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### Viewing cable 05GUATEMALA2653, CONTRABAND, CUSTOMS REFORM AND THE INFORMAL ECONOMY

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
05GUATEMALA2653 | 2005-11-22 22:06 | 2011-05-31 00:00 | CONFIDENTIAL | Embassy Guatemala

`

    This record is a partial extract of the original cable. The full text of the original cable is not available.

` `

    .C O N F I D E N T I A L SECTION 01 OF 03 GUATEMALA 002653

    SIPDIS

    TREASURY FOR OTA BOB WARFIELD

    E.O. 12958: DECL: 11/14/2010
    TAGS: ETRD EFIN BEXP ETTC KCOR KCRM KIPR PGOV PM PINR ASEC SNAR GT
    SUBJECT: CONTRABAND, CUSTOMS REFORM AND THE INFORMAL ECONOMY

    Classified By: Economic Counselor Oliver Griffith for reason 1.5(d)

    ¶1.  (C) Contraband poses an ongoing threat to Guatemala's
    economic development, undermining growth in the formal sector
    and diminishing the government's ability to collect taxes.
    The potential nexus with organized crime, human and drug
    smuggling, along with the incentive to corrupt and undermine
    law enforcement makes it a threat to Guatemala's national
    security as well.  Contraband, with its roots in tariff
    evasion, boomed under the previous FRG administration, which
    had direct links with smuggling and organized crime.  Many in
    the business sector fear that, although the Berger government
    is no longer directly involved, it is not taking forceful
    enough action to control contraband, which continues to grow.
     Recent initiatives undertaken by tax and customs authorities
    (SAT), as well as the Interior Ministry, show good will on
    the part of the GOG, but progress remains limited.  End
    summary.

    Business Committee Frustrated by Lack of GOG Progress
    --------------------------------------------- --------

    ¶2.  (SBU) On November 10, EconOffs met with the private
    sector's anti-contraband committee.  The committee, chaired
    by an AmCham representative, covers most sectors of the
    formal economy, with a focus on areas such as poultry,
    liquor, rice, sugar, and others that face a variety of import
    costs and taxes which increase the potential competitive
    damage from contraband.  Some of these sectors have obvious
    incentives for smugglers, including higher "sin" taxes on
    alcohol and tobacco.  Staple food items such as poultry, rice
    and sugar face higher tariffs, as well as various production
    and distribution subsidies in Mexico, making cross-border
    smuggling more attractive.  However, avoiding the 12% value
    added tax (IVA) alone is incentive enough for many smugglers
    in a country where the potential risks and added costs of
    running an illicit operation are low.

    ¶3.  (C) The committee voiced their frustration with what they
    describe as a generally well-intentioned government, but one
    that lacks top-level political will and is saddled by
    working-level corruption.  Overall, they claim to have lost
    up to 40% market share to contraband in some sectors, with
    liquor and tobacco facing 60% illicit competition due to
    their higher taxes.  They claim significant damage under the
    previous FRG administration, making reference to the cozy
    relationship between major smugglers and that party's
    leadership, as well as connections to Arzu's PAN
    administration, which preceded the FRG.  With Berger, they
    started off optimistic and supported the creation of a
    government/private sector Contraband Commission.  However,
    that commission has only met twice, with limited
    participation.  They expressed increasing disappointment with
    the SAT, which they view as well-meaning but ineffective in
    reform efforts.  They were more critical of the Attorney
    General's office, where they alleged that a mixture of
    incompetence and corruption prevents successful prosecutions,
    and complained of lower officials tipping off smugglers to
    pending investigations.

    Contraband - The Methods
    ------------------------

    ¶4.  (SBU) A favorite, particularly for foodstuffs, has been
    crossing the poorly controlled border with Mexico.  A visitor
    to the largest legitimate crossing point, the bridge at Tecun
    Uman, would witness the constant flow of migrants and
    contraband crossing the river.  A flotilla of rafts and
    barges supply everything from individuals loading their sacks
    to permanent bays and warehouses loading trucks.  Many
    smaller illicit crossing points and marketplaces can be found
    along the border between Mexico and Guatemala.

    ¶5.  (SBU) For larger shipments, it is reportedly easy to buy
    your way across the formal border, paying a customs agent to
    look the other way or to accept false documents .  This
    method is also common in Guatemala's three main ports, where
    containers are said to "fly," as they somehow get over port
    walls without ever passing through customs.  Those that pass
    through legitimate procedures can under-invoice, undervalue
    or mislabel contents.  A third method for crossing legitimate
    points of entry is to fake the re-export of goods, claiming
    an export exemption from the IVA.  Illegitimate domestic
    producers also fake export to avoid IVA payment and undercut
    their legitimate, tax-paying competitors.  Of course, many
    local producers simply never register with any authorities
    and conduct their business beyond the reach of tax officials.

