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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