VZCZCXYZ0005
OO RUEHWEB

DE RUEHAC #1242/01 3481936
ZNR UUUUU ZZH
O 141936Z DEC 06
FM AMEMBASSY ASUNCION
TO SECSTATE WASHDC IMMEDIATE 5139

UNCLAS ASUNCION 001242 
 
SIPDIS 
 
SIPDIS 
 
FOR WHA/BSC KATHERINE READ 
 
E.O. 12958: N/A 
TAGS: PREL PTER KCRM SNAR PA
SUBJECT: PARAGUAY SCENESETTER FOR STAFFDEL WALKER 
 
 
¶1. (SBU) Staffdel Walker: Embassy Asuncion warmly welcomes 
your visit as an opportunity to highlight U.S. activities 
focused on combating terrorist financing, disrupting criminal 
organizations, strengthening democratic institutions, and 
promoting sound economic policies and good governance.  You 
come at a particularly sensitive time, with President Duarte 
feeling strong one moment (after his party,s strong showing 
in November,s municipal elections) and buffeted the next (as 
he is now in the wake of early December riots over judicial 
corruption, the worst Asuncion has seen in years). 
Bilaterally, significant actors call into question important 
aspects of our security relationship.  Many Paraguayans, 
however, support closer U.S. ties, especially to offset their 
uneasiness over the 
Venezuela-Bolivia Military Agreement. 
 
¶2. (SBU) An overview of the current situation in Paraguay 
follows, highlighting key issues which may come up in your 
scheduled meetings. 
 
The Political Scene:  President Duarte,s Efforts Under Fire 
 
¶3. (SBU) Your visit comes three years into the presidency of 
Nicanor Duarte Frutos.  In that time, Duarte has taken steps 
to deal with a pressing fiscal crisis, reviving the economy, 
and fighting corruption.  In the last year, however, 
political support for Duarte has sagged, with polls 
indicating the general population is not satisfied his 
government has taken adequate measures to create jobs, 
improve the economy and tackle corruption.  In addition, he 
has sought a Constitutional Amendment allowing for his 
reelection.  Much of the population as well as the opposition 
parties and some within the Colorado Party (who seek to back 
other candidates) strongly oppose his reelection bid. 
 
Paraguay,s Public Security Challenges 
 
¶4. (SBU) Twelve members of the Free Fatherland Party (PPL) ) 
a far-left, rural-based political movement -- were found 
guilty this month in the kidnapping and murder of the 
daughter of former president Raul Cubas.  The body of Cecilia 
Cubas was discovered in February 2005.  Paraguay has been 
able to gain the expulsion from Argentina, Brazil and Bolivia 
of others implicated who took refuge abroad.  Evidence ties 
the PPL to the Revolutionary Armed Forces of Colombia (FARC). 
 The Cubas kidnapping has proven to be one in a series of 
recent events that suggest the emergence of a political 
movement bent on provoking instability through violence.  A 
culture of distrust, allowing for little inter-institutional 
cooperation, hampers the ability of Paraguay,s law 
enforcement community and military to tackle rising concerns 
about public security; Paraguay,s National Police are widely 
disparaged by the general population as incompetent and 
corrupt, and the police and military are rivals, not 
partners.  The Cubas killing and clear evidence of FARC 
involvement shocked Paraguay,s leaders and population into 
assuming a more pro-active stance in dealing with potential 
security threats. 
 
International Crime and Counter Terrorism 
 
¶5. (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, 
trafficking in arms, intellectual piracy, document forgery, 
counterfeit cigarette manufacturing and loose border controls 
(especially at the Friendship Bridge connecting Paraguay with 
Brazil). 
 
¶6. (SBU) Paraguay has a well-deserved reputation as the 
weakest link in combating the wide range of illicit 
activities that occur in the TBA.  Corruption at multiple 
levels undercuts serious law enforcement efforts. 
Nevertheless, Paraguay has taken serious steps to address its 
institutional deficiencies by creating special units, 
principally in Customs and the Ministry of Industry and 
Commerce (MIC) to investigate more effectively IPR violations 
and customs fraud.   The MIC,s Specialized Technical Unit 
(UTE) in particular has made a number of significant seizures 
of counterfeit products.  These units receive significant 
assistance from the USG in the form of INL funds or the MCC 
Threshold Program.  Separately, Brazilian efforts to tighten 
enforcement of customs restrictions, including regular 
inspections and seizures, have contributed to a significant 
decrease in the movement of contraband and pirated goods at 
this border crossing. 
 
