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Cablegate: A Shift in Chile's Thinking On Bank Secrecy

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DE RUEHSG #0818/01 2541755
ZNR UUUUU ZZH
O 101755Z SEP 08
FM AMEMBASSY SANTIAGO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3686
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
INFO RUEHSS/OECD POSTS COLLECTIVE
RUEHPE/AMEMBASSY LIMA 5668
RUCNMER/MERCOSUR COLLECTIVE
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UNCLAS SANTIAGO 000818

STATE PLEASE PASS TO USTR KDUCKWORTH
STATE FOR WHA/BSC-LCATO, WHA/EPSC-FCORNEILLE, EEB/EPPD-JMUDGE
TREASURY FOR MMALLOY
COMMERCE FOR KMANN

SENSITIVE

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E.O. 12958: N/A
TAGS: OVIP ECON EFIN EINV ECIN PGOV PREL CI

SUBJECT: A SHIFT IN CHILE'S THINKING ON BANK SECRECY

1. (SBU) SUMMARY: Treasury A/S Lowery, DAS O'Neill, and Ambassador
Simons met with Finance Minister Velasco and Special Envoy to the
OECD Karen Poniachik, in separate meetings, September 1. A/S Lowery
explained the U.S. could not consider a double taxation treaty
without a change in Chile's bank secrecy laws. Velasco understood
the importance of the issue but noted the Bachelet Administration
did not have the votes to pass such a reform in Congress. The GOC
was working on a public awareness campaign to raise the profile of
the issue. Special Envoy Poniachik said Chile was almost done with
its memorandum of accession, except for bank secrecy and the
Anti-Bribery Convention. The GOC wanted to bring Chile's banks
closer to world standards. It is a welcome change that the GOC is
taking a new, positive approach on bank secrecy. END SUMMARY.

2. (U) U.S. Treasury A/S Clay Lowery, Treasury DAS Brian O'Neill,
Ambassador Paul Simons, and Econoff attended a meeting, September 1,
with Chilean Finance Minister Andres Velasco and Coordinator for
International Affairs Raul Saez. In a later, separate meeting, DAS
O'Neill and Ambassador Simons met with Chilean Special Envoy to the
Organization for Economic Cooperation and Development (OECD) Karen
Poniachik and Coordinator Saez.

Let's Work Together On Double Taxation and Bank Secrecy
--------------------------------------------- ----------

3. (SBU) A/S Lowery informed Minister Velasco that a U.S.-Chile
Double Taxation Prevention Treaty was not possible given Chile's
bank secrecy laws, which were not up to world standards. Ambassador
Simons noted bank secrecy was an issue the U.S. had raised with
Special Envoy Poniachik and one with which the OECD was also
concerned. On double taxation, the U.S. had been approached by
certain concerned AFP (Chilean pension management companies) who had
started to take investments out of the U.S. and put them in
off-shore locations, such as Guernsey. DAS O'Neill added this was
likely prompted by the U.S. Internal Revenue Service's pending
decision to reexamine whether Chile's AFP qualified for tax exempt
status. Velasco said that this was the first he had heard of the
issue.

4. (SBU) Minister Velasco explained that he knew bank secrecy was a
critical issue for the U.S. and the OECD. Any change, however, had
to be made by Congress, and currently the Bachelet Administration
did not have the votes for such a reform. Coordinator Saez said the
GOC was hosting a seminar in November on banking. The event was to
mark the start of a public program highlighting that Chilean banking
standards did not measure up to world standards. DAS O'Neill noted
the head of the Treasury office of tax policy was an expert (with
connections to Chile) who might make an excellent guest speaker.

5. (SBU) DAS O'Neill said the U.S. was hoping Chile would resolve
its bank secrecy problems through the OECD accession process, the
momentum from which could lead to a double taxation prevention
treaty with the GOC. Velasco liked this idea of using "both hooks
for the same fish" but was afraid the "fish" (i.e., Chilean banks)
was simply unaware of the issues. Therefore, the Ministry was
asking the OECD to work with the GOC to raise awareness on bank
secrecy in the Chilean private sector and political circles.

Poniachik Committed To Raising Chile's Bank Standards
--------------------------------------------- --------

6. (SBU) In her meeting with DAS O'Neill and Ambassador Simons,
Special Envoy Poniachik said that Chile's OECD Memorandum of
Accession was almost finished. There were two key issues left:
bank secrecy and the OECD Anti-Bribery Convention. (NOTE: Chile
has ratified the Convention and adopted implementing legislation,
but the OECD has said Chile needs to update the legislation to
better comply with certain international obligations. END NOTE.)
Poniachik opined Chile's bank laws were a blemish on its otherwise
strong record of economic reform and private sector transparency.
Chile's lagging standards meant increased service costs and lack of
double taxation prevention treaties with countries, such as the U.S.
and Australia. Making progress on bank secrecy would expand
Santiago's financial sector. The GOC wanted to move Chile closer to
world banking standards, perhaps by mandating increased transparency
in just a few areas for a start. The key, however, would be raising
public awareness, through efforts such as the Ministry of Finance's
November seminar on banking.

7. (SBU) COMMENT: The meetings with Minister Velasco and Special
Envoy Poniachik indicate the GOC has changed its tack on bank
secrecy. While officials continue to point to Congress as the chief
obstacle, they appear to have realized it is in Chile's best
interest to start raising public awareness on the issue, especially
in the private sector, as a condition for OECD membership. The
Embassy will support this new, positive approach.

SIMONS

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