Banking Law In Panama
Panama introduced a new and comprehensive banking law (which covered local
trust companies as well) in February, 1999, replacing one that had been in place
since the 1960s. The National Banking Commission that previously issued licenses
was replaced by a Superintendency which comprises a Board of 5 Directors and
In addition to increased investigative powers, the 1999 law tightened general
controls and regulations, and brought the country’s supervision more in
line with the regulatory standards found in European and American banking centres.
Three additional laws passed in 2003 increased Panama's defences against financial
crimes, money laundering and terrorism (see below).
Panama has, at the time of writing, concluded mutual legal assistance treaties
with the US, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Colombia.
The treaties operate at the administrative level: in other words, Court procedures
are not required, although there is an appeal procedure. The treaties cover
serious crime, but do not include fiscal crime. The Panamanian authorities do
not entertain requests for information on fiscal matters.
In December 2002, the Panamanian Legislative Assembly approved the Financial
Crimes Bill (Law No. 6 of December 6, 2002), which established criminal penalties
of up to ten years in prison and fines of up to one million dollars for financial
crimes that undermine public trust in the banking system, the financial services
sector, or the stock market. The penalties criminalized a wide range of activities
related to financial intermediation, including the following: illicit transfers
of monies, accounting fraud, insider trading, and the submission of fraudulent
data to supervisory authorities.
With support from the Inter-American Development Bank, Panama began to implement
a Program for the Improvement of the Transparency and Integrity of the Financial
System. This Transparency Program was targeted, through enhanced communication
and information flow, training programs, and technology, at strengthening the
capabilities of those government institutions responsible for preventing and
combating financial crimes and terrorist financed activities.
Panama and the United States have a Mutual Legal Assistance Treaty that entered
into force in 1995. The government has also assisted numerous countries needing
assistance in strengthening their anti-money laundering programs, including
Guatemala, Costa Rica, Russia, Honduras, and Nicaragua. Panama also hosted the
Seventh Hemispheric Congress on the Prevention of Money Laundering in August
2003. Panama is active in the multilateral Black Market Peso Exchange Group
In March 2002, the Panama signed the cooperation agreement issued by the working
group as part of a regional effort against the black market system.
Panama is a member of the Organization of American States Inter-American Drug
Abuse Control Commission (OAS/CICAD), the Caribbean Financial Action Task Force
(CFATF), and the Offshore Group of Banking Supervisors. The UAF is a member
of the Egmont Group.
Panama is a party to the 1988 UN Drug Convention. Panama is a signatory to
11 of the UN terrorism conventions and protocols. During 2002, Panama became
a party to the UN International Convention for the Suppression of the Financing
of Terrorism, and in 2000 signed, but has not yet ratified, the UN Convention
against Transnational Organized Crime.
According to a comprehensive global money laundering report by the US State
Department in March, 2006: 'Panama is a major drug-transit country, and particularly
vulnerable to money laundering because of its proximity to major drug-producing
countries, its sophisticated international banking sector, its U.S. dollar-based
economy, and the Colon Free Zone (CFZs). Some goods originating in or transshipped
through the CFZ are purchased with narcotics proceeds (mainly via dollars obtained
in the United States) through the Colombian Black Market Peso Exchange.
'Despite significant progress to strengthen Panama’s anti-money laundering
regime, Panama must remain vigilant to the threat that money laundering continues
to pose to the stability of the country’s legitimate financial institutions.
'After Hong Kong and the British Virgin Islands, Panama has the highest number
of offshore-registered companies, approximately 350,000.'
The OECD and FATF Black-Lists
In the summer of 2000, Panama was included by the OECD and the FATF on their
'blacklists', and along with other offshore jurisdictions was given a year to
conform or face financial sanctions.
The blacklisting of Panama as a country alleged to facilitate the passage of
so-called "hot money" spurred a flurry of activity from the financial
centre. Following the publication of the FATF list, a government-led consultative
group made up of banking, security and law enforcement representatives, met
weekly to review existing banking regulations and hammer out proposed changes.
Recommendations included extending the current list of offences linked to money
laundering to cover arms trafficking, kidnapping, extortion and contraband.
In July of that year, the US Department of State published details of 'advisories'
issued against the so-called FATF 15, including Panama. The Treasury said the
advisories, prepared in collaboration with other Group of Seven (G-7) partners,
were not sanctions. The G-7 countries would consider taking measures against
those countries that continued not to cooperate, it added. The fact sheet said
each advisory would remain in effect until the identified country brought its
policy against money laundering into line with international standards.
That September, Panama sent a high-level government delegation to four European
countries in a bid to improve its international standing in the wake of its
inclusion on the FATF list.
Panama's Foreign Minister at the time, Jose Miguel Aleman explained that: 'The
aim of the visit is to demonstrate to our counterparts (in Europe) the seriousness
with which Panama takes the issue ... and to show them by diplomatic means the
priority which Panama is giving to resolve it.'
The Panamanian delegation was headed by the then Deputy Foreign Minister Harmodio
Arias and Special Ambassador for International Services Carlos Cordero, and
met authorities in France, Germany, Spain and the UK.
