VZCZCXYZ0000
RR RUEHWEB

DE RUEHQT #0549/01 1871419
ZNR UUUUU ZZH
R 061419Z JUL 09
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC 0583
INFO RUEHBO/AMEMBASSY BOGOTA 8236
RUEHCV/AMEMBASSY CARACAS 3618
RUEHLP/AMEMBASSY LA PAZ JUL LIMA 3289
RUEHGL/AMCONSUL GUAYAQUIL 4452
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS QUITO 000549 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EC
SUBJECT: PRESIDENT'S BROTHER INVOLVED IN PUBLIC CONTRACTING 
CONTROVERSY 
 
¶1.  (U) Summary:  An Ecuadorian newspaper story on June 14 denounced 
President Correa's brother Fabricio for alleged corruption in public 
contracting, claiming he received $80 million worth of government 
contracts through shell companies based in Panama and other 
suspicious business dealings.  President Correa responded by issuing 
a decree prohibiting public contracting with companies domiciled in 
"tax haven" countries (including Panama, Hong Kong, and numerous 
Caribbean countries) or firms with shareholders in these countries. 
End Summary. 
 
¶2.  (U) On June 14, Diario Expreso, a Guayaquil newspaper, published 
a scathing article denouncing President Correa's brother, Fabricio 
Correa, for alleged corruption in public contracting.  The report 
alleged that a conglomerate of offshore businesses headed by 
Fabricio obtained contracts with public entities worth over $80 
million.  The report implied that he used nepotism to obtain the 
contracts, and that his companies were located offshore to conceal 
shady business dealings. 
 
¶3.  (U) Fabricio Correa conceded that his companies had secured 
major contracts in the oil and hydroelectric sectors with public 
institutions, but claimed the contracts were awarded based on his 
years of experience.  A government procurement law passed in 2008 
forbid relatives of senior government officials from obtaining 
public contracts.  However, Fabricio claimed that the law's 
implementing regulation (passed in May 2009 by a presidential 
decree) only specified that contractors could not be related to the 
heads of the agencies signing the contracts, and therefore, his 
relation to President Correa would not count as nepotism. 
 
¶4.  (U) President Correa reacted initially by claiming the press was 
attacking his family.  He challenged Expreso to demonstrate any 
irregularities, favoritism, or injury to the government in the 
awarding of Fabricio's contracts.  However, he also asked the 
Comptroller General and the National Assembly to investigate the 
cases, certain they would find no wrongdoing.  Several days later, 
in his June 20 radio address, he admitted that he recognized that 
Fabricio Correa's companies in Panama were "foreign shell 
companies," and signed Executive Decree 1793, prohibiting public 
contracting with firms in "tax haven" countries such as Panama. 
 
Decree 1793 - More Restrictions on Public Contracting 
--------------------------------------------- -------- 
 
¶5.  (U) The decree specifically prohibits public sector contracting 
with companies domiciled in any countries Ecuador's SRI (tax 
authority) has listed as "tax havens," and with any companies that 
have shareholders domiciled in the tax haven countries.  Eighty-nine 
countries are designated as tax havens by the SRI, including 
Caribbean islands such as the Cayman Islands and the Bahamas, but 
also Hong Kong, Panama, Uruguay, Liechtenstein, and Monaco.  It 
notes that companies with public contracts must obtain approval from 
the GOE before transferring 25% or more of the firm's capital (in 
the past, it appears only oil companies were subject to this 
requirement).  Companies with public contracts must notify the GOE 
of all shareholders, associates, and participants in the company and 
their locations, as well as any changes in this structure. 
According to the director of Ecuador's Public Contracting Institute, 
if companies with government contracts were determined to be 
domiciled in SRI tax haven countries (or have shareholders in such 
companies), they would have to transfer their shares to companies 
based in other countries or their contracts could be subject to 
unilateral termination. 
 
¶6.  (SBU) Legal opinion has been critical of the decree.  One legal 
source says that the tax haven rule and the requirement for GOE 
approval before transferring company shares contradict the Companies 
Law's provision for freedom of capital movement for corporate 
entities.  Countries on the "tax haven" list have also reacted 
negatively to the move.  The government of Panama announced that it 
would implement a reciprocity law to prevent granting public 
contracts to Ecuadorian companies (which could exclude Ecuadorian 
companies from work on the upcoming expansion of the Panama Canal), 
and hinted at other retaliation that could include limiting canal 
usage.  Three members of ALBA, the Chavez-led political group which 
Ecuador recently joined, are also on the list. 
 
¶7.  (SBU) Meanwhile, the Comptroller General and the National 
Assembly have moved forward with their investigations.  On June 24, 
Alfredo Vera, Ecuador's Transparency Secretary, requested that the 
Ministries of Housing, Transport, and Public Works, and state oil 
company Petroecuador annul Fabricio Correa's contracts.  However, 
when interviewed about the request, the heads of these entities said 
that they would not take any action until they received an official 
request.  While some question the ethics of the President's brother 
 
obtaining numerous government contracts and having offshore 
companies, it does not appear that he has broken any existing laws. 
In fact, Fabricio announced on June 29 that he planned to transition 
his companies to Ecuadorian ownership to comply with the new decree 
and to maintain his government contracts.  President Correa's 
concerns are twofold.  First, the offshore "shell companies," which 
are out of his government's jurisdiction and control.  They are also 
likely not paying taxes within Ecuador, a lack of potential revenue 
that the cash-strapped GOE could use.  Second, Fabricio Correa's 
contracts, while so far apparently legal, do raise questions of 
nepotism, particularly in light of widespread business community 
assertions that Fabricio is corrupt.  For President Correa, who 
brandishes his honesty, this is potentially a heavy political cost. 
 
 
Press Angle 
----------- 
 
¶8.  (SBU) One additional piece of this puzzle is the press, which 
Correa has repeatedly criticized.  The newspaper that published the 
initial story about Fabricio claimed it was not doing so to get back 
at the President for fining television channel Teleamazonas, but 
others disagree.  Correa's decree in turn could be partially 
targeted at the press.  One legal expert told us that 7 out of 8 
major dailies in Ecuador are owned by companies or have shareholders 
in "tax haven" countries such as Panama.  Correa has hinted that 
government advertising in newspapers could be considered public 
contracting, and could be prohibited for papers with such ownership 
structures. 
 
¶9.  (SBU) Comment:  President Correa's decision to issue Decree 1793 
in face of the controversy surrounding his brother's government 
contracts was taken hurriedly, and may end up being revised.  A 
blanket restriction limiting public contracting with companies that 
have shareholders in certain countries seems excessive, difficult to 
implement, and likely to bring retaliation, as threatened by Panama. 
 The move likely reflects Correa's frustration with his inability to 
control offshore companies.  Based on private conversations with 
contacts at INCOP, it appears unlikely that Fabricio has broken any 
existing laws or that his contracts will be terminated following the 
investigations.  However, the controversy could have implications 
for Correa's image, since it gives at least the appearance of 
favoritism at the highest levels of an administration that has 
prided itself on fighting corruption. 
 
HODGES