The U.S. Knew for Years That Panama Was Full of Shady Money

It has been an exciting, exhausting week for those of us working to increase transparency and accountability in the global financial system. The “Panama Papers” have made headlines worldwide all week, and the issues of financial transparency that we at Global Financial Integrity work on have been front and center. I began this work in 2009, however, when we were focusing on Panama in a somewhat different, but certainly related, way.

In 2010, Congress was locked in fierce debate over the proposed U.S.-Panama Trade Promotion Agreement (TPA). Of major concern: Panama’s strict bank secrecy laws, lack of financial transparency, and lax anti-money laundering regulations. The argument being made by advocacy groups like Public Citizen and skeptics of the plan was that Panama’s laissez-faire regulatory apparatus could permit tax evaders, corrupt politicians, organized crime syndicates, and other criminals to easily incorporate anonymous shell companies and turn them into vehicles to hold, hide, transfer, and spend the proceeds of their various crimes with virtual impunity.

The TPA, for its part, proposed to tear down barriers to trade related to Panama’s services sector, which then comprised about 70 percent of the country’s economy, and included both the country’s financial services and professional services sectors — the very sectors that both create these companies and hide and move the money they hold.

With the publication of the Panama Papers — the result of a collaboration between the International Consortium of Investigative Journalists and more than 100 news organizations around the world which analyzed massive amounts of data leaked from the law firm Mossack Fonseca — we now have an intimate look into the incorporation practices and client services offered by this Panama-based company. The leaks give us reason to look anew at the United States’ decision to liberalize trade with Panama, amid warning signs that the country was not fit to be a “trusted partner” of the United States.

Even before this week’s revelations, Panama’s reputation as a tax haven and host for hot money was well-earned. In the 1970s, it adopted strict bank secrecy laws preventing its tax and regulatory authorities from accessing bank account information, which allowed illicit money to flow through the country’s financial system without risk of being identified by Panamanian banks or law enforcement. During the 1980s, Panamanian dictator Manuel Noriega worked closely with Pablo Escobar’s Medellín Cartel; Noriega managed to move $23 million of his dirty money to the Bank of Credit and Commerce International (BCCI), a bank with a Panama office that was eventually exposed by a Senate Foreign Relations Committee investigation as a bank catering to the world’s corrupt elites. The U.S. government eventually demanded its U.S.-based offices be shut down, and the main bank was seized in 1991. Regulators from five different countries seized bank assets elsewhere simultaneously

Today, we often say that effective anticorruption and anti-money laundering measures require a strong “tone from the top,” but the person at the top in Panama in the 1980s was not setting a particularly good example. These laws also prevented foreign law enforcement agents — including American officials — from investigating the other end of financial transfers that flowed to or from Panama.

Eventually, the Organization for Economic Cooperation and Development (OECD) caught up with Panama’s shady dealings. In 2000, it placed Panama on its list of uncooperative tax havens. Being on the OECD blacklist was a signal to other governments: If their citizens held accounts in Panama, tax evasion was likely in the mix. Panama soon realized that the stigma was bad for business. In 2002, it formally committed to adopting measures to align itself with OECD standards around financial transparency, which included a willingness to provide information about bank accounts held by foreign nationals when their countries came knocking. By 2010, however, Panama had only agreed to exchange tax information with one other country: Mexico. Not surprisingly, in 2015, the European Commission included Panama on its list of 30 countries identified as “non-cooperative tax jurisdictions.” At that time, Pascal Saint-Amans, the OECD’s top tax official, described Panama as a “holdout” for failing to sign on to global transparency initiatives it had agreed to implement 13 years earlier.

Failure to cooperate with other countries on tax matters wasn’t Panama’s only flaw. Its laws around money laundering and terrorist financing were also severely deficient. In 2000, the Financial Action Task Force (FATF), the international body that sets anti-money laundering standards, placed it on the list of countries deemed uncooperative. Panama’s placement on the FATF blacklist, like the OECD’s tax transparency blacklist, sent a message to other governments that the country lacked the laws or regulations to guard against, investigate, or charge anyone that may be laundering money through Panamanian banks. But a spot on the FATF blacklist came with even more severe economic repercussions: Banks around the world understood that doing business with a Panamanian bank would be viewed by their regulators as actively inviting dirty money.

So, once again, Panama committed to cleaning up its act and adopting anti-money laundering laws and due-diligence regulations that would bring it in line with the FATF’s international standards. As a result, FATF delisted Panama in June 2001, just prior to the 9/11 attacks, which elevated money laundering and terrorist financing to an issue of primary governmental concern.

Somehow, Panama’s laws managed to escape FATF review through two subsequent rounds of tightening international money-laundering standards. The country was not reviewed again by FATF until 2014 — and the results weren’t good. Panama, it turned out, had some very significant deficiencies, earning it a place on a list of countries that were at “high risk” for money laundering and terrorist financing but had committed to improvement. Panama was not removed from that gray list until February of this year.

