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Cablegate: Treasury Under Secretary Levey Scenesetter

VZCZCXYZ0006
RR RUEHWEB

DE RUEHMD #0757/01 1920918
ZNY CCCCC ZZH
R 100918Z JUL 08
FM AMEMBASSY MADRID
TO RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHC/SECSTATE WASHDC 5063

C O N F I D E N T I A L MADRID 000757

SIPDIS

TREAS FOR (DFERNANDEZ)

E.O. 12958: DECL: 07/07/2018
TAGS: ECON EFIN EINVETC ETTC ETRD KTFN PREL PARM
PTERS, SP
SUBJECT: TREASURY UNDER SECRETARY LEVEY SCENESETTER

Classified By: Charge d'Affaires, Hugo Llorens. Reasons: 1.5 (b) and (
d)

1. (SBU) Summary: Embassy Madrid warmly welcomes your
visit. Your presence provides an excellent opportunity to
reinforce our message on Iran financial sanctions with both
government and private sector representatives. (Note: Your
schedule has been sent via e-mail to staff.) You will also
have an opportunity to discuss terrorism finance matters with
Spanish officials. End Summary.

------------------------
IRAN FINANCIAL SANCTIONS
------------------------

2. (C) Perhaps one of the most important things you can do
during your calls is to stress that pressure to isolate Iran
economically is likely to increase. While the Spanish
government agrees with the U.S. objective of preventing Iran
from building a nuclear weapon, the Spaniards are more
comfortable with the carrot and engagement side of the
relationship with Iran. This is why it is going take hard
work to secure Spanish support for the ratcheting up of
sanctions, but if additional sanctions are approved by the UN
and/or the EU, Spain will implement those sanctions.

3. (C) Spanish trade with Iran is not large. In 2007, Spain
exported USD 693 million to Iran (0.24 percent of Spanish
exports to the world) and imported USD 2.4 billion from Iran
(0.55 percent of Spanish imports from the world), mostly
petroleum products. There are no Spanish data on Spanish
investments in Iran in 2006 or 2007. There was no registered
Iranian investment in Spain in 2006 or 2007 either. The
other big EU economies exported considerably more to Iran. In
2007, France exported USD 2 billion, the UK USD 801 million,
Italy USD 2.5 billion, and Germany almost USD 5 billion.
Spain's base position is that it implements UNSCRs 1737 and
1747, and we have no reason to disbelieve that it does so.
With respect to UNSCR 1803, there is reporting from Brussels
indicating that Spain moved slowly with respect to approving
the EU's so-called autonomous designation list, but
ultimately Spain approved.

4. (C) Spain will likely support EU recommendations with one
important exception: Spanish officials have told us that they
will not accept restrictions on investment in the oil & gas
sector. This is somewhat ironic because Repsol has decided
not to pursue the development of the South Pars gas field's
block 13, although Repsol (and Shell) have not ruled out the
prospect of working on latter phases of the project.
Ambassador Aguirre has discussed Iran on several times with
Repsol CEO Antonio Brufau. Your meeting with Brufau is an
opportunity to thank him for not pursuing the South Pars
deal, and to to encourage the company to continue to desist
from investing in Iran's oil and gas sector.

5. (C) Deputy Treasury Secretary Kimmitt and Ambassador
Aguirre have talked directly to Spanish banks about being
very careful about their activities in Iran. EconCouns
talked to Banco Sabadell management as well about its
Iran-related activity. Our sense is that Spanish banks are,
in fact, monitoring their activities carefully. Ministry of
Industry, Tourism and Trade Secretary of State Silvia Iranzo,
chairs an inter-ministerial committee looking into possible
dual-use exports to Iran. We think that Spain analyzes
possible dual-use issues carefully. With respect to export
credit policy, Ambassador Aguirre and EconCouns have talked
about Iran with Spanish officials. Spain takes the position
that Spanish policy is set in the OECD's export credit
committee. Whatever Spain does with respect to export
credits is likely to be coordinated with the EU. The Spanish
government is aware that in addition to talking to the
government, we also talk directly to private sector actors
about Iran.

