Since December, Panama’s Ministry of Economy & Finance has been study possibly regulations for the financial services market. The particular focus of the proposed law is Fintech (finance & technology) products. In particular, this introduces and regulates:
- block chain technologies
- sandboxes and their incentives
- family offices
- protected cell companies
- segregated portfolio companeis
- holding companies
- limited partnerships
Panama last innovated in its financial services sector ine 1995, when it introduced the Private Interest Foundation. It relies heavily on the corporation (Law 32 of 1925), which has been under attack from the OECD. While it updated the LLC legisltation in 2009, it repealed the section regarding LLCs being “flow through entities”. This took place about a week after adopting the new legislation. In a legislative slight of hand, it reduced the opportunities for using an LLC in the local market with any tax advantage over the corporation. So, it will be interesting to note how these companies and matters are actually regulated once introduced. The legislative project is ambitiously titled “Modernization of Panama’s International Financial System“.
Of particular interest with the financial services regulations are the so-called “EFE”s – “Entidades Financieras Especializadas”. This translates as Specialized Financial Entities – SFEs. These are entities that offer
“opening and management of payment accounts, transfers, money transfers, and issuance of digital money, etc.”
Once adopted, this legislation appoints the Ministry of Economy & Finance as the watchdog, responsible for introducing the regulations and policies regarding SFEs. After three years, it is anticipated that the Banking Superintendence will become the watchdog. Included in SFEs are the providers of internet and hosting companies for such digital currency, as well as any custodians of digital currencies or blockchain wallets. This also includes companies which permit the purchase of gold, silver or antiqueties (whether in coins or bars. Additionally, it includes FOREX traders.
It is interesting to note the following about this draft legislation:
- The minimum paid in capital of an SFE will be US$30,000.00, rather than the typical $10,000 capital for a Panamanian company. However, up to 50% of the capital may be paid in “in kind”, such as technology, trademarks, know-how and the such like.
- However, if the company will include international transfers, the minimum paid in capital will be US$60,000.00, and payment “in kind” will not be permitted.
- If the SFE will issue digital currency, of any kind, the capital required is US$150,000.00.
- For FOREX trades, a capital of US$60,000.00 is required. If you act as an agent, the minimum paid in capital is US$1 million.
Also note that the “financieras” or small finance companies and the remittance companies (such as Western Union) will be transferred to the Banking Superintendance. They are currently supervised by the Ministry of Commerce.
Financial services watchdog
At the moment, there are 3 or more financial services watchdogs in Panama. We have:
- Banking Superintendent
- Securities Commission
- Insurance Superintendent
- Ministry of Commerce for some financial entities
This project introduces a single watchdog for financial services, which will envelope all of these areas under a single regulator.
Crowd-funding & incubators
The second area of focus of this legislative project is “Centros de Financiamiento Colectivos” (CEFICO). We know this as crowd-funding. As circulated, the project indicates that no participant may fund more than 2% of a project under US$1 million, or 1% of any project over US$1 million. This would even apply in those cases where a second round of funding is requested. There were also discussions that the net worth of a participant in crowd-funding should be greater than US$125,000.00 or an annual income greater than US$50,000.00. However, all of this is very preliminary information. It is anticipated that this will eventually fall under the supervision of the Banking Superintendence.
This project also introduces the “sandbox” for innovation projects in the City of Knowledge. Although the City of Knowledge is already supposed to work as an incubator for technology companies, the idea behind this project is that the companies be specifically fintech, rather than only technology.
At the same time, this legislation introduces numerous new entities, such as the Family Office and Protected Cell Companies.
The Family Office regulations are anticipated to copy that of the Multinational Companies legislation, with the difference that a minimum capital of US$30,000,000 will be required, instead of the US$200 million required for a Multinational Company. The purpose of this legislation is to attract to Panama the holding companies of Latin America, making Panama the financial hub for the Americas.
This is a very preliminary view of the proposed legislation, which is only now being presented to the Legislature. It now has to undergo public debate in the three rounds of debates at the legislature. Only then will we see the final version passed into law. After that, we wait for regulations.