New Legislation Fails To Pacify The FATF
In October, 2000, with just two days to spare before the FATF commenced a series
of talks in Madrid to discuss plans to step-up its global fight against money
laundering, and to review the improvements that tax havens had undertaken in
their attempts to be removed from its blacklist, the Panama government unanimously
endorsed legislation to bring the jurisdiction into line with international
anti-money laundering regulatory standards.
The new legislation extended the maximum penalty for money laundering to 12
years imprisonment. In addition, it enlarged upon the definition of money laundering
crimes to include the proceeds of all serious crime, instead of the previous
limitation to drug trafficking offences. Furthermore, all financial institutions
in Panama were brought under the watchful eye of the bank superintendency.
Previously only banks were legally bound to report financial transactions over
US$10,000 and other suspicious activities. However, as criminals can launder
their money through other outlets, the new laws required casinos, estate agents,
insurers, the stock exchange, companies in the Colon free zone and even the
national lottery to also disclose transactions of more than US $10,000.
Ruben Arosemena, chairman of Panama's Congress Justice Committee at the time,
said that the new legislation was 'a clear message that Panama is among the
countries that have adopted rigid legislation against this crime. At the end
of the day it will also strengthen our financial centre and free zone, to avoid
them being penetrated by money laundering.'
When the FATF met in Madrid, it praised seven of the 15 financial centres listed
on its blacklist for their endeavours in the global fight against money laundering,
including Panama. However, the FATF made it clear that the list would not be
amended until 2001. Patrick Moulette, FATF executive secretary at the time,
said he was pleased by the seven centres' swift reaction.
He announced: 'The steps taken are very encouraging because in many instances
the responses have been very rapid'. Then FATF president Jose Maria Roldan echoed
his words: 'We are generally pleased with the positive steps taken by many jurisdictions
named in June as non-cooperative. It remains, however, premature to remove any
from that list.'
The FATF stated that: 'The FATF Plenary must be satisfied that the jurisdiction
has addressed the deficiencies previously identified. The FATF will rely on
its collective judgement, and will attach particular importance to reforms in
the area of criminal law, financial supervision, customer identification, suspicious
activity reporting, and international co-operation. As necessary, legislation
and regulations need to be enacted and have come into effect before removal
from the list can be considered.'
The Panamanian government welcomed the FATF's recognition that money laundering
laws had been expanded, but was annoyed at the organisation's decision to keep
Panama on the blacklist while it saw how the changes actually worked, arguing
that this amounted to the unfair addition of an extra condition that wasn't
part of the original demands for change.
In an interview with a local newspaper, the Panama News, Minister of Economy
and Finance at the time, Norberto Delgado suggested that Panamanians should
forget about the blacklists and think about the country.
He added that the blacklist didn't affect the government's ability to get loans
or deal with the International Monetary Fund. He stated: 'I think that Panama
has demonstrated that it has a serious and responsible financial system. In
recent days I have spoken with various investors, including discussions with
members of the IMF, and explained all of the regulations and laws that this
country has to avoid whatever irregularity. They're norms that they don't have
in other countries.'
In Mr Delgado's opinion, Panama had done and was doing all that it could to
stop the laundering of drug trafficking proceeds and the recent reforms to the
money laundering laws were only the most recent of many efforts toward that
end. He added that the international investors with whom he had spoken viewed
Panama as a politically stable democracy with good conditions for smooth economic
development. He continued: 'On the world stage, Panama is a prestigious country
that's taken seriously. I'm confident that these problems are passing'.
Then Foreign Minister José Miguel Alemán however was more concerned
with the FATF's reluctance to proceed, suggesting that it was a worrisome sign
that the FATF had decided that before a country can be taken off of its blacklist,
it must prove the effectiveness of new legal norms. He said quite categorically
that the amendments to Panama's money laundering laws met the conditions imposed
by the FATF and thought that inclusion on the blacklist was bound to have a
negative effect on Panama's image and economy.
But Victoria Figge, the former director of Panama's Financial Analysis Unit,
suggested that it was unrealistic to expect that Panama could get off the blacklist
just by passing new legislation, pointing out that Panama's problematic image
at that time was not just a reflection of the country's laws.
The US Helps Panama To Become Compliant . . .
In January, 2001, a team of US experts made a three-day visit to Panama to
discuss the implementation of the country's new anti-money laundering measures
with Panamanian officials.
US State Department spokesman, Richard Boucher, said that the talks were "technical"
and their purpose was to 'better understand Panama's recent anti-money laundering
reforms and offer advice on implementing these reforms.'
Mr Boucher pointed out that the US team's visit to Panama bore no connection
with the work of the Financial Action Task Force (FATF). The main concern of
the US was that Panama's new laws were implemented properly and comprehensively.
Mr Boucher stated: 'Panama's new anti-money laundering measures are encouraging
progress toward meeting international norms of cooperation against money laundering,
but as with all such measures, comprehensive and effective implementation is
key to their success. This interagency team, which includes representatives
from the US Departments of Treasury and Justice and the Federal Deposit Insurance
Corporation, can provide Panama with expert counsel on implementation.'
