PANAMA: SCENESETTER FOR CODEL THOMPSON

UNCLAS PANAMA 000421

SENSITIVE
SIPDIS

PLEASE SHARE WITH CODEL THOMPSON

E.O. 12958: N/A
TAGS: PGOV PREL PM
SUBJECT: PANAMA: SCENESETTER FOR CODEL THOMPSON

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Panama After Operation Just Cause
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1. (SBU) Since the 1989 restoration of democracy, Panama has
established and consolidated a democratic, stable and
responsive government; accelerated economic growth through
open markets; and worked to ensure that the benefits of that
growth reach all citizens. While a hemispheric leader in
progress on these fronts, Panama today stands at a
crossroads. Panama has leveraged its superb stewardship of
the Canal and central location to create an economic and
logistical architecture that is now yielding comparatively
stellar economic growth and a substantial reduction in
poverty. However, opportunities created by the growth remain
elusive to many Panamanians due to continued income
inequality fostered by lack of access to quality education
and inadequate public infrastructure (especially
transportation and health).

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May 3 Elections
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2. (SBU) Panama held general elections on May 3, to elect the
President of the Republic and every elected position in the
country. Businessman Ricardo Martinelli won a landslide
victory, gaining 60% of the vote, and his "Alliance for
Change" coalition won a comfortable majority in the National
Assembly. The alliance features Martinelli's own Democratic
Change (CD) party, the Panamenista Party, led by his Vice
President-elect and Foreign Minister-designate Juan Carlos
Varela, the Patriotic Union (UP) party, and the MOLIRENA
party. Martinelli's government and the new National Assembly
will be sworn in on July 1. The governing Revolutionary
Democratic Party (PRD) was badly defeated, and is mired in
mutual recrimination among several leaders trying to
establish their leadership as the party prepares to rebuild.
The outgoing government has maintained excellent ties with
the USG, and there is every reason to believe relations will
continue to be close under the new government.

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Booming Economy
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3. (SBU) Panama's economic foundation is the Canal through
which passes roughly 5% of world commerce. The Panama Canal
Authority (ACP) has embarked on a $5.25 billion dollar
expansion, the centerpiece of which is a third set of locks
capable of handling the largest class of container vessels. A
growing network of ports, including Manzanillo International
Terminal in Colon (partially owned by U.S. firm Carrix),
facilitates trans-isthmian logistics along with revitalized
Kansas City Southern Railway between Panama City and Colon.
Panama Ports (Hutchison Port Holdings, Inc. of Hong Kong)
launched a $240 million expansion of its Pacific and
Caribbean terminals, augmenting the GOP's construction of the
$215 million Panama-Colon Highway. The Colon Free Zone
generated over $19 billion in trade last year. It serves as a
hemispheric "one-stop shop" for sourcing, financing, and
delivering products (mostly from Asia) to Latin American
markets. Panama's robust financial center, with 90 banks and
$63 billion in assets fuels the purchase and movement of
cargo and facilitates the absorption of robust foreign direct
investment (FDI) inflows that totaled $2.4 billion for 2008.
Through generally prudent management, it has been able to
finance construction projects and consumer spending, key
drivers of GDP growth - 11.5% in 2007 and roughly 9% in 2008.
Although the global financial crisis will impact Panama,
growth is expected to be 1-3% - one of the only countries in
the hemisphere expecting positive growth.


4. (SBU) In recent years, Panama has reached beyond its
traditional maritime and financial networks to build
connectivity of data and knowledge, and people. Panama lies
at the junction of five high bandwidth submarine fiber optic
cables, placing Panama City second only to New York City in
bandwidth availability. This feature was key in the decisions
of Dell and Hewlett-Packard to locate regional headquarters
at the former Howard Air Base, which is undergoing a $705
million transformation as a regional manufacturing and
distribution hub. Panama's tourism industry has similarly
mushroomed in the past five years, with tourist arrivals
increasing from 600,000 to 1.6 million between 2000 and 2008.
Arrivals at Tocumen International Airport reflect a similar
trend, climbing from over 2.1 million in 2000 to an estimated
4.5 million in 2008. Tocumen recently completed an $85
million expansion of its international terminal, complimented
by the concurrent growth in its flag carrier, Copa (which
codeshares with Continental Airlines).


5. (SBU) A recent United Nations report highlighted true
progress in poverty reduction from 2001 to 2007 - overall
poverty fell from 37% to 29% and extreme poverty fell from
19% to 12%. Yet, the distribution of Panama's wealth and
income remains highly skewed, and Panama has one of the
highest degrees of inequality in the Americas. This situation
creates palpable resentment as BMWs and Land Rovers zip past
hot, crowded, buses that subject riders to unreliable
multi-hour commutes. Most inhabitants of Panama City have
never visited an indigenous area or the Darien where poverty
predominates, and government services are minimal.

