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UNCLAS PANAMA 000367 
 
SENSITIVE 
SIPDIS 
 
WHSC PLEASE PASS TO USTR 
 
E.O. 12958: N/A 
TAGS: ECON ETRD PREL PGOV EFTA EFIN SNAR PM
SUBJECT: TORRIJOS BRIEFS MARTINELLI AS TIEA THREATENS FTA 
PASSAGE 
 
REF: A. PANAMA 326 
     ¶B. PANAMA 293 
 
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SUMMARY 
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¶1. (SBU) Vice-President Lewis reported to the Ambassador that 
President Torrijos recommitted to his endgame (reftels) for 
the U.S.-Panama FTA (FTA) during his first meeting with 
President-elect Martinelli.  That endgame calls for the Obama 
Administration to submit the FTA to Congress, after which 
President Torrijos intends to pass labor reforms and 
immobilize bearer shares.  However, if the Obama 
Administration requires a completed Tax Information Exchange 
Agreement (TIEA) as a condition for submitting the FTA, 
Torrijos will be unable to deliver and will instead seek a 
gracious disengagement to preserve bilateral relations as 
much as possible.  While Torrijos knows completion of a TIEA 
is impossible in the eight weeks remaining in his 
administration, he told Martinelli a TIEA  as inevitable in 
the face of OECD pressure.  Torrijos was relieved that 
Martinelli essentially agreed to this game plan, telling 
Torrijos: "You take care of this.  I'm not going to be able 
to deal with it." 
 
--------------------------- 
TORRIJOS CAN PASS THE LABOR 
AND BEARER SHARES REFORM 
------------------------ 
 
¶2. (SBU) In a May 5 six-hour first meeting between President 
Torrijos and President-elect Martinelli after Martinelli's 
landslide win, President Torrijos discussed the importance of 
the FTA and its current political state of play in Panama and 
United States. President Torrijos informed Martinelli that 
the labor reforms are nearly negotiated with the USG and he 
simply needed to decree some new regulations and pass already 
written legislation.  However, the much more difficult 
legislation to immobilize  bearer (anonymous) shares of shell 
corporations has not been written.  Minister of Commerce and 
Industries Porras is leading a Bearer Shares Commission that 
is writing the legislation.  The Commission contains 
representatives from the broader business community - 
including the bankers and attorneys.  In an effort to gain 
support from Martinelli, Torrijos invited Martinelli to 
appoint a representative to the commission. 
 
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A TIEA IS INEVITABLE, 
BUT THE FTA IS NOT 
------------------ 
 
¶3. (SBU) Torrijos acknowledged to Martinelli that he does not 
have sufficient political capital to pass a TIEA during his 
administration, but he made the case to Martinelli that 
passage of a TIEA by Panama is inevitable.  Torrijos' 
argument flows as follows: the OECD/G20 will demand a TIEA by 
March 2010 when Panama's status on the OECD greylist 
(jurisdictions committed to the internationally agreed tax 
standard, but have not yet substantially implemented) may 
downgrade to the blacklist (jurisdictions that have not 
committed to the internationally agreed tax standard). 
According to Torrijos, being blacklisted will endanger the 
economic growth of Panama by discouraging foreign investors. 
(In 2008, foreign investment totaled $2.4 billion and exceed 
10% of GDP.)  Sharply lower levels of investment flows will 
increase unemployment and poverty, and result in social 
instability.  Thus, Torrijos argued, Panama must pass a TIEA 
before the G-20 meets again in March. 
 
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RECOMMENDATION 
-------------- 
 
¶4. (SBU) How do we move both the FTA and TIEA forward?  We 
strongly recommend a two pronged strategy: 
 
(a) We should make a commitment to negotiate a TIEA appear 
(and it is) part of a pre-existing obligation, as opposed to 
a new obligation the USG imposed on the Panamanians after 
conclusion of ten rounds of negotiations and signing of a 
 
comprehensive FTA.  This format, as opposed to an explicit 
linkage by the USG, enjoys a far greater chance of success. 
It allows the Panamanians to retain pride and fend off 
political attacks, while achieving the substantive goals of 
greater transparency and enhanced revenue collection in the 
United States.  President-elect Martinelli's economic 
advisor, Frank De Lima, is quoted by Bloomberg as saying in 
reference to a TIEA, "We are aware that times are changing." 
However, he also asserts that "we will not succumb to 
pressure from the United States," and that the FTA and TIEA 
"should be dealt with separately."  Post will engage all 
leading economic players within the Martinelli team starting 
this week to send the following message: we can have an FTA 
and a manageable TIEA commitment, or we can lose the FTA and 
have a TIEA imposed upon you by the OECD/G20. 
 
(b) We should allow Congress (vice the Administration) to 
mandate negotiation of a TIEA as a condition of 
implementation of the Agreement, as opposed to being a 
condition for passage of the Agreement.  The Panamanians are 
far more comfortable with a Congressional directive, which 
has a precedent in the unilateral DeConcini Amendment 
(authorizing the use of force in defense of the Canal) to the 
1978 Panama Canal Neutrality Treaty, which achieved U.S. 
objectives while preserving Panamanian prerogatives.  What is 
more, this course of action allows us to direct the remaining 
capital of the Torrijos administration toward labor reforms 
and immobilizing bearer shares, desired USG outcomes that are 
very unlikely to be forthcoming from a Martinelli 
administration.  We can then concentrate all our firepower 
with the new Martinelli government on negotiating a TIEA, 
both to avoid an OECD blacklist and to gain entry into force 
of the FTA. 
STEPHENSON