VZCZCXYZ0006
OO RUEHWEB

DE RUEHAC #0231/01 0622026
ZNY CCCCC ZZH
O 032026Z MAR 06
FM AMEMBASSY ASUNCION
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3867
INFO RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
RUCNMER/MERCOSUR COLLECTIVE

C O N F I D E N T I A L ASUNCION 000231 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/BSC 
TREASURY FOR A/S O'BRIEN; CYNTHIA MEDINA 
 
E.O. 12958: DECL: 03/02/2016 
TAGS: PVOV PREL PTER KCRM SNAR PA
SUBJECT: PARAGUAY: SCENESETTER FOR TREASURY A/S O'BRIEN 
VISIT 
 
Classified By: Political Counselor James P. Merz. Reason 1.4 (b),(d) 
 
 
¶1.  (U)  Assistant Secretary O'Brien, Embassy Asuncion and I 
warmly welcome your visit as an opportunity to advance 
adoption of anti-money laundering legislation and strengthen 
cooperation with the GOP in combating corruption, including 
money laundering and other illicit activity. You come at a 
sensitive time, with President Duarte strengthened by recent 
internal party elections and with this law under debate by 
the Senate on the heels of our announcement about the MCA TP. 
 What follows is an overview of the current situation in 
Paraguay as relates to the money laundering law, highlighting 
the key issues at stake and how we see you engaging with 
influential interlocutors. 
 
------------------------ 
Your Program in Asuncion 
------------------------ 
 
¶2.  (U) We look forward to your visit.  Following meetings 
with me and the country team, you will meet with 
Vice-President Castiglioni, Presidential Economic Advisor 
Carlos Walde, the Banking Association, and Senators Gustavo 
Pedrozo and Bader Rachid, respectively the Presidents of the 
Commissions of Finance and Legislation, over lunch with key 
GOP players including Supreme Court Minister Antonio Fretes, 
Ministry of Industry and Commerce Raul Vera, Appellate Court 
Judge Luis Maria Benitez Riera, and SEPRELAD Director Carlos 
Yegros.  Your meetings afford the opportunity to stress our 
support for President Duate's commitment to combat corruption 
and informality as evidenced by our recent announcement on 
the MCA TP and, to that end, reinforce the importance we 
place on adoption of the AML law as a way to strengthen 
cooperation. 
 
--------------------------------------------- ------- 
The Political Scene: Election Win Strengthens Duarte 
--------------------------------------------- ------- 
 
¶3.  (U) Your visit comes two and half years into the Duarte 
presidency. In that time, Duarte turned a massive fiscal 
deficit into a large surplus, began a bold structural 
economic reform program, revived the economy, and has taken 
steps to fight corruption.  At the same time, Duarte has come 
under fire for not taking adequate measures to create jobs 
and meet public security concerns; his commitment to 
combating corruption when it affects the political and 
economic interests of his own party has been called into 
question.  As part of a bid to consolidate his power within 
the Colorado Party, Duarte ran for Colorado Party President. 
The significant victory he scored on 2/19 with 63 percent of 
the vote has strengthened his political capital.  He assures 
us that he intends to use that capital to advance reform.  To 
date, however, most evidence would suggest he is more focused 
on using it to pursue reelection which requires he amend the 
Constitution -- a long shot given stiff opposition 
resistance. 
 
------------------------------------- 
Paraguay's Public Security Challenges 
------------------------------------- 
 
¶4.  (U) Members of the Free Fatherland Party, a far-left 
political movement with a military wing, kidnapped and 
subsequently murdered the daughter of a former president, 
Cecilia Cubas, whose body was discovered in February. 
Evidence ties the PPL to the FARC.  More recently, upon 
investigating further violence in Paraguay's interior, more 
evidence of FARC and Venezuelan involvement in training 
leftist militants has been uncovered.  A culture of distrust 
allowing for little inter-institutional cooperation hampers 
the ability of Paraguay's law enforcement community to tackle 
rising concerns about public security; Paraguay's National 
Police are widely disparaged by the general population as 
incompetent and corrupt.  Large areas of Paraguay have no 
government presence.  In late 2004, given the lack of 
confidence in the police, the President called the military 
out of the barracks to assist with law enforcement efforts. 
Its profile on the street has diminished as focus on the 
Cubas kidnapping recedes from the public eye.  The Cubas 
murder and clear evidence of FARC involvement shocked 
Paraguay's leaders and population. Increased cooperation with 
Colombia and the U.S. and realization of the need for better 
intelligence and other security measures were one result. 
 