Prohibited Shortterm rentals:
Panama City Airbnb Listing
Since November 2012, it is illegal in Panama City to rent out your home or apartment for less than 45 days. Law 80 (2012) applied fines to those offering short-term rentals in the City district. The Tourism Authority enforces this law strictly. These fines range from 5,000 to $50,000.000. This prohibition includes advertising the property online : for example: an Airbnb listing, sublet.com, or vacationrentals.com. Note, this only applies to the District of Panama.
HOA & Condomium Association rules:
Outside of the Panama City district, it is legal to offer the short-term rentals, such as an Airbnb listing. But, HOA or Condomium Association rules for buildings and housing subdivisions regulate what is permitted by their owners (which may restrict use of this nature). So, even for properties outside of Panama City, HOA rules may prohibit using the property for short term rentals. In these cases, the HOA association is responsible for enforcement, rather than the Tourism Authority.
So, in some cases, it may be beneficial to register your property as a tourism activity, such as a B&B, in order to avoid problems with your neighbours or the tourism authority. Of course, that will depend on the size of your property/home and whether you can comply with the requirements for registration. So, if you have a home in the provinces (rather than in Panama City), you might be able to register with the tourism authority as a B&B, and then get your Airbnb listing to assist in getting it filled, if you intend to run it as a business, rather than occasional lodging when you are not using your holiday home. Not all homes will be eligible, as the tourism authority requires a minimum of 3 rooms which must be separate from the rooms that the family uses habitually.
Registration with Tourism Authority:
For some properties, benefits exist for registration with the Tourism Authority of Panama under Law 80 (2012). However, the deadline to completed registration outside of the District of Panama is December 31, 2020. Tourism is a priority, in the national interest. “Tourism” includes agrotourism, ecotourism, rafting and adventure sports and other tourism activities.
Outside of the District of Panama City:
New Hotels and buildings:
To this end, the national tourism registry offers tax incentives for building new tourism establishments. These incentives apply to:
- import duties on construction materials & furniture and fixtures;
- property taxes on the land and improvements built for 15 years;
- duties for docks and airports built by the tourism company (which may be used by the State at any time without cost), for 15 years;
- income tax on interest on loans (available to the creditors who loan money for construction);
- income tax from the lodging business (hotel, motel, b&b, hostal, etc.) for first 15 years;
- capital tax for 5 years (this is a tax in the annual tax return of companies on paid in capital);
- loans made to the tourism business. These loans are exempted from the withholding of Law 4 (1994), and are not considered personal or commercial loans.
Existing tourism businesses:
For existing tourism businesses, with up to 50 rooms, who are not registered and receiving tax breaks, registration with the Tourism Authority results in shorter tax breaks. These incentives are:
- import duties on construction materials & furniture and fixtures for remodelling (for 5 years from the time of registration);
- property taxes on the land and improvements built for 10 years;
- income tax from the lodging business (hotel, motel, b&b, hostal, etc.) for 5 years;
- loans made to the tourism business. These loans are exempted from the withholding of Law 4 (1994), and are not considered personal or commercial loans.
Basic registration requirements:
The registration form must be completed and handed in to the Tourism Authority. This form is quite basic, asking information regarding the tourism operator, the investment being made and the property on which the lodging will or has been built. The following documents must also be submitted:
- Blueprints, stamped by the local city council (when you are requesting tax exemptions on the construction).
- If applicable, certification of approval by the environmental authority.
- Certification regarding the financing for the project – signed by a CPA.
- Public registry certificate – for the company that will own/operate the project
- ID of the legal representative
- Public registry certificate for the property on which the project is being built
- Feasibility study, signed off by an economist.
- Market study: the type of lodging offered, supply and demand, marketing
- Total investment to be made: income which is expected to be earned, operating costs, financing, payment terms, debt servicing, income/loss statement
- Financial evaluation: net income; IRR (internal rate of return); present value; cost benefit ratio; sensitivity analysis; and breakeven.
Once presented, the applicant has 30 days to provide a bond (to ensure completion of the construction/remodelling and the investment to be made) covering 1% of the investment (up to a maximum of $500,000.00). This is to ensure completion of the project, and not simply obtaining the tax benefits on the import duties and then never actually completing the project. If no construction is required, then the applicant must start operating in no more than 2 months after having been approved.
Types of Registration:
- Motel – minimum of 20 rooms, cafeteria, reception & salon, no more than 2 stories high
- Hostal – 20 to 80 beds/bunks; small reception/administration area; parking; communal kitchen area.
