PANAMA:  PATHWAY TO OFFSHORE PROTECTION AND PRIVACY

“The authorities and the banking industry are very aware of the prudential risks associated with money laundering and have in place adequate safeguards to deter improper use of the banking system for illegal purposes.  While no system is infallible, the mission team concludes that the legal, regulatory and supervisory systems in place in the banking sector compare favourably with internationally accepted prudential supervision practices… The legal and regulatory requirements are strict and many requirements exceed those in place in industrial countries.”  Which jurisdiction is being referred to?  Bermuda?  The Channel Islands?  The remarks, actually, are from a 2001 report published by the International Monetary Fund about Panama’s compliance with established international standards for an offshore banking system.  The positive tenor throughout the report on Panama underlines the fact that the jurisdiction is conscious of the need to have sound financial regulatory and supervisory systems in place.  Equally, the jurisdiction has won high praise for its money laundering controls which are also mentioned in the IMF report:  “The legal and regulatory requirements are strict and many requirements exceed those in place in industrial countries … the level of supervision dedicated to anti-money laundering is exceptional and under different circumstances disproportionate relative to the risk posed by money laundering”.

Against this favourable background Panama has continued to attract business requiring trusts, foundations and offshore companies (known also as IBCs), these being the core offshore services offered by the jurisdiction. 

It is the offshore company, however, that has always been central to an offshore plan.  Although trusts and foundations (the latter with some exceptions) can open bank accounts, own real estate and manage investment accounts, it is usually less complicated and – which may be important – less revealing to submit company by-laws rather than foundation charters and trust deeds.  Practically every business or contractual relationship, bar marriage, can be entered into by offshore companies which are, inter alia, used for international trading and purchasing purposes, international investment, personal services (consultancy arrangements usually), intellectual property and land ownership, licensing and franchising, as well as shipping, aviation operations and as holding companies (central control of widespread activities of subsidiary companies).  Panamanian companies have been popular since before many offshore islands, particularly in the Caribbean (such as the Cayman Islands), became offshore centres; the material features of the legislation have changed little since promulgation in 1927.  Panamanian companies do not require accounts or annual returns to be submitted to government and the directors and officers (minimum of either 3 individuals or companies which can double for both sets of duties) need not reside in Panama.  No profits earned outside Panama are taxed (taxes, since the early part of the last century, have been territorial) and companies can migrate to other jurisdictions just as foreign companies can transfer to the Panamanian register.  Beneficial ownership need only be declared to the service provider and bearer shares are allowed; the Public Registry, however, requires details of the directors, but not the shareholders, to be recorded and who are normally nominees selected by the service provider. 

Although the foundation and trust can be fundamental to an offshore plan, usually their function is concerned more with continuity after someone’s demise.  In many cases a simple offshore will, specifically dealing with assets centralised in Panama, will suffice, the object being to ensure a smooth transition of control of the assets.  This is an important matter which is so often overlooked and can be an offshore structure’s Achilles heel:  the confidentiality so carefully achieved can fall asunder when the client dies and those managing the assets might have to look onshore for instructions.  Trust legislation was originally enacted back in the 1940’s and was based on the common law trust.  In 1984 more modern legislation was introduced in order to attract business by making the law more flexible.   There are no restrictions on what lawful purpose the trust can be established for and execution of the trust deed can remain private except when real estate in Panama forms part of the corpus and then the existence of the trust must be recorded at the Public Registry.  A trust deed, nonetheless, must be executed by both the settlor and the trustee before a notary public.  The trust falls within the ambit of the protection given to other financial services in Panama; trustees (including their employees) are bound by strict confidentiality and breaches can mean both prison sentences and substantial fines.  Settlors, trustees and beneficiaries can be companies rather than individuals if such arrangements will be conducive to a financial plan.  Even although the trust is regulated under Panamanian law, the law governing its administration can be that of another jurisdiction.  Trusts created under a foreign law can, conversely, adopt Panamanian law (but the formalities applicable to Panamanian trusts must first be complied with).  In all other material respects Panamanian trusts are indistinguishable from those of most jurisdictions, although there is the almost-unique twist of being governed by civil law and not common law.

One question often asked of me is this:  what is the difference between a trust and a Panamanian private foundation?   I often respond by saying that the foundation suffers from an identity crisis because it thinks like a trust but has the personality of a company.  It cannot, however, conduct commercial activities in its own name and for this reason it normally uses a company which it controls 100%.   Being a fiduciary instrument, it is very similar to a trust, having a founder (settlor), charter and regulations (trust deed), foundation council (trustee) and beneficiaries.  Like the Panamanian company and trust, its activities can be kept confidential.  Although the charter is required to be recorded at the Public Registry, the accompanying regulations (detailing information concerning beneficiaries, benefits and the bulk of powers given to either the foundation council or other parties) are not.  Once registered, the private foundation in Panama takes on the complexion of a corporate body.  The only details regarding the foundation which cannot be incorporated into the supporting private regulations, and which will appear on the Registry records, are the name of the foundation, its place of domicile, detail of the initial corpus (must be a minimum of US$10,000 in whatever currency chosen), names and addresses of foundation council members (either 3 individuals or one or more corporations), details of the local Registered Agent (must be either a lawyer or law firm in Panama), the objectives (including the general, but not specific, application of assets), duration (can be perpetual), how (but not who) beneficiaries are selected (usually a right reserved for either the client or the foundation council), confirmation that the charter can be modified and, finally, the manner in which liquidation is to be dealt with in the event of its dissolution.  By switching council members for directors and noting many of the other provisions, it is easy to see how the private foundation has a DNA similar to a company whilst at the same time being not unlike a trust.

