Following a series of reforms in its financial sector, Panama managed to secure its removal from the Financial Action Task Force's (FATF) grey list at the organization's last meeting in February 2016.
The FATF, the international body that sets standards for anti-money laundering and combating terrorist financing, groups countries whose efforts at combating money laundering and terrorist financing have been deemed inadequate and whose whole legal framework surrounding tax fraud are substandard. The FATF grey list currently includes such jurisdictions as Iran and North Korea.
Panama first entered the list in June 2014 following an IMF report that highlighted weaknesses in Panama’s banking framework, labeling the country as susceptible to crimes related to money laundering, fraud, and drug trafficking. The organization found that Panama fulfilled just one of its 49 recommendations, largely fulfilled three, and partially fulfilled 26. Panama has also previously been on and removed in 2011 from the OECD’s grey list of countries that do not implement internationally agreed upon tax standards and could therefore be considered a tax haven.
Its inclusion on the list undoubtedly affected investor perceptions of Panama, which has for years struggled to shed its reputation as a tax haven. “Having Panama labeled as a high-risk country has obviously affected banks and possibly discouraged investors from coming to Panama,” said Olga Cantillo, Vice President and General Manager of the Panama Stock Exchange.
Stating its removal from the list as one of the key priorities for the government in 2016, Panama took a number of steps to update its legal framework and strengthen its money laundering controls. One of the measures introduced in response was Law No. 23 of 27 April 2015: Adopting measures for the Prevention of Money Laundering, Terrorism financing and Financing of Proliferation of Weapons of Mass Destruction and other provisions.
Amongst the changes, the new law stipulates that all financial entities are now obliged to report suspicious financial activities. “Law 23 is a big step towards transparency and a better reputation for Panama in terms of its financial system in general,” said Marelissa Quintero de Stanziola, Superintendent of Securities Market. “Now more intermediaries have to report any suspicious transactions and potential money laundering to the Financial Analysis Unit. In the past, only brokerage firms and the self-regulating entities, which are the Stock Exchange and the Clearing Agency, were required to report suspicious transactions.” It also moved Panama to a standard of law-based to a risk-based supervision and gives further supervisory powers to the Superintendency. “These amendments give power to the Superintendent of the Securities Market to exchange confidential information with foreign regulators under the principles of reciprocity, confidentiality, and so forth.” Stricter controls are also placed on the previously unregulated registration of bearer shares.
At the latest FATF meeting, the organization recognized Panama’s efforts and congratulated it on its recent reforms. Algeria and Angola were also removed from the list at the same meeting. The removal is welcomed by the Ministry of Economy and Commerce as well as local and foreign players in the financial industry. It is hoped that the removal will send a message to the international investor community that Panama’s regulatory and institutional framework is adequate for the prevention of money laundering, financing of terrorism, and proliferation of weapons of mass destruction, thus promoting foreign investment and consolidating Panama’s position as a global financial center. The financial sector remains one of Panama’s major recipients of FDI and accounted for 15% of all foreign investment in 2015 even with the FATF’s warning.
Looking ahead, Panama will need to focus on its adoption of the OECD’s Automatic Exchange of Tax Information initiative. Panama continues to face criticisms following its decision not to adopt the Common Reporting Standard (CRS) despite its commitment to joining the list of OECD jurisdictions that automatically share tax information from 2018. The OECD insists that the CRS will allow countries to tackle tax evasion in the most effective way; however, Panama is adamant about developing its own mechanism for sharing tax information.
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