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MERIDA and PANAMA
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6. (SBU) Though it is in the transit zone for narcotic
smuggling and has large amounts of drugs flowing through its
territorial waters, Panama has taken decisive action against
drug traffickers, and is one of the top countries in Latin
America in terms of drug seizures, with 60 tons seized in
2007, 51 seized last year, and 23 tons seized so far this
year. This is due primarily to its excellent collaborative
counter-narcotics relationship with the U.S., and the work of
a small group of elite police officers. Major international
drug trafficking organizations from Colombia and Mexico are
present in Panama, as is the FARC's 57th Front, which
traffics drugs and weapons through Panama.


7. (SBU) While Panama's security apparatus racks up
impressive drug seizures, the Panamanian public is alarmed by
a perceived wave of crime and insecurity. Constant killings
among drug traffickers and a growing indigenous youth gang
problem have left the public feeling uneasy in this
traditionally low-crime country. Taking advantage of Merida
Initiative funds, Embassy Panama is implementing an
integrated inter-agency approach to the problem. The
foundation for our strategy is community policing. Post is
working with the Panamanian National Police (PNP) to
implement a Community Policing strategy, in conjunction with
the Miami Dade Police Department, to train the highest level
of the police leadership in the concept of community
policing. Community organizations are also being established
to interact with the police, not just to identify criminal
activities, but to report on police corruption and
malfeasance. Post will use additional funds allotted through
Merida to strengthen the PNP's ability to investigate and
discipline internal corruption as a prerequisite for
effective community policing. In addition, USAID Panama will
use Merida funds to develop youth centers in high risk areas,
in conjunction with Panamanian NGOs and faith-based
organizations, which will provide vocational training,
extra-curricular activities, safe-haven recreational
activities.

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Security/Counter-Terrorism
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8. (SBU) Panama's main terrorism concern is an attack against
the Canal. The Panama Canal Authority and the Government of
Panama work closely together to protect the Canal, and the
Embassy's Office of Defense Cooperation (ODC) has trained
several elite squads of security forces to support protection
of the Canal in the event of an attack. Panama co-hosts the
annual PANAMAX exercise, a multinational security training
exercise tailored to the defense of the Panama Canal. The
exercise replicates real world threats to the Canal in order
to develop appropriate responses and guarantee safe passage
to the approaches to the canal and through the waterway.
Twenty nations, including the United States, participate. On
the margins of PANAMAX, Panama hosts a tabletop exercise
specifically designed to enhance its ability to address
asymmetric threats.


9. (SBU) Panama's other main terrorism concern is the
presence of drug trafficking organizations (DTOs) and
elements of the FARC in the Darien. With a population of no
more than 50,000 and only one main road, the Darien is a very
underdeveloped region on the border with Colombia, which is
physically and psychologically remote for most Panamanians.
Elements of the FARC have long used the parts of this region
closest to the border as a rest and relaxation zone, in
addition to organizing drug trafficking and logistical
operations in support of other FARC units inside of Colombia.
In trying to confront this threat, Panama is limited by the
fact that it has no military forces, following their
dissolution after Operation Just Cause in 1989. Panama's
security is the responsibility of the Panamanian National
Police (PNP),the National Aero-Naval Service (SENAN),the
National Frontier Service (SENAFRONT),and the Institutional
Protection Service (SPI, a Secret Service equivalent). The
Torrijos government spun SENAFRONT off from the PNP late last
year in an attempt to stand up a more capable force on the
border that could keep the DTOs and the FARC under control.
While this was a good first step, SENAFRONT is still far away
in terms of size, training and equipment from being able to
take on the FARC. Post, through our Narcotics Affairs Section
(NAS) and ODC, has been working with limited funds to assist
the development of SENAFRONT with training and equipment.


10. (SBU) Post is developing a proposal for DOD
counter-insurgency funds that would stress a "whole of
government" strategy, based on the idea that the real danger
of the FARC and DTOs in the Darien is that they may be able
to usurp the legitimacy of the state in an area where the
state had little effective presence beyond the main road and
a few SENAFRONT bases, and the FARC and DTOs are able to buy
consciences by paying premium prices for goods and assistance
with the drug trade. The funds would be used to leverage GOP
funds and spearhead an effort to develop effective techniques
for improving government services in remote areas. This
program would go hand in hand with other DOD funded programs
to improve SENAFRONT's logistical capabilities so it could
cut the drug, weapons and supply trafficking routes in the
Darien.

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Homeland Security Cooperation
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11. (SBU) Post's Country Team features representatives of
ICE, CBP, and CIS. ICE has recently developed a vetted unit
within the PNP, funded by State Department Narcotics Affairs
Section (NAS) funds. This unit has already had several
successes and is expanding the Embassy's ability to
investigate and combat the organizations trafficking in
weapons, money and people. ICE is also working to develop a
Trade Transparency Unit (TTU) together with the Panamanian
Customs Authority. This program would allow the GOP and
ICE/CBP to get a much better understanding of the trade
patterns in Panama, and especially into and out of the Colon
Free Zone (the second largest in the world). At the same
time, CBP has been working with SENAFRONT and other
Panamanian security services to man a checkpoint on the
Pan-American Highway to try to stop the flow of drugs and
other illegal contraband along this critical roadway. They
have also brought teams down from the Border Patrol, funded
by NAS, to work with SENAFRONT and develop its professional
skills.