. . . But The FATF Holds Out
When it met in Paris in February, 2001, the FATF again said it welcomed the
'significant additional progress' made by most of the 15 jurisdictions it had
identified as non-cooperative in the global fight against money laundering,
but said that no jurisdiction had satisfied its criteria enough to be removed
from the blacklist.
The organisation's president at the time, José María Roldán,
stated that: 'Our goal is for countries to deal constructively with the gaps
in their anti-money laundering systems. We do not want to keep them on the list
any longer than necessary. Close monitoring of the remaining legislative and
implementation issues will be crucial in determining an appropriate time for
a jurisdiction’s removal from the NCCT list.'
In a press release, the FATF explained that it viewed enactment of necessary
legislation and the promulgation of associated regulations as essential and
fundamental first steps for jurisdictions on the list. Once this framework was
in place the jurisdictions would be invited to submit proposals for implementing
the changes. 'To this end,' stated the FATF, it had 'further elaborated a process
by which jurisdictions can be delisted at the earliest possible time.'
Panama's History Would Not Be Denied
While Panama waited expectantly for delisting by the FATF, history made itself
known in the shape of Peruvian investigators, trying to hunt down funds believed
to have been stashed away in Panama's banking system by Peru's former President,
Alberto Fujimori, and its former head of intelligence, Vladimiro Montesinos.
Montesinos had become the subject of Swiss investigations when the Swiss Banking
Commission announced that it was to carry out an enquiry into the conduct of
five major banks with links to Montesinos, with Swiss banking giant UBS believed
to be at the centre of the investigation. Then the Cayman Island's Grand Court
froze more than US$33m in accounts held by Montesinos and other prominent Peruvians
in the jurisdiction.
From Cayman, the trail led to Panama, where the investigators enlisted the
help of judges, Banking Superintendant Delia Cárdenas, officials from
the Public Ministry and members of Panama's Legislative Assembly to track down
the misappropriated funds.
According to reports published in Lima at the time of the investigation, the
$430m which Peru claimed was missing had been deposited in an account at the
Banco Exterior, which had since merged with BBVA, on Fujimori's personal orders.
In June 2001, the FATF finally removed the first four countries from its blacklist:
the Bahamas, Cayman Islands, Liechtenstein and Panama.
The US Treasury almost immediately issued revised instructions to banks and
other financial institutions, announcing that its Advisories were no longer
necessary, due to the enactment and implementation of new anti-money laundering
This effectively meant that US based banks and other institutions did not need
to apply enhanced scrutiny to transactions involving Panama, although James
F. Sloan, the director of the Financial Crimes Enforcement Network (FinCEN)
at the time, warned that the withdrawal of the advisories did not: '...relieve
institutions of their pre-existing and on-going obligation to report suspicious
activity, as set forth in regulations issued by FinCEN and by the federal bank
September 11th, 2001
Panama, like other offshore jurisdictions, found itself put to the test after
the September 11th atrocities in the US. After allegations were made in Switzerland
regarding the possible connection between Saudi dissident Osama Bin Laden, and
the financial services company Al Taqwa Management which was established in
Panama in January, 2001, the authorities launched a full investigation.
The Swiss newspaper which raised the alarm alleged that the company had been
under suspicion for three years in Switzerland, but sufficient evidence linking
the Swiss branch to terrorist funds had never been found.
The country's financial analysis unit, the UAF, ' focussed all its efforts
and resources to detect any transaction on behalf of these organisations that
could clarify this or any other situation that indicates the incorrect use of
the banking and financial sector,' said a spokesman.
Panama's speedy response to the Swiss allegations helped its reputation enormously.
The banking sector, which an unnamed diplomat in the NY Times described as
having been 'dogged by a long history of neglect and indifference', immediately
sprang into action, as the Executive Vice-President of the Banking Association
explained: 'When the 11th happened, we immediately got in touch with all the
banks and said terrorist activities are now on the front page,' said Mario de
Diego. 'We always said we were committed to helping in this fight.'
Dalys Teran, the head of the country's financial analysis unit, said that no
evidence of illegal activity had been turned up, although names and photographs
of suspected terrorists and criminals had been posted by compliance officers
in banks, and traces put on some transactions. 'Panama cannot afford to have
a bad reputation,' Ms Teran explained at the time. 'We are a service economy.
You have to give service but with adequate controls. That is what we are doing.'
Still, none of this was enough in the eyes of offshore publisher David Marchant,
quoted in the UK's Independent newspaper in October 2001 as saying: "If
I wanted to launder money, the three domiciles that I would consider using are
Panama, Nevis and Grenada,"
Panama's banking superintendent Delia Cardenas wrote to the paper to protest.
