24 August 2017 by Carlos Barsallo
Authorities in the country are seeking to address governance criticisms linked to the Panama Papers.
For all the bromides about the financial risks of reputation damage, the wake of the Panama Papers shows that a country’s economy can avoid significant hurt even as it is publicly maligned.
But this has not stopped Panama’s authorities from seeking to correct legal and regulatory frameworks, as well as plan discussions on tax evasion as money laundering. The question now is what impact the reforms will have.
Even before the Panama Papers, Panama had a reputation issue.
In ‘The image of Panama and the human cost of offshore’, anthropologist Brittmarie Janson Pérez commented: ‘Reading scoops about the scandal called the Panama Papers, I was reminded of the words of Guillermo Sánchez Borbón, published by La Prensa, on October 20 1982: “Panamanians live as though we are embers [always in the spotlight]. Whenever a scandal of any kind is uncovered anywhere in the world … it always jumps like a hare to muddy the name of Panama.”’
Similarly, writing in La Prensa, Panamanian professor of international affairs Carlos Guevara Mann cited historian Dr Marixa Lasso, who called Panama part of ‘this essential space of the economic world, but a part that no one wants to be associated with’.
“Panama is part of this essential space of the economic world, but a part that no one wants to be associated with”
Linking to this, Professor Mann explains that today’s offshore companies are an economic driving force for the entire world. While those in international finance benefit from their existence, they prefer not to speak of them.
The Panama Papers have exacerbated this reputation issue. In June this year, the country RepTrak – a study that measures the reputation of countries, carried out by the Reputation Institute – was published.
The results were clear: the Panama Papers had a major effect on the perception of Panama in two of the 17 attributes analysed by the study. The scores obtained in the ‘ethical country’ and ‘responsible stakeholder in the global community’ metrics were not favourable.
Despite this, on the economic front, things appear positive. Contrary to the prescribed thinking, the Panama Papers did not drive off depositors in the banks operating in Panama. According to the Superintendency of Banks of Panama, the total assets of the banking centre, as of November 2016, were US$119 billion dollars – 1.7% more than in March 2016, before the Panama Papers incident.
Alongside this, when Panama opened itself to the possibility of sharing tax information through bilateral agreements with other countries, an expected decrease in deposits in the banking centre did not occur. Instead, quite the opposite happened.
A partial explanation for this second example can be found in works such as Niels Johannesen and Gabriel Zucman’s 2013 study: ‘The end of bank secrecy? An evaluation of the G20 tax haven crackdown’.
The data shows that bilateral information exchange treaties may have initially caused the relocation of deposits between tax havens, but have not produced a significant repatriation of funds.
Between 2007 and 2011, analysis of bank deposits in 19 tax havens shows that Panama appears with an increase of 0.5%, the seventh highest. When comparing the growth of deposits and the activity of signing of bilateral information exchange treaties, Panama appears first with 80% growth. Today, Panama leads the economic growth in Latin America with 5.6% for this year.
The rating agency Fitch Ratings believes the role of Panama as a regional financial centre is increasingly disputed. The persistent corruption and money laundering could exert great pressure on access to finance, and conduct and reputational risk will remain a key issue for Panamanian banks in 2017. Competition from other centres is another key factor to consider.
More than 30% of bank deposits of general licensed banks in Panama come from abroad, mostly in Latin America. This emphasises, according to Fitch, the potential for the banks to receive funds without clear origins.
“More than 30% of bank deposits of general licensed banks in Panama come from abroad, mostly in Latin America”
However, it is recognised by key people in the financial community that the Panamanian regulators have acted quickly to improve the regulation and supervision since the Panama Papers.
For example, Panama has tried to meet requests for cooperation from the international community, the government having decided to sign the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters to boost transparency and combat cross-border tax evasion.
Panama was placed on the Financial Action Task Force (FATF) list of non-cooperative countries for money laundering and financing of terrorism, or ‘grey list’, in June 2014.
Two months later, the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Treasury Department, issued a recommendation to US institutions that they increase their controls on relations with Panamanian banks.
In many cases foreign banks chose to limit their relationships with Panamanian banks. According to the Superintendency of Banks of Panama, when the country was placed on the grey list, 36 correspondent lines were lost.
In February last year, FATF announced that Panama was no longer on the grey list. This decision was then recognised by FinCEN. This should have a positive impact on the risk perception of international banks relating to Panama.
FinCEN recognises that ‘Panama has been withdrawn from the list of the FATF and its process of monitoring because of its significant progress in establishing a regulatory framework to address all or almost all its strategic shortcomings in the fight against capital laundering and the financing of terrorism at a technical level’.
This is a positive step to improve the international image of the country and relations with foreign banks, but the recovery of the lost correspondent lines will not be immediate.
Recently, the authorities have begun to provide statistics that previously were either nonexistent or not properly collected. In November 2016, it was reported that Panamanian financial regulators and prosecutors opened 240 investigations for alleged money laundering in the past two years.
According to the statistics presented by the authorities, on average 10 investigations are opened for alleged money laundering each month. The Ministry of Economy and Finance of Panama stated that in 2015 and 2016 regulators advanced some 67 investigations for money laundering and prosecutors have conducted 173 investigations.
“In November 2016, it was reported that Panamanian financial regulators and prosecutors opened 240 investigations for alleged money laundering in the past two years”
Of these cases, 30 were in the process of final judgment, 38 have already been decided with fines and 66 have been referred to the judicial body. The Superintendency of Banks of Panama said that so far in 2017 it has imposed fines totalling some US$3.2 million dollars to different banking institutions of the country.
Showing full implementation and enforcement of new legal provisions to combat money laundering and active international cooperation is a must. However, it could be insufficient. The issue of tax evasion as money laundering is still up for discussion in Panama.
In May, the United Nations (UN) independent expert on foreign debt and human rights, Juan Pablo Bohoslavsky, after a formal exploratory visit requested by Panama, delivered his verdict on the country: ‘Now we have to focus on tax evasion and the banks must do their part.’
According to Mr Bohoslavsky: ‘The agenda of reforms in Panama must now focus on the fight against tax evasion and better regulation of the banking industry in this same field.’
He recognised ‘the important progress made by the Panamanian authorities aimed at the strengthening of financial and corporate transparency’, adding that ‘Panama now has a more robust regulatory system … which includes greater international cooperation in this area’.
In March next year, the conclusions and final recommendations will be presented in a report to the Council of Human Rights of the United Nations in Geneva.