- B&B – 3 to 9 rooms, with at least one bathroom for every 3 rooms (may be shared bathrooms), which cannot be used by the family, offering at least breakfast.
- Aparthotel – at least 8 apartments (40 if in Panama City), each apartment with at least basic kitchen, dining room, living room & bedroom.
- Camp sites – basic infrustructure with bathrooms, showers, cooking area, and recreational areas, in addition to the camping sites. Mens and women’s lavatories. Each site should have: electric outlets, water, and an appropriate sewage system. Appropriate rubbish disposal system and bins.
- Cabins – at least 3 cabins which must each have their own bathroom/shower and closet and each must have its own cooking equipment (basic). Parking close to each cabin, as applicable. Reception area/principal entrance / administration area.
We have a number of Christmas Holidays this year, which we would like to draw your attention to:
Mother’s Day 2017
Friday, December 8, 2017 – our office will be closed.
Christmas Holidays 2017:
Our office will close at mid-day on December 22, for a Staff Christmas lunch. We will be back on the 2nd of January. During the holiday period, we will have a skeleton staff avilable for emergencies, but any routine things (such as annual renewal fees and corporate matters) should be requested before we close for Christmas.
We appreciate your cooperation and wish you Happy Holidays this Christmas and New Year’s season.
March 30, 2017 – Executive Order #62
Rules for Non profit Organizations: associations & foundations
This Order was issued by the Ministry of Government (“MinGob“), regulating Non Profit Organizations, such as associations and foundations.
Examples of such Not-for-Profits are:
- private not-for-profit foundations
- religious churches, congregations or communities
- federations or other entities which are not tied with cooperatives, sports, agriculture or other types which have special legislation.
In simple terms, this Executive Order establishes the basic requirements for registering a Not-For-Profit with MinGob, who is in charge of granting “legal status”, which is later published and made known through the Public Registry of Panama. Unlike companies, which receive their legal status simply through the filing at the Public Registry, in the case of Non Profit entities, it is MinGob who grants them legal standing.
It is easy to present the papers to MinGob, but you will require the services of a lawyer. The basic requirements are:
- Power of attorney and Application by the lawyer
- Articles of Association, establishing the Board of Directors and approval of the Bylaws, signed by the President and Secretary
- List of the members of the Board of Directors (at least 3 members) – natural or legal persons. If you include a legal person, this entity must approve (shareholders or stakeholders) participation in the Board of Directors.
- The Bylaws, which should be duly signed by the President & Secretary
- Two full sets of copies of the entire set of documents.
The entity must not have private beneficiaries and may in no way dish out income or donations received to members, board members or founders. It may, however, hire staff.
Bylaws of Non Profit Organizations
The Bylaws of the Not-For-Profit Organization should contain the following:
- Name – in Spanish or with a translation to Spanish
- Registered Address in Panama (changes must be notified)
- Geographic area in which it will operate
- Detailed objectives – is it philanthropic, union or other nature
- Initial capital or donations to the entity and money raising actions
- Will it require quotas? If so, who sets the quotas?
- How to become a member, how human rights are upheld, and other basic Constitutional rights
- Losing membership
- Rights and duties of members
- Governing bodies: General Assembly, Board of Directors
- Who is the legal representative?
- Changing the bylaws?
- How the accounts will be registered? Manner in which you will record funds received and spent?
- Can branches or chapters be set up? How is this to be done?
- What is the process for dissolving and liquidating? How will the funds be used on dissolution?
If there are mistakes or errors in the documents handed in, you have 60 days to fix them (once notified), otherwise the request will be denied.
Members of the Board must be residents of Panama: natural or legal persons, Panamanian or immigrants. Embassy staff, diplomats, and other State or international entity envoys, may also be members. Global Non Profit bodies may also help establish local Not-For-Profit bodies and appoint resident board members, such as:
- Chambers of Commerce
Order #62 regarding Non Profit Organizations also covers other matters like:
- Review and Inquests
- Use of funds – prudence and purpose
- Changes of Bylaws
- Setting up branches of foreign bodies
- Dissolving and liquidating
- Supervision, follow-up and reviews
For more information regarding setting up a Non Profit Organization, please contact Betsy Moran. She will assist with the registration process, and follow up to get all of the permits, including tax exemption status.