¶7. (SBU) Paraguay,s Anti-Money Laundering Secretariat 
(SEPRELAD) has also received technical assistance and 
equipment from the U.S.  Paraguay has subscribed to all 12 UN 
counter-terror conventions but its anti-money laundering law 
is lacking in that it does not allow for prosecution of money 
laundering as an autonomous crime.  Nor does Paraguay yet 
have counter terrorism legislation.  Paraguay seeks to meet 
its international obligations through provisions in a series 
of three bills.  UNCTC Executive Ruperez approved of the 
draft legislation text when he visited in July 2007.  The 
first bill establishing money laundering and terrorist 
financing as crimes and setting out the consequent penalties 
was delivered to Congress this October.  The bill on 
procedural tools for the prosecution of these crimes remains 
under arduous debate before a Legislative Reform Commission 
and could face much of the same when it is submitted to 
Congress.  The law establishing SEPRELAD,s regulatory 
authorities has been drafted but not yet submitted to 
Congress pending movement on the first bill.  Paraguay,s 
SEPRELAD could face suspension from the Egmont Group should 
this bill not be adopted before June.  In the absence of an 
effective money laundering law, Paraguay has prosecuted three 
alleged Hizballah terrorist financiers for tax evasion. 
 
¶8. (SBU) Paraguay,s Anti-Drug Secretariat (SENAD) represents 
the single-most effective law enforcement body in Paraguay. 
Working closely with the U.S., it has effectively targeted 
Brazilian trafficking groups that are run mostly out of Pedro 
Juan Caballero (PJC) on Paraguay,s northern border with 
Brazil.  Within the last six months, SENAD has made a number 
of significant arms seizures with evidence signaling links to 
Brazil,s PCC and Colombia,s FARC.  While these weapons were 
seized in PJC and Asuncion, arms and drug trafficking also 
occur out of CDE.  Presently, SENAD is hard-pressed to meet 
challenges in that region for lack of resources (its national 
annual budget is just $2 million). 
 
¶9. (SBU) Paraguay has signaled concern about potential 
terrorist financing occurring out of the TBA but will be 
reluctant to speak to this issue directly.  We are working to 
strengthen cooperation on the ground at the local level and 
between governments in undertaking investigations and 
prosecuting cases.  To the extent we can speak to how this 
effort rebounds to Paraguay,s benefit in fighting 
corruption, promoting economic development and countering 
crime and insecurity, Paraguay will likely be predisposed to 
be supportive.  We continue to monitor closely CDE and 
government reactions to the December 6 OFAC designations of 
TBA Hizballah financiers. 
 
¶10. (SBU) 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 (1954-1989) still cast a long shadow.  In 2004, 
President Duarte received JCS Chairman General Myers but then 
made a public show of announcing that Paraguay would not send 
a contingent to Iraq despite having volunteered to do so to 
President Bush a year earlier.  Given recent false 
allegations that the U.S. wants to establish a military base 
in Paraguay, we recommend tailoring any public remarks about 
Paraguay,s role in the GWOT in a way that will not lend fuel 
to these false claims.  It is perhaps best to focus 
interlocutors on attacking corruption and the combating 
transational crime as ways to improve Paraguay,s 
international image. 
 
¶11. (SBU) Paraguay is a significant transit point for cocaine 
and other narcotics by air from Colombia and Bolivia to 
Brazil.  Much of the northwestern part of the country is 
barren and uninhabited, and the GOP has difficulties in 
enforcing the law due to geography and the political (and 
judicial) power some drug traffickers wield.  SENAD, the 
National Anti-Narcotics Secretariat, coordinates GOP 
interdiction efforts, with significant assistance from the 
DEA and training support from US Special Forces JCETS.  In 
2004, Paraguay and Brazil collaborated in a joint operation, 
with DEA assistance that produced an historic seizure of over 
260 kilograms of cocaine and the arrest of Brazilian drug 
kingpin Ivan Carlos Mendes Mesquita, wanted in the U.S. on 
drug trafficking charges.  Paraguay cooperated with the USG 
extradition request and Mendes Mesquita was taken into U.S. 
custody in 2005, a dramatic and unprecedented step.  Post 
considers this case emblematic of the success we have been 
able to achieve by working with the SENAD as an autonomous 
unit. 
 
