A. Background

1. Panama is 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. It is a country with an open, dollarized economy which, as a regional and international financial and corporate services center, offers a wide range of offshore financial and commercial services. The Panamanian financial platform has been under scrutiny for some time, with the criticism intensified following the inclusion of Panama in the grey list of the FATF in June 2014², and the document leak related to the Mossack-Fonseca scandal in April 2016.

2. The authorities made a high-level commitment to enhance Panama’s financial integrity and strengthen its AML/CFT regime. Panama conducted a national ML/TF risk assessment in 2016 to identify potential threats, vulnerabilities, and consequences. The results of the risk assessment were used to prepare the 2017 national AML/CFT strategy, supported by IMF technical assistance, the National Strategy to Combat Money Laundering, Terrorism Financing and Weapons of Mass Destruction Proliferation. The authorities closely cooperate with the Financial Action Task Force of Latin America (GAFILAT) and other relevant international supervisory bodies.³

3. While no specific cases of terrorist financing (FT) have been identified to date, the FATF assesses Panama as vulnerable to FT risks. The country is a key transit hub which attracts a fair share of migratory flows.⁴ Panama’s proximity to Colombia heightens FT concerns amid the recent reactivation of FARC and resurgence of armed conflict in that area. To this end, Panama’s 2017 national strategy recognizes its vulnerability to terrorism financing without the proper safeguards. For example, the Colon Free Trade Zone (FTZ) is the second largest in the world and may be exposed to the passage of weapons or dual-use goods in the absence of appropriate regulations and surveillance mechanisms. The preliminary conclusions of the risk assessment update, which is currently underway jointly with the World Bank, show FT risks shifting from “low” to “medium” in Panama, especially in the corporate sector, as transactions of medium and small companies operating in the FTZ lack adequate onsite supervision.

B. Recent Developments

4. Panama was placed on the FATF’s grey list for monitoring by the ICRG after the June 2019 plenary⁵. Due to lack of compliance on 9 out of the 11 immediate outcomes on effectiveness (details discussed below), the FATF designated Panama as a “jurisdiction with strategic deficiencies”, placing it under ICRG monitoring until major deficiencies are resolved and reassessed. In response, the Panamanian authorities adopted an action plan that made commitments to:

• Strengthen their understanding of the national and sectoral ML/TF risks and improve national policies to mitigate these risks;

• Proactively take action to identify unlicensed money remitters, and ensure effective, proportionate, and dissuasive sanctions again AML/CFT violations;

• Ensure adequate verification and update of beneficial ownership information, establish an effective mechanism to monitor the activities of offshore entities, assess existing risks of misuse of legal arrangements to define and implement specific measures to prevent the misuse of nominee shareholders and directors, and ensure timely access to adequate and accurate beneficial ownership information;

• Ensure effective use of its Financial Intelligence Unit (FIU) for ML investigations, demonstrating their ability to investigate and prosecute ML involving foreign tax crimes and to provide constructive and timely international cooperation with such offences.

5. Exiting the FATF grey list is macro-critical for Panama. In the absence of policy action, corresponding bank relationships risk being severed, which in turn would dry up foreign credit and limit domestic lending, squeezing bank margins and increasing credit risk. This would inevitably dampen economic activity, with potentially long-lasting negative effects. In addition, the reputational damage that the new administration may sustain if exiting the grey list protracts beyond the targeted dates (after the February or June 2021 FATF plenary, as communicated in the press) can undermine its capacity for reform and weaken its political influence.

6. Panama continues to make progress on technical compliance with the FATF recommendations.⁶ GAFILAT’s latest mutual evaluation report (MER)⁷ noted Panama’s progress to improve its technical compliance by: (i) addressing the deficiencies of technical compliance identified in 2017; and (ii) implementing new requirements where the FATF recommendations have changed. The MER recognized the authorities’ continued progress in addressing outstanding AML/CFT deficiencies and concluded that four FATF recommendations can be rerated from “Partially Compliant” to “Compliant”, and seven more recommendations demonstrated “improvement of the technical compliance” albeit without rerating.

Panama: Reporting of Suspicious Activity and FATF Compliance

Citation: IMF Staff Country Reports 2020, 125; 10.5089/9781513541679.002.A002

Sources: Panama’s Financial Intelligence Unit, and the Financial Action Task Force of Latin America (GAFILAT).

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Panama: Reporting of Suspicious Activity and FATF Compliance

Citation: IMF Staff Country Reports 2020, 125; 10.5089/9781513541679.002.A002

Sources: Panama’s Financial Intelligence Unit, and the Financial Action Task Force of Latin America (GAFILAT).

• Download Figure
• Download figure as PowerPoint slide

Panama: Reporting of Suspicious Activity and FATF Compliance

Citation: IMF Staff Country Reports 2020, 125; 10.5089/9781513541679.002.A002

Sources: Panama’s Financial Intelligence Unit, and the Financial Action Task Force of Latin America (GAFILAT).