" I was surprised and dismayed to read the article 'The sun goes down
in tax-free paradise'," wrote Ms Cardenas, "in which the scope, strength
and sophistication of our system of banking supervision and regulation, as well
as the drive and determination of our country to co-operate in the prevention
of and fight against money laundering, is put in doubt. Specifically, the article
states that Panama is considered to be an attractive jurisdiction to the underworld
and that this country is extremely corrupt, with legislation which is not enforced
"As you should be well aware, we have been receiving very high marks from
the Financial Action Task Force (FATF), as well as other bodies with recognised
expertise, authority and credibility in addressing money laundering issues,
precisely because of our great efforts in this area. As a result, Panama is
no longer included in the list of countries whose banking legislation is inadequate
to fight against money laundering and other financial crimes; in addition, our
country has demonstrated that, as a matter of state policy, it is committed
to preventing its international banking centre from being used in criminal activities."
Major Changes Planned To Panama's Banking Sector
Despite Panama's delisting by the FATF, the authorities launched a $1.2 billion,
two year program in February, 2002, designed to put a stop to international
money laundering activities through the country's banking sector.
According to the country's Banking Superintendency, new measures taken in by
the action plan included more effective monitoring and reporting of suspect
transactions, greater information exchange with the US Federal Bureau of Investigation,
tougher prison sentences for money launderers and terrorist financiers, and
the establishment of a regional committee to improve regulation of Panama's
The country's free trade zone, casinos, and gaming halls would also be subject
to increased scrutiny as a result of the program.
'We aim to find out just how much money is laundered via Panama today and put
an end to it,' Panama's Banking Superintendent at the time, Delia Cardenas,
In April, 2002, a report suggested that Panama's banking industry was nearing
full compliance with the Basle Committee's recommendations on regulation. Following
a concerted effort to improve the jurisdiction's reputation as an international
banking centre, the sector at that time met 23 of the 25 Basle principles on
banking supervision and best practice, said the report, and the country's banking
regulator had designed a working plan to ensure that the industry was compliant
with the two remaining recommendations by the end of the year.
Capping a year of significant progress, Panama was also delisted by the OECD
in March, 2002, having signed a 'commitment' letter shortly before the agency's
final list of jurisdictions was due to be issued.
The government identified the combating of money laundering as one of five
goals in its five-year National Drug Control Strategy issued in 2002. The Strategy
commited it to devoting $2.3 million to anti-money laundering projects, the
largest being institutional development of the UAF.
Also in 2002, the Institute of Autonomous Panamanian Cooperatives, UAF, and
the US Embassy Narcotics Assistance Section cosponsored a roundtable on money
laundering that offered practical training to financial institutions to assist
them in meeting the reporting requirements under Law No. 42. Both private and
public sector officials responsible for enforcement of money laundering laws
participated in a number of training events during 2003.
Law No. 50 of July 2003 criminalized terrorist financing, and gave the UAF
responsibility for prevention of this crime. There are no legal impediments
to the government's ability to prosecute or extradite suspected terrorists.
In May, 2006, a Nicaraguan court blocked an attempt by Panama to try the former
President of Nicaragua, Arnoldo Aleman on money laundering charges, by granting
him an injunction against extradition.
The ruling, issued by the Appeals Court of Managua, meant that Aleman would
be unlikely to have to stand trial in Panama on charges that he stole money
from the Nicaraguan Treasury and laundered it through a series of Panamanian
companies and bank accounts.
Aleman, who led Nicaragua from 1997 until 2002, and several of his associates,
were accused at a preliminary hearing by Panama's anti-corruption prosecutor,
Mercedes de Leon, of using some 60 Panamanian companies to conceal the transfer
of more than US$58 million from the Nicaraguan Treasury into Panamanian bank
Judge Adolfo Mejia wrote on May 15 2006 that there were also "sufficient
indications of links" between Aleman, his wife, Maria Fernanda Flores de
Aleman, her father, Jose Antonio Flores, and former Nicaraguan internal revenue
chief Byron Jerez.
Jerez was also granted protection against extradition by the Nicaraguan appeals
court, the President of which also happened to be a member of Aleman's Liberal
Aleman also faced a civil trial in Miami over allegations he purchased US bank
certificates with money stolen from Nicaragua's government, according to an
Associated Press report.
Aleman has already faced corruption charges in his own country and in December
2002 he was sentenced to a twenty-year prison term for a string of crimes including
money laundering and embezzlement. The sentence was, however, reduced to house
arrest thanks to the influence of Liberal Party loyalists in parliament, and
he is now theoretically on probation while he appeals the corruption convictions.
The EU's Savings Tax Directive and the OECD
When the EU's Savings Tax Directive deal was agreed in January, 2003, Panama
wrote to the OECD putting on hold any further actions to fulfil the 'commitment
letter' it had signed. Here is the text of the letter:
Republic of Panama
Ministry of Economy and Finance
Office of the Minister
Panama, 28th January 2003
Note No.101-097 DMEyF
Mr. Donald Johnston
Secretary General of the Organization for Economic
Cooperation and Development
2 Rue André Pascal
75775 Paris, Cedex 16
Dear Mr. Secretary General :
The Government of the Republic of Panama writes to you once again to address
the matter of the European Union's directive regarding savings that was approved
by the Council of Ministers of Economy and Finance of the fifteen member nations
You will remember that last December our Vice Minister of Economy, Mr. Domingo
Latorraca, had advised you of the Government of Panama's deep concern in light
of the preferential conditions that such exchange of tax information directive
would grant to Austria, Belgium and Luxembourg, as well as to Switzerland (which
does not form part of the EU), all these being members of the OECD.
