Why Panama Remains a Money Laundering Haven

Panama has made some key moves in order to get itself removed from the international “grey list” of nations that aren’t doing enough to fight money laundering, but these efforts may yet fall short.

The grey list is maintained by the Financial Action Task Force (FATF), an inter-governmental body that promotes anti-money laundering policies. Panama has been on the list since June 2014, alongside other countries like Afghanistan, Sudan, and Syria.

Panama developed an action plan with the FATF in order to remove this designation, which included a legislative proposal meant to strengthen government supervision over the financial sector. However, talks between the FATF and Panama have run into trouble lately.

One of the main sticking points in these ongoing negotiations has been Panama’s limited regulation of bearer shares. These are equity securities that are exclusively owned by whoever physically possesses them. Bearer shares are also highly vulnerable to money laundering, as those who issue them don’t keep records of the buyers, and selling them is as easy as delivering a piece of paper to someone else.

No one keeps tracks of this buying and selling process, which makes it extremely difficult to determine who owns the share. Before Congress passed reforms earlier this year, Panamanian law made it even more difficult, as the original owner of the bearer share was not required under any circumstance to turn it over to an authorized custodian such as a bank or an attorney.

Another impediment to Panama’s removal from the FATF grey list is the ease with which companies can be formed. Two or more adults of any nationality — even those who do not physically reside in Panama — can create a company in the country, according to Law 32 (pdf) in the Panamanian legal code. They can choose to register the company as either a persona natural (“natural person”), which means the company is essentially a person, associated with their identity document; or as a persona juridica (“legal entity”), a corporation that is identified through its registration with Panama’s Taxpayer Registry (RUC by its Spanish acronym).

However, corporations in Panama will often opt to register as a sociedad anonima (“anonymous society”), or bearer share corporation. This protects the confidentiality of the company’s assets, the identity of its owner or owners, and all business and banking transactions under Law 32.

While the founders of a sociedad anonima are required to sign documents identifying themselves as such before a Panamanian notary, laws firms in the country offer a convenient loophole. For a fee, the sociedad anonima can hire lawyers to sign the required paperwork before a notary in their place. As part of the deal, lawyers retain the ability to renounce their obligations to the company if their clients are not in Panama. All of this further conceals the identities of the company’s owners.

There are other regulations in Panama that may attract those looking to set up front companies. Companies that operate outside of Panama do not need to obtain a license for their foreign business operations. Nor is the process of registering a company in Panama that expensive: according to the Ministry of Commerce and Industry’s eRegulations website, the average total cost of the registration process is slightly under $1,000.

Sociedad anonimas provide a number of other benefits to corporations, which can be readily exploited for money laundering purposes. These include:

1.) Minimal reporting requirements. Corporations do not need to file tax returns or have their accounts audited.

2.) Attractive tax exemptions. The Panamanian government does not require corporations to pay income taxes on international transactions; nor must corporations pay capital gain, interest income, and sales tax, among others. Corporations only need to pay an annual franchise tax of approximately $300 to the Panamanian government to remain operational.

3.) Confidentiality. As the name suggests, sociedades anonimas offer a corporation and its beneficial owners complete confidentiality — they don’t even need to have a physical address in Panama. This confidentiality is also due to the fact that the beneficial owners’ names and personal details are not filed with the Panamanian Public Registry, and documentation at the Public Registry does not need to be modified to reflect any changes in ownership.

As a result, only the sociedad anonima’s directors know the identities of the actual owners, since they maintain the sociedad anonima’s records and distribute the share certificates. However, under Panamanian corporate law, corporations do not need to keep records of any transactions. And even if the records exist, corporations are not required to disclose them to foreign governments and can keep the records outside of Panama.

Money Laundering, Financial Gain, and Panama’s Shipping Industry

Another sticking point between the FATF and Panama is lax regulations over the shipping industry. While Panama’s shipping registration process has helped create the world’s largest commercial shipping fleet, it has also made the shipping industry highly conducive to money laundering and tax evasion. Panama maintains an open shipping registry, which means that any country in the world can register a ship under the Panamanian flag. According to a 2014 United Nations report (pdf), about 21 percent of all commercial ships registered in Panama are foreign-owned.

The Panama Maritime Authority also offers a host of other incentives for ships to join the Panamanian shipping registry. These include full access to the system of sociedades anonimas, no minimum tonnage requirements, and lax regulations for vessels older than 20 years, which simply need to pass an inspection before becoming operational. Additionally, ship owners that change their flag to the Panamanian flag do not need to have their ship re-inspected if they have valid safety and tonnage certificates when registering.

While Panama’s shipping registration process has helped create the world’s largest commercial shipping fleet, it has also made the shipping industry highly conducive to money laundering and tax evasion.

