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Panamá y la Prevención de Delitos Financieros

Participation of Dr. Eduardo Morgan Jr. in the Latin America and the Caribbean Forum on Financial Crime Prevention

January 14-18, 2013

Sponsored by the UK Office and Commonwealth Office – Embassy of the United Kingdom in Panama

Panama is proud of its legal system and of its enforcement in the daily practice, as it represents a barrier to prevent Panama from being used to hide profits from financial crime. The corrupt and the criminal need legal entities and banks to hide the money obtained through their misdeeds.

It is well known that to open a bank account in Panama means going through a burdensome procedure because of the amount of information the banks require. They are so strict that an ambassador of an OECD country complained to the President of the Republic about how difficult it was for companies of his country to use Panamanian banking services.

Not only do we comply with the rules on the control of money laundering but we also apply them in the day-to day practice. Banks will not hesitate to refer to the UAF any detected transaction suspicious of money laundering. We have no scandalous case of corruption involving large sums of money laundering in European banks, and in the United States, such as the highly publicized cases of Mexican Salinas de Gortari, the powerful drug cartels in Mexico, African dictators, Ferdinand Marcos, etc.

What we state about our banks also applies to our legal instruments.

The law of SA was established in 1927 and along with the Shipping Registry, it was the contribution of Panama to the globalization of the economy.  The flexible registration allowed maritime trade to expand by allowing foreigners to own ships and also to allow foreigners as part of the crew. This, together with our Naval Mortgages system and the security of our Public Registry, gave confidence to specialized banks to condition credit to ship owners, under Panamanian registry. At present our Merchant Marine is about 20% of the world fleet and our Public Registry protects billions of dollars in ship mortgages. Panamanian societies perform the same role for international transactions. We copied the laws of U.S. States such as the ones in Florida, New York and Delaware, not for interstate commerce as they did, but for world trade.

CHARACTERISICS OF PANAMANIAN CORPORATIONS

In Panama, the Articles of Incorporation must be made by public deed  registered in the Public Registry; they must contain, necessarily, the name and address of both, the resident agent (lawyer) and at least three Directors. In addition, it is legal obligation for the Panamanian attorney to obtain the identity of whoever is requesting the society; no shelter is provided under professional secrecy in case of an investigation.

Our law allows the company to have shares and bearer shares; it also allows the social pact to contain a ban on the issuance of these. Many banks require this ban from the contracting companies. The government also prohibits them in many regulated activities, as in the case of banking licenses.

Panama’s success rests on the judicial certainty it gives to the users of our societies, created to facilitate businesses to honest businessmen and individuals, not to hide criminals. The wrongdoer does not seek a Panamanian corporation to hide their crimes; for them it is cheaper and safer to use U.S. companies in States where not even the FBI, with all its technical capacity, are able to locate them.

That such is the case has been confirmed by the Attorney General’s Office, our highest authority in criminal matters, certified as follows:

“It is noteworthy that the Panamanian system publicizes who the directors, officers and resident agent of any society are by public record, allowing the authorities to investigate who has the final beneficial ownership of a corporation in Panama even if the shares are issued as bearer shares. An example of this are the cases in which, through the resident agent, we were able to locate the final beneficial owner of these companies, given that the agent has an obligation to “know your customer”, based on the provisions of Executive Order N. 468 of 8 September 1994”.

This certification was issued even before the adoption of Act 2 of February 1, 2011 that further strengthened the obligation of the Resident Agent to know and DOCUMENT the client. An example of this are the well known cases of Central American presidents and politicians, Vladimiro Montesinos, and others like David Murcia Guzman who tried to hide money obtained through acts of  corruption and illegal operations  shielded behind Panamanian corporations.

Let’s see what one of the highest authorities on the subject, Professor Jason Sharman, think of our corporate system in relation to international standards.  The Professor, at the request of the Faculty of Law and Political Science of the University of Panama, studied our society system with emphasis on corporate bearer shares; he then compared it to the major OECD members and competitors of Panama in the business of offshore companies. This study was requested to counteract the OECD vicious attacks to our country and the refusal of the Global Forum to give us its approval unless we eliminate, immobilize or deposit our Bearer Shares.

