A/S GLASER’S AUGUST 25-26 VISIT TO CHILE: SCENESETTER

Código Fecha Clasificación Origen
05SANTIAGO1739 18 August 2005 No clasificado Embassy Santiago

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

UNCLAS SECTION 01 OF 03 SANTIAGO 001739

SIPDIS

STATE FOR WHA/BSC; STATE PLEASE PASS TO TREASURY

E.O. 12958: N/A
TAGS: SNAR, PGOV, EFIN, PTER, CI, OVIP
SUBJECT: A/S GLASER’S AUGUST 25-26 VISIT TO CHILE:
SCENESETTER

REF: SANTIAGO 1712

1. Summary: Following a successful run on the international
stage, Chile is shifting its focus to domestic issues and its
December 11 presidential and congressional elections. Former
Defense Minister and ruling coalition candidate Michelle
Bachelet is the favorite to succeed President Lagos. Chilean
chief executives are legally barred from seeking re-election.
All three main presidential candidates are likely to keep
the country and our relationship on track. Chile’s economy
is robust and stable. In June, a historic, country-wide
judicial reform went into effect in Santiago, the last of the
municipalities. Chile’s Financial Intelligence Unit (FIU)
has taken positive steps to combat money laundering and
terrorist finance. However, the Constitutional Court deemed
laws empowering the FIU unconstitutional in early 2004; new
legislation designed to restore those powers has been
submitted to Congress but not passed. A general lack of
awareness and, in some instances, denial complicates Chile’s
ability to combat money laundering. Chile remains on the
terrorists’ least desirable list, but its porous northern
region provides easy access for terrorism financing and
narcotics trafficking. A Department of Treasury team visited
Chile during the week of July 25-29 to assess Chile’s gaming
industry. The team will return during the week of September
12-16 (at Chile’s request) to assist the GOC in developing a
structure to review potential casino vendors. End summary.


FROM APEC TO COMMUNITY OF DEMOCRACIES


2. Minister of Interior Jose Miguel Insulza’s May election as
OAS Secretary General capped a successful six-month run on
the international stage for Chile. During this time, Chile
hosted two high-level international meetings (APEC Leaders’
Week and Community of Democracies Ministerial), concluded (in
December 2004) a productive two-year term on the UNSC, and
maintained a leadership role in Haiti peacekeeping efforts.
Throughout, Chile generally proved to be a reliable and
rational partner for the U.S.


DOMESTIC SCENE


3. Chile will hold presidential and congressional elections
on December 11, 2005. This will be Chile’s fourth
presidential election since the end of the Pinochet era in
1989. The previous three elections were judged free and
fair, and there is no reason to expect otherwise for the
upcoming one. There are currently four presidential
candidates: the Socialist Party’s Michelle Bachelet
(representing the ruling Concertacion coalition); the
Independent Democratic Union’s Joaquin Lavin; the National
Renewal’s Sebastian Pinera; and the Communist Party’s Tomas
Hirsch. (President Ricardo Lagos, who is riding high in the
polls, as incumbent is constitutionally barred from serving
consecutive terms.) Bachelet, the Concertacion’s
presidential candidate and former defense minister, is
leading in the polls. She would become Chile’s first female
president if she wins. Half the seats in both the Senate and
the Chamber of Deputies are also up for election on December
11. The new president and members of Congress will take
office on March 11, 2006.

4. In recent years, Chile has taken a number of significant
steps to strengthen democratic institutions and deal with the
human rights abuses of the past. In November 2004, the
National Commission on Political Prisoners and Torture
(Valech Commission) issued a landmark report on human rights
abuses during the Pinochet era, and the judicial system
continues to investigate and prosecute a number of human
rights cases. In June, a historic, country-wide judicial
reform went into effect in Santiago, the last of the
municipalities. In July, Congress passed a number of
constitutional reforms designed to increase civilian control
over the military.


ECONOMY


5. Chile’s economy is the main reason behind President Lagos’
70 percent approval rating. The Chilean economy grew at an
impressive 6.1 percent in 2004 — almost double the rate in
2003 — and may do even better in 2005, due in large measure
to a boom in global copper prices. Bilateral trade increased
over 30 percent during the first year of the U.S.-Chile Free
Trade Agreement, and related cooperation on labor and
environmental protection is going well. Chile’s inadequate
protection of intellectual property rights remains a
significant sore point, and both sides are anxiously awaiting
better, new market access for beef and poultry. The U.S.
remains Chile’s most important source of foreign investment,
although Spain surpassed us in 2004 as the number one
provider of foreign direct investment. Since 1990, U.S.
firms have invested over USD 16 billion in Chile, with a
concentration in the energy, telecommunications and mining
sectors. U.S. companies generally praise Chile’s mostly
transparent but close-knit business climate.