Last year Panama had many changes in the financial sector: the Panama papers scandal lead to greater international pressure for OECD compliance and exchange of information. Months later the Clinton list added Waked and Grupo WISA (affecting some 6000 local employees), including two newspapers. The US alleged money laundering, although these allegations to date have been ruled unfounded by the courts. Nevertheless, these measures have resulted in company liquidations, interventions and sell-offs. There was also increased regulations introduced for lawyers and law firms, regarding bearer shares and due diligence, with registration of firms both with the Supreme Court of Panama and also with the Intendent that supervises Professionals (such as Realtors, Accountants, Casinos, Money Exchanges, Free zone and others). Furthermore, the pressure has increased against Panama to require all companies to provide accounting records.
As of January 1, 2017, Panamanian corporations that are open and operating, are required to have accounting records. They will need to notify their Registered Agent in Panama where these records are being kept.
Accounting Records for Offshore Companies & Foundations
The new rules adopted by Law 52 (2016) are for those offshore companies and foundations, even though they hae no direct business transactions in Panama.
- Offshore corporations – irrespective of whether or not they have bank accounts, are holding property or their purpose and function. If the company is in good standing, it is required to keep accounting records
- Private Interest Foundations – irrespective of what assets or holdings the foundation have
- Holding companies – even companies whose sole purpose is to hold share in other companies are required to have accounting records
Accounting records in Law 52 are described as “that data that clearly and precisely indicates the commercial operations that the entity has, its assets, liabilities and capital contributions.” In the Commercial Code of Panama, we find that the accounts are described as being essencial the the “Diario” and the “mayor”, and the supporting documentation. The “mayor” is the ledger , and the “diario” would be the book where you register the day to day transactions . The supporting documentation would be the invoices, cheque stubs, banking statements, contracts for sale or purchase, or other documentation. All of this data should ensure that the company can provide an updated balance sheet at any time of assets, liability and capital.
The law does not specify “how” these records are to be kept, but in Panama the Commercial code establishes 2 principal ways of keeping your accounting records – manually (in accounts books) or digitally. In this second case, Panama does not recognise Excel sheets as being an acceptable digital form. It is recognised that Excel can be easily modified and does not have a double-entry system. Sage / PeachTree is typically used by businesses in Panama to run their accounting or tailored accounting programs for this purpose.
What is important is that the information MUST be kept up to date – i.e. no more than 60 days after month end.
Panama does not require that these records be maintained physically in Panama or that you hire or retain a Panamanian accountant or book-keeping firm to maintain the accounts. Nevertheless, each company must inform the registered agent which officer/director/agent (natural person, not a company) will be responsible. The company must inform where these records will be physically located. In the event of any changes (the person moves or changes), the registered agent must be informed in no more than 10 days of said change.
For how long?
These records must be kept for no less than five years after the period ends, even in the event that the company is closed down.
What does Gray & Co. expect from clients?
All clients have been sent an Accounting Records declaration form, in which the client is required to indicate:
- who is the person that will be responsible for keeping these accounting records?
- where will the accounting records be kept?
- how will the accounting records be kept – format?
The Registered Agent’s responsibilities:
The registered agent of a company is expect to:
- Have from each client that does not have their accounting records with the law office, a sworn declaration as mentioned above
- In the event of a request for accounting records from a duly authorised Panamanian official, notify the client that they have 15 days in which to comply and provide the records
- Should the client fail to comply in these 15 days, the registered agent is required by law to resign.
Other books & registers
After you have considered the matter of accounting records, you might also turn to look at other documentary requirements. Panamanian corporations are also required to maintain the following books and registers:
- Minutes book – all minutes of meetings of the Board of Directors or Shareholders – these should be in chronological order and should include signed originals. The Company Secretary should hold these.
- Shareholder Register – the register which shows who is(are) the current shareholder(s), and any previous shareholder(s). This should include details such as:
- the number of shares issued
- the share certificate number
- the payment made for the shares (fully paid or partially paid)
- the date of issue
- the name and address of the shareholder
If the company still has bearer shares, these must now be held in custody (since December 31, 2015). For more information, please see our article Bearer Share Custody. If you had bearer shares, and failed to make the change to registered shares, then you need to contact your registered agent to get the company records into order.