--------------
TERROR FINANCE
--------------

6. (U) The GOS is efficient in imposing freezes and sanctions
related to UN and EU designations but does not implement E.O.
13224 designations. The GOS has the authority to do so under
Law 12/2003, but chooses instead to apply standard judicial
procedures when dealing with non-UN or EU designated
entities. Nonetheless, the GOS actively complies with our
requests to investigate designated entities and is very
efficient and discreet in conducting searches for funds from
individuals and organizations listed in pre-notifications.
In recent years, no such related funds have been found in
Spanish accounts.

7. (U) SEPBLAC is Spain,s FIU with a primary mission to
receive, analyze, and disseminate suspicious and unusual
transaction reports. SEPBLAC works in close coordination
with the Directorate General of the Ministry of Economy and
Finance (MEF), the entity with the authority to freeze assets
and impose sanctions. SEPBLAC and the Directorate General
are overseen by an inter-ministerial policy committee
referred to as the Commission for the Prevention of Money
Laundering and Monetary Offenses (CPBCIM) chaired by Second
Vice President and Secretary of Economy Pedro Solbes.

8. (U) As an organization, SEPBLAC has grown by almost 50
percent in the past year to about 60 employees. Included in
its ranks are members of the Guardia Civil, National Police,
and Spanish Customs who cooperate with each other and
supplement the information provided by reporting parties.
Press reports indicate that the number of Suspicious Activity
Reports filed by banks has increased substanitially in recent
years.

9. (C) We have scheduled an appointment with SEPBLAC for you.
The reason is that if you find it opportune, we recommend
you ask re: the status of a reported SEPBLAC investigation
into Barakat Yarkas's possibly financing terror finance
activities from his jail cell. (Note: Yarkas was convicted
for membership of a terrorist organization and for conspiring
to commit terrorist acts. He was suspected of being involved
with individuals linked to the September 11, 2001 attack.)
On April 28, Spain's leading daily, El Pais, published a
story alleging that Yarkas was financing terrorist groups
from his jail cell, and that there was an outstanding
judicial investigation against Yarkas involving a new
terrorism finance charge(s) against him. You may wish to ask
SEPBLAC whether there is, in fact, an ongoing investigation
into Yarkas's possible activities. We have not been able to
confirm whether there is an investigation through other
channels. (Note: The National Security Council has been
interested in designating Barakat Yarkas for several years,
and we have urged the Spanish government to do so. For
reasons still not entirely clear to us, the Spanish
government has desisted from designating Yarkas.)

----------------------
DOUBLE TAXATION TREATY
----------------------

10. (U) We are providing the following information for you
as background should the issue arise in connection with your
American Chamber of Commerce (AmCham) lunch. The Chamber is
seeking to convince the GOS to amend the 1990 double taxation
treaty between the U.S. and Spain. The biggest change would
allow U.S. corporations that sell stock in their subsidiaries
in Spain for the purpose of corporate reorganizations to be
taxed on their capital gains in the U.S., rather than at the
Spanish 25 percent rate. Procter & Gamble, IBM, and GM are
particularly interested in this change. The U.S. Treasury
Department's Office of International Tax Counsel is, in
principle, willing to renegotiate the treaty but only if the
Spanish government indicates strong interest and if American
firms lobby Treasury through the National Foreign Trade
Council and the Tax Executive Institute. With respect to the
latter, we have encouraged AmCham to have their members lobby
through these organizations, but this has not taken place
yet. The Spanish government is aware of the AmCham's
interest in amending the treaty, but so far our sense is that
not enough business interest has been demonstrated to
convince the Spanish government to pursue this matter. The
AmCham is currently organizing a campaign to get major CEOs
to write the government about this topic.

