PANAMA: WORLD CLASS TAX HAVEN
PART 7 of 9 - Excerpted from 'Tax Havens of the World' - by
Walter H. & D.B. Diamond.
Banking and Foreign Exchange
Long recognized as a commercial beehive of Central America since
it was a converging point of world steam-ship lanes, Panama had
similarly developed into a banking and foreign exchange center.
The National Banking Commission and the Government's wholly owned
commercial bank, Banco Nacional de Panama (BNP), manage and supervise
Panama's central banking functions. With the closing down of most
banks during the 1988 political strife resulting from the Noriega
upheaval, a number of major foreign banking offices and branches
left the country, but virtually all have returned. Before this
political and economic turmoil took hold of the Republic, Panama's
banking system, patterned after the United States banking system,
had increased to more than 120 commercial banks. Under Panama's
revised banking legislation, any transaction exceeding $10.000
must be scrutinized by the bank involved to make certain it has
not evolved from money laundering operations. The United States
and Panama also signed a Mutual Legal Assistance Treaty covering
money laundering. The United States failed to persuade Panamanians
to include tax evasion in the treaty because they fear it would
prove disastrous to the offshore banking business. Signing the
agreement has made Panama eligible for $80 million in United States
aid which otherwise would have been subtracted from the total
grant of $420 million.
Inspired by the 1970 banking law, which guarantees free movement
of funds and lower taxes, more than 30 foreign countries have
been represented with commercial banks in Panama. Despite the
run on banks during the height of the Noriega crisis, only three
banks closed and the banking industry survived without "suffering
permanent damage." Total number of companies registered has
soared to more than 285.000.
Banking Recovery
Since the end of the Noriega regime deposits have recovered to
some $30 billion and total loans and advances are up 50% to $15
billion. However, domestic credits still are down because of the
lagging economy. More than 6,000 Panamanians are employed by the
banks, with 85 foreign banks operating in Panama. Net assets of
foreign banks grew by $8 billion in the last five years and their
level of liquidity is high. Of the 120 banks officially registered,
more than 70 provide full domestic and foreign services, 29 are
licensed strictly to conduct international operations and the
remainder are representative offices. A number of major American
banks have opened branches in Panama in order to provide their
customers with financing outside of the United States and to facilitate
the use of Eurodollar borrowings. Many banks use their Panamanian
branches to channel Eurodollars into Central and South American
markets, while some of the banks are also active in financing
trading. Numbered accounts are available at local banks. Offshore
loans and most agricultural credits are exempt from Panamanian
income tax.
Under the 1970 reform regulations, which weeded out offshore
"pirate" banks, the Banking Commission (Comision Bancaria
Nacional) issues bank licenses; sets reserve requirements and
supervise the banking system in other ways. Every foreign licensed
bank must keep a minimum of 500,000 balboas ($500,000) on deposit
at all times to guarantee it can cover its obligations. This consists
of deposits at the Banco Nacional de Panama, government banking
bonds, or assets free of encumbrances and those designated by
the National Banking Commission. The 500,000 balboas ($500,000)
are considered as part of the 1 million balboas ($1,000,000) capital.
Bank licenses are issued in three categories: License 1, for full-service
banks that serve both residents and non-residents of Panama, which
must have the minimum paid-in capital of 1 million balboas ($1,000,000)
and contingent lines of credit equal to 10% of their assets in
Panama; license 2, for offshore banks, which require minimum capital
of 250,000 balboas ($250,000); and License 3, for foreign banks
having only representative offices in Panama.
Panama Banking Law (Decree Law No. 9) 1998
Panama's revised banking law came into force in June 1998 with
the stated intent of strengthening and modernizing bank regulation
up to Basle Committee standards while maintaining an autonomous
regulatory environment. Panama's banking industry hopes that the
position taken by the Superintendent of Banks created in the Law
will be made with complete impartiality in view of the fact the
appointment is made by the President's office without the right
of the Assembly to advise and consent, making such a power potentially
easy to abuse. The Banking Superintendency replaces the old Panamanian
Banking Commission and is granted not only greater supervisory
powers but also the ability to authorize the transfer of shares
in a bank when such a transfer affects the control of it. A Superintendant
also possesses the capacity to authorize mergers or consolidations
of banks and the inspection of the economic groups of which the
bank is part.
