Panama: Selected Issues
Author: International Monetary Fund. Western Hemisphere Dept.
Publication Date:
17 Jan 2019
eISBN:
9781484394069
Language:
English
Keywords:
ISCR; CR; Panama; asset quality; financial condition; bank; Panamanian authorities; risk assessment; due diligence; supervisory framework; risk understanding; Money laundering; Tax evasion; Legal support in revenue administration; Terrorism financing; Global
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Selected Issues

Abstract

Selected Issues

Financial Integrity In Panama1

Panama is a key regional financial and business services provider with a strategic location in Central America. Its business model, built on banking, logistics, and trade activities, has transformed the economy into one of the most vibrant in Latin America. Following unfavorable assessments by international standard setters, the authorities have recently upgraded their framework for AML/CFT and implemented initiatives to enhance tax transparency. This paper takes stock of progress on these issues since 2013 and suggests a way forward to improve compliance with international standards as a way to secure Panama’s competitiveness as a regional center for finance and business. It finds that while recent efforts have yielded positive gains, with Panama now on par with peers in terms of the technical compliance with FATF’s standards, the country is still exposed to ML/FT risks in several critical areas and needs to enhance the effectiveness of the AML/CFT system. Going forward, the near-term focus should be to build on the recent progress and close the remaining gaps in the AML/CFT framework with urgency ahead of the next FATF plenary in February 2019, to avoid going back to FATF’s ICRG “grey list”. In light of the analysis, it will be important to: (i) criminalize tax evasion, including bringing tax crimes in the scope of ML offences); (ii) improve the transparency of corporate vehicles created in Panama; (iii) further strengthen the AML/CFT supervisory framework, including with risk–based tools given the high number of financial and non-financial intermediaries in Panama; and (iv) strengthen timely exchange of tax information with foreign counterparts.

A. Introduction

1. Panama is an attractive international financial and business services center. Its comparative strengths include a modern international financial center, a dollarized system, a logistic hub (air and sea), a low-rate and territorial tax regime, a friendly legal framework for company formation, a stable macroeconomic environment and a strategic geographic location. Panama’s business model, built on banking, logistics and trade activities, has propelled the economy into one of the most vibrant in Latin America2. While this model has served Panama well, the country’s connectivity and nature of products and services offered, leaves it vulnerable to money laundering, including those related to corruption, drug trafficking and other predicate crimes, such as tax crimes committed abroad.

2. In response to unfavorable assessments by international standard setters, Panama has recently upgraded its framework for AML/CFT and tax transparency. In addition to series of legislative amendments, the framework for anti-money laundering and combating the financing of terrorism (AML/CFT) was revamped in 2015 in line with recommendations from the Financial Action Task Force (FATF) (but prior to the most recent revision of the international standards). The new AML/CFT framework provides for a risk–based approach for AML supervision, appropriate mitigating mechanisms, and measures to facilitate international cooperation. This new framework aims to prevent risks of misuse of products and services offered by financial, non-financial and professional business entities as instruments for money laundering and financing of terrorism. Together with advances on tax transparency, Panama’s technical compliance is now closer to international standards. Nonetheless, a few significant gaps remain in the AML/CFT framework and more needs to be done to assure effective implementation.

3. This paper takes stock of progress since 2013 and suggests the way forward to secure Panama’s competitive position in a rapidly evolving international financial landscape. It seeks to answer the following questions: (i) to what extent is Panama exposed to the risks of money laundering?; (ii) where is Panama in its efforts to tackle ML/FT risks in compliance with global standards?; (iii) how does Panama compare with peers?; and (iv) where does Panama want to go from here? To do this, Section B first gives an overview of the financial system and corporate services sector, highlighting certain peculiarities about Panama. Next, section C discusses Panama’s vulnerability to ML risks. Section D discusses compliance with global standards, comparing Panama’s progress with peers. In section E, the paper identifies areas where further progress is needed, while section F suggests priority actions and the way forward. Section G concludes.

B. Overview of Financial and Corporate Services Sectors

The Financial System

4. Panama’s strategic geographic location facilitated the emergence of a regional financial hub. The financial center is well-known and one of the oldest in the Western Hemisphere. It serves mostly clients in Latin America, capitalizing on Panama’s location, connecting North and South America. The financial center is linked to trade and logistics activities in the domestic economy (the other engines of growth), mainly through the Canal and free trade zones.

5. The financial center is relatively small compared to major jurisdictions that offer similar services. Although the financial system is large in relative terms, with assets equivalent to 238 percent of GDP at end–2017, it is small in absolute terms, with cross-border portfolio flows to Panama amounting US$50.7 billion at end–June 2017, representing 0.1 percent of world total (Figure 1). Its share of portfolio flows to 23 selected Offshore Financial Centers (OFCs) amounted to only 1 percent. Compared to similar flows to large LACs, Panama accounted for only 5 percent of the total, far behind Mexico and Brazil, with 35.6 and 35.2 percent, respectively.

Figure 1.
Figure 1.

Panama: OFC Portfolio Investment Liabilities

June 2017

Citation: IMF Staff Country Reports 2019, 012; 10.5089/9781484394069.002.A002

Source: Coordinated Investment Portfolio Survey; IMF Staff Calculations

6. Financial activity is centered on banking. The assets of the Panama’s international banking center amounted to 194 percent of GDP at end–2017 (see Table 1), representing 93 percent of the financial system’s total. The banking center consists of 88 banks, 49 of which hold general banking license (including two state-owned banks), 26 hold international license, and 13 are representative offices of foreign banks. The sector offers primarily traditional products of deposit taking and lending. In terms of direct economic contribution, the banking center accounted for 6.5 percent of GDP and 2.5 percent of total employment in 2017.

Table 1.

Panama: Structure of the Financial System

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Source: SBP; IMF Staff calculations

Includes financing, leasing and factoring companies, and two other small sectors

7. The general-license (onshore) banks are the largest component of the financial system, helped by a strong presence of regional banks. The assets of onshore banks are equivalent to 164 percent of GDP (78 percent of financial systems total). Of the 49 onshore banks, 17 are Panamanian owned, while 30 are foreign-owned. Foreign banks account for 44 percent of banking total assets, 38 percent of total deposits and 31 percent of total loans. Large banks, four of which are Colombian-owned, are part of financial conglomerates. Panamanian licensed banks, unlike most OFCs, must have a physical presence in Panama. They are permitted to conduct banking business with both residents and non–residents.

