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Viewing cable 06LIMA396, ENGELHARD LOSES IN FINAL COURT RULING

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Reference ID Created Released Classification Origin
06LIMA396 2006-02-01 11:56 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Lima
VZCZCXYZ0006
RR RUEHWEB

DE RUEHPE #0396/01 0321156
ZNR UUUUU ZZH
R 011156Z FEB 06
FM AMEMBASSY LIMA
TO RUEHC/SECSTATE WASHDC 8480
INFO RUEHBO/AMEMBASSY BOGOTA 2913
RUEHBU/AMEMBASSY BUENOS AIRES 2215
RUEHCV/AMEMBASSY CARACAS 9000
RUEHQT/AMEMBASSY QUITO 9973
RUEHLP/AMEMBASSY LA PAZ FEB SANTIAGO 0133
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEHNSC/NSC WASHDC
UNCLAS LIMA 000396 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
USTR FOR AUSTR EEISSENSTAT AND BHARMAN 
 
E.O. 12958: N/A 
TAGS: ETRD ECON EINV PGOV PREL PE
SUBJECT: ENGELHARD LOSES IN FINAL COURT RULING 
 
REF: A) 05 LIMA 4228, B) 05 LIMA 4033 
 
1. (U) Summary:  By a decision of 5-1, the Constitutional 
Court ruled against gold trading firm Engelhard of New 
Jersey, holding that the company's rights had not been 
violated by the Tax Court.  With this negative decision, the 
company has exhausted all its legal options in Peru.  The 
company is contemplating taking the dispute to the Inter- 
American Court of Justice.  The GOP Commercial Disputes 
Coordinator told us that the company had pursued the wrong 
course of action, choosing to challenge the process through 
an injunction instead of through administrative litigation. 
End Summary. 
 
2. (U) The Constitutional Court issued a 5-1 decision 
against Engelhard on January 25, stating that the company's 
constitutional rights had not been violated by the Tax Court 
as the company had claimed (reftels).  The Appeal to the 
Constitutional Court ("accion de amparo") over due process 
was the last legal recourse in Peru available to the U.S. 
company. 
 
No "Problem" with 2003 Tax Court Ruling 
--------------------------------------- 
 
3. (U) Peru's Tax Court in February 2003 upheld tax agency 
SUNAT's 1999 action to draw down two Engelhard letters of 
credit (worth approximately $20 million) and withhold about 
$10 million in tax refunds claimed by the firm.  SUNAT 
argued that Engelhard, as part of the chain of 
commercialization, had been involved in phony gold 
transactions to take advantage of a tax rebate regime.  In 
its 2003 ruling, the Tax Court cited three pieces of 
evidence, two of which were not in the Engelhard case file; 
none of these directly incriminated Engelhard.  The company 
argued that it did not have access to the two reports at the 
time of the Tax Court ruling, and that its rights had been 
violated because the company could not defend itself against 
evidence it never saw. 
 
Narrow Constitutional Court Focus 
--------------------------------- 
 
4. (U) The Constitutional Court addressed two issues.  The 
first was the "existence" of two reports that Engelhard 
stated were not in the official court file at the time of 
the February 2003 Tax Court ruling.  The Court concluded 
that the reports did "exist" and that the company had 
knowledge of them.  The Court disregarded a police 
investigation launched by the company that demonstrated that 
one of the reports, a Universidad Nacional de Ingenieria 
report, was a preliminary unsigned study (not valid evidence 
in Peru).  (Note: The report supposedly proved that a gold 
refinery could not have refined gold bought by Engelhard 
through a supplier because of a missing chemical input.  The 
authors of the university report told the police that SUNAT 
provided them with all of the information for their report, 
and that they never corroborated their findings with the 
gold refining firm.  The authors admitted to police 
investigators that the report was a preliminary document 
from which no conclusions could be drawn.  One of the 
authors was not an engineer, as claimed in the report.  End 
Note.) 
 
5. (U) The second issue the Constitutional Court addressed 
was whether the company could be held responsible for 
actions of third parties.  Engelhard has argued all along 
that it should not be blamed for any wrongdoing committed 
down the chain of commercialization by other companies. 
Engelhard stated that it bought gold and paid IGV taxes to 
registered gold suppliers.  On this point, the 
Constitutional Court concluded that an injunction was not 
the appropriate venue ("no es procedente") to reevaluate 
evidence and claims about third parties. 
 
6. (U) The Constitutional Court concluded that it considered 
the evidence presented by the Tax Court in 2003 to be 
sufficient.  The Constitutional Court noted that the two 
missing reports "did exist," and that the Tax Court did not 
rely exclusively on these reports.  The Constitutional Court 
cited a report from the Ministry of Energy and Mines about 
gold production during the period in question, and alluded 
to other evidence reviewed by the Tax Court that the 
Constitutional Court did not identify. 
 
GOP: Engelhard Chose Wrong Legal Strategy 
----------------------------------------- 
 
7. (SBU) GOP Commercial Disputes Coordinator Aurelio Loret 
de Mola told Econcouns that while he did not like the 
decision, the ruling was a sound one -- well substantiated 
and a demonstration of due process.  Loret de Mola stated 
that in his opinion Engelhard's attorneys had pursued the 
wrong course of action.  Instead of arguing the facts in 
administrative litigation (contencioso administrativo), the 
company chose to file an injunction, which is predominantly 
a review of process, not facts, he emphasized.  (Note: 
Engelhard had no choice but to chose between the two 
options.  The company pursued the injunction route because 
the court of last instance was the Constitutional Court, 
which is considered more independent and reliable. End 
note.) 
 
Company in Disbelief Over Decision 
---------------------------------- 
 
8. (SBU) Outraged with the result, Engelhard is planning a 
media campaign to publicly challenge the decision, which it 
describes as an aberration of Peruvian law.  The company's 
lead local attorney, Cecilia Delgado, told us that if the 
decision is permitted to stand, it would set a precedent by 
allowing tax agency SUNAT to use whatever evidence it 
desires to go after tax payers, including tax information in 
other case files to which an accused party does not have 
access.  (Note: We consulted two attorneys not affiliated 
with the company about the missing evidence issue; they 
indicated that a basic tenet of law is that all evidence 
needs to be in the file of the accused.  End note.) 
 
9. (SBU) Engelhard made an administrative appeal within the 
three-day limit of the decision, but this is not likely to 
change the result.  The company is contemplating taking the 
dispute to the Inter-American Court of Justice in Costa 
Rica. 
 
Comment:  Where's the Beef? 
--------------------------- 
 
10. (SBU) The Court decision is disappointing, particularly 
since there is no apparent evidence that directly links the 
company to any wrongdoing.  Loret de Mola had assured USTR 
that the Constitutional Tribunal would get to the bottom of 
the matter.  Still pending is a separate criminal proceeding 
against two local Engelhard executives.  The Prosecutor had 
recommended to the judge that the executives be excluded 
from the case.  The judge has yet to determine whether the 
case will go to trial without the company executives.  This 
penal proceeding, which has more than 200 defendants from 
the gold sector, is more than 5 years old. 
 
STRUBLE