Allow me to read a few paragraphs from Professor Sharman’s study and let me tell you how proud I feel that the serious manner in which we manage our system has been recognized by the brilliant Professor.

Regulating bearer shares is important in ensuring corporate transparency. Yet studies of actual practice strongly indicate that Panamanian Corporate Service Providers are far more compliant with international standards than their counterparts in the United States, the world’s most important financial center and the largest incorporation jurisdiction. A review of the proposed US Incorporation Transparency and Law Enforcement Assistance Act supports the conclusion that untraceable shell companies are more common in the US than Panama.

In sum, an objective consideration of Panama’s legal and material compliance with beneficial ownership standards indicates that this compliance is superior to that of the UK and US, notwithstanding Panama’s bearer share companies.

More specifically, the applicable standards for the Global Forum in relation to the availability of company ownership information read as follows:

A.1.1: Jurisdictions should ensure that information identifying owners of companies and any bodies corporate is available to their competent authorities. Owners include legal owners, and, in any case where a legal owner acts on behalf of any other person as a nominee or under a similar arrangement, that other person, as well as persons in an ownership chain.

A.1.2: Where jurisdictions permit the issuance of bearer shares they should have appropriate mechanisms in place to allow the owners of such shares to be identified. One possibility among others is a custodial arrangement with a recognized custodian or other similar arrangement to immobilize such shares.

The relevant FATF standard dated February 2012 is the Recommendation 24, which reads in part:

Countries should take measures to prevent the misuse of legal persons for money laundering or terrorist financing. Countries should ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities. In particular, countries with legal persons that are able to issue bearer shares or bearer share warrants, or which allow nominee shareholders or nominee directors, should take effective measures to ensure that they are not misused for money laundering or terrorist financing (FATF 2012: 22).

In principle, the OECD has specified three routes to obtain beneficial ownership information: through the company registry, via a Corporate Service Provider (CSP), or through strong law enforcement powers (OECD 2001; see also FATF 2009). The latter has been identified as the least promising, in that no matter how sweeping law enforcement agencies’ investigative powers may be, if no beneficial ownership information is collected when a company is established, there is simply nothing there to be seized, especially in the case of foreign customers (OECD 2001: 84-85; FATF 2009: 6).

In few countries, if any, does the registry have the capacity, or even the will to hold and verify identity documentation on the real owner of a given company (StAR 2011: 7, 70). Prominent FATF members, including the United States, have expressed their strong opposition to any requirement whereby registries would have to maintain a record of beneficial ownership (FATF 2009: 7).

By and large it is the third option, the Know Your Customer, the rule for the professional intermediaries that form and maintain companies, the one  regarded as the most promising way to ensure the availability of beneficial ownership information (StAR 2011: 7). In turn, imposing this KYC obligation requires that said CSPs are licensed and regulated. Panama achieves this goal by restricting company formation to lawyers and law firms, and imposing a KYC requirement upon them. Many prominent OECD countries fail to regulate their CSPs, including the United States, and those that do often fail to impose a duty to know the beneficial owner of the companies established by the provider.

As can be seen from the table above, a clear majority of OECD member states (20 of 34) allow bearer shares or bearer share warrants.

From the information provided in the Tax Cooperation 2010 report, few of these countries have immobilized their bearer shares. What restrictions there are on this type of instrument seem to apply only to publicly traded companies. Yet such a restriction misses the point that it is privately-held companies that pose the far greater risk when it comes to tax evasion and other forms of financial crime.

This section makes a brief comparison of Panamanian and US compliance. It finds that although bearer shares in the United States were abolished in 2007, this has not substantively improved the poor performance of the US in relation to OECD and FATF standards on beneficial ownership, which remains markedly inferior to the performance of Panama measured against these same standards.

