Thanks and a hat tip to Chip Pickard for this excellent article.
There is no other way to put it: Panama is booming. This year the economy is expected to grow by 6%, that’s ten times more than the regional average. But the one-year-old administration of President Varela isn’t resting on its laurels. It is enacting a series of new legislation to enhance Panama’s status as a financial centre.
Of course while 6% annual GDP growth is not to be sniffed at, it’s actually down from 6.4% in 2014 and 8% in 2015. Many would see this as a sign of an economy running out of steam but Meliton Arrocha, Minister for Trade and Industry, disagrees.
Meliton Arrocha, Minister for Trade and Industry
“We’re actually trying to manage a controlled deceleration because the old rate of growth, which some times hit the double digits, wasn’t sustainable. For a dollarized economy like Panama, that can’t control monetary policy, high inflation can be very dangerous, so we had to make sure that the economy didn’t overheat.”
The other element that this administration has been keen to bring under control is government debt, which spiralled under previous president Ricardo Martinelli. “Our debt to GDP ratio is solid and we are ranked as investment grade by the ratings agencies but we felt that the path of the last government wasn’t sustainable. Lots of infrastructure projects were being funded through debt, which would have eventually led to debt servicing becoming more onerous. So we decided to evaluate projects more carefully and make sure that the money was being spent wisely.”
In effect, says Minister Arrocha, the shift is to a model where the government has a smaller role in the economy, which should create more opportunities for other sources of funding. Given that Panama attracted around $5billion of foreign direct investment last year, it shouldn’t be too hard to persuade international investors to fill that gap.
Financial hub
Panama is famous for its canal, which sees 14,000 ships pass through its locks every year. But it’s also an important conduit for capital with a robust banking system and extensive offshore finance platforms. Yet Panama’s status as a finance hub came under attack last year when the OECD’s Financial Action Task Force (FATF) placed Panama on its compliance ‘Grey List’, indicating that the country had to do more to combat money laundering and funding of terrorism. Many in Panama were angered by the decision, which placed Panama in the unlikely company of countries such as Afghanistan and South Sudan. But, as Finance Minister, Dulcidio de la Guardia, told LatAm INVESTOR earlier this year, the government made getting off the list a priority.
“Being on this list definitely matters”, explains Ricardo Fernandez, Panama’s Superintendent of Banks. “I used to be a banker in the private sector and when a country is on observation lists it’s an important matter. It makes entities in the country higher risk from a compliance perspective and can affect their medium or long-term financing – so it’s a serious issue.” As a result Panama has enacted a wave of new legislation to help tackle the issues raised by FATF.
“We’ve done a lot in a small period of time”, says Fernandez. The two major pieces of legislation is Law 47, which tackles the issue of ‘bearer shares’, and Law 23, which combats funding of terrorism. “The fact that the government could pass legislation on ‘bearer shares’, was particularly impressive”, says Superintendent Fernandez, “that was like a sacred cow that nobody in Panama wanted to touch.”
Of course, you expect government officials to talk up their administration, but the private sector seems supportive to. “”The current government has successfully managed this impasse with exceptional diplomatic manoeuvring” says Ramsés Owens, Senior Partner at Owens & Watson, a specialist law firm that also offers offshore trust services. “For a long time, we were part of a group of legal and trust service firms that opposed these changes to the Bearer shares system. As a result of the heavy pressure coming from the OECD and the Financial Action Task Force we recognised that reforming the law was inevitable. If you look at other jurisdictions, such as the British Virgin Islands – where a similar reform in 2004 practically abolished bearer shares – it is evident that these reforms are not impeding legal services to continue. However, our previous arguments for maintaining bearer shares, were based on the fact that other offshore jurisdictions, such as Liberia and the Marshall Islands, still provide bearer shares without custody. Essentially, we now argue that the worldwide legal services system should immobilise bearer shares in order to create a level playing field across jurisdictions.”
we are devoting a lot of resources to FATF matters and also sharing the best practises with other Panamanian institutions…
Of course passing the laws is only half the battle, Panama also has to show that it is forcing companies to comply with them. “We have really staffed up”, says Superintendent Fernandez, “we are devoting a lot of resources to FATF matters and also sharing the best practises with other Panamanian institutions.” Indeed, last year, a high-level government delegation recently travelled to Quito to demonstrate to FATF officials how Panama’s new systems use the Public Registry database to show if a Panamanian corporation has filed to immobilize their bearer shares and also learn the name of the authorized custodian. Now, if everything goes to plan, the next step will be a site visit from FATF official to Panama, which, if successful, would lead to Panama’s removal from the ‘grey list’ in 2016.