----------------
Political Update
----------------

11. (SBU) The general elections in March 2008 were a hard
fought affair that saw President Zapatero's Socialist
party(PSOE) defeat Mariano Rajoy's Popular Party (PP). The
PSOE, which needed 176 seats in the 350-seat Congress to gain
an absolute majority, won 169 seats or about 44 percent of
the vote. The Popular Party won about 40 percent of the
vote, which translated into 155 seats. Smaller regional
parties from Catalonia, Galicia, and the Basque Region all
received enough votes to gain congressional representation
but lost seats to the two main political parties, the PSOE
and PP. Voter turnout nationwide was over 75 percent. The
slowing Spanish economy, the terrorist threat from both the
Basque terrorist group ETA and Islamic extremist groups,
regional autonomy, and immigration were all major topics
during the election. Foreign affairs did not play a major
role in the campaign, but the PSOE reminded voters that it
removed Spain's troops from an unpopular war in Iraq.

12. (SBU) Since winning reelection, Zapatero has named a new
government, created new ministries and combined others.
Zapatero's new cabinet notably has more female ministers
(9)than male (8), including Spain's first female Minister of
Defense, Carme Chacon. Two new ministries have been added:
The Ministry of Equality and the Ministry of Science and
Technology. The Ministry of Agriculture has taken on the
additional responsibility of Marine Affairs and has been
combined with the Ministry of the Environment. The GOS'
First Vice President for the Presidency, Second Vice
President for Economy and Finance, and Ministers of Foreign
Affairs and Interior remain the same.

---------------
Economic Update
---------------

13. (U) Spain has had one of Europe's fastest-growing
economies over the last decade. It has the world's eighth
largest economy and is the world's second largest tourism
destination and eighth auto manufacturer. Its GDP per capita
is expected to pass Italy's in 2010. The next year or two
will be more difficult. A housing boom that spurred growth
for several years ended abruptly in 2007. Construction has
slowed dramatically, and unemployment has risen to almost 10
percent. Inflation is higher than the EU average, which
hurts competitiveness.

14. (U) U.S. investment has long been important to the
Spanish economy (more so than bilateral trade), and U.S.
firms employ over 220,000 Spaniards. The growth of Spanish
multinationals and the strong Euro have led to a surge of
Spanish investment in the U.S. in the last few years. In
2007, Spain was the fourth largest foreign investor in the
U.S., with particular emphasis in banking, toll road
construction, and renewable energy. Spanish firms now own
wind farms in at least 14 U.S. states, as well as solar power
and biofuels plants.

-----------------------------------
Diplomatic Cooperation and Security
-----------------------------------

15. (SBU) U.S.-Spain relations were seriously damaged by
President Zapatero's decision soon after his election in 2004
to abruptly withdraw Spanish forces from Iraq. However, over
the last several years, both countries have made a concerted
and successful effort to rebuild the relationship based on
strong mutual interests in counter-terrorism, fighting
narcotics trafficking and organized crime, and rapidly
expanding economic ties. The real bilateral story is found
in novel initiatives such as the HSPD-6 agreement we signed
last September to facilitate the sharing of information
between our national counter-terrorism authorities. Following
the March 11, 2004 train bombings, Spain remains a target of
Islamic extremists. Al-Qaeda leaders often call for the
recapture of the medieval "Al Andalus," and the recent
uncovering of a cell allegedly sympathetic to Al-Qaeda and
operating out of Barcelona has shown the Spanish that this
threat is not an idle one.