Presented with these 3 pillars of the Panamanian offshore financial services industry, how does one utilise one or more of them from a practical standpoint?  Unfortunately, space permits me to provide only the briefest of outlines of 2 cases as an illustration which I have recently dealt with.  Material details have been altered for purposes of confidentiality.   The first case concerns an Argentinean businessman who has a very successful business partnership and who was referred to me by an associate.  In addition to his Latin American activities, he had agreed to serve as a consultant to a European pharmaceutical company with international operations.  There was no conflict of interest in him becoming a consultant as far as his partnership was concerned, but he did not wish his partners nor certain members of his family to be privy to the details of the consultancy.  Prior to visiting us he had clarified the legal and tax implications of his plan and these presented him with no obstacles:  his objective was simply to achieve confidentiality.  Many readers who have been keeping their finger on the pulse of offshore matters in the last year will know how precious a commodity confidentiality is becoming and that Panama is one of the few jurisdictions left that can still offer genuine traditional confidentiality for those whose activities are lawful.  It was important, therefore, to create an alternative persona for the businessman.  The nature of the consultancy meant that the client could provide the services through a company owned by himself if he wished:  reports could be presented and signed by a company on his behalf, avoiding even the need for his personal signature.  After several discussions, arrangements were made for the pharmaceutical company to contact my trust company directly so that a suitable consultancy agreement could be drafted.  A Panamanian company would enter into the consultancy agreement on behalf of our client and would deal with all required correspondence, data and accounting.  In providing this facility my trust company entered separately into an agreement with our client which contained suitable clauses clearly setting out the extent of our duties and also including, where applicable, appropriate indemnifications for both parties.  Once the Panamanian company (let’s call it “Star”) had been formed and the terms of the consultancy agreement and ancillary matters had been settled, a postal address, telephone and fax numbers were arranged for Star so that the data for analysis could be received by us and then passed on to our client.  Star opened up a bank account in Panama with our assistance in order to receive the agreed consultancy fees and to also handle related payments.   The local bank, of course, has on record who the beneficial owner of Star is but, similar to trust companies in Panama, this information cannot be divulged to unauthorised third parties.  The consulting fees will now accumulate and plans are in place for them to be invested through various channels.  Once the structure was in place, I advised my client to consider estate planning which would cover the issued shares of Star.   Did he want them to form part of his domestic estate or would he prefer separate arrangements to be put in place?  Subsequently, a Panamanian foundation was formed (the client being more familiar with civil law) with its sole asset at present being the issued shares of Star.  Upon the demise of my client, specific terms of the foundation deal with either the transfer of ownership or dissolution of Star.  The process is both private and probate-free.

Another concern which many of my clients have is protection of assets and whilst legitimate tax savings might be a plus, taxes are not the key motive for them going offshore.  I have, incidentally, found that privacy and protection are usually the most important issues.  My second case involves a successful doctor from California who purchased an apartment in Panama.  He is a widower who likes the cosmopolitan atmosphere of Panama and intends to enjoy the use of the apartment during his lifetime after which he wants it to be left to certain relatives in Europe.  What constantly worries him is the possibility of a malpractice lawsuit which could have the potential of depleting his assets and although he understood that complete protection was not possible, certain of his assets could be legitimately taken offshore out of the reach of creditors by prudential planning.  Key to his plans, of course, was the need to first get expert advice in California on all legal, as well as tax, issues which could arise.  We were instructed to form a Panamanian company (I shall call it “Kildare”) which would purchase the apartment here in Panama.  An unplanned additional advantage is the fact that whenever the apartment is to be subsequently sold, it might be possible for the conveyance to only entail the transmission of Kildare’s shares, as opposed to the need to have the property transfer recorded at the Public Registry.   The shares of Kildare were gifted to a Panamanian trust drafted by us  which the doctor settled with ourselves appointed the trustee.  It is important to stress that this was not a placebo trust (not the real thing) but a Casablanca trust (the fundamental things apply); these are 2 terms which I devised following the increasing number of sham trusts which are now coming to light.  So the gift was genuine; my client swapped ownership of the apartment for a lifetime right of occupancy.  He would be also entitled to income payments from the trust which were to be discretionary and subject to strict criteria.  In order to create a source of income, my client also gifted a sum of money to the trust with which Kildare (through its directors who are nominees of my trust company) opened an appropriate investment portfolio with an international brokerage house.

Those are just 2 examples of how useful offshore structures can be, but in every instance preliminary planning and research is essential.  We usually only hear the horror stories about how things went badly wrong offshore, but the truth is that there are a vast number of structures which are very successful.  I can think of an Argentinean and a doctor in California who would agree with me.