For more information regarding these requirements and how Gray & Co. can serve you, please contact us.
They say state-run hacking is how World War III will be waged. In the present time, hundreds of millions of records of private data have been stolen from corporations large and small who thought they were protected. This affects all levels of an organization, and particularly our clients and consumers. So, what do we do?
First of all, we must understand cybercrime. According to Wikipedia, “a hacker is someone who seeks and exploits weaknesses in a computer system or computer network”. A hacker might be intentionally trying to access information for personal monetary gain or to damage a system because he/she doesn´t like the company. Others do it for the thrill and pride of being able to access systems that have been set up at large expense to prevent unauthorized entry, but there is always a back door, a vulnerability that a hacker will find and exploit. These hackers sometimes work alone, or as a syndicate, and others can be hired as another front in an already existing war or rebellion. Because there are so many motives behind hacking, and there´s more likely an entrepreneurial aspect to it, it is very difficult to fight against it. Without motives or sometimes even financial backing, it is hard to thwart efforts of individuals who are able to use their minds to damage large institutions and states.
One more thing, once a company is hacked, you can´t get the information back from the hacker. It´s out there and under the control of the hacker or whoever hired him/her. It could be an ex-employee, a political movement, a whistleblower who disagrees with company activities, or a teenager who doesn´t plan to do anything with it. Perhaps you can find the person and get him/her behind bars, but once breached, the damage is done.
So now that we understand who does it, how do we prevent or protect a company from losses from hacking, reputational as well as financial?
On average, computer systems have been hacked 220 days after they have been hacked. Antivirus software, firewalls (software and hardware), and other traditional forms of protection are obsolete. At any given time, hackers can access computer systems with emails, through old versions of software and browsers, company laptops salesmen take on the road and connect to wifi at a hotel or coffee shop, and worse of all, Android phones. The larger the corporation, the more numerous the opportunities to find a vulnerability, an unprotected terminal, but this problem is not just for large corporations. Small companies, with perhaps less of a budget for cybersecurity, are increasingly vulnerable, and losses from hacking could cripple them.
Cybersecurity starts with education and training. All employees, upon hiring, must be trained on the company´s values and ethics, the usual operational procedures as well as guidelines on dealing with strange email, USB memory cards, installing 3rd party software on office computers, and other user-level security measures. They must also know how to identify phishing (fake messages from seemingly familiar persons) and whaling emails (seemingly from a high executive, but false). For this, competent lawyers can be hired to draft a complete employee handbook that not only ensures employees know what is expected of them on their day-to-day tasks, but also how they must diligently protect the company from cyberattacks. Also they must be aware of the consequences of not following these guidelines, or of deliberately breaching these protocols and exposing company information.
Along with procedure manuals and employee handbooks, confidentiality agreements must be drawn for all employees with access to sensitive information, where they commit and expressly agree to certain protocol and guidelines to help prevent data leaks, and affirm they will not deliberately retrieve and disclose information to third parties.
Another strategy against hacking is insurance. Once hacking takes place, there are reputational and financial losses. Insurance policies can be drawn up to include, depending on the type of company involved, PR campaigns, recalls, notices to change passwords, as well as crisis management to secure the network with additional systems, hardware, software and employee training. Also forensic and legal expenses may be incurred to find and accuse an alleged hacker or group of hackers. Cyber insurance is a new area, which makes it easier to contract a policy that best fits your company needs.
Last but certainly not least, is the main weapon that must be acquired to fight off hackers: a robust and integrated program that analyzes all live processes as well as all terminals and servers, to ensure there are no unauthorized programs run behind the scenes. The best programs that offer this kind of analysis can generally find unauthorized programs in the first 20 minutes of analysis. The programs they find are not in the usual antivirus updates because new ones are created every day, and these are referred to as “zero-day attacks”. Zero day script is new and original software introduced into networks and is it impossible to keep up with considering the types of hackers who create it. Instead, these robust, integrated programs such as Cyfir, CyberArk, and others which detect any process that is not authorized and isolates it until it can be determined it is, in fact, unauthorized.