Upon confirming that the proposal made by the above EU president has been basically
adopted such that the above-mentioned countries will not exchange tax information
on savings accounts with other EU members - nor with OECD members - until 2010,
the Government of Panama reiterates its rejection of such action, as it directly
violates the principle of equality envisaged in the often discussed concept
of a "level playing field" that is the essential basis for the undertaking
signed by my government, in good faith, to participate in the studies of the
OECD's effective tax information exchange project at its Global Forum.
This situation is even more untenable upon confirmation that one of the arguments
put forth to justify the granting of a "special" treatment to these
three EU members by their community partners is the defense of their economic
interests as providers of international financial services.
My Government has learned that the government of Antigua and Barbuda and that
of Saint Vincent and the Grenadines have asked the Secretariat General of the
OECD to call, as a matter of urgency, a meeting of the Global Forum in order
to assess the future of the studies on the matter of tax information in light
of the serious damage that a measure such as that adopted by the EU implies
for this multilateral effort, as well as the damage that would be done to all
the participants who have in good faith signed undertakings regarding this matter
and whose economic interests as providers of international financial services
are equally important, particularly since they are for the most part developing
The Government of Panama supports the proposal made by Antigua and Barbuda,
since technical studies such as those of the Ad Hoc Group on Accounts are being
made on premises that have presumably been established on a political level,
such as absolute compliance with the principle of equality or of a "level
playing field". These studies cannot be continued inasmuch as there is
not absolute certainty that the conditions shall be equal for all participating
Consequently, the Government of Panama joins in the statement made by the Government
of Antigua and Barbuda and evidences its view, in light of the change in the
conditions set down for carrying out the studies of the Global Forum, that it
does not deem it appropriate to respond to any document sent by the OECD until
such time as a meeting of all OECD countries and all non-OECD jurisdictions
that participate in the Global Forum shall be held in order to assess and decide,
together, whether there are sufficient grounds and guarantees from all the OECD
countries so as to allow the studies on the effective exchange of tax information
project to continue.
We look forward to your reply on this matter and remain
(sgd.) Norberto Delgado D.
Minister of Economy and Finance
The previous November, Mr Aleman had launched a strong attack on what he called
the OECD's 'imperialistic agenda' at the International Bar Association Conference
in Durban, South Africa, calling for a level playing field between OECD members
and offshore economies, and distinguishing between countries such as Panama
and jurisdictions which are dependent territories of larger states.
Extracts from Mr Aleman's speech:
'The Republic of Panama is a real sovereign state. The OECD reports on this
topic have mixed sovereign states, members of the community of nations, with
jurisdictions yet to become real participants of international diplomacy. Located
in Central America, and a small country with only 75,517 square kilometers and
2.8 million inhabitants, Panama is nonetheless a member of the United Nations
and an independent sovereign state since 1903.
'For better or for worse, Panama's economic development is conditioned by significant
factors. These are: the nonexistence of natural resources, the smallness of
its territory, the existence of the interoceanic waterway, and the use of the
U.S. currency as means of monetary transactions since 1903.
'As a consequence, the Panamanian economy has oriented itself towards the services
sector. Panama has developed a competitive advantage which has allowed it to
grow and improve economic standards locally – a legitimate aspiration
for any sovereign state - thanks to this industry. Indeed, the services sector
amounts to over 75% of GNP and has contributed to make of Panama one of the
most trade and open economies in the World, - a goal pursued by the OECD.
'The Panamanian economy has consolidated itself as an international services
provider thru the establishment of a banking system, a regime for insurance
companies, the existence of the largest duty free zone in the western hemisphere,
a stock market, corporate legal principles which were born out of those in the
United States such as the Law of Corporations, a trust and a leasing system,
a shipping registry which is the largest and most advanced in the World, and
the existence of legal principles for the promotion and protection of private
investment, intellectual and industrial property.
'Panama is, for those and other reasons, a real international provider which
collects a significant amount of income from the different duties and taxes
collected from those activities which in no case are by any means fictitious
or unregulated, as the OECD reports have repeatedly reported.
'As any developing country in the region or anywhere else in the world, Panama's
tax system includes some tax incentive regimes. This is no secret. Their objective
is legitimate: to attract local and foreign investment to particular sectors
of the economy. These regimes were not set out to facilitate tax evasion in
other countries as the OECD reports pretend to say. Ironically, and contrary
to common belief, tax evasion is punished with imprisonment by Panamanian legislation,
something the OECD Secretariat does not believe.
'In applying tax law, Panama follows the principle of territoriality. This
is an internationally recognized principle of taxation which is followed by
other countries in the region which are not labeled as "tax havens".