A restriction is imposed by the Law on the granting of credit
facilities to one natural of juridical person where such facilities
or warrants exceed 25% of the bank's capital regardless of whether
the loan is totally guaranteed with money deposited in the bank.
These sweeping changes were designed to improve confidence in
the banking system and to encourage deposits from foreigners.
Allowances will also be made for foreign regulatory authorities
to file requests for information and make inspection visits to
the offices of foreign banks located in Panama for the purposes
of regulation and supervision. Agreements are to be facilitated
between foreign regulatory authorities and the Banking Superintendency
as well.
Other provisions include the following that are designed to improve
depositor, investor and consumer protection:
- The effective interest rate of all loans must be specified;
- Abusive clauses in banking agreements will be addressed;
- Banks are required to file additional audited statements;and
- The bank liquidation process will be simplified.
Banking confidentiality is also guaranteed by the new Law.
Fees for banks located in Panama and those that have representative
offices will be paid on the following basis:
General licenses – 30,000 balboas ($30,000) plus a sum of
35 balboas ($35) for each million on total assets up to a maximum
of 100,000 balboas ($100,000)(25,000 balboas ($25,000) under previous
laws).
International licenses – 15,000 balboas ($15,000)(same as
under previous law).
Representative licenses – 5,000 balboas ($5,000).
There are also conditions for minimum capital requirements to
carry out the banking activities based on Basle standards, minimum
assets to be maintained in Panama, description of activities incompatible
with those of banking and a number of other requirements enacted.
Numbered Accounts
The bank act permits numbered bank accounts and sets severe penalties
of a fine of up to 10,000 balboas ($10,000) and a jail sentence
of up to six months for anyone who discloses information except
to the Court in a criminal proceeding. Judges and magistrates
must keep the facts confidential while a case is under investigation
and may decide never to release the facts. However, in 1987 the
National Assembly passed a bill requiring banks to furnish information
on financial transactions of suspected drug dealers and allowing
their numbered bank accounts to be frozen. Disclosure is required
for cash transactions exceeding 10,000 balboas ($10,000) under
anti-money-laundering measures enacted in 1990. The Banco Nacional,
the Panamanian counterpart of a central bank, is the depository
of government funds and manages Panama's international reserves.
It also operates as a commercial bank and handles the clearing
operations for the banking system.
The $100 annual fee levied on corporations also is applied to
branches of foreign banks. In addition, there is a banking tax
of $300, monthly for each banking office located in Panama City
and a municipal charge of approximately $30 annually. The clearing
house fee is $350 per month for each member. The annual tax on
a License 1 bank is $25,000 balboas ($25,000), and 15,000 balboas
($15,000) for a License 2 bank. An annual license tax equal to
1% of paid-in capital is also imposed up to a maximum of 20,000
balboas ($20,000).
Anti-Money Laundering Laws Strengthened
Although Panama was one of the first Caribbean countries to adopt
strict anti-money laundering measures, its provisions did not
satisfy the three international groups that in 1999 issued "report
cards" on offshore jurisdictions' performance. Not only was
Panama described as "harmful" by the Organization for
Economic Development and Cooperation (OECD), but it also landed
on the "black list" issued by the Financial Action task
Force, and was graded "uncooperative" and not up to
international standards by the Financial Stability Forum.
To prevent a disastrous withdrawal of foreign investment, Parliament
engaged in damage control by passing two important laws in October,
2000: Law No. 41, entitled "Capital Laundering," amends
the Penal Code to expand the scope of anti-money laundering measures
to capital laundering," which includes all serious crime
ranging from drug trafficking to white slavery and extortion.
Cabinet Decree No. 10 of March 9, 1994 made it mandatory for persons
entering Panama to declare to Customs the amount of cash or negotiable
instruments carried into the country. Since then, bank transactions
exceeding U.S. $10,000 in cash or similar exchange have hade to
be registered and declared. Law No. 41 of 2000 extended these
requirements to include all transactions of more than $10,000
by the stock exchange, casinos, insurers, real estate agents,
and the national lottery. Data is now submitted to the newly-created
Financial Intelligence Unit for the Prevention of Crime and Capital
Laundering (FIU). Law No. 42, also of October 2, 2000, set down
the bill for Prevention of the Crime of Capital Laundering. Under
Legislative Decree No. 42, natural persons and corporate bodies
must declare to the Financial Intelligence Unit (1) cash deposits
exceeding 10,000 balboas ($10,000), (2) cashing or exchanging
lower denominations of currency for higher denominations, or vice
versa; and (3) cashing checks and payment orders issued to bearers
with blank endorsements and issued on or close to the same date.