• Download Figure
• Download figure as PowerPoint slide

7. Committed to exit the FATF grey list by 2021, Panama made significant steps to improve its legal framework in 2019 and 2020. In chronological order, these include:

• Enacting Law 70 criminalizing tax evasion and the laundering of tax evasion proceeds by adding it to the Criminal Code and modifying the Tax Code (on January 31, 2019). This implies that when the tax office has information that in a calendar year an amount of US$300,000 or above has been evaded, the Tributary Administrative Court can be notified with the appropriate evidence to file a criminal case through the prosecutor’s office. Tax evasion is punishable with a prison sentence of between two and five years, as well as a financial penalty of between two and ten times the amount evaded.

• Passing resolution 002–2019 imposing greater controls on financial transactions by strengthening due diligence to detect fiscal crimes (on April 11, 2019). The document, issued by the Superintendence of Banks of Panama, regulates rules on customer profiles, resident agent profiles, and suspicious operations for banks and other fiduciaries.

• Launching a new anonymous platform to report incidents of money laundering (on May 16, 2019). Panama’s Financial Analysis Unit (UAF), jointly with Crime Stoppers (a community-based crime-reporting program), created an online platform designed to anonymously report information about who, when, how and where citizens suspect of laundering money. The platform gained traction with the public, generating 43 reports of suspicious activity to date.

• Passing an amendment to the tax evasion legislature (Law 87 of October 2019 modifying article 288-J of the Criminal Code) which introduces criminal punishment for repeat tax offenders. The amendment is aimed at corporations and other legal entities and grants exemptions from jail time only if the defrauded amount is returned during the investigation phase and if it does not exceed US$300,000.

• Signing a statement of intent with France, creating a working group to cooperate on fiscal and financial transparency and AML/CFT measures (on November 28, 2019). Specifically, the agreement focuses on the adoption of more efficient mechanisms for the exchange of fiscal information between the two countries.⁸

• Introducing criminal penalties for unlicensed money remitters (Law 123 passed on December 31, 2019), including imprisonment from 5 to 8 years.

• Creating the Superintendence of Non-Financial Entities (Law 124 passed on January 7, 2020). The law elevates the previous intendance to superintendence status. It was created to strengthen the supervision of non-financial businesses and professions (most notably, FTZs, lawyers, construction and real estate companies). This autonomous agency also conducts training and onsite inspections of relevant entities in the nonfinancial sector.

• Suspending delinquent corporations from public registry (via Executive Decree 905 of September 20, 2019). In January 2020, 381,000 legal entities were reportedly suspended from the public registry of Panama (out of a total of 776,000 registered companies) for failing to pay their fees for three consecutive years or not having a resident agent and will be permanently dissolved if their status is not33 regularized within 90 days.

• Approving the creation of a s3ingle registry for beneficial owners (Law 169 passed on February 20, 2020) to enhance the transparency and traceability of the ultimate beneficiary ownership data for legal entities established in Panama.

• Proposing a law requiring resident agents to obtain and maintain financial statements of companies established in Panama but operating abroad, and to submit these accounting records to the fiscal authorities upon request (more precisely, modifying Law 52 of 2016). The Ministry of Economy and Finance acknowledged in a statement on January 8, 2020 that although agreements have been signed to exchange such financial information in the past, in practice no such data are provided. The amendment aims to enforce record-sharing and enhance tax transparency.

• Establishing an AML unit within the customs administration (forthcoming in 2020) staffed with compliance officers trained to perform due diligence on suspicious transactions. To further reduce ML risk, the customs administration plans to move away from cash payments to digital transactions for enhanced traceability.

• Adopting blockchain technology to enhance transaction reporting for goods passing through the Colon FTZ (forthcoming in 2020) thus reducing FT risk. This effort is spearheaded by the customs administration.

C. Policy Priorities

8. To address the strategic deficiencies underscored by the FATF’s June decision, the authorities need to work coordinately to quickly and effectively tackle the four pillars of their action plan. On the strategic front, designing and implementing a formal communication strategy should be a key priority for the authorities in order to: (i) ensure that the authorities’ commitment to expediently address the FATF’s areas of concern is widely acknowledged, (ii) continuously update GAFILAT and all relevant parties of changes to the AML/CFT national strategy or the legal framework in a timely manner, and (iii) appraise the domestic agents of any applicable changes. Since GAFILAT is the relevant regional authority which makes country-level assessments and subsequently informs the FATF—the international standard setter on AML/CFT—efficiently liaising with GAFILAT is of utmost importance going forward. On the technical front, creating a taskforce and a roadmap for the undertaking of necessary reforms is urgent, with necessary assistance available to the authorities from experts in the field, including at the IMF.