--------------------------------------------- - 
Reforming the Economy, But Growth Insufficient 
--------------------------------------------- - 
 
 
¶5. (U) Paraguay's formal economy relies on agriculture.  It 
features bloated but weak state institutions and the heavy 
involvement of state-owned enterprises.  There is 
considerable activity involving the trading of imported 
legitimate goods, as well as contraband and counterfeit 
products, most of which are destined for Brazil or Argentina. 
 The Duarte government took office in 2003 on the heels of 
Paraguay's worst recession in years promising to attack 
widespread corruption and reform the economy.  Duarte named a 
non-partisan, technocratic economic cabinet and has supported 
their efforts.  On a macro-economic level, Paraguay's 
performance has been strong: economic growth reached  4.0 and 
2.7 percent in 2004 and 2005, respectively, and inflation was 
brought down to near 3 percent in 2004 and just under 10 
percent in 2005.  However, whereas the government succeeded 
early on in getting some significant economic reform laws 
through Congress, progress over the last year has been slow. 
For Paraguay to escape from the poverty affecting roughly 
half of its population, the country needs to increase 
productivity by attracting capital and raising annual growth 
rates closer to 5 or 6 percent.  Success will require the 
government to stay the course on macro-economic 
stability and undertake deeper structural reforms. 
 
----------------------------------------- 
International Crime and Counter-Terrorism 
----------------------------------------- 
 
¶6.  (U) The Tri-Border Area (TBA), the region of Paraguay 
that meets Brazil and Argentina, near the city of Ciudad del 
Este, is a primary USG concern. The area is notorious for 
drug and other smuggling, including trafficking in persons, 
intellectual piracy, document forgery, counterfeit cigarette 
manufacturing and loose border controls, especially at the 
Friendship Bridge  connecting Paraguay with Brazil. 
 
¶7.  (C) Paraguay cooperates closely with us in addressing all 
the problems of greatest U.S. concern, including terrorist 
fund-raising by Hezbollah.  Paraguay took the lead in 
establishing a 4 nation coordination group known as the "3 
plus 1" (Argentina, Brazil, Paraguay and the U.S.).  Also 
despite the lack of specific anti-terrorist statutes, 
Paraguay has actively prosecuted known terrorist fund-raisers 
on tax evasion charges.  FARC involvement with the Cubas 
kidnapping and links to the local violent leftist Free 
Fatherland party have heightened Paraguayan concerns about 
terrorism.  President Duarte noted the threats from 
international crime, including terrorist fund raising, in his 
July State of the Nation address.  More recently, his 
Minister of Interior has asked for assistance in gathering 
more intelligence about the location and activities of 
militants in the interior. 
 
¶8.  (C) Despite preoccupation with close-to-home terrorism 
issues including kidnappings, local violent radicals, the 
FARC, and fund-raising for Hezbollah, Paraguay is reluctant 
to take a lead in the war on terrorism beyond its borders. 
This is due to pressure from Brazil as well as domestic 
concerns that an aggressive anti-terrorism policy (e.g., vis 
a vis the Middle East) will draw terrorist reprisals.  In 
addition, memories of abuses under the Stroessner 
dictatorship remain a factor. 
 
¶9. (U) Paraguay is a significant transit point for the 
transportation of cocaine and other narcotics by air from 
Colombia to Brazil.  Much of the northwestern part of the 
country is uninhabited, and the GOP has difficulties in 
enforcing the law due to geography and the political power 
some drug traffickers wield.  SENAD, the national 
anti-narcotics secretariat, coordinates GOP interdiction 
efforts, with significant assistance from the DEA.  In 
November 2004, Paraguay, Brazil and DEA collaborated in a 
joint operation that produced the seizure of 260 kilograms of 
cocaine and the arrest of Brazilian drug kingpin Ivan Carlos 
Mendes Mesquita, wanted in the U.S. on drug trafficking 
charges involving Colombia's FARC guerrillas.  Paraguay 
extradited Mendes Mesquita to the U.S. in June 2005 , a 
dramatic and unprecedented step. 
 
--------------------------------------------- ------ 
Where We Are on the Anti-Money Laundering Law (AML) 
--------------------------------------------- ------ 
 
¶10.  (SBU) Adoption and implementation of the draft AML law 
represents one of this Mission's highest priorities.  A law 
drafted by a group of experts from the Attorney General's 
Office, the judiciary including the Supreme Court, the 
 
Central Bank, the anti-Money Laundering Secretariat 
(SEPRELAD), the anti-Drug Secretariat (SENAD), together with 
U.S. experts from the Department of Justice and the Treasury 
was submitted to the Senate in May 2004 where it remained 
stalled until late 2005.  In October 2005, under significant 
U.S. pressure, the Finance Commission President submitted the 
law for full Senate action in October for a special procedure 
that required all Senators meet a 3/7 deadline for offering 
amendments.  On 3/1, however, the first day back after a two 
month recess, Senators decided to suspend this procedure on 
grounds this law was very complicated and required more time 
for review. 
 
