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Panamanian President Juan Carlos Varela announcing plans to create a panel of international experts. (Photo: Fredy Peña/Panama President's Office) 
Wednesday, April 20, 2016

After Panama Papers: More Transparency?

Do financial systems need more transparency?

Inter-American Dialogue

Panamanian President Juan Carlos Varela on April 6 announced that his government will create a panel of international experts in an effort to improve transparency in the country’s offshore financial industry. The announcement came just days after the massive ‘Panama Papers’ data leak that detailed how law firm Mossack Fonseca reportedly helped clients conceal assets. What will be the consequences of the ‘Panama Papers’ leak for the financial and advisory services industry in Panama and for offshore banking practices more broadly? Does Panama need to change its laws to address criticisms over financial transparency? If so, which other countries also need to improve? Do people and businesses have a right to a degree of privacy in their legitimate financial transactions across borders?

Jacqueline de Gramont, policy director at Transparency International – USA, and Natalie Baharav, communications coordinator for the Americas at Transparency International: The Panama Papers have shone a stark light on how facilitators create anonymous companies that can enable the corrupt, money launderers and other criminals to hide and launder their illicit funds.

While Panama has made an effort to adopt legislation to avoid illicit use of its financial sector in recent years, what the country now urgently needs is aggressive enforcement of existing laws.

Yet this scandal is not just about Panama. Secret companies are a global issue; they need to be outlawed throughout the Americas and all around the world. The G20 committed to stopping them in 2014 but only five of the 20 rich countries have taken real steps to legally stop secret company ownership on their shores. In the United States, for example, one can incorporate a legal entity without having to disclose who controls the entity or derives economic benefits from it. The adoption of legislation at present pending in Congress that would require the collection, maintenance and updating of beneficial ownership information on legal entities for law enforcement purposes is crucial for changing the status quo. Further, financial institutions should be required to determine and verify the identity of the beneficial owners of their legal entity customers and gatekeepers, such as in the real estate industry, and should have due diligence requirements. Internationally, TI calls for immediate action by world leaders:

(1.) All countries should require much higher levels of transparency around who owns and controls companies registered in their territories.

(2.) Professional enablers such as bankers, lawyers and tax professionals who are found to be complicit in corruption must be sanctioned.
(3.) All countries should require any company bidding for public contracts or purchasing property to disclose on whose behalf they are operating.

Michael Diaz, Jr., founding partner of Diaz Reus & Targ LLP in Miami: The recent fallout from the Panama Papers – Mossack Fonseca leak will have little impact on the financial and advisory services industries in Panama and other offshore locations unless enforcement is swift, substantial and memorable.

The U.S. Department of Justice and its federal law enforcement agencies including the Department of Homeland Security wasted no time in seizing this opportunity for new evidentiary leads on their current and ongoing money laundering and corruption investigations including the FIFA and PDVSA bribery scandals.

What remains to be seen is whether Attorney General Loretta Lynch and her Panamanian counterparts will be true to their promise to turn their focus on the unscrupulous banks and bankers without which these crimes cannot be completed. As the ‘Panama Papers’ show, names are obfuscated through layers of corporate shells, trusts and powers of attorneys designed to disguise the ultimate beneficial owners of the entities, structures and bank accounts.

Glaringly, even when inherent risks are exposed by the standard due diligence process, the Panama Papers demonstrate how offshore advisory services, Mossack Fonseca and others rationalize and ignore the compliance risks, but nevertheless service their clients with impunity. Surely, there are legitimate reasons for offshore structures (such as asset protection and tax planning). However, what the Mossack Fonseca leak now brings out in the open is what U.S. law enforcement has already known for quite some time—offshore banks and advisory services in Panama, Switzerland and elsewhere have been conspiring and assisting clients with dubious sources of funds to disguise their identity and the true beneficial ownership of those funds for a handsome fee.

Matías Mora Simoes and Michael Malarkey, managing directors at Berkeley Research Group: The apparent leak of the ‘Panama Papers’ has caused significant reputational damage to Panama, especially to its financial and legal services sectors. This crisis could affect Panama’s foreign investment opportunities, and it could also generate stricter scrutiny of the commercial activities of law firms and banks on behalf of international regulators and correspondent banks. Additionally, the perceived risk of Panama has provoked drastic diplomatic reactions, such as the inclusion of Panama in France’s list of tax havens. However, the current situation has motivated international organizations to strengthen their efforts to reduce tax evasion, a crime that is classified as money laundering in several jurisdictions; by utilizing offshore banking improperly. Due to this, and several other factors, additional and stricter measures will be taken by member countries of these organizations, regarding the taxation of offshore bank accounts.

Panama is the headquarters for one of the world’s most important financial services centers, and as such, it has succeeded in complying with high transparency standards. However, due to the current situation, the Panamanian government has created an independent committee of experts, both national and international, with the purpose of evaluating and adopting measures to reinforce the transparency of the country’s legal and financial systems. More importantly, this is not a problem just for Panama, but for many countries including the United States. In fact, Delaware is the second smallest state in terms of territory, but it is one of the most popular offshore territories in the world, thanks to its taxation laws and financial secretiveness. People and companies have the right to maintain their privacy regarding their legitimate financial transactions, mostly due to security reasons. Financial confidentiality must not be confused with secret keeping, which can be utilized to cover illegitimate funds or to bypass illegal money through channels especially designed to dodge compliance systems.

James M. Meyer, partner at Harper Meyer in Miami: Much of the media coverage regarding the ‘Panama Papers’ has been either misinformed or has itself been misinforming regarding the international financial services industry. The press seems to have largely failed to mention the legitimate purposes of offshore planning, including security, country and political risk, which is something many who are safely tucked away in the United States have a hard time conceptualizing. Moreover, unless and until the sovereign nations of the world are able to agree on an internationally uniform tax system, offshore tax planning remains a common, legitimate and important part of any cross-border transaction or business plan. Of course, there is a great deal of social and political activism pushing for a borderless tax system and total international transparency, but that is highly unlikely to occur during the span of any of our lifetimes. In the meantime, however, it seems to have made for a lot of journalism that offers much more sizzle than steak. It is as if the media just realized that bad guys are using bank accounts and they are writing stories about how nefarious bank accounts are.

Republished with permission from the Inter-American Dialogue's bi-weekly Financial Services Advisor


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