9. While Panama’s AML/CFT regime has demonstrated much improvement in technical compliance with FATF recommendations over the years, GAFILAT’s assessment of its effectiveness remains relatively low. GAFILAT assessed Panama’s effectiveness, particularly in preventing the misuse of foreign and domestic legal entities incorporated in Panama, to be lacking. According to GAFILAT’s MER published in January 2018, the FTZ, real estate and banking are the most vulnerable to money laundering as sizable financial inflows are channeled to Panama through these sectors. The 2018 assessment shows that Panama’s AML/CFT framework is only effective (or “substantial”) in two areas (preventive measures and financial sanctions related to terrorism financing and proliferation financing). In all other areas, GAFILAT deemed Panama’s effectiveness to be insufficient (“moderate” or “low”). This covers Panama’s understanding of risk, international compliance, supervision, preventive measures, transparency of legal persons and legal arrangements, financial intelligence, money laundering investigations and prosecution, confiscation, and terrorism financing investigations and prosecution.

10. Some of the deficiencies in Panama’s AML/CFT regime will take time to address, although efforts to do so are underway. Urgent policy action in these areas needs to be undertaken in order to exit the grey list by 2021, as announced by the authorities, as well as to comply with the international standard, following FATF’s recommendations. Specifically, priorities include:

• Strengthening customer due diligence (CDD) obligations of resident agents. The passing of a comprehensive AML Law 23 in 2015, which clarifies CDD obligations of resident agents, obviates the need for the 2011 special Law 2 which is less strict on CDD requirements. Amending Law 2 (for which the proposal has been put forth by the authorities but not yet approved) would remove the legal ambiguity and subject all reporting entities in Panama, including resident agents, to abide by Law 23.

• Demonstrating the ability to criminalize tax evasion which first needs to be operationalized either though providing disclosures that proper taxes are filed and paid, or supplying copies of tax returns to relevant financial institutions – whichever option is acceptable to the authorities and approved by GAFILAT. Subsequently, should cases of tax evasion be identified, Panama’s judicial system needs to demonstrate its ability to competently investigate and prosecute such cases. Given that this law is new, the judicial system and other institutions need to develop the capacity to do so within a relatively tight timeline.

• Enhancing data transparency on beneficial ownership, building on Law 169. Panama faces significant challenges ensuring the timely availability of accurate beneficial owner information of domestically incorporated entities. Concerns over misuse of corporate vehicles led the FATF to strengthen its standards on transparency, but Panama’s current regulation falls short of these standards (in fact, Transparency and beneficial ownership of legal persons is the only FATF recommendation where Panama scored as “Noncompliant” in the latest evaluation). Specifically, only the information on beneficial owners that control 25 percent or more of an entity were required to be kept by law. Furthermore, ownership information was difficult to obtain when a resident agent had lost contact with a corporate entity, and when entities lacked physical presence in Panama. Under the new law, resident agents are required to provide beneficial ownership information for all legal entities registered in Panama. In order to pass the compliance threshold, the authorities need to demonstrate that the ownership registry is fully operational and adequately collects the required information.

• Dissolving or regularizing the large number of dormant entities. Most of the dormant corporate vehicles cut off relationships with the resident agent and ceased paying their yearly license fee. While corporate inactivity in itself is not illegal, provided all accrued fines are paid, Panama’s large share of dormant companies poses risks to the transparency of ownership information for CDD purposes. The recent action to remove 381,000 dormant entities from the public registry is a decisive and encouraging step in the records cleanup process.

• Improving AML/CFT statistics. Given the fragmented nature of AML/CFT oversight and enforcement in Panama, relevant data are not always shared in a timely manner among agencies and with third parties. While the national strategy and the UAF aim to streamline and enhance relevant information sharing, statistical data quality remains of concern. The recently created roundtables (mesas de trabajo) for AML/CFT cross-agency cooperation aim to make information sharing timelier and more accurate.

D. Conclusions

11. The newly-formed government needs to prioritize strengthening Panama’s AML/CFT regime and enhancing its financial integrity to maintain competitiveness. Building on the momentum of recent legal initiatives to enhance the AML/CFT regime, Panama’s authorities should prioritize addressing the remaining shortfalls of the legal framework, particularly in light of the FATF grey listing. In the short run, this requires urgent action to address the FATF’s recommendations outlined in the June 2019 action plan.

12. In addition to tighter technical compliance with the FATF recommendations, the authorities need to focus on enhancing the effective implementation of their legal framework and the accompanying communication strategy. Addressing deficiencies in the effectiveness of the AML/CFT regime will be challenging and more time-consuming than technical compliance, as it requires capacity building, enhanced inter-agency coordination, continuous education of reporting agencies and the public at large, as well as international cooperation. Improving these and other aspects of the AML/CFT regime will help the authorities meet their financial integrity objectives and boost Panama’s standing in the international arena.

13. Recent initiatives—legislative actions and other reforms—demonstrate that the new administration is committed to exit the FATF watchlist as promptly as possible. The authorities appear very cognizant of the reputational damage Panama stands to incur should the FATF grey listing protract. In addition to quickly scaling up regulatory measures, they are working on improving cross-agency coordination and information sharing as well as building capacity and public awareness to have better control over financial transactions and the passage of goods through the country.