12. (SBU) One of the most important Homeland Security
programs in Panama is the Container Security Initiative
(CSI),a joint CBP and ICE program, which currently features
three scanners at Panama's three busiest ports scanning
containers heading to the U.S. and CBP officers in-country
assisting in the ports. The GOP was so impressed with this
program that it bought nine additional scanners to scan
additional containers at additional ports.

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Torrijos wants the FTA
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13. (SBU) President Torrijos, who leaves office July 1,
asserts he fulfilled all major campaign promises, but one -
the FTA. The FTA is a legacy issue; President Torrijos
desires a 'book-end' to his father's Canal treaties. Thus
President Torrijos and his administration are willing to
spend political capital to legislatively address labor and
bearer share issues brought up by the U.S. legislative and
executive branches. However, this late in his administration,
that capital is rapidly diminishing. The choreography of the
potential movement of the FTA through Congress and
synchronization with potential Panamanian reforms is
difficult. The U.S. legislative and executive branches must
signal to the Panamanians that the U.S. Congress will vote on
the FTA in order to rally the PRD majority in the National
Assembly to pass legislation on labor issues and bearer
shares during the Panamanian lame duck session, before the
July 1 transfer of power. Torrijos has already issued three
executive decrees instituting labor reforms. But the rest of
the issues require National Assembly action, and the
legislation is politically difficult. On labor, President
Torrijos' center-left majority can muster the votes, but
cannot appear to be kowtowing to the United States. On bearer
shares, the Torrijos Administration faces powerful and
persistent opposition by lawyers who issue those shares, two
of whom are former Panamanian ambassadors to the United
States, and many of whom are stalwart contributors to the
PRD.


14. (SBU) After July 1, a new Administration assumes power.
The incoming Martinelli administration, thanks to lobbying
from Obama administration officials and G-20/OECD pressure,
has already agreed to start TIEA negotiations in 2009.
However, that agreement is fragile, especially in light of
recent statements by Obama administration officials that seem
to indicate a reconsideration of U.S. trade policy as a
whole, including forward movement on the Panama FTA. It would
also be very difficult for Martinelli's administration to
take on the labor reforms. Martinelli's administration, based
on a small and weak party (Democratic Change),will spend
considerable effort merely maintaining an unwieldy four party
coalition to govern. His coalition might very well splinter
if forced to vote on labor reforms, and complex issues will
be difficult to deal with as the government assembles its
team and learns to work together. A failed FTA will be a blow
to reformers and will strengthen both traditional and
nationalist voices in Panama and those in a new generation
who simply call for fewer American-centric policies. Failure
could also increase uncertainty about the $6.2 billion stock
of U.S. investment in Panama.

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Panamanian Reforms - Tax Haven
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15. (SBU) Many sources have labeled Panama as a tax haven.
However, Panama is not the stereotypical post office box
destination for corporations seeking to avoid U.S. taxation.
Rather, the vast majority of U.S. companies that locate
subsidiaries in Panama do so to expand market share in Latin
America. U.S. businesses are attracted to Panama due to the
use of the U.S. dollar, modern banking system, the Colon Free
Zone, and transportation/logistical architecture that
includes the Panama Canal, Panama Canal railroad, major
ports, and a regional air hub. Companies use Panama as a
marketing and distribution platform to expand brand awareness
and sales in the region, often leading to increased
employment in the United States.


16. (SBU) The reason Panama does not fit into this stereotype
is that Panama has effective anti-money
laundering/anti-terrorist finance banking regulation.
However, transparency issues remain, concentrated in the
corporate practices of Panama's loosely regulated legal
profession. Under Panamanian law, lawyers are the only group
empowered to establish corporations, including shell
corporations that issue bearer shares. Bearer shares serve as
an extremely powerful 'cloaking device' for financial crimes.
Held anonymously by "the bearer," these instruments allow the
persons possessing them to store and transfer funds with
little risk of detection. Often wealthy individuals or
companies will open an "anonymous society" corporation in
Panama. The President and Directors of the company are random
people paid a nominal sum to sign a legal document that
allows them to be the "leadership" of the anonymous society
corporation. However, true ownership lies in the person who
physically controls the bearer shares. The person who
physically controls bearer shares likely will not be able to
deposit them in a Panamanian bank without strict disclosure
requirements, as the banks are tightly bound by
know-your-customer rules. However, nothing stops bearer
shares holders from traveling to a country with lax banking
regulations and opening bank accounts through an attorney or
other proxy (who can hide the identity of the holder of the
bearer shares).


17. (SBU) After substantial engagement from the U.S.
Government, the Government of Panama announced on April 7
that it intends to regulate bearer shares. This breakthrough,
when fully executed, will fulfill the USG's most prominent
financial crimes regulatory recommendation, and remedy
Panama's sole grave remaining anti-money
laundering/counter-terrorism finance (AML/CFT) deficiency.


18. (U) End Scenesetter.
STEPHENSON