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Panama: Banking Confidentiality

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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 a Superintendent.

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 Directive.

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.

At Last!

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 laws.

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 supervisory agencies.'

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 at all."

"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 banking sector.

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, explained.

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 accounts.

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 Party.

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
France

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 last week.

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 countries.

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 jurisdictions.

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

Yours sincerely,
(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 they promote.

'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 regime.

'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 Arabia."

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 haven' status.

“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 broad numbers.”

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 possible.

“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 for Panama.

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 grey list.

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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