Representatives of the Department had intended to discuss the matters
outlined in this memorandum with Señor Illingworth, the Ecuadoran
Minister of Finance, during his recent trip to the United States. During
the course of these discussions, it was contemplated that the memorandum
would be delivered to Señor Illingworth upon the basis that it was
prepared for use in the Department but that it was thought that the
memorandum might be helpful to Señor Illingworth in working out the
various problems connected with the Ecuadoran freezing controls upon his
return to Ecuador. In particular, the Department wished to stress the
importance of the role of the Ecuadoran Development Corporation16 as a possible
agency for implementing plans for the disposition of Proclaimed List
properties.
It was not found possible to discuss these matters with Señor Illingworth
during his initial visit in Washington and it has now been determined
that he will not be returning to Washington prior to his departure for
Ecuador. It is suggested, however, that, unless you perceive some
objection, it may be desirable for you to deliver this memorandum to
Señor Illingworth with an explanation of the reasons why it was not
possible to deliver it to him in Washington.
The Department would appreciate being advised of any comments which you
may wish to make on this memorandum and, should it be delivered to Señor
Illingworth, of any comments which may be made by him.
[Enclosure]
Memorandum
The institution and effective enforcement of appropriate controls
over economic and financial transactions which may be of benefit to
the Axis nations is a matter of great concern to all the American
republics. This concern has been evidenced by Resolution V of the
Conference of Foreign Ministers held in Rio de Janeiro in January
1941 [1942]17 as implemented in detail by the Resolutions of the
Inter-American Conference on Systems of Economic and Financial
Control, held in Washington in the summer of 1942. In general, the
primary objectives of these Resolutions fall into two broad
categories: (1) the prevention of economic and financial
transactions between [Page 424] each
American republic and other nations, particularly nations outside
the Western Hemisphere, which may be of benefit to the Axis or to
persons whose activities are inimical to the security of the Western
Hemisphere, and (2) the elimination from the economic life of each
American republic of all undesirable influence of persons whose
activities are inimical to the security of the Western Hemisphere.
The ultimate goal is, of course, the effective participation by each
American republic in a broad program designed to aid in the defense
of all the American republics and in the winning of the war.
The Government of Ecuador has already, through the adoption of a
decree on February 9, 1942, instituted freezing controls and the
Department is pleased to learn that discussions have been held
recently between the Minister of Finance and representatives of the
American Embassy at Quito relative to the adoption of additional
measures designed to strengthen and expand the existing Ecuadoran
controls and that the Minister of Finance at the present time has
under consideration draft texts of a proposed decree and of
regulations thereunder.
Before the enactment of additional measures there are certain matters
which the Department of State feels should be given primary
consideration in determining the form in which the decree and the
regulations are finally to be adopted.
It is understood that persons and firms in Ecuador appearing on the
United States Proclaimed List have in their possession or under
their control substantial stocks of scarce materials which are
urgently required by the Ecuadoran Development Corporation as well
as by other deserving firms and persons in Ecuador to carry on their
business operations and which are difficult to obtain in sufficient
quantity from the United States due to the exigencies of the war
effort. The primary function of the Ecuadoran Development
Corporation is to assist in the coordination of the resources of
Ecuador so that the economy of Ecuador will be strengthened and
benefited to the maximum possible degree. However, the Ecuador
Development Corporation, pursuant to its agreement with the
Export-Import Bank, cannot make purchases or otherwise deal with
persons and firms on the Proclaimed List. Consequently, means should
be devised whereby the Ecuadoran Development Corporation can carry
out its function and acquire and equitably dispose of the scarce
materials now held by Proclaimed List persons and firms in Ecuador.
It is believed that the most effective way to achieve this result is
to provide a means, through vesting, forced sale or liquidation of
the assets of such persons and firms, for eliminating their
undesirable influence and activity from the economic life of
Ecuador, rather than merely to [Page 425] provide for the requisitioning of scarce materials
in their possession. Requisitioning alone even though accompanied by
effective blocking of funds would only be a temporary and partial
expedient, whereas appropriate measures for the elimination of the
undesirable influence and activity of such persons and firms would
be of permanent benefit to the economy of Ecuador.
Such measures will necessarily vary from case to case. In general,
however, the types of cases may be divided into three broad
categories:
(1) Those-firms in which minor changes in
organization and personnel will not be sufficient to eliminate
their undesirable influence and activities, but whose continued
business activity is essential to the economy of Ecuador.
In these cases, it will be necessary to reorganize the business
organizations completely. This can be done by forcing the sale of
the business organizations (or that part which is owned by
undesirable persons) to desirable purchasers, the proceeds of the
sale to be effectively blocked, the undesirable employees
eliminated, the undesirable business connections severed, et cetera.