Why is relevant a comparison with the United States? The United States is the world’s largest economy and financial center, as well as the largest market for illicit drugs. Approximately 2 million corporations of various types are formed in the United States every year (compared with approximately 40,000 annually in Panama), many by foreigners. Given the enormous scale of general economic activity and company formation, to the extent the US does not enforce international standards in this area, the efforts of other countries will be irrelevant. The United States is the most important country in determining whether the international beneficial ownership rules are effective or not.

In 2006 two retired US IRS officials, Michael McDonald and Steven Smith, decided to directly test incorporation requirements in the United States and Panama. McDonald and Smith used a Nevada CSP to form one company in New York and another in Florida, and then opened internet bank accounts for each. They did not have to provide proof of identity, or their Social Security Numbers, and used the name of a pet dog for one of the company officers. They then used a Panamanian CSP to establish a third shell company in Panama with an associated bank account. In contrast to their experience in the United States, in Panama  Smith and McDonald had to provide notarized copies of the picture page of their passports, as well as notarized copies of their driver’s licenses. They then made wire transfers between their three shell company bank accounts, which were in effect untraceable because of the lack of due diligence carried out by the US provider. The ex-IRS officials explicitly noted how lax US standards were in comparison to those in Panama (http://www.usatoday.com/money/companies/2007-03-19-money-launder-usat_N.htm).

The example above may be dismissed as a single isolated incident, however, now somewhat dated. Yet there is a considerable volume of more recent and more systematic, evidence that indicates the continuing relevance of this case. The US government itself has produced a great deal of convincing evidence that US shell companies are routinely involved in major financial crime, both at home and abroad (GAO 2006; FinCEN 2007; Levin 2011). This extends to international terrorists (like Viktor Bout), major drug cartels, and corrupt senior officials from the developing world (US Senate 2010). The US routinely receives requests from foreign law enforcement agencies on the beneficial ownership of US corporations, about whom, frequently, the US authorities cannot supply the information (Levin 2011). A recent World Bank/United Nations Office on Drugs and Crime Stolen Asset Recovery (StAR) report noted that US corporations are being used for laundering the proceeds of corruption more than in any other countries (StAR 2011: 121).

In general terms, this last study disclosed that in reference to regulations of shell companies:

The United States is by far the worst performer. Out of 27 service providers under US jurisdiction returning a valid response, only 3 said they asked for any form of identity documentation, whereas the others (24) were prepared to form companies without conducting any due diligence whatsoever (StAR 2011: 92).

Where the Stolen Assets Recovery report and various US government publications have been forthright in their criticisms of the United States when it comes to shell companies, the Global Forum has been noticeably more deferential in ignoring or down-playing these key failures. This forgiving attitude is especially apparent with regards to the decision to allow a combined Phase 1 and Phase 2 review of the United States, in sharp contrast to the staggered and conditional progress from Phase 1 to Phase 2 imposed on Panama and many other less powerful countries.

An even larger and more recent study once again supports the conclusion that the standards of corporate regulation in Panama are significantly higher in relation to beneficial ownership than those of the United States (Findley, Nielson and Sharman 2012). The study was conducted with 21 fictitious characters, of obvious acts of corruption, money laundering and risk of financing terrorist activities; these characters requested from CSPs the formation of shell companies. Using these fake identities, the authors made 7,466 approaches to 3,773 CSPs in 182 countries to determine how easy it was to obtain a shell company without having to provide any identification documents, that is, how easy it was to obtain an untraceable shell company in contravention of global standards. The Panamanian CSPs not only required identity documents significantly more often than those contacted in the United States, but complied significantly more than those CSPs in the UK, Australia and Canada.

It is notable that, despite the major differences of scale, the studies by Smith and McDonald, the World Bank/UNODC and Findley, Nielson and Sharman all show a consistent picture whereby international beneficial ownership standards are enforced much more rigorously in Panama than in the United States. Furthermore, the latter two studies indicate that providers in other OECD countries are much more likely to violate international standards by providing untraceable shell companies than those in Panama.