As you all probably know, industrialized OECD members follow a more ambitious
tax principle. The domicile principle. This principle implies the extraterritorial
application of the sovereignty of states outside its borders in order to tax
all transactions of their nationals and residents anywhere in the World.
'Panama applies the principle of territoriality to residents and non-residents
alike, thus, it is wrong to state that Panama has a preferential tax treatment
for all income generated abroad. In applying the territoriality principle, Panama
understands, and respects, the sovereign right of other nations to tax incomes
of its nationals when they are generated from transactions conducted in those
foreign nations. This could very simply support Panama's argument that its tax
system does not promote tax evasion.
'In 1996, the G7 group of nations expressed concern about tax schemes in developing
countries to attract financial activities. This, they argued, was a "harmful
tax practice". A competition, I would say, only harmful to industrialized
economies with very expensive social agendas.'
Mr Aleman went on to explain the conditions under which Panama had agreed to
make a 'comittment' to the OECD after inclusion on its list of 'harmful' jurisdictions.
'The conditions set out by Panama included that the OECD would treat all countries
and jurisdictions participating in the Initiative, members and non-members,
equitably. In addition, Panama's commitment would not affect its tax autonomy
and would prevent its inclusion in any new list of uncooperative tax havens.
Panama would also be invited to participate on equal footing in any fora called
to discuss the design of internationally accepted standards and would not be
forced to collect taxes on behalf of anyone.
'Finally, Panama asked that those jurisdictions which would not commit to the
Initiative or would not comply with its objectives, whether OECD members or
not, would be subject of coordinated defensive measures.
'As long as these conditions are met, Panama is willing to cooperate on both
fronts of the Initiative: Exchange of Information and Transparency. As a committed
jurisdiction, Panama has accepted to implement a series of actions in these
two fronts such as the implementation of legal mechanisms to provide information
on criminal matters by the 1st of January of 2004 and on civil matters by 1st
January 2006, or mechanisms to ensure that information on benefitial ownership
of companies, partnerships and other legal entities.'
Mr Aleman complained that as a result of the OECD's initiative, many countries
had applied discriminatory sanctions against Panama.
'At present, Panama's international trade is seriously affected by the measures
applied by Mexico, Argentina, Venezuela, Brazil, Spain and Italy. Peru has recently
removed all measures against Panama.
'In all these countries tax laws, Panama is identified as a tax haven. Some
of the effects of the various tax and administrative measures applied against
the services provided by Panama are the inability of banks domiciled in Panama
to provide financing to residents; the application of higher taxes, duties or
administrative requirements for investments made by Panamanian corporations;
the inability of residents to deduct as expenses for purposes of income or corporate
tax, any payment for services provided by Panamanian nationals or customs restrictions
to services and goods arriving from Panama.
'These measures, as you can well imagine, affect day after day the competitiveness
of Panama as a service provider. This is a situation which our government is
handling with concern. As a sovereign nation, Panama has rights which protect
it from these type of unilateral and arbitrary actions by other nations. As
a service provider and a member of the World Trade Organization, Panama is giving
serious thought and analysis to this situation from the perspective of WTO law.
'It is clear to me and my country that the industrialized economies, exporters
of capital and place of residence to most of the transnational corporations
and investors, feel threaten and fiscally harmed by the same free trade policies
'Panama is a nation politically organized around a democratic system which
tries to grow into a first class international service center, believing its
role in international trade is of a service provider and not of a harmful tax
'There is no doubt in my mind that Panama's tax system is consistent with internationally
recognized legal principles of taxation in existence in other nations not unfairly
classified as tax havens. Let me reiterate that our tax system was not enacted
to facilitate tax evasion but to consolidate Panama's economy as a service provider
for international trade.'
Mr Aleman concluded: 'Panama will cooperate with the OECD in matters of transparency
and exchange of tax information because it wishes to preserve its image, competitiveness
and integration in the global world. Panama does not want to be labeled anymore.
However, this cooperation will be based upon the principle of level playing
field. Any and all measures proposed by the OECD must be implemented by, both,
members and non-members of the OECD.
'I do not want to finish without repeating some of my first words, as I think
it is important to remind ourselves and the world that Panama is a real sovereign
nation, a real developing economy with a real tax system. Panama is not, I repeat,
is not a tax haven. It is an international service center wishing to compete
on equal footing with others around the world.'
The Caribbean Financial Action Task Force
In 2003, Panama continued to make progress in fighting money laundering, and
played a full role in the work of the Caribbean Financial Action Task Force
(CFATF), whose members are 'highly committed to supporting the international
fight against money laundering and terrorist financing', according to CFATF
executive director, Calvin Wilson.
Mr Wilson announced that the CFATF, in conjunction with the Inter-American
Development Bank, and the governments of Costa Rica, the Dominican Republic,
Panama, and Venezuela, was preparing to spend around US$100,000 on training
front-line finance industry officials from the public and private sectors in
the latest anti-money laundering techniques.
'Money launderers have a powerful incentive to attempt to circumvent anti-money
laundering controls, and therefore there is a need to continually provide updated
training in monitoring and detecting to respond to the challenges facing banks,'
Mr Wilson observed.
