840.51 Frozen Credits/8832

The Secretary of State to the Chargé in Ecuador (Nester)

No. 1573

Sir: There are enclosed herewith the original and one copy of a memorandum concerning the institution and effective enforcement by Ecuador of appropriate controls over undesirable economic and financial transactions.

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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.

Very truly yours,

For the Secretary of State:
Dean Acheson


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.

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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.

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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:

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.
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.
Applications for licenses to withdraw blocked funds can be checked carefully in order to make certain that the withdrawals are not excessive.
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.

  1. For correspondence concerning this Corporation, see pp. 383391 passim, and 400414.
  2. Third Meeting of the Foreign Ministers of the American Republics; for Resolution V, see Department of State Bulletin, February 7, 1942, p. 124.