There are a slew of other benefits available — including the fact that the process of registering a ship in Panama can be completed within a day — but one stands out above the rest: foreign shipping corporations do not need to pay income taxes to the Panamanian government.

These perks have enabled Panama to rake in around $150 million annually in shipping registration and renewal fees. Once benefits for businesses and indirect income are factored in, total revenue jumps to an estimated $300 million annually.

However, Panama’s lax shipping registration procedures have also earned it international condemnation for ignoring its responsibility to investigate allegations of corruption in favor of getting more ships registered. The country has also derisively been classified as a “flag of convenience” country, a dubious distinction its shares with the likes of North Korea, Burma, and Liberia.

More worrying still is that Panama’s current registration system allows ship owners to operate under a veil of anonymity, as it is virtually impossible to determine a ship’s actual owner or owners, which allows them to engage in unlawful acts with near impunity. Furthermore, due to the sheer size of its shipping fleet and its open registry, Panama has fallen prey to what the Global Financial Integrity organization calls “Illicit Financial Flows (IFFs),” in which importers and exporters manipulate trade invoices to avoid paying customs duties, valued-added taxes (VAT), or income taxes on their goods. From 2003 to 2012 (the most recent year in which data is available), export and import under-invoicing amounted to an estimated $383 million in lost revenue for Panama.

What Next for Panama?

Panama has unarguably made some significant strides in its campaign to get off the FATF grey list by 2016. In May 2015, Panama’s Congress implemented a law meant to comply with FATF regulations. Known as Law 47, it strengthens oversight of current and future shareholders, requiring them to hand over their shares for safekeeping to an authorized custodian. These include a regulated bank, trustee, stock brokerage firm, or pre-approved lawyers.

The law also laid out stricter regulations for foreign shareholders. They must use foreign banks or other financial intermediaries that are either licensed, operate in FATF member countries, or are registered with Panama’s Banking Supervisory Authority; this essentially immobilizes bearer shares by preventing the shares from moving around freely.

Panama’s Congress also passed Law 23 in April 2015, which included other measures meant to combat money laundering and the possible financing of terrorism. This sweeping law also seeks to improve the coordination between the financial and security sector, in order to facilitate information sharing.

The law also establishes oversight over non-financial companies in real estate, the gaming industry, money transfer (remittances), construction, as well as the Baru Free Zone, the Colon Free Zone, Panama Pacifico and other free trade zones that engage in foreign commerce.

In addition, Panama formed an Anti-Money Laundering and Financing of Terrorism Strategic Unit, which will fall under the Ministry of Economy and Finance. The country also developed a risk analysis plan that highlighted various issues that need to be systematically evaluated, including the banking sector, insurance industry and the Colon Free Zone, among other areas.

However, while the FATF has acknowledged Panama’s advances in fighting money laundering, the inter-governmental agency says there is still significant room for improvement. In a June 2015 memorandum, the FATF identified seven deficiencies that Panama has yet to address, many of which have to do with the legal framework for dealing with money laundering. The FATF has also asserted that of the 40 recommendations that the organization issued in 2012, Panama only fully complies with one of them.

There have been other troubling signs that it might not be so easy for Panama to shed its notoriety as a money laundering hub. Authorities recently awarded lucrative contracts to the Odebrecht Group, a scandal-plagued Brazilian conglomerate whose CEO is currently in prison on money laundering charges. One of the most influential members of President Juan Carlos Varela’s cabinet runs a law firm, Mossack Fonseca, which is reportedly one of the most prolific creators of shell companies in the world. The firm also has alleged ties to associates of Muammar Gaddafi, Robert Mugabe, and Bashar al-Assad (the former leader of Libya, the president of Zimbabwe, and the president of Syria, respectively) as well as the recent FIFA scandal. Meanwhile, several real estate developers — which a leaked US Embassy cable linked to money laundering and other illicit activities — continue to operate in the country.

Ultimately, Panama will determine whether it leaves the grey list or not, and only skillful maneuvering by its government will allow it to safely navigate the treacherous waters of international finance and commerce without sinking its own economic self-interests.

Source: Insight Crime

Note:  According to the law firm of Mossack Fonseca,

The Republic of Panama is not included on the District of Columbia’s (DC) list of tax havens for fiscal year 2016. The DC Fiscal Year 2016 Budget Support Act of 2015 defines “tax haven” as a jurisdiction that:

• Has no effective tax, or a nominal tax on the relevant income
• Has laws and practices that prevent the exchange of tax information with other governments
• Lacks transparency
• Facilitates the establishment of foreign entities without a local presence or impact on local economy
• Excludes local residents from taking advantage of the tax regime’s benefits
• Has a tax regime that is favourable for tax avoidance

The government of Panama has recently enacted laws that include stringent controls, supervision, and regulation of its banking, financial, and non-financial sectors.