AWAY FROM THE SHADE

Panama 2014 | FINANCE | FOCUS: INTERNATIONAL REGULATIONS

Panama's FATF gray list status shows that more reforms are in order, however, the sector is rapidly improving and shedding its former reputation as a tax haven.

When Panama was removed from the OECD gray list in 2011, it seemed that the country had finally shed the reputation it acquired during the days of Noriega, when Panamanian banks were places where colorful business entities deposited their cash far from the prying eyes of law enforcement officials. By June of 2014 however, Panama was added to the Financial Action Task Force (FATF) gray list, following an IMF report that found the Panamanian banking system to be, “vulnerable to money laundering (ML) from a number of sources including drug trafficking and other predicate crimes committed abroad such as fraud, financial and tax crimes." Meanwhile, the latest assessment carried out by the FATF found that of the organizations 49 recommendations, only one was fulfilled, three largely fulfilled, and 26 more partially fulfilled. And while this designation poses a serious threat to Panama's financial standing, the Superintendency of Banks cautioned that removing the country from the gray list would be harder than expected, since not all sectors regard the designation as a priority issue for the economy.

The IMF report also found other weaknesses that the sector will need to address to improve its standing. Panama's strategic geographic location, its dollarized economy, status as a regional financial, trade, and logistics center, and its lenient regulatory system make the country an attractive destination for potential money launderers. The report found that while Panama has criminalized money laundering and terrorism financing, its efforts to combat money laundering and the financing of terrorism are still not in line with FATF regulations. Even though instruments were put in place to combat the financing of terrorism, these mechanisms were inconsistent with the legal principles of the constitution, and therefore ineffective. Regarding the anti-money laundering measures in place in Panama, the laws covered most of the core financial sectors, but failed to fully apply to the insurance sector, as well as a number of other financial activities that must be addressed under FATF standards. These allegations, and a number of other findings regarding money laundering, tax evasion, and the financing of terrorism prompted the FATF to designate Panama to the gray list.

Critics allege that the issue of bearer shares is the biggest obstacle for removal from the gray list. Bearer shares are not registered to any authority, and therefore, transferring ownership of the stock is as simple as delivering the physical share. These shares lack the regulation and control of common shares because ownership is never recorded. Panama's bankers are quick to counter that Panama's Law 47 (2013) provides for a system of custody for bearer shares. The law stipulates that shareholders must deposit their certificates with legally approved custodians, such as attorneys, banks, and vetted and licensed broker-dealers. Those custodians are then required to notify the authorities of the identities of the shareowners. Panama's bankers counter that they are subjected to a biased application of FATF regulations. Speaking with TBY, Arturo Müller of Banco Delta pointed out these discrepancies, “one of the biggest tax havens in the world is probably Delaware in the US… the Panamanian banking sector is running ahead to comply with the Foreign Account Tax Compliance Act (FATCA), which is a US imposition." Müller's allegations are partially supported by the IMF's own findings, which showed that number of suspicious transaction reports (STR) received by the Unidad de Análisis Financiero (UAF) shows a decline from 1,315 STRs in 2008 to 652 in 2011, and 405 in 1H2012. This decline was mostly consistent across all sectors, with banks showing the greatest decline from 1,024 STRs in 2008 down to 481 in 2011. In other words, evidence points to an increasingly effective regulatory regime.

In June 2014, Panama made a high-level political commitment to work with the FATF and GAFISUD to address its anti-money laundering and combating terrorism weaknesses. As part of its commitment, Panama agreed to work toward implementing its action plan to address these deficiencies by: adequately criminalizing money laundering and terrorist financing; establishing and implementing an adequate legal framework for freezing terrorist assets; establishing effective measures for due diligence in order to enhance transparency; establishing a fully operational financial intelligence unit with a sufficient mandate; establishing suspicious financial transaction reporting contingencies for all financial institutions; and finally, by ensuring effective mechanisms for international co-operation. This announcement was met with enthusiasm by the FATF, as it demonstrated an awareness of Panama's responsibilities to shake its status, and regardless of whether or not Panama is being singled out, increased transparency and anti-corruption measures will benefit the sector.