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Panama: Top 15 Banks by Asset Side: Country of Ownership 1/

(2016Q4; in percent of total assets of top 15 banks by asset size)

Citation: IMF Staff Country Reports 2019, 012; 10.5089/9781484394069.002.A002

Sources: SBP; IMF staff calculations. Includes consolidated operations of subsidiaries.

8. Offshore banking is second in importance. The assets of offshore banks are equivalent to 27 percent of GDP (14.2 percent of financial system total), but offshore activities go beyond offshore banks only, given that, for example, onshore banks are permitted to conduct offshore operations. The sector has limited connections with the rest of the financial system, which limits contagion risks from abroad. The economic contribution of the sector is decent, accounting for about 3.5 percent of total employment of the banking center, 0.1 percent of overall local expenditure, and about 0.1 percent of public revenues in 2015 (see Hadzi-Vaskov, 2016).

9. Panamanian banks continue to maintain stable correspondent banking relationships (CBR). Since the removal of Panama from the FATF grey list in February 2016, 72 new CBRs have been established, according to the authorities, bringing the total to 458 as of December 2017. All banks have CBRs, including smaller Panamanian banks that were affected by global banks’ recent CBR withdrawals.

10. Although relatively small, the non-bank sector is dominated by a large number of institutions. It comprises over 1,000 licensed entities, including securities, insurance, cooperatives, savings and loans, developments banks, finance companies, trust, leasing companies. Together, they account for 7.2 percent of financial system’s assets (15.2 percent of GDP). The vast number of entities in this sector poses a major challenge for regulation and supervision.

11. AML/CFT oversight is fragmented. The five main supervisors include the Superintendence of Banks of Panama (SBP), the Superintendence of Insurance and Re-insurance (SSRP), the Superintendence of the Securities Market (SMV); the Intendency of Supervision and Regulation of Non-Financial Institutions (created in 2015), and the Panamanian Autonomous Cooperative Institute (IPACOOP) (see Table 2). They are sufficiently empowered to undertake AML oversight. Others are: The Gaming Board, the Ministry of Commerce and Industry, the Administrator of the Colon Free Zone, and the National Mortgage Bank (Banco Hipotecario Nacional, BHN). With such a high degree of fragmentation of supervisory responsibilities, coordination of AML efforts is very vital. The creation in 2015 of the National Commission Against Money Laundering3, integrated by high level government official, seeks to overcome this through the establishment of AML/CFT policies and inter-institutional coordination.

Table 2.

Panama: Technical Compliance with FATF Recommendations, 2018

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Source: GAFILAT (2018); IMF Staff calculations

Trust and Corporate Services Sector

12. Panama is a well–known center for trust and company formation and administration. Panama is among the world’s top three providers of company formation services (Warf, 2002, TJN 2018)4. Legal persons and arrangements that can be created under Panamanian law include corporations, limited liability companies, foreign companies, partnerships, trusts and private interest foundations. Panama’s friendly legal framework has facilitated the creation of close to 900 thousand of these corporate vehicles (equivalent to one per Panamanian household), as of September 2018, to conduct a wide range of commercial activities. They are also often used as part of wealth management services for both domestic and foreign clients. An average of 25,000 new entities were formed annually in the last three years. Estimates of the economic contribution from the existence of these entities are imprecise but considered very small by the authorities.

Total Registered and Inactive Legal Persons and Arrangements by Type, as of September 2018

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Source: Public Registry of Panama, GAFILAT 2018

13. Joint stock corporation (Sociedad Anónima) is the most commonly incorporated entity by both resident and foreign investors, ahead of foundations and trusts. It accounted for about 78 percent of registered entities as of September 2018ahead of trusts and private interest foundations (with shares of 13 percent and 6 percent of the total, respectively). The law does not distinguish between a domestic and offshore company, which may be formed by any two natural persons, irrespective of their nationality. Private interest foundations may be formed by a natural person, a legal person, or a nominee. On the other hand, trusts are formed by a trust deed, which must designate a settlor, trustee, and beneficiaries. Trust may be administered by a natural or legal person. These corporate structures have been used in the past to obscure ownership and launder illegal proceeds (FATF, 2014), and have been vulnerable to misuse in Panama.

New Registered Legal Persons and Arrangements

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Source Public Registry of Panama

As of August 2018

14. More than half of legal entities incorporated are dormant. A new law passed in October 2016 (Law No. 52), which came into effect in January 2017, requires corporations, limited liability companies, and any other legal person, to pay an annual franchise fee of US$300 upon registration and in subsequent years to maintain a valid license (except private interest foundations, which are to pay US$350 at registration and US$400 thereafter). Non-payment of the fee after a 6-month grace period attracts a penalty of US$50 dollars per year, and results in non-issuance of certificates and suspension of corporate rights after three consecutive years in default. Once suspended, entities are permitted to reactivate their registration within a period of two years with a fine of US$1,000, otherwise they will be dissolved. While it is difficult to determine the total number of delinquent entities, available data indicates that about 381,000 corporations (55 percent of total registered) are 3–10 years overdue in the payment of annual fees, despite dissolutions that averaged 13,000 a year in recent years. These legacy entities have no activities, physical presence, and no contact with the resident agent and the Panamanian authorities5.

15. There is no requirement for a corporation to have a registered office, any other form of physical presence, or assets in Panama. As a result, it is difficult to determine and monitor the entities that operate outside of Panama, which represent a reputational risk if misused for money laundering. Instead, corporations, irrespective of their location, or source of income, must designate a resident agent, who will be registered at Panama’s Public Registry. Any corporation without a resident agent for more than 90 days, perhaps due to resignation, or termination, will have its corporate rights suspended. The Public Registry reported 28,645 of such entities as of September 2018.