Presidential Decree No. 163 of October 2, 2000 amended Decree
No. 136 of June 9, 1995, extending the operational capacity of
the Financial Intelligence Unit by listing in detail the Unit's
functions for: (1) covering collection of information from public
institutions and private entities; (2) identifying suspicious
or unusual transactions by studying information; (3) exchange
of information with similar enterprises in other countries; and
(4) providing assistance when required to the Office of the Attorney
General and Banking Superintendency.
Confidentiality Still Protected
Executive Decree No. 213 of October 2, 2000, which established
the Financial Intelligence Unit for the Prevention of Capital
Laundering, covers disclosure of information concerning trusts
obtained by the Banking Superintendency or any other Government
inspectors and introduces penalties for breaches of confidentiality
in all financial matters. A public official violating this provision
may have to pay a fine up to $1,000,000.
Under a Panamanian law passed in 1994 with the help of the Panamanian
Bar association, money laundering is penalized with prison sentences
recently raised to a maximum of 12 years, no bail for defendants,
and confiscation of assets. Bank employees are subject to criminal
responsibility if found guilty of allowing any money laundering
or bending the rules for extradition of offenders in drug-related
cases.
Banks and other financial institutions must practice proper due
diligence under Panamanian law. They are required to know their
clients, monitor and report suspicious transactions of which they
are aware, establish internal procedures and controls to prevent
money laundering operations, train personnel properly to deter
tainted transactions, and keep records of all documents and transactions
for a period of five years.
The July 27, 1994 Law was further strengthened by Executive Decree
No. 468 of September 19 of that year, and the Code of Conduct
approved by the International Lawyers Association, which makes
it mandatory for all attorneys to know their clients and to obtain
sufficient information and references from clients before rendering
any services. A high-level Presidential Commission operates with
authority to use all means to prevent money laundering and a so-called
"Drug czar" coordinates its efforts with other activities
to promote anti-money laundering.
A "Financial Analysis Unit (FAU) for the Prevention of Money
Laundering Obtained from Drug Trafficking" operating under
Executive Decree No. 136 of June 9,1991 has been successful in
compiling information from banks and other private and Government
entities and individuals to inhibit activities linked to money
laundering. In 2000, the FAU received increased authority to analyze
all information compiled to detect suspicious or unusual transactions
and movements of cash in the country from drug trafficking. Confidentiality
of all financial and banking transactions is honored in order
to protect the respectable status of the FAU.
Panamanian authorities have also taken drastic action to help
prevent illicit money laundering operations and crime in the Colon
Free Zone. In 1996, the Government issued a decree requiring all
transactions in the Zone exceeding U.S.$10,000 to be declared
and it also halted receipt of such traditional payments as money
orders, traveler's drafts and third party transfers.
Captive Finance Companies
Under the Panamanian banking legislation, so-called "captive
finance companies" are encouraged to provide available funds
and support cash flow requirements by offering a useful tool to
finance semi-durable and durable products and stockpiling of goods
through fully-recourse paper and collateral loans. In its efforts
to become a still more important financial center in the Western
Hemisphere, Panama created a rediscount counter for export credits.
Initial capital was subscribed to by various Latin America Central
banks whose Finance Ministers are supporting the Panamanian plan.
There are no exchange is the United States dollar, which is freely
interchangeable with the Panamanian monetary unit, the balboa.
The balboa is at par with the United States dollar.
Documents are now being processed normally for most letters of
credit and collections drawn on Panamanian buyers, with delays
on receiving funds longer than 60 days. Meanwhile, the United
States Treasury has eliminated regulations that made it nearly
impossible for United States companies to survive in Panama. A
ruling published in the Federal Register permits "administrative
fees and taxes paid in connection with basic business activity"
to be processed. The action by the Treasury is said to have come
as result of pressure and complaints from the American Chamber
of Commerce in Panama.
Transfer of Funds and Guarantees
There are no levies or controls on transfer of funds. Investment
guarantees on nationalization or expropriation and against inconvertibility
of currency are available through the Overseas Private Investment
Corporation in the United States.