Corporations large and small are coming to grips with this new reality, and in an ever-changing landscape of cybersecurity, much deliberation must be involved when establishing company policy, guidelines as well as the procedures to be followed in the event of a cyberattack. The CEO, CIO and all members of the organization must work together with their legal team to implement the best strategy to defend against hackers and manage their response.
If you read Panama’s recent headlines, you might be forgiven for thinking that all we have here are scandals and corruption, no laws in Panama and no Criminal Code. If you’ve driven in Panama, you might also be lead to believe that we don’t have a Road Code. That’s not true! We have all the laws we need – we just selectively comply with them, due to selective enforcement. One of my pet peeves in Panama is that drivers STILL don’t know how to go around a round-about!
I highlight this because in 2014 Panama was once again grey-listed by GAFILAT (the Latin American Financial Action Group, a member of the FATF), in spite of having AML (anti-money laundering) and CFT (couter financing of terrorism) laws in place. An IMF visit to Panama highlighted the lack of enforcement of 16 of the principal FATF recommendations. Panama’s principal problem has been one simply of enforcement of the laws that it has. In October 2015, when FATF meets in Europe, Panama will request another evaluation of the measures taken in the past 18 months to ensure enforcement of the laws and compliance with the principal recommendations.
The reality of Laws in Panama
While Panama changed its rules regarding Bearer Shares (requiring that they go into custody or switch to registered shares) and adopted KYC (know your client) rules for lawyers and registered agents, without mentioning the regulations, procedures and reporting standards that exist for financial institutions, it has customarily ignored an important part of the process relating to implementation and supervision.
I will admit, when Panama adopted Law 23 in April of 2015 I groaned – “another law, another supervisory body”: as if there weren’t enough already! As lawyers, we are already subject to the Fourth Chamber (Sala Cuarta) of the Supreme Court, as well as being subject to the oversight of the Colegio Nacional de Abogados (Panama’s Law Society). We already had Law 2 (2011) and Law 47 (2013). And yet, neither of these bodies is charged with the oversight and supervision of compliance with AML/CFT rules.
Law 23 (2015), whose purpose is “to prevent money laundering, financing of terrorism and financing of the proliferation of weapons of mass destruction” established the framework for the “Administration Office for Supervision of Non-Financial Subjects”, as part of the Ministry of Economy & Finance. The administrator, Francisco Bustamante, has already participated in meetings to establish a series of training sessions, particularly aimed at operators of the Free Trade Zone in Colon, to ensure best practices are incorporated into policies and manuals, and communicated to all employees that deal with financial transactions. There is a long list of enterprises that will now fall under the supervision of this office, which were previously not supervised by any bodies. To date, supervision had been limited to the Banking Superintendence (banks and trust companies), the Insurance Superintendence (insurance companies & brokers), the Securities Market Superintendence (stock exchanges, brokers & dealers, investment advisers), and the Cooperatives.
This new office, which we will refer to as the AOSNFS (Administration Office for Supervision of Non-Financial Subjects), has the oversight of 16 sectors of the economy, which previously were reported to FAU (Financial Analysis Unit of the Ministry of Economy & Finance) in the case of suspicious financial transactions, but which were not directly subject to any supervision. There are now 20 new “subjects” that will need to report suspicious transactions over the $10,000.00 limit. These sectors are the following:
- Free Trade Zone companies, including Colon FTZ, Barú FTZ, Panamá-Pacifico & Bolsa de Diamante
- Remittance services (for sending money)
- Casinos, betting agencies and other forms of gambling
- Notaries public
It is expected that over time the AOSNFS will issues procedures and policies to be followed by companies within each of these sectors for compliance with AML/CFT measures. With the implementation of this law, adopting Executive Decree 361 (August 2015), which gives an organic structure to the AOSNFS, including offices and sub-directors, it is expected that Panama is 90% compliant with the 6 basic action plans that were agreed upon to get Panama off the grey list. Additionally to Law 23 (2015), Panama has also made modifications to the Criminal Code (tighter money laundering rules, among other things) and also a law to enhance and enable international cooperation with other agencies. As of July 2015, a round of seminars for FTZ companies and currency exchange companies already began. But, there is still a ways to go; the AOSNFS still has to finish appointing its staff, decide which systems and software to use, and then start the laborious task of working with each segment of industry to adopt appropriate Risk Based Approaches for AML/CFT.