16. (SBU) Spain is no stranger to terrorism, having fought
the domestic Basque terrorist group ETA for almost 40 years.
Spanish political leaders are currently showing a united
face, as - for the first time in several years,
representatives of all political parties in the Spanish
Congress issued a joint statement on March 15 announcing that
all would work together to defeat ETA. Interior Minister
Rubalcaba said in late March that "we are entering a long
cycle of violence" with ETA and, according to Spanish media,
the Spanish National Intelligence Center (CNI) has informed
the government that ETA has no plans to negotiate for at
least the next 18 months. The Basque terrorist group has been
active in recent months, detonating explosives on several
occasions, including one that resulted in the death of a
Spanish Civil Guard Officer on May 14. ETA also assassinated
a former PSOE city councilman on March 7 (two days before
national elections), and two Spanish Civil Guard officers in
France in December 2007. Spanish security forces are
concerned that ETA has established new bomb manufacturing
centers and techniques that will enable the organization to
launch more attacks.

17. (SBU) Narcotics trafficking is another area of common
concern and excellent cooperation. Spanish authorities
acknowledge that Andean cocaine is a serious problem here,
and Colombian trafficking organizations are active in Spain.
Money laundering is another serious issue. We are eager to
find ways to increase bilateral cooperation and to encourage
Spain to engage more aggressively with law enforcement
authorities in key Latin American countries. Spain has
recently taken steps in this direction. Within the last two
months, the Director General of Spain's Police and Civil
Guard traveled to Colombia to sign a cooperation agreement to
fight drug trafficking and its related crimes through
increased personnel and information exchange.

18. (SBU) Spain, second only to the U.S. in terms of
investment, is actively engaged in Latin America. In
addition to cultural and historical ties, Spain shares our
interest a strong democratic and free market institutions in
the region. Regarding Cuba, we share with Spain the
objective of a peaceful transition to democracy but differ
markedly on how to achieve this end. Spain's socialist
government has opted for engagement, claiming it can
encourage regime elements who want change. We take every
opportunity to remind the Spanish that the Cuban regime is
only interested in survival and that the Cuban dissidents
need and deserve the active and visible support of
democracies everywhere.

19. (SBU) Spanish military cooperation matters. The bases of
Rota and Moron are strategic hubs, midway between the U.S.
and Afghanistan and Iraq. U.S. planes and ships account for
around 5,000 flights and 250 port calls a year in Spain. The
Spanish military is pro-U.S. and pro-NATO. We need to keep
this relationship strong. Spain has nearly 800 personnel in
Afghanistan and runs a provincial reconstruction team in
Badghis province. Spain has contributed some 150 million
Euros in Afghan reconstruction funds. Planning is underway
to allow the Spanish to train and equip an Afghan Army
company, which we hope will be a prelude to the training and
equipment of a full battalion. Spain has nearly 1,100 troops
with UNIFIL in Lebanon and about 700 in Kosovo. On Iraq,
Spain has contributed $22 million to the Basrah Children's
Hospital and a further $28 million in development funding for
Iraq. Spain's total commitment to the Iraq Compact was USD
225 million. The Spanish Foreign Ministry says that Spain
has disbursed all of its pledge except for its concessional
loans, which are pending completion of project proposals. It
also has provided through UNHCR over 800,000 euros for
refugee and displaced persons relief in Jordan and Syria.
Spain is an active participant in EU-Iraq negotiations on an
economic cooperation agreement that would provide additional
funding for training and development activities.

-------------------
Security Assessment
-------------------

20. (U) In general, Spain is safe. However, Madrid,
Barcelona and other large cities in Spain attract a large
number of criminals and pickpockets and frequent incidents of
crime of opportunity against the unwary do occur. It is best
to carry only essential items including a photocopy of your
passport's photo page. Visitors can protect themselves
against crime by being street-smart, alert and aware of their
surroundings. Travelers are encouraged to review the most
recent Worldwide Caution issued by the Department of State.
As the Department of State continues to develop information
on any potential security threats to Americans overseas, it
shares credible threat information through its Consular
Information Program documents, available on the Internet at
http://travel/state.gov. Additional information regarding
safety and security in Spain is available on the U.S.
Department of State's website (www.embusa.es).
LLORENS

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