New Dissolutions

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Source Public Registry of Panama

As of September 2018

16. The role of lawyers and corporate service providers is critical. Legal entities can only be incorporated by a resident agent, who must be lawyer, admitted into practice in Panama, or a law firm. Resident agents are not subject to any additional licensing requirement6, and as such any lawyer, or company service provider can incorporate a company. Out of the estimated 10,000 of individual lawyers and law firms reported to operate in Panama, around 4,200 were registered at the Public Registry as of March 2017, of which around 3900 were individual lawyers and some 300 were law firms. Panama also had 72 trust company providers of which 39 were banks, or their subsidiaries. The resident agent is the key link between the owners of the company and the authorities. They must notarize and file all relevant company documents required at the Public Registry and make annual franchise payments on behalf of their clients. In addition, they render nominee services, including acting as directors and shareholders, or engaging a third party to do so. They can also serve as custodian for bearer shares subject to approval by the SBP.

17. Resident Agents and the Public Registry are the national primary sources of company information. Company information on the identity of beneficial owners are required to be kept by the company itself and by its resident agent. Entities that operate outside of Panama are required to keep accounting records at the office of the resident agent, or at any other national location, which must be disclosed to the resident agent. The authorities do not have any direct contact with companies that operate exclusively outside Panama. As such, the resident agent is the primary source of information. The public registry is a repository for basic company information and documents, such as the names and domicile of the subscribers, share ownership, articles of incorporation, name and address of the directors, the domicile of the corporation and name and address of the resident agent in Panama, which must be updated when changes occur. Information on the founders of private interest foundations and beneficiaries is not required to be contained in the foundation’s charter, and should therefore be known by the resident agent. The registry has a free online access but is hardly up-to-date given the large number of entities that are inactive. Due to the strengthening of AML/CFT compliance since 2015, financial institutions and designated non-financial businesses and professions (DNFBPs) have become important sources of information to the extent that they maintain a relationship with the entities.

18. A custody regime for bearer shares was introduced in 2013, aimed at gaining access to company ownership information. The new regime mandated bearer shares owners to deposit their certificates with an authorized local or foreign custodian together with identity information, or have bearer share certificates replaced with registered share certificates by December 31, 2015. Those who failed to do so by the deadline were considered to have lost their political and economic rights related to the shares. Issuance of bearer shares, which was a very common practice in the past, is prohibited except for corporations that adopted the custody regime before the deadline of December 31, 2015. In which case, any new bearer shares must be registered 20 days after issuance. GAFILAT (2018) recorded that 2,282 corporations filed for custody of bearer shares as of March 31, 2017.

19. Panama has a supervisor, since 2015, for all types of designated non-financial business and professions (DNFBPs) recognized by FATF. Current regulations apply to a large number of DNFBPs that t include casinos, real estate agents, dealers in precious metals, dealers in precious stones, pawn shops, notaries, lawyers and company service providers, other independent legal professionals and accountants (see Table 2).

Financial Institutions and Designated Non-Financial Business and Professions (DNFBPs) for AML/CFT Oversight 1/

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Source: Authorities; GAFILAT (2018); IMF (2006); Global Forum (2016)

Latest available

C. Illicit Proceeds and Vulnerability to Money Laundering and Terrorist Financing

Measurement of Money Laundering

20. It is difficult to quantify the amount of criminal proceeds generated from money laundering globally and the flow of such funds7. This is because money laundering by its nature is unobservable. The United Nations Office on Drugs and Crime (UNODC) in 2011 estimated that criminal proceeds are likely to have amounted to 3.6 percent of global GDP (2.3–5.5 percent), or about US$2.1 trillion in 2009–consistent with the consensus estimate of 2–5 percent of global GDP indicated in Camdessus (1998). Of the total amount, about 2.7 percent of global GDP (2.1–4.0 percent), or US$1.6 trillion were estimated by UNODC to have been laundered worldwide. The study further reported that illegal drug trade appears most profitable global illegal activity accounting for a fifth of all crimes and half of all proceeds of transnational crime. Out of the estimated gross profit from cocaine sales (US$85 billion), most were generated in North America (US$35 billion) and in West and Central Europe (US$26 billion). In addition, the UNODC study also reports that total cocaine-related flows into Central America, second to the Caribbean, were estimated at US$2.1 billion (equivalent to 1.6% of GDP), the strongest coming from North America (close to US$1 billion) and South America (US$0.9 billion). A study or estimate of the amount of criminal proceeds generated in or moving through Panama (if any) is not publicly available.

21. Assessment of vulnerability to money laundering thus focuses on country specific risks factors, the strength of the legal framework and the effectiveness of implementation. Relevant risk factors can cover the level and type of proceeds-generating crime in the country; extent of exposure to cross-border flows of criminal or illicit assets; and existence of active terrorist groups. Other considerations include the relative size of the economy; the size, integration and composition of the financial sector, the relative importance of different types of financial products; the volume of domestic and offshore business; and the extent of informality. All these are important elements in FATF’s assessment of ML/CFT threats to a country.

Panama’s Vulnerability

22. Panama has strong international financial linkages. BIS data suggests that banks located in other jurisdictions have a significant claim8 on Panamanian borrowers, which stood at US$85 billion (137.7 percent of GDP) at end-September 2017. Of the total outstanding cross-border claims, 85 percent, equivalent to 118 percent of GDP, were loans and advances and the main counterparty were non–bank financial institutions. Banks located in Japan hold 42.5 percent of these claims. Non– resident deposits as a share of banking system’s total deposits and total liabilities, were 28 percent and 23 percent, respectively, at end–2017, primarily from LACs, including Venezuela, Ecuador, Costa Rica, and Colombia. Domestic assets and liabilities of offshore banks are about 1.8 percent and 0.4 percent of their total assets and liabilities, respectively. The Panamanian authorities have identified banks as a higher risk sector for AML/CFT.

23. Trade openness is high, particularly through the Colon Free Zone (CFZ). The Colon Free Zone is regarded as the largest free port in the Americas, and second largest in the world. It offers services covering imports, storage, assembly, repackaging, and re-exports, and can potentially be an originator, or a transshipment point for goods purchased with proceeds of drug trafficking and other criminal activities. Re-exports through the CFZ to various destinations, though declining due to the economic challenges in Venezuela and an ongoing trade dispute with Colombia, amounted to 15 percent of GDP at end–2017. As in the case of banks, the authorities have identified free trade zones as a higher risk for AML/CFT.

