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Cablegate: Mexico See Fdi Surge From Tax Haven Countries

VZCZCXRO5687
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #3124 1651946
ZNR UUUUU ZZH
P 141946Z JUN 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 7500
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE PRIORITY
RUEHLO/AMEMBASSY LONDON PRIORITY 0390

UNCLAS MEXICO 003124

SIPDIS

SIPDIS

PASS TO WHA/MEX
EB/IFD/OIA FOR JOHN FINN

E.O. 12958: N/A
TAGS: EINV ECON EFIN MX
SUBJECT: MEXICO SEE FDI SURGE FROM TAX HAVEN COUNTRIES


1. (U) SUMMARY: During the first quarter of 2007, Mexico has
experienced a surge in Foreign Direct Investment (FDI) from
"tax haven" countries such as the Virgin Islands and Bermuda.
FDI inflows from these countries have been second only to
inflows from the United States. Officials from the
Secretariat of Economy acknowledge the phenomenon, and assure

SIPDIS
that the money is not involved in money laundering or
terrorist financing. While the fear of the funds being used
for illicit activities appears small, Post will continue to
monitor the situation. Current consensus is that the Mexican
surge in FDI from "tax haven" countries mostly reflects
multinationals seeking to legally minimize their tax
obligations. End Summary.

2. (U) The Secretariat of Economy and the Bank of Mexico
recently published the FDI numbers for the first quarter of
2007. Total FDI for the period was more than USD 6.5
billion, 66 percent more than FDI for the same period last
year. The number is a result of a large growth in profit
reinvestments. While this number is not likely to be
sustained over the course of the year, the GOM cites this as
proof that Mexico continues to be a strong FDI attractor.
Conversely, a majority of analysts surveyed by the Bank of
Mexico say that fiscal reform, labor reform and energy reform
are needed to encourage a sustained increase in investment.

3. (U) Miguel Messmacher, Head of the Secretariat of
Finance's Economic Planning Unit told Econoff that FDI
figures for the first quarter of 2007 were hard to read
because FDI was low at the end of 2006 due to uncertainty
about the 2006 Presidential election. He noted that there
was not a single one-time investment accounting for the 66
percent increase, noting that it was across-the-board. This
official said it was possible the increase resulted from
investments that had been delayed from 2006.

4. (U) More interesting is the change in the makeup of
countries that provide FDI. The United States continues to
be the primary investment source for Mexico with USD 3.2
billion and 66 percent of all FDI. However, the "tax haven"
countries of the Virgin Islands and Bermuda accounted for a
little over USD 1 billion (22 percent) of 1st quarter FDI.
Granted, these inflows will likely prove to be spikes as
other quarters see lower inflows from these two countries,
but the participation from these two countries over the past
few years has been notable. As recently as 2004, FDI from
the two countries accounted for only 0.2 and 0.0007 percent
of FDI, respectively. While neither country has experienced
years of sustained growth in FDI investments to Mexico, 2005
saw USD 2 billion in inflows from the Virgin Islands, while
this quarter's investment from Bermuda is the first of its
kind for that country.

5. (U) Gregorio Canales Ramirez, Director General for Foreign
Direct Investment at the Secretariat of the Economy, told
Econoff that the phenomenon of large investments from "tax
haven" countries is very well known, and is a recurring theme
in the Investment Committee and the OECD's Working Group on
Statistics. He says that the practice of some multinational
companies of moving money through "tax havens" greatly
affects the clarity of FDI figures and as of yet, no
worldwide methodological solution has been found to counter
the effects.

6. (U) Secretary of Economy, Eduardo Sojo publicly countered
claims that the increase in FDI from "tax haven" countries
could conceal the use of this investment in money laundering
schemes. He said that all investment into the country is
reported in the National Register of Foreign Investment and
any doubts on the origin of funds are reported to the
corresponding authorities. The Financial Intelligence Unit
(FIU) of the Secretariat of Finance is in charge of insuring
that funds that enter and leave Mexico are not used for
illicit purposes.

7. (U) Comment: All officials and experts that we spoke with
about the increase in FDI from "tax haven" countries agree
that this investment was due almost exclusively to companies
trying to legally minimize their taxes. At this time, FIU
officials see no increase in money laundering activity
despite the sharp increase in FDI. Post will continue to
monitor the situation particularly if the numbers continue at
such high levels.


Visit Mexico City's Classified Web Site at
http://www.state.sgov.gov/p/wha/mexicocity and the North American
Partnership Blog at http://www.intelink.gov/communities/state/nap /
GARZA

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