¶11.  (SBU) On the up side, the President, the Vice President, 
the Minister of Industry, key private sectors players are 
engaged and carrying out a full court press lobbying key 
Senators, strategizing to deal with the Banking Association 
opposition, and getting a strong public message out on merits 
of law.  This represents the first time these key GOP players 
are taking the initiative.  They have specifically asked us 
to step back both in terms of addressing the issue in the 
press and lobbying Senators hard, fearful our being seen out 
front will provide opponents with the pretext they need to 
play the nationalist card saying law is being imposed by U.S. 
 (NB.  This happened several years ago on the 
counterterrorism law, leading to its defeat.) 
 
¶12.  (SBU)  Notwithstanding the 3/1 setback, we are still 
probably in the best situation we have ever been in on this 
law in 2 years.  The GOP appears to realize how important 
this is to us, for them, and for our relationship.  In 
exchanges with key GOP reps, we have linked the AML law to 
the MCA TP noting that continued GOP failure to deliver on 
the AML law calls into question its the GOP will to fight 
corruption. 
 
¶13.  (SBU)  Duarte remains the key.  Over the last several 
months he has been ensnarled in a nasty race for the Colorado 
Party Presidency.  His recent big victory has strengthened 
him; he appreciated the recent announcement on the MCA TP 
which coincidentally occurred only several weeks before his 
election.  The Colorados do not enjoy a majority in the 
Senate, but we remain confident if Duarte weighs in to get 
the Colorados to vote the right way on this law, the 
opposition will go along. 
 
Maximizing Your Visit 
--------------------- 
 
¶14.  (U)  Your visit on 3/8 is well timed.  Coinciding with 
visit of OTA experts, it is a good chance to assess where we 
are on the AML and formulate a strategy on where we go from 
here.  It also offers a good chance for you as a high level 
Washington visitor to stress the importance of the AML law 
with key players including 
 
-- Vice-President Castiglioni who is pro-U.S. and with us on 
this issue.  You should stress how important adoption of the 
law is to relations and how it impacts Washington's views of 
Paraguay, and the Duarte administration in particular, and 
its commitment to combat corruption. 
 
-- Presidential Economic Advisor Carlos Walde who Paraguay's 
point person on MCA TP.   Walde needs to appreciate the U.S. 
desire to support GOP anti-corruption efforts, including 
through agreement to MCA TP, but that conversely the GOP 
needs to reinforce its bonafides by adopting the AML law. 
 
-- Banking Association President Cello Tunholi and Executive 
Director Haitter who convey support for the law in principle 
but object to several key provisions.  You need to stress the 
fact that the law is necessary for Paraguay to meet 
international standards, combat organized crime, and 
strengthen the credentials of the banking community. 
 
-- Senator Pedrozo who is President of Finance Commission and 
Senator Rachid who is President of the Legislation 
Commission.   Pedrozo has assured us the law will pass but 
with modifications.  We expect to work with him on the kinds 
of modifications he'll seek.  Rachid, who is President of the 
Legislation Commission and the brother of Paraguay's FM is of 
Syrian descent and has been accused of involvement in illicit 
activities.  He has conveyed strong objections to the law and 
on 3/1 led the charge in lifting the procedure that would 
have required Senators to opine on the law by 3/1.   In the 
past, he has also denied terrorist financing occurs in the 
TBA.  All that said, Rachid loves to be stroked.  Inviting 
him to the Ambassador's residence is a big deal.  We'll need 
 
to give our pitch on the AML law, emphasizing our concerns as 
they relate not just to Paraguay but others in region and be 
prepared to solicit and listen to their concerns. 
 
General Talking Points for Meetings 
----------------------------------- 
 
¶14.  (U)  You may draw as appropriate from the following 
talking points. 
 
-- Describe your job and note visiting countries in region 
Argentina, Brazil, and Paraguay discussing ways to improve 
cooperation in combating terrorist financing.  You  should 
speak to concerns as they relate to the region and be 
prepared to offer views on neighbors' legislation making the 
point -- provided it is true -- that they have passed 
legislation that meets international standards whereas 
Paraguay has not. 
 
-- With regard to Paraguay, we are concerned that the illicit 
activity that occurs in CDE creates an opportunity for 
individuals and organizations seeking to launder money, 
sometimes to finance terrorist organizations. 
 
-- We have worked in collaboration with Paraguayan officials 
to investigate individuals with such links.  We have provided 
Paraguay with training and resources to carry out these 
investigations.  But the work is complicated and requires 
strong laws. 
 
-- President Duarte has conveyed his own commitment to 
combating corruption.  He is also clearly committed to 
combating poverty, in large measure by promoting growth and 
investment and fighting informality. 
 
-- Together with the Congress, he has secured the adoption of 
key legislation including laws on a personal income tax, a 
new customs code, and a new customs regime in CDE.  His 
policies have also helped Paraguay register economic growth 
over the last two years. 
 