Regional Issues


6. Chile has been increasingly willing to assume leadership
roles in recent years. Former Minister of Interior Jose
Miguel Insulza was elected OAS secretary general in May. In
Haiti, Chile responded positively to the USG’s request for
support in February 2004, and self-deployed a battalion to
Haiti within 48 hours. Chile currently has approximately 600
troops deployed there as part of the UN Mission, and a
Chilean civilian serves as UN Special Representative. In
May, the Chilean Congress voted to extend Chile’s troop
deployment for six months to December 2005, with a provision
that the Government can extend the deployment for an
additional six months to June 1, 2006. On Venezuela, despite
its center-left political orientation, the governing
Concertacion coalition is wary of President Chavez. The GOC
shares our frustrations with the Venezuelan leader’s
behavior, particularly his non-democratic ways, and is
concerned that his rhetoric and actions (especially regarding
Bolivia) could prove destabilizing for the region. FM Walker
met with the Venezuelan opposition group SUMATE in Santiago
on August 9 (reftel).


MONEY LAUNDERING


7. Money laundering is a criminal offense in Chile. In
December 2003, Congress passed a law calling for the creation
of Chile’s Financial Intelligence Unit (FIU), in part due to
Chile’s past failure to meet the international Egmont
Standards. The law requires that annual reporting of
suspicious transactions by the financial sector become
mandatory. All cash transactions exceeding USD 12,000 must
be recorded, and Chilean customs requires declaration of cash
in excess of USD 10,000. The law also expanded the
definition of money laundering beyond narcotics-related
activity to include any act of terrorism, illegal arms
trafficking, fraud, corruption and prostitution. Oversight
of non-financial sector entities, such as money exchange
houses and the gaming sector, was not included in the law.

8. In early 2004, Chile’s Constitutional Court deemed
unconstitutional several aspects of the law. This adversely
impacted the FIU’s ability to obtain information, lift bank
secrecy provisions, freeze assets, and impose sanctions.
Chile’s stringent bank secrecy laws and deference to privacy
appear to have been motivating factors behind the ruling.


FINANCIAL INTELLIGENCE UNIT


9. The FIU opened its doors in April 2004 under the direction
of Victor Ossa, a former postal executive, and began
receiving Suspicious Transaction Reports (STRs) from the
formal banking center. Six months later, 25 STRs had been
submitted. In October 2004, FINCEN representatives deemed
the FIU as fully functional and in compliance with the Egmont
definition of an FIU. Today, a staff of 12 receives
approximately 10 STRs per month.

10. The laws governing the FIU do not specify a number of
STRs to be received. Nor do they explain what constitutes a
suspicious activity, or provide sanctioning capability for
reporting or not reporting suspicious activities. With the
country-wide implementation of judicial reform, any
suspicious case involving money laundering requiring
additional investigation is referred to the Public Ministry.
The FIU has neither investigative powers nor powers to obtain
court orders. Nor can it obtain information from banks other
than through an STR, which is initiated by the bank at its
discretion. Since the FIU’s inception, no criminal cases
have been opened. Legislation that restores sanctioning
powers, eases bank secrecy laws during investigations, and
allows access to third party information is needed for the
FIU to become fully functional.


COUNTER-TERRORISM/COUNTER-NARCOTICS


12. Chile remains on the terrorists "least desirable" list in
the hemisphere. The GOC has been supportive of U.S.
counter-terrorism policies, particularly during its time on
the UNSC. Chile is a signatory to all 12 UN anti-terrorism
conventions and protocols, and the UN International
Convention for the Suppression of the Financing of Terrorism.

13. The northern area of Chile is a focal point in the area
of terrorism financing and narcotics trafficking. This is
due in part to Chile’s border with Peru and Bolivia and the
free-trade zone in Iquique, Chile. Arica and Iquique,
Chile’s principal northern cities, are the main points of
entry for the bulk of the cocaine which enters Chile from
Peru and Bolivia through the land ports as well as by
maritime traffic. Chilean police estimates have two tons of
cocaine being stockpiled in Arica on a monthly basis. Money
(generally euros or pesos) also takes advantage of the porous
northern region, and is frequently trafficked along the same
drug routes or sent directly to Santiago.

14. Iquique is home to the Iquique Free Trade Zone (ZOFRI),
which is known for its cheap products made primarily in China
and Taiwan, as well as the importation and sale of used cars
and car parts. The bulk of these products are sold and
exported to Peru, Bolivia, and the tri-border areas of
Paraguay, Brazil and Argentina. There is a growing Pakistani
and Lebanese population in Iquique with business ties to the
Free Trade Zone.
KELLY