Cross-Border Positions by Instrument and By Sector of Counterparties Resident in Panama, as at September 2017

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Source: Bank of International Settlement; IMF Staff Calculations

24. The regulatory framework and supervisory practices are not effectively preventing the misuse of entities incorporated in Panama. While the regulatory framework has important strengths, GAFILAT found its effectiveness, particularly in preventing the misuse of foreign and domestic legal entities (e.g., companies) and legal arrangements (e.g., trusts) incorporated or used in Panama, to be low. It implies that corporate structures, trusts and foundations registered in Panama continue to be at risk of being misused for criminal purposes, due to lack of available, timely and up-to-date beneficial ownership information that provides a level of anonymity to the structures. Risk assessment by the authorities suggests that entities without physical presence in Panama are particularly vulnerable to abuse. High-profile incidents in the first half of 2016 that brought Panama into international focus highlighted the vulnerability of the corporate services sector, potentially affecting the effectiveness of the AML/CFT regime.

25. The flexible tax regime has attracted foreign business but may also provide opportunities for tax crimes. The tax code offers a number of benefits to Panamanian entities (e.g. low rates and other tax incentives). Also, as the tax system is based on the territoriality principle, income earned by Panamanian entities abroad are not subject to tax. At the same time, Panama is one of the few jurisdictions, including Latin America peers, where tax evasion is an administrative, rather than a criminal offence, according to the authorities’ study (CNBC, 2017b). The non-inclusion of tax crimes as predicate offence for money laundering in the legal framework exposes Panama to be misused by tax evaders from other jurisdictions.

26. Panama is a route for drug traffickers. According to the UNODC (2015), Central America (where Panama is located) is a major drug route (Figure 3). Cocaine trafficking is indicated to flow from Latin America to the US through the Central America and Mexico corridor. Panama’s unique connectivity provides opportunity for traffickers to transit cargoes of cocaine specifically from Colombia, Venezuela and Ecuador (Figure 2). The dollarized economy also makes Panama a sought-after destination by criminal groups involved in money laundering and drug trafficking.

Figure 2.
Figure 2.

Panama: Cocaine Trafficking Routes

Citation: IMF Staff Country Reports 2019, 012; 10.5089/9781484394069.002.A002

Source: Adapted from UNODC (2012): Delincuencia Organizada Transnacional en Centroamérica y el Caribe Una Evaluación de las Amenazas. It was based on UNODC interviews in the región.
Figure 3.
Figure 3.

Panama: Global Cocaine Trafficking Flows

Citation: IMF Staff Country Reports 2019, 012; 10.5089/9781484394069.002.A002

Source: Adapted from the UNODC 2015 World Drug Report

27. The authorities’ recent national risk assessment identified the main domestic and external threats. They see transnational organized crimes as the main external threat, while drug trafficking, corruption, financial crime, smuggling, and copyright crimes, were identified as domestic threats. Free trade zones, real estate and construction sectors were found to be the most vulnerable for money laundering as sizable inflows are channeled to Panama through these sectors that have not been tightly supervised in the past. Despite the strong global financial linkages, the authorities believe the risks from the banking sector are mitigated by robust regulation and supervision. As GAFILAT notes in the 2018 assessment, tax offenses have not been covered in the NRA, which points at a gap in Panama’s risk understanding, and negatively impacts on Panama’s risk mitigation measures, also in relation to banks.

Risk Assessment of Non-Financial Sector

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Source: National Commission for AML/CFT/WMD

D. Compliance with Global AML/CFT and Tax Transparency Standards

28. The Panamanian authorities recognize the importance of safeguarding financial integrity. Given the role of the financial center, the authorities acknowledge that a continued weak AML/CFT framework may restrict access to global financial markets, as demonstrated by the withdrawal of correspondent banking relationship by global banks in 2014. They also note that domestic and financial stability can be threatened by criminal activities. They are therefore committed to comply with international AML/CFT and tax transparency standards (Box 1).

29. Panama was assessed twice against the international AML/CFT standards over the recent years. The first assessment took place in 2012, against the 2001/2003 FATF 40 main recommendations and 9 special recommendations using the 2004 FATF assessment methodology. Under this methodology, countries were rated for technical compliance with the standards; however, the ratings could be adjusted using implementation data. The results of Panama’s assessment against these 49 recommendations was insufficient, causing Panama to be referred to the FATF’s International Cooperation Review Group (ICRG). The second and latest assessment was in 2017, against the revised 2012 FATF 40 recommendations using the 2013 FATF assessment methodology. Both the substance of the standards, and the assessment methodology have been revised, and assessments under the old and new standards and methodology are not strictly comparable. Under the current methodology, the main focus is on assessing effectiveness, for which countries are rated against 11 effectiveness outcomes. Panama has not done well under this assessment, meeting once again the threshold for FATF’s ICRG process. The current methodology also assesses technical compliance, and these technical ratings are no longer adjusted using implementation data. On technical compliance, Panama’s most current results are comparatively favorable. While the methodologies have changed, it is encouraging that Panama is closer to achieve best practices on technical compliance under the new and improved methodology.

International Standards on AML/CFT and Tax Transparency

The Financial Action Task Force (FATF).1 Recommendations are the internationally recognized standard for AML/CFT. They seek to strengthen global safeguards and protect the integrity of the financial system by providing governments with relevant tools to tackle financial crime (IMF, 2012). Originally developed in 1990, the standard has evolved, and in 2012 was further enhanced to address new and emerging ML/FT threats. Tax crime was recognized as an underlying ML offence. FATF has also emphasized the concept of risk-based supervision, according to which the authorities are expected to identify, assess, and understand their ML/FT risks.

Compliance with the standard are assessed through periodic mutual evaluations conducted by the FATF, FATF-style regional bodies, the IMF and World Bank. The assessment produces ratings for technical and effectiveness of the AML/CFT regime.