So one might think it was reasonable that U.S. President Barack Obama’s administration wanted to move forward with the TPA negotiations in 2011. After all, FATF apparently wasn’t overly concerned about Panama as a money-laundering risk, and Panama’s reluctance to share information about U.S. citizens holding accounts could probably be addressed as part of the trade agreement package. Both the White House and the U.S. Senate certainly knew, however, that Panama was a significant money-laundering concern; the State Department had been saying so for years. Volume II of its annual International Narcotics Control Strategy Report is dedicated to assessing countries’ level of risk for money laundering and financial crime. Since as far back as 2001, Panama has been included in the State Department’s list of those countries or jurisdictions of “primary concern” — its highest-risk category. In its assessment of Panama in 2009, as the TPA debate was brewing in Congress, the State Department noted that Panama had one of the fastest-growing economies in the Western Hemisphere. To what did it owe such success? Its “large number of offshore banks and shell companies, the presence of the world’s second-largest free trade zone, the spectacular growth in ports and maritime industries, and the use of the U.S. dollar as the official currency,” the report noted — all of which provided “an effective infrastructure for significant money laundering activity.”

The State Department also reported that most money-laundering activity in Panama was linked to narcotics or smuggling. The resulting funds, it stated, were susceptible to laundering through a number of channels, including the banking system, casinos, bulk cash shipments, prepaid phone cards, debit cards, insurance companies, and real estate. The government simply lacked — or had failed to create — the law enforcement structures necessary to curb all this illicit activity.

Despite the State Department’s long-standing concerns about Panama as a haven for financial crime — notably, in the trade sector — getting a piece of that phenomenal economic growth was apparently too good for Washington to pass up. To assuage the naysayers, the United States convinced Panama to sign a bilateral tax information exchange agreement. But there was a big problem: Panama didn’t have the legal regime in place to collect information about the real people who owned or controlled the companies anonymously registered there or to require its banks to carry out the necessary due diligence to determine the identities of the actual people who owned or controlled shell companies that held these accounts.

Aware of this critical deficiency, the United States insisted that Panama also sign a side agreement. Among other things, the agreement committed Panama to passing laws that would give the government the tools and authority to implement that tax information exchange agreement by 2011. This included eliminating bearer share corporations, the most anonymous form of corporate ownership. The agreement also required those who were identified on corporate paperwork as the contact for the company, or its registered agent, to know the identities of the actual owners.



Panama finally adopted laws pertaining to these requirements in 2011 and 2013, with the latter coming into effect in May 2015. Even after that, Panama had to revise the law to bring it up to full FATF standards. To date, bearer share corporations have yet to be eliminated. Panama also still doesn’t require them to be registered, as most countries around the world do.

The State Department wasn’t the only one to have worries about money laundering. Nonprofit watchdog Public Citizen put it all together in 2009, voicing significant concerns about the interplay between Panama’s penchant for financial secrecy, its status as a tax haven, and the liberalization of trade, including trade in financial and professional services. The group rightly pointed out that the Panama trade agreement “would directly conflict with the Obama administration goal of stopping tax-haven abuse that leads to the offshoring of U.S. jobs and investment money, and the objective of cracking down on money laundering and shady financial dealings that undermine our economic and national security.” Those concerns fell on too many deaf ears.

Flash forward to this week’s historic leaks. If the theoretical concerns of the OECD, FATF, and the U.S. State Department weren’t damning enough, we now have proof: story after story of shady deals built on a foundation of corporate and bank secrecy that has preserved Panama’s reputation as a tax haven and secrecy jurisdiction, despite recent legal reforms. The problem, of course, doesn’t stop at Panama’s borders. My organization, Global Financial Integrity, estimates that approximately $850 billion in illicit money is siphoned out of developing and middle-income countries alone, annually, through dodgy trade practices. Unfortunately, we cannot know exactly where this money ends up because countries will not allow the Bank for International Settlements, a repository of their global financial data, to release the data necessary to conduct the analysis (we’ve asked, as have others). Today, one can look to government and NGO lists of tax havens and secrecy jurisdictions to find out which jurisdictions, according to research, should bear the same type of scrutiny that we are applying to Panama today. It is as easy as an internet search for “tax haven lists” and “secrecy jurisdictions.”

The United States must think critically about whether liberalizing the trade of goods and financial and professional services provided under the U.S.-Panama TPA has simply been fueling a Panamanian money-laundering machine and strengthening an economy built on a foundation of dirty cash. More importantly, we must have an urgent conversation about whether we are truly committed to keeping dirty money out of the U.S. economy, combatting global criminal networks, and increasing financial transparency worldwide. Our trade policies are inextricably linked with these so-called priorities, and one can no longer be sacrificed for the sake of the other.

Photo Credit: Bloomberg

Correction: This piece originally misidentified the senate committee that exposed the workings of the Bank of Credit and Commerce International.