But Fernandez isn’t stopping there. He’s also sent another piece of legislation to Congress, which overhauls the regulatory framework for Panama’s booming trust industry. “This trust law reform is really a case of updating the existing legislation and making it more robust. We’ve been very careful not to damage the competitive advantages of Panama’s trust industry or change its role.”
Competitive but clean
The phrase ‘robust regulation’ is one that many financial service firms would fear, yet so far the reaction among Panamanian fund providers has been upbeat. “There are some positive moves in the trust law, which actually increases some of the services that we will be able to provide”, says Owens. “One of Panama’s main strengths is that it isn’t just an offshore platform but that it combines those services with other assets. Indeed the strategy of our firm, Owens & Watson, has been to build out a portfolio of services, from litigation to immigration, which we can combine with our trust platforms to give our clients a more complete offering. So in that sense, reforms that modernise and strengthen Panama’s status and reputation as a leading financial hub are actually beneficial for us.”
One of Panama’s main strengths is that it isn’t just an offshore platform…
Getting off the ‘Grey List’ and updating trust regulations, will no doubt help to boost Panama’s reputation in the financial world. However, the story that is grabbing all of the headlines at the moment is the ongoing investigations into the alleged corruption of the previous administration. Former President Martinelli is has been charged in his absence – he’s gone to the US, claiming that the allegations are politically motivated. Meanwhile a string of high-ranking figures from his government, including former ministers and Supreme Court judges, are under arrest.
Allegations of such high-reaching and extensive corruption could scare international investors into assuming that Panama is a corrupt place to do business, yet Minister Arrocha believes that investors should see the positives. “There will always be corruption, in any business environment. The important thing to ask is: does the local legal system work or not, and can it fight that corruption? If you look at Panama you can see an independent legal system that is clearly fighting corruption. The fact that it is taking on such high profile figures shows that it can bring anyone to justice, regardless of social, economic or political status.”
Derek Sambrook, a British national and Managing Director of Trust Services, a Panama-based trust provider, agrees. “I’ve been here for almost 20 years and the business environment here is good. Moreover in the time that I have been here, I have seen an improvement – it’s on an upward trend.”
Panama’s financial centre offers a myriad of opportunities for UK investors
Indeed it’s an area that Britain, which is the third-biggest foreign director in Panama, is keen to co-operate. Hugo Swire, the Foreign and Commonwealth Office Minister responsible for Latin America, believes that the UK can play a big role. “We are working together with the Panamanian government to increase transparency, and also tackle corruption and money laundering. For example, as part of our cooperation, the UK has a Crown Prosecution Service adviser working with Panamanian stakeholders to strengthen the justice system – fostering a predictable business environment; and our National Crime Agency cooperates with its Panamanian counterparts to tackle the types of international crime that can damage investor confidence.”
There are a range of different schemes being run by the British Embassy in Panama, including one that offers “advice in expanding the range of Panama’s financial services”. This isn’t pure-hearted altruism on the part of the British government. It recognises that Panama is on the path to becoming “the Singapore of the Americas” and it is keen to help UK plc play an important role in this success story.
For his part, Superintendent Fernandez believes Panama’s financial sector has a lot to offer British firms. “The large corporations present in Panama are a mix of borrowers and cash cows which means that there is plenty of local funding available. And with $30billion of new infrastructure projects in the pipeline for the coming years, there will be lots of work for banks. Moreover Panama’s location means that a bank based here can handle business from around the region. Britain is a leading player in global finance so it’s a good fit with Panama.”
Slowly but surely Panama’s political and financial elites have taken steps to see off threats to the country’s status as a financial hub. Some international critics have bemoaned the time that Panama has taken to enact the reforms but Owens believes that they are missing the point. “It’s true that Panama embarked on a period of debate and reflection before enacting these changes but that’s because we wanted to make sure that this was the right move for us. We don’t just follow international orders blindly but we evaluate them and make sure that they fit in with our vision of Panama and our international clientele. That’s what happened in this case. Ultimately Panama is a small country of just 4 million people but with an economy of around $50billion GDP, so that makes us very international and open to incoming investment.”
The high-profile fight against corruption and the moves to improve its FATF compliance show that Panama is keen for clean finance. The result is fast-growing, well-managed economy with an improving business environment in a strategic location. All of which means that Panama will become an increasingly important part of UK plc’s Latin America strategy.