822.6341 South American Development Co./34

The Consul General at Guayaquil (McDonough) to the Secretary of State

No. 616

Sir: I have the honor to report that the South American Company, of 19 Rector Street, New York, N. Y., operating a gold mine at Zaruma, Ecuador, and having its address in Ecuador at Postoffice box 655, Guayaquil, has requested this Consulate General to forward to the American Chargé d’Affaires at Quito and to the Department the enclosed copies and translations of various communications between the Chief Executive of Ecuador and the resident manager of the Company. A copy of this despatch and of its enclosures is being sent today to the Chargé d’Affaires ad ínterim, American Legation, Quito.

These communications are in regard to the demand made by the Government of Ecuador for a 100 percent increase in the production tax on the Company and for the payment of $600,000., United States currency, in taxes in advance. The payment in advance would be part of the increased taxes that would be due over a period of 15 years.

The letter (copy enclosed)29 from the Company received by the Consulate General enclosing the copies of the communications with the Government of Ecuador outlines the recent developments. The letter invites attention to the fact that the terms proposed for the revision of its contract with the Government of Ecuador, approved by Congress and executed May 8, 1934,30 are very unfavorable and constitute [Page 538] almost a complete derogation on the part of the Government of the Company’s contractual rights thereunder.

The Company’s letter enumerates the unfavorable decrees or demands by the Government which include the following: the discriminatory decree of December 13, 1937, requiring foreign enterprises to pension all employees having over 20 years of service; the decree of December 30, 1937,31 prohibiting the granting of free entry on imports; and the demand for an increased production tax and for payment of a very large sum in advance.

The Company has made a formal protest to the Ecuadoran Government against the pension decree. It will make a formal protest as soon as it is denied free entry on supplies and equipment covered by its contract with the Government. The question of the demand for the payment of a 100 percent increase in the tax on production with a large sum to be paid in advance under the heading of taxes for the next 15 years is being considered by the board of directors in the United States. The terms of the enclosed memorandum from the Supreme Chief of Ecuador are regarded by the Company as practically confiscatory.

A period of ten days has been given by the Government of Ecuador to the Company for the latter’s reply to the memorandum. In view of the extreme urgency and importance of the subject, the Company has requested the Consulate General to forward the copies of the communications directly to the Department to save time instead of sending them through the normal channel of the American Legation, Quito.

Interviews have been had on the subject with Mr. A. M. Tweedy, the General Manager of the Company, who has just arrived from the United States and who called at the Department about two weeks ago when only the pensions decree had been approved.

Mr. Tweedy points out that the Company’s contract of May 8, 1934, was made with a constitutional government in Ecuador and was ratified by the Congress, and that it was intended definitely to end all questions. He regards all three points or demands as very detrimental and states that any one of them would seriously affect operations.

The Company has been operating in Ecuador for 40 years. It has over 200 employees who have been working more than 20 years for it and thus are entitled to receive pensions which would seem to be greater than their present active pay. Mr. Tweedy says that not only would very heavy current payments be necessary but prohibitive outlays would have to be made for setting up a pension reserve for the future, and that the Company could not operate on this basis.

The abolition of free entry guaranteed under the contract is also regarded as vital by Mr. Tweedy. He states that the new Cotopaxi [Page 539] Exploration Company, an American corporation controlled by the same interests and not yet in operation, would have to suspend operations, and that the South American Development Company itself would have to close down as no great gold reserves are visible and the Company could not afford to do development work. He mentions the high duties charged on such necessary supplies as dynamite and cyanide.

The demand for payment of double the present tax on the gross production of the Company is regarded by Mr. Tweedy as practically confiscatory. The Company does not have available funds for the payment of taxes for 15 years in advance and could not operate its low grade ores under such heavy taxation.

Mr. Tweedy requests good offices to prevent the matter from coming to a head so as to obviate more serious difficulties later.

The South American Development Company is the largest American interest in Ecuador and has several millions of dollars invested in this country. It is the only producer of gold in large quantities in Ecuador.

Almost identical demands have been made of the Anglo-Ecuadorian Oilfields Ltd., a British concern which is the principal producer of petroleum in Ecuador. The main difference in the position of the oil company is that it has not been operating in Ecuador for 20 years and thus has no employees eligible to pension.

The British Consul at Guayaquil suspects that the present measures against foreign capital in Ecuador may have been inspired by Italian influence in Quito exerted through the Italian Military Mission so that Italian or German capital can get control of the mineral wealth of Ecuador. The American gold mining company and the British oil company are the only two large and important producers of mineral products in Ecuador.

According to a press report*, the Supreme Chief of Ecuador in a public statement on the subject of his determination to charge higher taxes on the production of mines and oilfields in Ecuador cited as a precedent the confiscation by the Government of Bolivia of the properties of the Standard Oil Company of Bolivia.32 The press has also published a report that Sr. Gómez Morin, the Mexican economist who visited Ecuador recently, had stated that in Mexico the oil companies had to pay a tax of 40 percent on their production to the Government.

The pension decree was reported in my despatches Nos. 599 and 607, [Page 540] dated December 27 and 31, 1937, respectively.33 That decree is an express discrimination against foreign enterprises operating in Ecuador.

A preliminary report of the decree abolishing free entry except for diplomatic and consular officers is given in my despatch No. 606 of December 31, 1937.34 The decree is No. 124 of December 30, 1937. This decree violates the terms of the contracts of a number of foreign firms, mainly American and British interests.

The question involved in the abolition of free entry and the projected increase in production tax on the American gold mining company is not merely that of a foreign concern coming into a country and being subject to the changes in its laws affecting all persons or companies in general. A solemn contract executed by a constitutional government of Ecuador has been violated.

Respectfully yours,

Dayle C. McDonough
  1. Not printed.
  2. For text, see Ecuador, Registro Oficial, August 30, 1934.
  3. Decree No. 124, Ecuador, Registro Oficial, January 8, 1938.
  4. El Universo, Guayaquil, January 11, 1938. [Footnote in the original.]
  5. See Foreign Relations, 1937, vol. v, pp. 275 ff.
  6. El Universo, Guayaquil, January 13, 1938. [Footnote in the original.]
  7. Neither printed.
  8. Not printed.