The Global Forum (GF).2 is the premier international body that sets standards on tax transparency and exchange of information. It is the largest international platform that brings together nearly 150 jurisdictions, including all G20, all OECD members, key international financial centers, and many developing countries, to fight tax evasion and avoidance in a coordinated manner. The GF monitors members implementation of the standards through a peer review mechanism.

The GF facilitates information sharing between tax authorities through two complimentary international standards on tax transparency. The first–exchange of information on request (EOIR) standard– which is the bedrock of the GF’s work, establishes a framework for tax authorities to request and obtain information from their foreign counterparts on the offshore financial activities of non–residents. The automatic exchange of information (AEOI) standard, modelled after the U.S. Foreign Account Compliance Act (FACTA), enables members to automatically share the financial accounts of non–residents, on annual basis starting in 2017, with all interested appropriate partners, under the internationally agreed “common reporting standard”, developed by the OECD’s Forum on Tax Administration. These two complimentary mechanisms assist jurisdictions to tackle illicit financial flows.

1 The FATF is an inter-governmental body whose purpose is to develop and promote national and international policies to combat money laundering, the financing of terrorism and, more recently, the financing of the proliferation of weapons of mass destruction. It was established by the G7 in 1989 in response to mounting concern over money laundering. The FATF is complemented by nine FATF-style regional bodies (FSRBs); together, the FATF and the FSRBs comprise over 180-member jurisdictions2 The Global Forum, restructured in September 2009, is an extension of a forum created in the early 2000s in the context of the OECD’s work to address the risks to tax compliance posed by non-cooperative jurisdictions. The original members of the Global Forum consisted of OECD countries and jurisdictions that had agreed to implement transparency and exchange of information for tax purposes.

30. The 2012 IMF–led assessment found significant shortcomings in Panama’s framework for AML/CFT, which the authorities are actively trying to address. 13 In June 2014, Panama was made subject to the FATF’s monitoring under its on-going global AML/CFT compliance process, also known as the FATF’s ICRG “grey list”, the second time since 2001. As a result, the authorities agreed to an Action Plan to upgrade their legal and institutional framework for AML/CFT by mid-2015. Following significant implementation of the Action Plan, including the approval of a set of legislations, FATF removed Panama from the ICRG process (i.e., the grey list) in February 2016. However, soon after FATF’s recognition of the authorities’ progress, Panama’s reputation was affected by the release of the “Mossack Fonseca documents” in April 2016, immediately followed by U.S. sanctions on money laundering involving a few Panamanian entities in May14 (See IMF Country Report No. 16/337) with mixed results. These cases highlighted the possible deficiencies in AML/CFT implementation and showed that there is ample room for improvement. To guide future policy and further reforms, the authorities have adopted a national AML/CFT strategy, with IMF TA, following the completion of a national risk assessment in January 2017.

FATF’s Adverse Decisions on Panama

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31. After the 2012 assessment, Panama took important measures to strengthen technical compliance. Panama’s legal framework criminalizes most money laundering and terrorist financing predicate offences under FATF standards, with a sole exception of tax offences, a gap later identified by GAFILAT in the 2018 assessment. The revised AML/CFT Law 23, which partly reflects FATF’s recommendations, aims to prevent risks of misuse of products and services offered by financial, non-financial and professional business entities as instruments for money laundering and financing of terrorism (see Box 2). It established a risk–based approach for AML/CFT supervision, appropriate mitigating mechanisms to protect the integrity of the financial system and the economy, and measures to facilitate international cooperation. The law extended coverage to activities and professions, previously not covered by the then existing AML/CFT framework. It also enhanced the mechanism for Customer Due Diligence (CDD) requirements, and the powers and resources of Panama’s Financial Intelligence Unit (Unidad de Análisis Financiero, UAF) to ensure its operational independence. A new high level national AML/CFT coordinating body was created in 2015, tasked with the responsibility of monitoring, establishing and coordinating national AML risk strategies and priorities, and overseeing the implementation of the national action plan.

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Technical Compliance with the 40 FATF Recommendations

Citation: IMF Staff Country Reports 2019, 012; 10.5089/9781484394069.002.A002

Sources: IMF (2014) and GAFILAT (2018)

Panama: Key Reforms by Law 23 to the Legal Framework Since 2015

These reforms were aimed to address the shortcomings identified in the 2014 assessment report.

Nonfinancial entities

  • Extended and deepened the scope of covered entities for customer due diligence (CDD) by including nonfinancial entities in addition to all financial institutions. Introduced suspicious transaction reporting (STR) requirements for all nonfinancial entities.

  • Established an intendancy for supervision and regulation of nonfinancial entities.

  • Adjusted the legal framework to grant the financial intelligence unit (FIU) access to information maintained by all nonfinancial entities and resident agents and a heightened role in AML/CFT matters.

Identification of beneficial ownership

  • Amended the legal provisions to ensure identification of beneficial owners of all customers (natural and legal) in trust companies and associated services.

  • Introduced mandatory identification of all parties to a trust client and covered them by the CDD obligations.

  • Restricted the existence of bearer shares by creating a legal obligation for delivery of all bearer shares to be delivered to a custodian, to identify shareholder(s) or their replacement with nominal share certificates.

  • Obliged all resident agents to gather and maintain information on beneficial ownership.

Criminalize ML/TF

  • Extended the scope of covered entities for customer due diligence (CDD) by including nonfinancial entities in addition to all financial institutions.

  • Added crimes as predicate offenses to ML under the previous FATF standard: piracy, forgery, forgery of money, smuggling, etc.

Freezing of terrorist assets

  • Established immediate mechanisms to freeze terrorist assets in accordance with UN guidelines without prior judicial review.

  • Adopted procedure to freeze terrorist assets for cases initiated under other jurisdictions.

Strengthen the FIU

  • Enhanced financial and human resources in line with its expanded responsibilities for new reporting entities.

  • Set the FIU as the central agency that receives STRs; strengthened STR quality by providing feedback to reporting entities and coordination with other supervisors.

International cooperation

  • Set explicit legal provision to regulate the principles and procedures for international legal cooperation in the absence of a treaty.

  • Fostered the signing of MoUs with foreign FIUs, under the Egmont Group framework.

Source: IMF Country Report No. 16/337; and the Panamanian authorities.

