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The International Consortium of Investigative Journalists in April published the Panama Papers after a yearlong investigation along with German newspaper Süddeutsche Zeitung and more than 100 other news organizations. (Photo: ICIJ)
Monday, August 22, 2016

Panama Papers Hurt Latin America Corresponding Banking

Increased reluctance of international banks to conduct correspondent banking with Latin American counterparts.

Inter-American Dialogue

The massive “Panama Papers” data leak earlier this year drew media attention and regulatory scrutiny for the ways elites around the world have hidden wealth from tax authorities. What has been the impact on financial services companies operating in Latin America and the Caribbean in the months since the revelations? To what extent are governments and regulators in the Americas moving toward new rules to close loopholes and change tax policies? How much more regulatory oversight of tax havens is needed, and what should any new regulations entail?

James M. Meyer, partner at Harper Meyer in Miami: For the most part, the Panama Papers merely demonstrated the perils that can befall professional advisors and financial service providers who do not or who are unable to 1) take adequate measures against the misappropriation of their proprietary and confidential business information and that of their clients and 2) adequately know all of their customers and the legitimate business purposes for which their services are being engaged. For that reason, most professional advisors and financial service companies are now going to even greater lengths to secure their information and to know their customers, their businesses and the sources of their income. If this new and heightened sense of security and scrutiny makes it harder for the occasional bad apple in the bunch to engage in their illegitimate activity, we have all been served for the better. However, unless and until there is a universal and borderless tax regime around the world, which is not a foreseeable event, most multi-jurisdictional transactions will still require international tax planning and the services of ‘offshore’ professional advisors and financial services providers. New regulations that would disproportionately thwart this important economic activity without adequate justification would be imposed at a high price to many local and regional economies, if not the global economy at large.

Marta Colomar, partner, and Marcela C. Blanco, associate attorney, at Diaz Reus & Targ: In light of the Panama Papers, Latin America is taking a closer, more serious look at solving corruption, money laundering and tax evasion problems. Latin America has a world of diverse laws and business practices that can contribute to the plethora of legal loopholes that allow criminals to hide money laundering, tax evasion and other illicit financial activities. One way to overcome this problem might be to reform and harmonize laws across Latin America to effectively close those loopholes. However, achieving uniformity of legislation across so many countries is neither simple nor quick. The reform of the Latin American taxation law will require unfettered cooperation of the governments and regulatory bodies of offshore tax havens, financial institutions and other service providers that provide opportunities to transfer funds, and the respective parliaments and law-reform agencies that can harmonize laws and ensure legal and procedural problems of cross border proceedings are dealt with effectively. Even if that harmonization is achieved, one can be sure that no matter what reforms are instituted, what matters most is how national courts will interpret the reforms. In a domestic context, these reforms will present new, unique and unforeseen issues. Suffice it to say that any harmonization process through Latin America will be a complex exercise. The differences in legal cultures among various countries will inevitably create challenges involving time, resources and cooperation.

Georges Hatcherian, analyst in the Financial Institutions Group at Moody’s Investors Service: The main immediate impact of the Panama Papers is the increased reluctance of international banks to conduct correspondent banking with Latin American counterparts due to rising compliance risks, especially in Central America and the Caribbean. While the leak has not triggered a massive severing of correspondent lines per se, it has increased reputational risks in banking systems, with some already facing headline risks from corruption and money laundering scandals. Small banks are mostly affected, given their limited capacity to invest in new compliance controls to maintain cross-border correspondent banking relationships. For the particular case of Panama’s financial system, the leak has diminished the initial positive effect from the country’s removal from the Financial Action Task Force ‘gray’ list in February. Particularly, the event has negative implications for Panama’s offshore banks because it may lead some foreign companies and individuals to cut their ties with the country’s banks, reducing deposit and earnings growth. The region’s anti-money laundering regulatory framework is gradually evolving. Panama’s AML law passed in April 2015 calls for the country’s Financial Intelligence Unit to share information with foreign counterparts. Also, last March, Mexico announced a new platform to monitor dollar-denominated interbank transfers, which should help reduce the country’s vulnerability to money laundering. In addition, regulators have taken action over the past year to crack down on the channeling of illegal resources through banks, including the seizure of Panama’s Balboa Bank & Trust and Honduras’ Banco Continental.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor


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