Reforming the Economy, But Growth Insufficient 
 
¶12. (U) Paraguay,s economy relies heavily 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, contraband and counterfeit products, most 
of which are destined for Brazil or Argentina.  President 
Duarte took office in 2003 inheriting a weak economy and 
promising to attack widespread corruption and reform the 
economy.  He named a non-partisan, technocratic economic 
cabinet and has supported their efforts.  On a macroeconomic 
level, Paraguay,s performance has been strong: economic 
growth reached 2.9 and 3.0 percent in 2004 and 2005, 
respectively, and inflation was held down to near 3 percent 
in 2004 though it reached 9.9 percent in 2005.  The IMF 
expects 2006 growth near 4 percent and year-on-year inflation 
near ten percent.  However, whereas the government succeeded 
early on in getting some significant economic reform laws 
through Congress, progress over the two years has been slow. 
The confrontation between Congress and the Executive has all 
but frozen any reform efforts that require legislation; the 
Congress has rejected several concessional loans (from the 
IDB and Japan) and suspended for one year the application of 
the previously authorized personal income tax.  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 to at 
least 5 or 6 percent -- and sustaining them there.  Success 
will require the government to stay the course on 
macroeconomic stability and undertake deeper structural 
reforms. 
 
Regional Concerns 
 
¶13. (SBU) The political situation in Bolivia and the 
activities of President Evo Morales are currently at the 
center of the political radar screen in Paraguay.  Some 
Paraguayans have conveyed a concern about lingering 
irredentist claims within some segments of the Bolivian 
military to territory in the Chaco -- a vast region in 
Western Paraguay that borders Bolivia and served as the site 
of a war with Paraguay in the 
1930s -- that could stir controversy and tension should 
Bolivia suffer an extended period of instability.  Brazil and 
Paraguay rely on Bolivian infrastructure for land traffic 
extending to the Pacific coast that could be jeopardized in 
the event of instability in Bolivia.  Recently, some Bolivian 
commentators, including political officials, have signaled 
concern that the U.S. sought to establish a military base in 
the Chaco (sic) for the purpose of monitoring activities in 
Bolivia or attempting to control energy resources in the 
Bolivian and Paraguayan Chaco region.  Paraguay and Bolivia 
relations remain tense over the Venezuelan and Bolivian 
Military Agreement announced this Fall.  Some within the 
Paraguayan government, civil society and the media have 
expressed the desire for Paraguay to enter into a bilateral 
security agreement with the United States. 
 
U.S. Activities 
 
¶14. (SBU) U.S. activities in Paraguay are focused on 
strengthening democratic institutions, promoting sound 
economic policies and good governance, disrupting criminal 
organizations, and combating terrorist financing.  Post 
maintains bilateral assistance programs dealing with 
combating narcotics trafficking, money laundering, 
intellectual property violations, and trafficking in persons. 
 A Department of Justice Resident Legal Advisor and advisors 
from Treasury,s Office of Technical Assistance worked 
quietly behind the scenes over the last three years to assist 
the Paraguayan Government in developing appropriate money 
laundering and counter-terror legislation. In the wake of the 
Cubas kidnapping, Vice President Castiglioni traveled to the 
U.S. for meetings with VP Cheney, SECDEF Rumsfeld, and other 
key officials to discuss a comprehensive approach to 
Paraguay,s security challenges, including a high-level 
seminar sponsored by the Center for Hemispheric Defense 
Studies (CHDS) that was held in September 2005.  Then SECDEF 
Rumsfeld visited Paraguay in August 2005.  CHDS has 
followed-up with comprehensive meetings last week on 
transformation and reformation of the military.  Paraguay has 
expressed interest in acquiring technical assistance in 
development of its National Security Strategy and National 
Defense Plan.  USAID and the Peace Corps also have programs 
in the country.  Paraguay began to implement a USD 34 million 
Millennium Challenge Account Threshold Program in May; its 
poor historical record on corruption was the major reason it 
did not qualify for full participation in the program.  The 
Threshold Program focuses on combating impunity and 
informality. 
 
CASON 
CASON