speculation and pressure from the United States and the EU,
the coalition leaders -- Stanishev, Saxe Coburg Gotha, and
Dogan -- publicly announced the duty-free shops' closure on
February 10 at a meeting of the Coalition Council. On
February 13, the Council of Ministers approved two amendments
to the Duty Free Trade Law banning duty free stores at land
border checkpoints. The amendments have yet to be formally
submitted to Parliament.


5. (C) The Duty Free Trade Operators Association -- and the
"shady" business interests they front for -- is mounting a
tough rear-guard action against the closure. The association
said it plans lawsuits against the government demanding
considerable compensation for investments on the duty-ree
trade licenses, and that the closure will create an
"international scandal." At a February 19 Anti-Corruption
Commission meeting chaired by Interior Minister Petkov, EU
ambassadors and the DCM kept the coals stoked for prompt
Parliamentary action on tough legislation, and rapid
enforcement. The Finance Minister Plamen Oresharski told
Ambassador Beyrle February 26, however, that pressure to
retreat from a total shut-down was increasing; Beyrle told
him any retreat at this point would reinforce the view that
in Bulgaria, the politicians feared the criminals, and not
vice-versa.

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TAX BREAKS FOR CASINOS DEFEATED, CASH PAYMENTS ARE NEXT
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6. (SBU) The Bulgarian government's decision to close the
duty-free shops comes on the heels of the Parliament's
rejection of a government proposal to amend the Corporate Tax
Act to give tax breaks on gambling establishments. Pursuant
to this decision, in 2008 the gambling tax remains at 10
percent for casinos and 12 percent on other games of chance.
Leading think-tanks and commentators -- aided by the
Ambassador's criticisms on a morning TV talkshow --asserted
that these breaks were designed to benefit a handful of
individuals with shady ties. The public outcry against the
proposal was rapid and dramatic, and helped shape our
strategy against the duty-free stores.


7. (SBU) With tax breaks for gambling establishments
defeated, and duty-free shops on their way to closure (we
hope),we have now set our sights on a loophole in Bulgarian
financial reporting. Bulgaria's anti-money laundering
legislation requires financial institutions to report cash
transactions over 30,000 leva (15,000 euro) to the Financial
Intelligence Directorate (FID). The form used by banks for
reporting these transactions does not include the actual
amount of the transaction. The FID has identified this
loophole as a key impediment to determining if cash
transactions merit further investigation. According to the
FID director, there were approximately 250,000 such
transactions in 2007. The FID is unable to distinguish
between transactions of 30,000 and 3 million leva. We see
the closure of this loophole -- a simple administrative fix
requiring only political will -- as key to improving
Bulgaria's anti-money laundering efforts. The Chairman of
the Bankers Association told us February 25 his group will
not oppose a change in the regulation. The Minister of
Finance is also on board. The road block remains the Central
Bank, which states Bulgaria's money laundering legislation
already exceeds EU standards. Using our multi-pronged action
plan involving various mission elements, NGOs, and other
like-minded embassies and GOB officials, we will target
Central Bank resistance to the elimination of this loophole.

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COMMENT
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8. (C) We and our EU co-conspirators will keep a sharp eye
on the duty-free legislation and bolster public support to
keep pressure on the government. The border shops are not
yet shut down, and the huge money at stake will soon be
brought to bear. In addition we, along with our partners --
Bulgarian NGOs and other embassies -- will continue work on
closing the loophole to improve Bulgaria's anti-money
laundering efforts. A recent editorial lamented that the
government moves against corruption only because of outside
pressure. Although not all positive developments are the
result of outside pressure, recent successes achieved in
tandem with local NGOs and other embassies are an essential
component for the public to demand that the government make
needed reforms. Bulgarians still depend, too often, on the
United States and the EU to do pathbreaking work. But we do
see signs they are shouldering more of the load. The key, as
always, is political will -- and whether the government
develops it on its own or we continue to shame them into it,
we'll take it however it comes. End Comment.
Beyrle