32. The recent assessment by GAFILAT, published in January 2018, confirmed the authorities’ clear progress towards achieving technical compliance with the AML/CFT standards. Panama was found to be fully or largely compliant with the majority of the 40 FATF’s technical recommendations, with 10 complaint ratings, 22 largely compliant ratings, 7 partially compliant ratings and 1 non-complaint rating. Panama’s compliance is strongest in the following areas: confiscation and provisional measures; financial institutions secrecy laws; politically exposed persons; correspondents banking relationships; new technologies; internal controls and foreign branches and subsidiaries; tipping off and confidentially; financial intelligence unit, guidance and feedback; and international instruments. It does not currently meet the standard for the transparency and beneficial ownership of legal persons.

33. While Panama demonstrates technical compliance, important weaknesses were identified in the effectiveness of the AML/CFT framework. Under the current FATF methodology, effectiveness is the core of the assessment. GAFILAT recent assessment shows that Panama’s AML/CFT system is only effective in two areas (targeted financial sanctions related to terrorist financing and related to proliferation financing). In all other areas, GAFILAT deems Panama’s effectiveness to be insufficient. This covers Panama’s risk understanding, international compliance, supervision, preventive measures (CDD), transparency of legal persons and legal arrangements, financial intelligence, money laundering investigations and prosecution, confiscation, and terrorist financing investigations and prosecutions.

34. The authorities have already taken steps to improve the effectiveness of the system over the longer term. As reflected in the GAFILAT report, measures taken after the 2012 assessment included a renewed focus on AML/CFT supervision, which has intensified since 2015, facilitated by the creation of a new intendency and improvements in supervisory capacity. Total onsite inspections conducted by the five main supervisory entities increased by 10 percent, and 40 percent in 2016 and 2017, respectively, facilitated by additional human, financial and information technology resources. The overall number of SBP’s inspections went up by 36 percent and 23 percent in 2016 and 2017, respectively, with the number for trusts and other financial entities rising by 84 percent and 300 percent in 2016, respectively. The scope, frequency and the quality of supervision varies across institutions, with banking supervision found to be strong by the 2012 Financial Sector Assessment (FSAP) and continue strengthening. On staffing, the newly created Intendency for regulation and supervision of non-financial entities (which has the complicated task of monitoring a very large number of DNFBPs) and the UAF hired 40 and 35 new staff, respectively in 2017. Supervision (both offsite and onsite) has stepped up through implementation of risk-based models and tools. Although GAFILAT deemed these measures to be insufficient to achieve effectiveness in their 2018 assessment; over the longer term, these measures could be useful components of a larger effort to achieve effectiveness.

AML/CFT Supervision

(Number of supervisions conducted)

article image
Source: National Commission for AML/CFT/WMD

Panama: SBP Supervision

(Number of supervisions conducted)

article image
Source: Panama Superintendence of Banks

includes finance, leasing and factoring companies

35. The authorities also stepped up AML/CFT awareness and training programs after the 2012 assessment. National awareness appears to have improved in recent years. The authorities reported 766 trainings, workshops and seminars on AML/CFT issues during 2015–17, attracting close to 42,000 participants

Training on AML/CFT

article image
Source: National Commission for AML/CFT/WMD

36. Suspicious transactions reporting (STR) has increased steadily since 2014, but there is low filing in sectors considered as high risk. STR received by the UAF increased by 73 percent in 2015 to 1,734, and by 45 percent in 2017 to 2,897, mainly from banks and remittance agents. There appears to be low filing from free zones, lawyers and real estate sectors that ML/FT risks were found to be elevated by the national risk assessment. The authorities are of the view that there is resistance in these sectors for fear of losing their clients. Banks are also thought to have been filing for the clients in the free zones. Despite the number of STRs generated by banks, which appears high, GAFILAT’s 2018 assessment indicates that more STRs should be coming from the sector due to its size and risk as well as international linkages.

37. The authorities have expressed commitment to implementing important initiatives to enhance tax transparency. Following several assessments by the Global Forum, the latest concluded in November 201615, the National Assembly has passed legislation in the past three years to establish the legal basis for AEOI, enhance the revenue administration’s powers, and require all companies and foundations registered in Panama to keep accounting records. With IMF assistance, the authorities have reorganized EOI unit under the Directorate of General Income (DGI), and increased staffing for effective information exchange. Panama has signed over 30 bilateral tax treaties and tax information exchange agreement. It has ratified the OECD’s Multilateral Convention on Tax Matters, and met FATCA information reporting requirements, with first transmission of information taken place in September 2017. It has also initiated automatic exchange of tax information (AEOI) with 31 jurisdictions, under the OECD’s Common Reporting Standards (CRS). According to UAF, response time to the request for information from foreign counterparts has improved since 2012, from 250 days to 150. Recent advances on tax transparency initiatives led the Global Forum to upgrade Panama’s rating to “provisionally largely compliant in mid-2017 under its Fast Track Review process. Nonetheless, Panama must demonstrate compliance with the enhanced GF standard in the ongoing comprehensive assessment by the Global Forum.

38. Compliance with Base Erosion and Profit Shifting (BEPS) measures is advancing. As a member of the Inclusive framework on BEPS16, Panama is implementing four Minimum Standards to which it is subject to peer review and monitoring. These four standards (which are at the core of the BEPS measures) are: (i) countering harmful tax practices (Action 5); (ii) preventing treaty abuse (Action 6); (iii) implementing country-by-country (CbC) reporting (Action 13); and (iv) making dispute resolution mechanisms more effective (Action 14). Recent efforts have centered on implementing Action 5 shortcomings, primarily through legislative amendments.

Panama in International Context

39. In a select group of offshore centers and regional peers, Panama ranks above the median on technical compliance with FATF recommendations, but it is among the low performers in effectiveness.17 In the ratings of assessments conducted from late 2016 to early 2018 (against the 2012 standards using the 2013 FATF methodology), Panama fared well on the quality of its AML/CFT framework, among a select group of offshore centers and regional peers. Panama was rated ‘Compliant’ in one-quarter of the 40 recommendations, same as the median of the group, and ‘Largely Compliant’ in 22 recommendations, better than the median. However, Panama is lagging most comparators on the effectiveness of the regime, perhaps because most of the recent revisions to the AML/CFT framework have not be sufficiently tested given that Panama’s technical framework was strengthened in 2015.