He went on to add that the programme would also provide regional banking regulators
with the opportunity to share experiences of how to maintain the integrity of
anti-money laundering systems.
Developments In 2006-07
In July 2007, Financial Secretary to the UK Treasury, Jane Kennedy on Wednesday
announced details of the UK's treaty negotiating priorities for the year to
31 March 2008.
Ms Kennedy stated that:
"I am pleased to announce the programme of work on double taxation conventions
for the year to 31 March 2008. The UK has a comprehensive network of bilateral
conventions and is committed to maintaining and strengthening this network.
Double taxation conventions provide an agreed framework for individuals and
businesses when dealing with overseas tax systems."
In a statement on the matter, HM Revenue & Customs confirmed that that:
"We plan to complete work on new DTCs with the Faroes, Macedonia, Moldova,
Slovenia and Thailand; and on Protocols with Australia, Mexico, New Zealand,
South Africa and Switzerland. We also plan to complete work on new Tax Information
Exchange Agreements (TIEAs) with Jersey, Guernsey, the Isle of Man, Anguilla,
Bermuda and the British Virgin Islands."
"We intend to progress negotiations with Bahrain, the Cayman Islands,
China, Croatia, Germany, Hungary, Luxembourg, Libya, Netherlands, Peru and Saudi
With regard to planned new talks, the tax authority revealed that:
"We have plans to commence negotiations with the Turks & Caicos Islands,
the Netherlands Antilles, Aruba, the Bahamas and Panama on TIEAs. We will make
further announcements about DTC talks with other jurisdictions as and when arrangements
are in place."
Later that year, in October, the Organisation for Economic Cooperation and
Development (OECD) published two new reports outlining the progress made so
far in its campaign against tax evasion.
'Improving Access to Bank Information for Tax Purposes – the 2007 Progress
Report' described developments in OECD countries and six others (Argentina,
Chile, China, India, the Russian Federation and South Africa) with respect to
access for tax authorities to bank information.
Meanwhile, 'Tax Co-operation: Towards a Level Playing Field – 2007 Assessment
by the Global Forum on Taxation' compared the legal frameworks for international
tax co-operation of 82 OECD and non-OECD economies. It is the second in a series
of factual reports by the OECD’s Global Forum on Taxation, which was formed
as part of the OECD’s efforts to curb 'harmful' tax practices.
The Organisation observed that:
"Many financial centres, both onshore and offshore, are making progress
in improving transparency and international co-operation to counter offshore
tax evasion, but some still fall short of international standards that have
been developed over the last seven years."
The OECD went on to suggest that significant restrictions on access to bank
information for tax purposes remain in three OECD countries (Austria, Luxembourg
and Switzerland) and in a number of offshore financial centres (e.g Cyprus,
Liechtenstein, Panama and Singapore). It further argued that a number of offshore
financial centres that committed to implement standards on transparency and
the effective exchange of information standards developed by the OECD’s
Global Forum on Taxation have "failed to do so".
“No one country or even a small group of countries can address the issue
of harmful tax practices on their own,” commented Paolo Ciocca, chair
of the OECD’s Committee on Fiscal Affairs and co-chair of the Global Forum.
“This is a global challenge which requires a global response. In co-operation
with partner financial centres, that is what OECD is seeking to achieve.
Developments In 2008-09
Senior Democrats in the House of Representatives have said that Congress will
not ratify the pending free trade agreement between the United States and Panama
until certain issues relating to tax and banking secrecy laws in the Central
American country are settled.
Rep. Charles Rangel, the New York Democrat who chairs the influential House
Ways and Means Committee, which has jurisdiction over tax and trade laws, issued
a statement on March 25, 2009 confirming his reservations about Panama's 'tax
“As I have discussed with the government of Panama and the US Ambassador
to Panama, there are remaining outstanding issues that need to be addressed
and actions that need to be taken by Panama before Congress considers the FTA,"
he announced. "These include specific actions to meet ILO labor standards
and resolution of the tax haven issue now being discussed by our two governments.
I hope these actions will be taken soon.”
Rangel's statement echoed views expressed by Rep. Sander Levin, the Democratic
Chairman of the Ways and Means Subcommittee on Trade in a speech to the Washington
International Trade Association, where he spoke of "outstanding issues"
that must be resolved before passage can occur.
Levin confirmed that discussions about "issues relating to Panama’s
laws and practices regarding tax havens" were underway.
In a letter dated May 20, another Levin, this time Senator Carl Levin, the
Michigan Democrat with an offshore axe to grind, co-signed a letter with Congressman
Lloyd Doggett, a Texas Democrat, urging President Obama to make approval of
the Panama FTA “contingent on Panama’s cooperation with efforts
to combat international tax evasion.”
“In this time of economic distress, we can no longer afford to ignore
the billions of dollars of tax revenue lost to the US Treasury due to the bank
secrecy practices of Panama and other tax havens,” they wrote. “Implementing
an agreement on trade while ignoring Panama’s status as one of the world’s
recognized tax havens would not only undermine your efforts to address offshore
tax evasion, but would also thwart the best opportunity our nation will have
to obtain cooperation from a country that has resisted for years American efforts
to encourage changes to its secretive banking and regulatory practices.”
