This century has seen a marked improvement in the sophistication of financial services in the Republic of Panama.  The country continues to introduce legislation that will enhance its image as an international financial services centre or, to use the usual nomenclature, offshore finance centre.  Legislation covering Private Foundations (an alternative to trusts) and Captive Insurance (first such legislation in Latin America) as well as a new banking law have been promulgated.  The new and comprehensive banking law replaces one that was passed nearly 30 years ago and it provides the last building block in a structure of services that makes Panama South America’s all-round offshore finance centre.

Very often, the quality of an offshore finance centre is gauged by the calibre of its banking laws, and on that basis the new banking law in Panama scores high.  In previous articles I have emphasised the importance of supervisory standards because the quality of a bank licence is only as good as the corresponding level of supervision.  The new law in Panama has been designed to stimulate business and although the banking sector’s assets are relatively small by international standards, nonetheless, the industry is important to Panama’s economy and accounts for about 11% of gross domestic product.  The National Banking Commission that previously issued licenses has been replaced by a Superintendency which comprises a Board of 5 Directors and a Superintendent.  The Superintendent oversees the soundness and efficiency of the banking system and endeavours to strengthen it as part of the continuing development of Panama not only as a regional, but as an international, banking centre.  The Board of Directors of the Superintendency function as a policy committee and are responsible for the establishment and implementation of the general policies of the Superintendency.  Both the Superintendent and the Board of Directors are appointed by the Executive branch of Government and none of the Directors can be practising bankers, nor can they be directors or shareholders (unless the shareholding is under 5%) of any bank that is subject to Panamanian supervision.

The banking laws of offshore finance centres have to be especially mindful of concerns over confidentiality, which have to be balanced against the inherent risks of deposits being derived from money laundering and drug trafficking, often via corporations registered in the same or another offshore finance centre.  As a former Superintendent and draftsman of banking regulations and guidelines, I fully appreciate what a fine balancing act that can be.  The law must be flexible, but should not allow licenses to be issued to a class of banks that, according to a United Nations report, are little more than “closets with computers”.  Brass plate banks represented by a law firm, for example, are not permitted in Panama and the banks that do operate here are fully staffed and functional. 

The Government of Panama recognises its responsibilities as a leading South American banking centre and has introduced stringent monitoring and vetting procedures that must be followed by the banking community and other related businesses as well.  The new century has seen this awareness of responsibility increase considerably.  Banks have compliance officers who are responsible for ensuring that the controls put in place are followed and the Government has created a special financial intelligence unit. Generally-accepted indices of weighting and guidelines in regard to capital adequacy, risk asset reviews, statutory reserves and the definitions applicable to primary and secondary capital and concentrations of risk are major considerations.  A bank must have a minimum capital of US$10 million.

The Superintendent has wide powers of examination and investigation, but the statutory authority is subject at all times to compliance with strict rules of confidentiality, a subject already mentioned.  Heavy criminal and civil sanctions can be imposed on bankers as well as the Superintendent and his Board of Directors for wrongful disclosure.  Although confidentiality is enshrined in the new law, a prima facie case proving funds are illicit will not protect criminals from exposure. In addition to increased investigative powers, the new law has tightened general controls and regulations and brought the country’s supervision more in line with the regulatory standards found in the European and American banking centres.  Significantly, the Superintendency is financially autonomous from central government controls, with funding for its operations coming from licensing fees and other charges levied on the banks.  I have always been a strong advocate of autonomy and see this as a very positive step by Panama.

Following several major banking scandals in recent times, it is recognised that bank regulators need to have much closer liaison with their counterparts in other jurisdictions and one crucial element in this closer working relationship is consolidated supervision.  The new law contains comprehensive provisions stipulating that foreign banks licensed in Panama must comply with the liquidity requirements, capital adequacy and other technical obligations that are imposed by the law of the country in which the main branch of the foreign bank is domiciled.  The law goes further than this and permits a foreign regulator to make inspection visits to any related foreign banks in Panama.  One of the grounds for revoking a licence in Panama can arise when a foreign regulator moves against a foreign bank’s main branch.  The importance of international co-operation is underlined in the law by requiring the Superintendent to establish areas of co-operation with international supervisory bodies in order to strengthen control mechanisms, develop appropriate regulations and exchange information pertinent to the supervisory function.  The law also confirms that the Panamanian Government cannot impose any restrictions, including attachments or withholding measures, upon funds deposited in Panama by central banks, or similar deposits representing the reserves of sovereign states.

The new law improves the competitiveness of a banking system which already compares favourably with many other countries in the region.  But Panama’s future competitiveness in banking and related fields will probably be spurred on by certain developments that have taken place in Europe and elsewhere. The 30 members of the Organisation for Economic Co-operation and Development (with the exception of Luxembourg and Switzerland) have focused their attention on the benign income tax policies found in most offshore finance centres.  Loss of tax revenues is at the heart of the matter because there has been a dramatic increase in the flow of funds to offshore finance centres in recent years which threatens to seriously undermine the integrity of some tax systems.  Demographics in Europe point to a narrowing of the tax base this century, placing further strain on government revenues which will have to pay an increasing number of state pensions.  Although justifiable concerns have been previously expressed by the OECD over offshore finance centres being used as conduits for drug trafficking and money laundering, there can be no doubt that worries about depleted tax revenues run a very close second to those over drugs and laundering. The British Government, for its part, has forced changes in the regulations and standards of supervision in its two Crown Dependencies of the Channel Islands and the Isle of Man and also its 5 Overseas Territories in the Caribbean, namely, Anguilla, the British Virgin Islands, the Cayman Islands, Montserrat and the Turks & Caicos Islands.  The aim of the British Government is to see that all these Caribbean offshore finance centres have levels of supervision and control similar to those already found in Europe whilst the OECD has declared that it wants to see tax havens stamped out.  Developments bear out the fact that radical changes are destined to happen to the way offshore business is conducted in this new century.

Where does Panama fit into all this?  Its regulatory regime is not subordinate to, and cannot be held hostage by, the political agenda of another country.  Outside pressures can be applied, of course, but compliance cannot be imposed and, consequently, I predict that offshore finance centres which are sovereign states, such as Panama, will have a more positive future as traditional offshore finance centres.  In short, regulation without revelation for the honest offshore investor who is seeking nothing more than privacy but finding less of it than before. Panama’s banking law is an encouraging addition to the existing slate of innovative legislation in Panama and has been welcomed by international investors and practitioners alike.