Anyone familiar with Panama’s economic history isn’t surprised by revelations of shell companies and hidden assets created by a law firm based in the small nation.
“I’ve been screaming about it for decades,” said Jack Blum, an attorney and former US Senate staff who focused on international tax evasion.
In fact, Panama has been a widely-used tax haven for nearly a century, a practice that goes all the way back to US industrialist John D Rockefeller that has evolved into a complex relationship between the country’s banking, legal and financing sectors. That long, secretive history came crashing out this week with the release of the Panama Papers, which revealed exactly how Panama has created conditions for foreigners to hide their assets through corporations there.
The influx of foreign cash to take advantage of that system is so big that Panama’s financing sector accounts for 7% of the country’s entire GDP.
“You can walk into a bank there with a stack of US money and they just say, ‘Fine,’” Blum said. “This has been going on for so long, and is so obvious and problematic, that the question is, ‘How come nothing was done about it before?’”
Several other countries allow foreigners to hide their assets, but few are as well-positioned to do so as Panama.
The Central American country took its first step into that shady world nearly 100 years ago, when the government first allowed foreign companies to register foreign ships, according to a report from the Norwegian Center for Taxation. That move was designed to help Rockefeller’s Standard Oil avoid taxes in the US, and set the stage for a 1927 law that allowed foreigners to establish tax-free, anonymous corporations with few questions asked, according to the report.
In 1948, the country then created a free trade zone that has become the largest and most used in the Americas. People looking to launder their illegally-obtained goods can buy and sell products in the Colón Free Trade Zone with minimal oversight.
In the 1970s, the country moved into the world of offshore accounts that added an extra layer of protection for foreigners trying to avoid prying eyes. In the 1980s, that meant drug cartels funneling their profits through Panamanian-created corporations. In the 1990s, world leaders, wealthy investors and others joined in.
That combination helped create an elaborate, government-supported system that drew in clients from around the globe.
“It’s not like it’s a single firm,” said Joseph Ganitsky, director of the University of Miami’s Center for International Business, Education and Research. “It’s the industry, it’s the culture. They have said very clearly: ‘If you stole the money, if you cheated elsewhere, it’s not our problem.’”
Critics in the US are also pointing to the 2011 Free Trade Agreement, first negotiated by President George W Bush and ultimately signed by President Obama.
The White House has defended the agreement, saying it helped force Panama to sign on to a separate tax information exchange treaty, which has improved transparency into deals that take place in Panama. But Lori Wallach, director of Public Citizen’s Global Trade Watch, said the free-trade agreement’s fundamental problem was that it gave Panama a “US stamp of approval.”
In recent years, the Panamanian government has tried to crack down on criminal activity. The government passed more stringent laws to monitor and sanction banks and businesses engaged in illicit activity. And in February, the Financial Action Task Force, an international body that sets standards for anti-money laundering rules, removed Panama from its “blacklist” of countries that were not complying.
But plenty of questions remain.
The International Monetary Fund conducted an investigation into Panama’s regulations and found gaping holes still exist. The country’s anti-money laundering law, for example, is designed to regulate banks and other financial institutions. But the IMF found that the law didn’t cover lawyers, accountants, insurance companies, notaries, real estate agents or dealers of precious metals and stones.
“Because Panama is an important international financial and corporate services center…this lack of coverage is a key systemic deficiency,” the report found.
The disclosure of the Panama Papers could lead to changes. The 11.5 million documents hacked from Panamanian law firm Mossack Fonseca revealed how world leaders, their relatives and their associates keep business dealings and vast sums of money hidden in off-shore accounts. So far, the revelations have brought down the prime minister of Iceland, the CEO of an Austrian bank and prompted investigations around the world.
Panamanian President Juan Carlos Varela has said the country has been unfairly blamed for the global corruption exposed by the leak. He says his country’s reputation has been damaged and worries that foreign investors will look elsewhere.
But experts say Panama has plenty of other economic foundations to fall back on.
“The Panama Papers are going to have an impact, but I don’t think we should blow it out of proportion because the canal is still there,” said Mauro Guillén, a professor of international management at the University of Pennsylvania’s Wharton School of Business.
He’s referring to the Panama Canal, built by the US, handed over to Panama in 1999 and now among the busiest shipping channels in the world.
Guillén said Panama has a long list of perfectly legitimate industries that will insulate the country from any short-term blowback to the Panama Papers.
It’s airport is now the busiest in Central America, its highways, hospitals and public sector buildings have been improved, Panama City now has the first subway in Central America and the tourism and real estate industries remain strong.
“The good thing that they have is they really have no competition in the region,” said Guillén, director of The Lauder Institute at Wharton. “It’s English-speaking, it’s easy to get there, they have relatively good infrastructure, and they have the canal. As long as they have all of those advantages, I think they’re going to be in good shape.”
Source: Dhaka Tribune