40. The Global Forum’s ratings suggest that Panama’s performance on tax transparency needs strengthening, especially when compared to other jurisdictions.18 The authorities have implemented initiatives to strengthen information exchange for tax purposes (see paragraph 37), which led the Global Forum to provisionally upgrade Panama’s overall rating from ‘Non-compliant’ to ‘Largely Compliant’ under its Fast Track Review Process in mid–201719. However, the Global Forum has maintained the ratings of the essential individual components from the Phase 2 assessment published in November 2016, pending a comprehensive assessment, which started in September this year.

uA02fig03

Compliance with FATF and Global Forum Standards

Citation: IMF Staff Country Reports 2019, 012; 10.5089/9781484394069.002.A002

Source: Official data from FATF, and the Global Forum, and Staff calculations.

E. Critical Areas for Further Reform

41. Despite recent progress, GAFILAT’s latest assessment pointed out important areas in the AML/CFT framework for further strengthening:

  • Criminalization of tax evasion. Panama’s tax to GDP ratio is relatively low, at around 10 percent of GDP, compared to peers. A 2017 study by the authorities indicates that Panama is one of the few jurisdictions where tax evasion is an administrative, rather than a criminal offence (see CNBC 2017b). It found that most Latin America countries classify tax evasion as a criminal offence, unlike Panama. The non-inclusion of tax crimes as underlying ML offences significantly hampers the authorities’ domestic AML/CFT efforts and information sharing with foreign counterparts. This should be addressed in line with FATF recommendations.20

  • Transparency of legal persons and arrangements. Existing regulations do not sufficiently guarantee adequate, timely, accurate and up-to-date beneficial ownership information of entities established in Panama. Only Information of beneficial owners that control 25 percent or more of an entity are required to be kept by law. Access to ownership information is difficult to secure where a resident agent has lost contact with a corporate entity, and where entities lack physical presence in Panama.

  • Large number of dormant entities. These entities, in most cases, have cut-off relationship with the resident agent and ceased paying their yearly existence corporate fee. The resident agent is the primary source of information on their activity and their beneficial owners at the inception of the relationship, as required by CDD under Law 23. There are some concerns about the timeliness and reliability of the information in the Public Registry, which in some cases is not always up-to-date21.

  • Customer due diligence (CDD) obligations of resident agents. The law is not clear regarding the scope of customer due diligence to be conducted by resident agents, partly because of perceived tension in the provisions of a special law (Law No. 2) and the AML law (Law No. 23). Despite bringing resident agents under Law 23, the scope of CDD measures under Law No. 2, appears limited, for example, it requires resident agents to conduct due diligence measures for entities for which they have an ongoing professional relationship, and in the application of such measures, are not obliged to verify the accuracy of the information provided by their client regarding the activity of the company, neither are they strictly required to identify the final beneficial owner.

  • Financial Intelligence. Despite ongoing efforts to register reporting entities in the UAF online platform, registrations of DNFBPs is relatively low, contributing to low filing of suspicious transaction reports. Compared to financial institutions, DNFBPs are not fully up to speed in effectively implementing compliance measures, due to low risk awareness given that oversight of the sector is relatively recent. Moreover, the timeline allowed by law to report STR is rather long, 15 days after detection22. Furthermore, the UAF’s processes appears less oriented towards producing usable financial intelligence of interests. There is low dissemination of available products for use by relevant prosecutors and law enforcement agencies.

  • AML/CFT Statistics. Information compiled are not systematic, comprehensive and readily available through the designated national authority (the UAF), partly reflecting weaknesses in the national statistical system. There is coordination gap between the UAF and some data generating authorities.

42. Weak implementation undermines the strength of Panama’ AML/CFT framework. The low and moderate ratings on the effectiveness of the AML/CFT framework indicates that financial integrity objectives are not being met. GAFILAT found that Panama has not demonstrated sufficient results in important areas including the understanding of risk, transparency of legal persons, and financial intelligence.

43. Oversight is inadequate, particularly for DNFBPs. While there is scope to further enhance AML/CFT oversight generally, the regulation and oversight of this sector is complicated by the very large number of entities and professionals that operate in this sector. The intendency for DNFBPs was only created in 2015 and available resources are inadequate. In this context, further developing risk-based tools will be critical to prioritize efforts.

F. Priority Actions and Way Forward

44. Moving forward, continued strong efforts are needed to maintain the business model and secure Panama competitive position as international financial and business services center:

  • Further reinforce the AML/CFT framework in line with the GAFILAT assessment and FATF recommendations. The near-term priority should be to correct shortfalls in the AML/CFT regime, build on the recent favorable technical assessment by GAFILAT and demonstrate sufficient progress in effectively implementing the legal framework. Panama must avoid public listing by FATF/OECD and the potential consequences. The authorities should expeditiously criminalize tax evasion and make tax crimes a predicate offense to money laundering in line with FATF recommendations.

  • Improve transparency of corporate vehicles. Concrete actions are needed in this area where Panama was found to be particularly weak and highly vulnerable to money laundering. To ensure the availability of beneficial ownership and accounting records of Panamanian entities, the authorities should clarify the role of resident agents, keep the public registry up to date, expedite the dissolution of legacy entities, and remove any impediments to timely access to information. They should take measures to remove any appearance of secrecy in the law.

  • Strengthen AML/CFT supervision. Effective implementation of the AML/CFT framework must remain a priority. It will be important to enhance the understanding of AML/CFT risks to which Panama is exposed, particularly in the highly vulnerable sectors, which will help devise strategies to mitigate AML/CFT risks. Strengthening supervisory capacity for AML/CFT oversight, particularly for DNFBPs is critical. Further development of risk-based approaches to AML/CFT supervision will be essential to effectively channel available resources to critical areas, in view of the high number of financial and non-financial intermediaries in Panama.

  • Build a strong financial intelligence knowledge and capabilities. Continuously educate reporting entities of their AML/CFT compliance obligations. Strengthen the capacity of the UAF to gather, analyze and disseminate intelligence products useful for prosecution and investigation of money laundering offences. Maintain consistent and comprehensive AML/CFT statistics, including through enhanced coordination among competent authorities.