-- The U.S. has conveyed its support for the President in 
word and action.  Most recently, we announced USG agreement 
to $35 million in connection to the Millennium Challenge 
Account Threshold Program to support Paraguay's efforts to 
combat impunity and informality. 
 
-- If Paraguay meets the objectives of this program it could 
qualify for full participation in the MCA program, opening 
the door to significantly greater assistance programs. 
 
-- As you are aware, a bill to modify Paraguay's anti-money 
laundering law is presently before the Congress.  This bill 
addresses deficiencies in the current law.  It would enable 
Paraguay to meet obligations it assumed when it ratified a 
number of international treaties and conventions on 
international terrorism. 
 
-- Paraguay's adoption of this bill would reinforce the 
President's commitment to combating corruption giving his law 
enforcement community an important tool to combat this crime. 
 
 
-- We hope Paraguay will be able to move on a timely basis to 
adopt and implement this law.  We are prepared to assist in 
anyway we can. 
 
You can draw from the following points on an as 
appropriate/if raised basis: 
 
-- Laundering money 1) fosters corruption, 2) cuts tax review 
and 3) discourages clean investment.   It also provides cover 
for terror financing. 
 
-- Concern is concrete, not theoretical.  Paraguay has 
convicted three terrorist financiers (Sobhi Fayad, Ali Nizar 
Dahroug, Assad Barakat) over the last three years on tax 
evasion.  Another two -- Hatem Barakat and Kasan Hijazi -- 
suspected of financing terrorism are being prosecuted for 
document fraud and tax evasion respectively. 
 
-- Money laundering charges were not brought against them and 
their assets were never seized because of deficiencies in 
current law. 
 
International Obligations 
 
-- Paraguay has ratified all 12 UN counter terror conventions 
 
and both OAS conventions.  We applaud that step. 
 
-- But these treaties (UN Vienna Convention in 1988 and the 
OAS Inter-American Convention Against Terrorism) impose 
obligations. 
 
-- UN Security Council Resolution 1373 adopted on 9/28/01 in 
immediate aftermath of 9/11 requires States to: 
 
-- Prevent and suppress financing of terrorist acts; 
-- Criminalize willful provision or collection of funds to 
carry out terrorist acts; 
-- Freeze without delay funds of persons who facilitate 
terrorist acts; 
-- Ensure that any person who participates in the financing 
of terrorist acts is brought to justice. 
-- Under its existing law, Paraguay cannot meet these 
commitments. 
 
Strengths of Law 
 
-- Draft law aims to correct deficiencies of current law: 
 
-- 1)  Current law requires conviction for a predicate 
offense.  Incredibly wasteful as AML investigation can't 
begin until there is a prior conviction.  By then the party 
has effectively destroyed evidence.  Obstructs investigation 
of most economic crimes and stimulates corruption.  New law 
makes AML autonomous crime. 
 
-- 2)  Under current law, fiscales can't keep up with money 
launderers for lack of investigative tools.  New law avails 
prosecutors many of tools they now have to investigate drug 
cases: communication intercepts, informants, undercover 
investigation, controlled deliveries, plea bargaining. 
 
-- 3)  Under current law, asset seizure possible in theory 
but in absence of concrete procedures it is not possible. 
New law establishes procedures to hit criminals where it 
hurts by seizing their assets. 
 
-- 4)  Under current Law SEPRELAD works under a Council made 
up of Executive Branch members of high rank.  Creates 
artificial bureaucracy and slows down process.  Under new 
law, works directly for president. 
 
-- Experts that visited Paraguay affirmed the law meets 
international standards. 
 
With the Press 
-------------- 
 
¶15.  (U)  You can expect to encounter the press at least 
coming out of your meeting with the Vice-President.  In your 
comments you should stress that 
 
-- you are visiting the region, including Brazil and Paraguay 
in conjunction with an invitation to attend a conference in 
Argentina on counter terror financing. 
 
-- U.S. shares Paraguay's concern about illicit activities in 
the region; 
 
-- U.S. support Paraguayan efforts to combat illicit 
activity, including money laundering, through the adoption of 
key reforms including money laundering legislation that is in 
compliance with international norms; 
 
-- U.S. looks forward to continuing to cooperate with 
Paraguay to combat illicit activity in the region as concerns 
about transnational crime including money laundering and 
terrorist financing know no borders. 
 
 
(if raised)  Does U.S. have proof of terrorist activity in 
the TBA? 
 
-- As the U.S. has stated on occasions in the past, there is 
no evidence of terrorist operational activities in the TBA. 
 
-- We share Paraguay's concerns as relates to illicit 
activity which opens the door to money laundering and 
terrorist financing. 
 
-- President Duarte himself has conveyed Paraguay's concerns 
as relate to terrorist fundraising. 
 
-- We look forward to continuing to work with Paraguay in 
addressing these concerns. 
 
CASON