    The Cost of Contraband
    ----------------------

    ¶6. (SBU) A large portion of Guatemala's informal economy,
    estimated at around 30% of GDP, is comprised of small
    businesses put off by the expense and bureaucratic hassle of
    formalizing operations and paying taxes.  However, it also
    includes major illicit businessmen evading taxes.  This has
    the obvious negative impact on legitimate businesses,
    undercut by illegal competitors who benefit from and
    encourage corruption of the system.  It also complicates
    fiscal reform, fueling the mantra of the business community
    that they will not accept new taxes until the existing tax
    laws are fairly enforced.  At around 10% of GDP, Guatemala's
    inadequate tax collection is a long-standing impediment to
    development.

    ¶7.  (C) The precise links with drug and people smuggling are
    not entirely clear.  However, a significant portion of
    economic smuggling is managed by major organized crime, which
    thrives in the chaotic environment of Guatemala's ports and
    borders.  Guatemala cannot successfully combat trafficking of
    drugs or people if it does not get a handle on illegal
    economic activity at borders, ports and elsewhere.  All
    require establishing rule of law.

    SAT Reform: Potential Success Story with Gasoline
    --------------------------------------------- ----

    ¶8.  (C) Notably absent from the anti-contraband committee,
    the chamber of petroleum importers and distributors has been
    working their issue somewhat successfully directly with the
    Embassy, President Berger and the SAT.  The chamber estimates
    that up to 60% of gasoline sold in Guatemala in recent years
    was contraband.  The smuggling method of choice involves
    export zones, where gasoline is brought in tax-free through
    the ports and stored to await re-export.  Export documents
    are falsified, with the gasoline sold on local markets
    avoiding IVA, import, and road use taxes.  Former VP Reyes
    has long been rumored to profit from the illicit trade using
    his fleet of trucks and ties to corrupt former SAT Director
    Abadio to smuggle product out.  In a meeting with the
    Ambassador, current SAT Director Roca described the
    two-for-one "happy hour" in the export zones, where two
    trucks would leave the zone, with taxes paid on only one.
    Roca, with USG and industry assistance, is developing
    legislative, administrative and technological reforms to
    better trace gasoline sales to prevent future fraud.  She has
    also put together several major criminal cases that are
    currently with the Attorney General's office, including one
    for $800 million, hoping to collect much-needed revenue and
    make an example out of these smugglers.  The gasoline issue
    is being watched closely as a test-case for broader reforms
    in the SAT.

    SAT Reform: Slow Progress in Customs
    ------------------------------------

    ¶9.  (C) Customs has proven the most difficult part of SAT to
    clean up.  Years of fraud and mismanagement by former SAT
    Director Abadio (currently in jail) left customs almost
    ungovernable, allowing organized crime to strengthen its ties
    to the organization.  Current SAT Director Roca admits that
    she has little control over agents stationed at border posts
    and ports where organized crime is strongest.  Roca complains
    that she has had difficulty filling positions with
    trustworthy people.  The woman she appointed to head up
    operations in Puerto Quetzal returned after one week and
    refused to go back, citing threats against her family.  In a
    meeting with the Ambassador, Roca mentioned that personal
    security was a major concern for her and the organization.
    She also brought up the case of Pacheco, her former head of
    customs, whom she fired shortly after her arrival.  As an
    example of her autonomy, she pointed out that even though he
    was close to President Berger, he respected her decision to
    remove him.  Unfortunately, he was widely suspected of
    running his own smuggling ring from within the SAT, further
    complicating reform efforts under this administration.  Roca
    is working with international donors to develop the kind of
    institutional checks and balances that take discretion away
    from customs agents, hopefully making them less attractive
    targets for bribes or threats.  The Embassy has long pushed
    for implementation of transparent inspection criteria, and
    coordinated inter-agency inspections.  However, results have
    been frustrating.  The slow pace has drawn increasing
    criticism from the business community, who appreciate Roca's
    integrity but lament her lack of progress.
    ¶10.  (C) Taking control of the borders and slowing contraband
    will require significant SAT reform, but also support from
    other GOG security and port authorities.  Minister of the
    Interior Vielman recently announced the recall of all 90
    police assigned to support customs at the borders.  This is
    the third major recall of security personnel from the borders
    since Berger took office.  Vielman also supported the USG
    investigation that led to the recent arrest of three top
    anti-drug police (SAIA) officials, including the director of
    the service and the head at Puerto Santo Tomas.  It shows the
    administration's will to confront the problem, but also the
    difficulties in implementing the institutional reforms and
    safeguards needed for long-term success.

    Comment
    -------

    ¶11.  (C) The Berger administration made a promising start and
    has shown a real interest in tackling the conundrum of
    customs, contraband and related illegal activities.  However,
    in spite of several operational successes going after certain
    corrupt individuals, it has not been successful in
    implementing the institutional reforms necessary to be
    successful.  Of interest to the business community, the GOG
    has not been able to mount a coordinated law enforcement
    effort to disrupt any of the major contraband and smuggling
    organizations.  Contraband will continue to be a major
    impediment to Guatemalan development, with its effects on the
    market share of legitimate businesses, tax collections,
    fiscal reform, and its connection to organized crime and
    corruption.
    DERHAM

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