Currently, the United States represents a real danger to the international financial system because of the lax or non-existent regulation of its shell companies.

Note: In 2006 the Government Accountability Office (GAO), the investigative branch of the Congress, made of public knowledge a devastating report under the title “Formations, Minimal Ownership Information is Collected and Available” on juridical persons in 50 States of the U.S.A. United; this report proved to what extent was the lack of control affecting the good name of the country. As a consequence, a project to legislate on the matter was submitted.

SHARMAN SAYS:

“The impetus for the legislation is that US CSPs are unregulated (unlike Panama), and hence under no obligation to collect and file proof of customer identity (again, unlike in Panama). As the Senator (Carl Levin) who submitted legislation had previously noted, American laxity in this domain provides ‘an open invitation for wrongdoers to form entities within the United States’, noting many examples of money launderers, corrupt officials and terrorists furthering their activities with US shell companies. Levin noted how the Bahamas, the Cayman Islands and the Channel Islands all have superior regulation on company beneficial ownership (Levin 2011).

The proposed US legislation would impose a legal duty on states to add a question to annual company renewal forms asking for the name and address of the beneficial owner, as well as a number from a US driver’s license or passport. Non-residents who do not hold a US license or passport would have to supply proof of identity with reference to a foreign passport. Supplying false information would be a felony. The information would be held either by state authorities, or registered agents. As in Panama, there would be no obligation to make this information public, though it would be provided to law enforcement agencies on production of a subpoena. This legislation would mark a welcome advance on current US under-regulation, but it would at best only bring the United States up to the standard that Panama achieved many years ago.

The main contribution of this brief is to offer a comparison of Panamanian law and practice relative to those of OECD competitors, rather than merely presenting another summary of national laws and regulations in isolation. However, it is relevant to briefly relate Panamanian standards to those now existing in the US, and those proposed in the Levin bill. Executive Decree no. 468 of 8 September 1994 created a Know Your Customer duty for Registered Agents (CSPs) of Panamanian corporations, including those with bearer shares. These Registered Agents are publicly identified in the company registry, and are regulated, in that since 1966 only a licensed lawyer or law firm may exercise this role. This obligation was reinforced by Law 2 of 2 February 2011 which creates penalties for Registered Agents who fail to carry out their KYC duties. In practice, Panamanian CSPs establish clients’ identities with reference to copies of government-issued photo identity documents, usually passports. As noted above, from the 2011 StAR report’s solicitation exercise, this system actually works in practice, in that CSPs do in fact carry out their legal KYC obligations. Thus Panama already has a functioning system for establishing the beneficial ownership of companies, including bearer share companies, that is at least as strong as that proposed under the US Incorporation Transparency and Law Enforcement Assistance Act.

Unfortunately, however, the chances of the US bill passing look small, and so the likelihood of the US meeting Panamanian standards of beneficial ownership regulation are correspondingly remote. The bill has been introduced on three previous occasions without coming close to success. Given the opposition of powerful US corporate interests, and the notable lack of any external pressure from the OECD and the Global Forum for the US to meet international standard in this area, once again the bill’s chances look slight.

In sum, the single most important country in the global financial system, the United States, is clearly inferior to Panama in its regulation of company beneficial ownership information. The fact that the US does not have bearer shares is largely irrelevant, in that anonymous, untraceable shell companies are in practice readily available from American CSPs.

In this context, it is unclear why the failure to abolish or immobilize bearer shares in Panama in and of itself is a problem. As a matter of law, most OECD countries likewise allow bearer shares, and have not immobilized them, including important financial centers like the UK. As a matter of practice, available evidence strongly suggests that Panama is significantly more compliant with international beneficial ownership standards than many OECD countries, and especially the United States. In light of this evidence, it is difficult to take the above-mentioned commitments by the OECD to fairness, consistency and objectivity at face value in its treatment of Panamanian bearer shares.”

Finally, I would like to thank all of you for the invitation to participate in this event. To end this presentation I quote the title of one of my articles:  “Panama, an example to the world”.

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