Dogget and Levin claim that the US Treasury loses USD100bn a year in tax revenues
to offshore jurisdictions. However, this figure is much disputed and even Internal
Revenue Service Commissioner Doug Shulman admitted in testimony to the House
of Representatives Appropriations subcommittee that such ‘tax gap’
calculations are nothing more that “wild estimates” using “pretty
Following the G-20 London Summit, Panama was named on the OECD ‘grey
list’ of jurisdictions that agreed but not yet “substantially implemented”
its tax standard. To achieve elevation to the OECD’s ‘white list’
a country must sign Tax and Information Exchange Agreements with a minimum of
12 other countries. Unsurprisingly, the United States appears on the OECD ‘white
list’ despite concerns from ‘grey-listed’ such as Luxembourg
and Switzerland that company laws in some states, including Delaware and Nevada,
appear to directly contradict the transparency standards that the federal government
claims to uphold.
Panama has yet to enter into any bilateral or multilateral tax data sharing
agreements, but according Senator Max Baucus, the Montana Democrat who chairs
the Senate Finance Committee, which has jurisdiction over federal tax and trade
laws, Panama has “made clear” that it intends to address this situation
and he called on administration to send the agreement to Congress as soon as
“Both the current and incoming administrations in Panama have made clear
that they are willing to take the necessary steps to change their tax laws and
share tax information with the United States,” Baucus said in May 2009.
Senator Chuck Grassley, the ranking Republican on the Finance Committee, said
during a committee hearing that he welcomed a report claiming Panama’s
Vice President has committed Panama to negotiating a legally binding instrument
some time in 2009 to facilitate the exchange of tax information with the US.
However, he argued that such an undertaking should not be a pre-condition of
the trade agreement being sealed.
“I fully support concluding a Tax Information Exchange Agreement with
Panama as soon as possible,” he said. “But I don’t see why
our exporters should have to pay for that agreement with lost export opportunities,
which is exactly what’s happening.”
Dogget and Levin are the authors of a hard-line anti-offshore bill known as
the Stop Tax Haven Abuse Act which would, among its many provisions, treat foreign
corporations managed and controlled in the United States as domestic corporations
for income tax purposes, create a ‘blacklist’ containing 34 jurisdictions,
and dramatically strengthen penalties against tax shelter promoters.
While the Dogget/Levin bill faces competition from less stringent proposals
due to be introduced by Baucus, Obama was a co-sponsor of an earlier version
of the Stop Tax Haven Abuse Act while sitting in the Senate in 2007, and has
placed elements of these legislative proposals in his 2010 budget. These include
elimination of ‘check the box’ rules for US companies with offshore
subsidiaries and more onerous reporting requirements for businesses and individuals
with offshore financial arrangements.
The Panamian government was not very fast in making efforts to conform to the
OECD's new 'listing' requirements announced in 2009.
In July, 2010, the Panamanian government finalized negotiations in Luxembourg
ahead of the signing of a treaty to avoid double taxation between the two countries,
announced deputy economy minister, Frank De Lima, who led the negotiating team
With the closure of negotiations, Luxembourg joins eight other nations with
which Panama has successfully advanced negotiations, which may allow Panama
to be removed from the Organization for Economic Cooperation and Development
De Lima said that Panama had signed treaties so far with Mexico, Barbados and
Italy following the visit of President Silvio Berlusconi. Negotiations are set
for July with Portugal, August with Singapore and Korea, September with Ireland
and October with the Czech Republic.
Negotiations may also commence with Canada, Bulgaria, Hungary, Portugal, the
UK, Cyprus, Germany, and Switzerland.
In August, 2010, Panama’s Deputy Economy Minister, Frank De Lima said
that by the beginning of 2011 Panama should be placed on the Organization for
Economic Cooperation and Development’s (OECD's) white list of territories
that have substantially implemented the internationally agreed standard for
transparency and tax information exchange through the signing of comprehensive
Double Tax Agreements (DTAs).
He said negotiations with South Korea for a convention for the avoidance of
double taxation had commenced on August 13 and negotiations with Singapore were
to begin that week. The conclusion of these two agreements, De Lima said, would
bring Panama’s tally of such OECD model agreements to twelve, satisfying
the criteria for white list placement.
According to De Lima, to date Panama has agreed the text of double taxation
treaties with France, Italy, Belgium, Spain, Luxembourg, the Netherlands, Qatar,
Portugal, Mexico and Barbados, but has only signed the latter two. Panama is
also in negotiations for similar agreements with Ireland, the Czech Republic,
Canada, Bulgaria, Hungary, Britain, Cyprus, Germany and Switzerland.
In September, Panama will conclude talks on a text with Ireland, and in October
with the Czech Republic, De Lima disclosed. Also in October, Panama’s
Vice President and Foreign Minister, Juan Carlos Varela is to undertake an official
tour of Europe, signing treaties with Italy, Spain, France, Portugal and Luxembourg.
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