Article 5 of the proposed new decree specifically gives the Minister
of Finance the power to force such sales. However, there may be
cases in this category where because desirable purchasers cannot be
found immediately, or where because a forced sale would not be
desirable for other reasons, the Ecuadoran Government may itself
desire to operate the business organization on a temporary or
permanent basis. In such cases, it might be appropriate for the
Ecuadoran Government to consider the advisability of vesting in
itself or in some appropriate governmental agency the title to these
business organizations (or that part which is owned by undesirable
persons) and then take such further steps as may be necessary to
cleanse the firms. This procedure could, of course, be used in all
cases in this category with sales to desirable purchasers being made
in appropriate cases after vesting.
Vesting is the procedure utilized by the United States and it has
been found to be very satisfactory. When a firm is vested by the
United States Government no immediate payments are made to the owner
of the property vested. However, the owners may be permitted to file
claims with this Government but the disposition of such claims will
be determined at some later date, probably at the end of the war.
The Ecuadoran Government may for the reasons stated above also wish
to utilize this procedure. Should this be the case, it is believed
that attention should be given to revising article 5 of the proposed
decree so as to make certain that the Minister of Finance, or such
agency as he may designate, will have the power to vest. It may be
that article 5 already gives the Minister this power, but this is
not absolutely clear.
(2) Those firms in which minor changes in
organization and personnel will not be sufficient to eliminate
their undesirable influence and activities, but whose continued
business activity is not essential to the economy of
Ecuador.
[Page 426]
In these cases, the primary objective should be liquidation. This can
be accomplished through a refusal by the Minister of Finance to
license transactions by such firms except for this purpose or by the
issuance of directive licenses for this purpose. As a consequence,
the business activity of these persons and firms will die out. It is
believed that, under article 5 of the proposed decree, the Minister
of Finance has sufficient power to carry out this objective.
However, it should be noted that in some cases in this category,
where the assets of the business are large and important,
affirmative participation by the Ecuadoran Government in the
liquidation may be advisable. In such cases, it may be desirable for
the Ecuadoran Government to vest in itself title to the assets of
such business and to carry out the liquidation directly.
Consideration has already been given to the vestting procedure under
category (1).
(3) Those firms where only minor changes are
necessary.
In this category, there are a myriad of cases. For example, there
will be those firms who have in the past merely engaged in a few
isolated undesirable business transactions. In such cases, the
application of the general freezing controls will probably be
sufficient. Another example will be business organizations with
merely a few undesirable officers or employees or with an
undesirable business connection. All that is necessary in these
cases will be to eliminate these officers or employees or to sever
the undesirable business connection. Here, attention should be given
to clarifying the proposed decree in order to be certain that the
Minister of Finance has the required authority.
Of the utmost importance in the program for eliminating from the
economic life of Ecuador the undesirable influence and activity of
the above-mentioned persons and firms is the governmental agency
through which the program is carried out. It is believed that the
Ecuadoran Development Corporation could be utilized very effectively
in many of the situations previously discussed. The Corporation, as
the agency for coordinating the use of Ecuador’s resources, is
ideally equipped to coordinate the disposition of the assets of
undesirable persons and firms. The Corporation is in a position to
supply funds for the operation of business firms after the
undesirable elements have been eliminated. The Corporation is in a
position to supply funds to desirable purchasers of the business
interests of undesirable persons or firms, where the forced sale
technique is utilized and funds are necessary. The Corporation has
the technical experts on its staff to operate business firms falling
in category (1) and to liquidate those falling in category (2). It
is, therefore, suggested that the Minister of Finance may wish to
consider utilizing the facilities of the Ecuadoran Development
Corporation to assist him in carrying out some of his functions
under the proposed new decree.
[Page 427]
It is believed that, in expanding and strengthening the Ecuadoran
freezing controls, special attention should also be given to the
establishment of an adequate staff which can devote its full time to
these matters. If this is done, it will be possible to strengthen
many phases of the Ecuadoran freezing controls, some of which are
the following:
- (1)
- Blocking of all property covered by
the freezing controls can be assured. Appropriate
investigations can be made to discover such property and
steps taken to compel persons holding such property to
conform to the requirements of the freezing controls.
- (2)
- Cash operations in violation of the freezing controls can
be prevented. In this connection, it is understood that this
is one of the difficulties in connection with the existing
controls and that business firms on the Proclaimed List have
been able to make a substantial number of sales out of their
stocks and of purchases of new supplies through cash
transactions.
- (3)
- Applications for licenses to withdraw blocked funds can be
checked carefully in order to make certain that the
withdrawals are not excessive.
- (4)
- Investigations can be made to discover violations of the
controls and the violators can then be prosecuted. This will
serve as a deterrent to further violations.
It is hoped that appropriate steps will be taken as quickly as
possible to expand and strengthen the Ecuadoran freezing controls
and thus further participate in the common defense of the Western
Hemisphere.