  • Enhance information exchange. Efforts to further enhance tax transparency and information exchange should continue, towards a successful ongoing assessment by the Global Forum. Implementation of the minimum standards on Base Erosion and Profit Shifting (BEPS) should advance at a faster pace.

G. Concluding Remarks

45. Panama is an important provider of international financial and business services, capitalizing on its key strengths, including its strategic location. Its business model, founded on banking, logistics and trade activities, has transformed the economy into one of the most vibrant in Latin America. While this model has served Panama well, the nature of products and services offered leaves the country vulnerable to money laundering, including from corruption, drug trafficking and other predicate crimes, such tax crimes committed abroad.

46. In recent years, the authorities have made progress in strengthening financial integrity and tax transparency. The authorities are very much aware of the importance of combating money laundering. In this regard, they have passed series of legislations in the past few years, bringing Panama’s technical compliance closer to global standards on AML/CFT. Specifically, the AML/CFT framework was revamped in 2015 to prevent risks of misuse of products and services offered by financial, non-financial and professional business entities as instruments for money laundering and financing of terrorism. The new framework provides for a risk–based approach for AML/CFT supervision, appropriate mitigating mechanisms, and measures to facilitate international cooperation. AML/CFT supervision has strengthened with the creation of new intendency in 2015 and greater allocation of resources and training. The legal framework and institution for tax information exchange has been enhanced, including with IMF technical assistance, which has facilitated timely sharing of information with foreign counterparts (recently under the Foreign Account Tax Compliance Act, FATCA and OECD’s Common Reporting Standards).

47. Nonetheless, efforts must continue to improve the effectiveness of their AML/CFT framework, enhance tax transparency and solidify Panama’s competitive position. Considering the remaining gaps identified in this paper, the authorities should demonstrate good progress in fully aligning its AML/CFT framework with international standards before the next FATF plenary in February next year to avoid being listed as non-cooperative jurisdiction by mid–2019. Specifically, the authorities should expeditiously criminalize tax evasion in line with FATF recommendations and take concrete steps to improve the transparency of corporate vehicles. It will be important to continue strengthening the effectiveness of their framework as well as enhancing AML/CFT supervision, especially for DNFBPs. Efforts to further improve tax transparency and information exchange should continue, including advancing the implementation of the minimum standards on Base Erosion and Profit Shifting (BEPS).

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1

Prepared by Joel Okwuokei with assistance from colleagues from the LEG Department, including Kathleen Kao, Richard Berkhout, and Francisco Figueroa.

2

See Chapter 1 of this SIP and Beaton, K. and Hadzi-Vaskov, M. (2017) on the analysis of Panama’s growth performance.

3

National Commission Against Money Laundering, Financing of Terrorism and Financing of Proliferation of Weapons of Mass Destruction (CNBC).

4

British Virgin Island (BVI) and Hong Kong, SAR are the other two jurisdictions.

5

It is understood that some of these entities were created to execute a transaction and has a life span of 3–5 years, and because dissolution triggers charges, the owners decide to discontinue paying the franchise fee and abandon the company.

6

Besides the license issued for professional practice by the Fourth Chamber of the General Affairs of the Supreme Court of Justice of the Republic of Panama.

7

While various studies have attempted to measure illicit proceeds generated from criminal activity, such as money laundering, estimates are to be treated with caution. This paper does not attempt a comprehensive review of the literature, which are mostly outdated, but looks at some estimates reported by the UNODC to provide some perspectives on the likely scale of money laundering.

8

Cross-border positions by location of banking office.

13

The report was published in February 2014.

14

Pursuant to the Foreign Narcotics Kingpin Designation Act. (https://www.treasury.gov/press-center/press-releases/Pages/jl0450.aspx)

15

This phase 2 review focused on the practical implementation of international standards for transparency and exchange of information on request, during a three-year period (1 July 2012 to 30 June 2015) as well as amendments made to Panama’s framework since the Phase 1 review (in September 2010) up to 12 August 2016.

16

Panama became the 87th member in October 2017.

17

The list of countries and jurisdictions include: Bahamas, Barbados, Canada, Costa Rica, Ireland, Isle of Man, Macao SAR, Malaysia, Mexico, Panama, Samoa, Singapore, Switzerland, USA, as well as, Australia, Cuba, Jamaica, Fiji, Guatemala, Honduras, Mongolia, Nicaragua, Thailand, Trinidad and Tobago, and Vanuatu.

18

Reflecting data availability, the list of countries and jurisdictions include the first 14 in the previous footnote as well as: Bahrain, Bermuda, Brazil, British Virgin Islands, Cayman Islands, Chile, Colombia, Hong Kong SAR, Luxemburg, Seychelles, Turks and Caicos.

19

Panama’s rating following the Fast Track Review Process reflect a rigorous review process and is based on input from its peer but it did not involve an on-site visit and does not substitute a full peer review, which the Global Forum has initiated in September 2018.

20

There is pending legislation, in second debate, before the National Assembly to criminalize tax evasion and to bring tax crimes in the scope of money laundering offences.

21

All dormant entities which have been so identified by the Tax Authority (Dirección General de Ingreso) have a side notation in the public registry, an evidence of default with their obligation under Panamanian Law.

22

There is pending legislation, in second debate, before the National Assembly to require that STR be reported “Promptly”.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Panama: Selected Issues
Author: International Monetary Fund. Western Hemisphere Dept.
Volume/Issue:
Volume 2019: Issue 012
Publisher:
International Monetary Fund
ISBN:
9781484394069
ISSN:
1934-7685
Pages:
88
DOI:
https://doi.org/10.5089/9781484394069.002

Panama: OFC Portfolio Investment Liabilities

June 2017

Panama: Top 15 Banks by Asset Side: Country of Ownership 1/

(2016Q4; in percent of total assets of top 15 banks by asset size)

Panama: Cocaine Trafficking Routes

Panama: Global Cocaine Trafficking Flows

Technical Compliance with the 40 FATF Recommendations

Compliance with FATF and Global Forum Standards