As usual, the newspaper headlines in Panama focused on the fact that lawyers, accountants and auditors were to come under supervision by the AOSNFS; and yet, when you read the actual article, the main changes are with the Free Trade Zones, currency exchanges, pawn shops and remittance services. But it’s much more interesting to focus on the lawyers and accountants! Or as another news headline read “Even your lottery winnings will be scrutinised”, since one of the resolutions adopted by the AOSNFS indicated that winnings over $500.00 should be reported, as well as pawning more than $1,500.00 or sending more than $2,000.00 through remittance services. As of today, the AOSNFS has adopted and published 14 resolutions, regulating the type of reporting to be undertaken by different sectors.
If in New Zealand and Australia they have come to realise that dirty money has driven up property prices, would it be true to say the dirty money is responsible for holding Panama’s property prices at an unrealistic high? Overseas research points out that money laundering is much easier in major cities and it has a large impact on property prices, especially as prices in London have soared. In Mexico, after adopting new AML regulations for realtors, pawn shops and used car dealers, companies complained that business had dropped some 30% (Latin America: Money Laundering Grows). Panama’s requirements for developers, realtors and construction companies, in the past, were not stringent enough to deal with these issues, so some have speculated that our real estate bubble need never burst.
The new regulations (Resolution JD-001-015 of the 14 of August 2015), however, provide very practical requirements for ensuring that AML/CFT measures are adopted:
- Developers must obtain proper due diligence from any investors who participate in the project
- Builders and sub-contractors must verify the identity and details of the developer of a project
- Developers must obtain proper due diligence on realtors and agents that sell the project
- Real Estate companies must have proper documentation identifying each of their agents and any independent agents they work with
- Realtors and real estate companies must identify who is the person buying the property, and if a corporation is used, the person controlling the corporation
- In the event of any cash or cash-like transactions, identify any suspicious transactions.
Listed among the measures to be adopted, are requirements such as knowing what the purchase of property is to be used for, knowing the client in person, as well as other ways to verify the documentation that has been received. In the case of any cash or cash-like transaction, the client should provide:
- Full name
- Birth date
- Country of birth and nationality
In the case of a corporation, foundation or other legal entity being used in a purchase, it is additionally required to get full documentation on the corporation, the officers, directors and shareholders, and identify the ultimate beneficial owner. Additionally, banking and commercial references should be obtained. PEP rules have also been introduced with these regulations, which is especially important given Panama’s recent scandals involving members of the past government and their property purchases.
Along similar lines, lawyers, notaries and accountants are required to obtain similar information regarding their clients, for real estate transactions (when they are acting on the client’s behalf). In all of the following cases, this information is required to be obtained:
- Purchase of real estate
- Administering funds, securities or other assets on the client’s behalf
- Administering bank or securities accounts
- Organising capitalisation of a company or its administration
- Creation of corporations, foundations, trusts etc., or their administration
In the event that the client uses cash or cash-like transactions to pay, over USD$10,000.00, the professional should take extra care to ensure that full compliance with the AML/CFT measures is met. These measures are the following:
- Full name
- Postal address, if different
- Phone number
- Mobile phone
- Fax number, if applicable
- Email address, if applicable
As with the case of realtors, in the case of acting on behalf of a legal entity, full due diligence on the parties involved should be obtained, such that the ultimate beneficial owner and other controlling parties are all identified.
In the case of any suspicious transactions, all “non-financial subjects” are required to report the transaction directly to the UAF, in which case they are prohibited from informing the client of the report filed. Law 23 protects the informant from any civil or criminal action being taken against them by the client for having reported the transaction, as it is not considered to be a breach of confidentiality or privilege to report a suspicious transaction under this law.
The issue of AML/CFT will not simply be taken care of by laws in Panama and regulations – without actual supervision and implementation, it will be difficult to ensure that Panama is truly compliant. Unless it assigns enough resources to make enforcement effective, money laundering (whether from corruption, drugs or other crimes) will continue to be a blot on Panama’s reputation.
In recent years, the fight against money laundering has gained importance in the priorities of many countries. Moved by FATF, governments from principal financial centers have worked to identify money laundering typologies, develop recommendations on best practices to combat money laundering and encourage cooperation among national law enforcement and regulatory agencies. In response to this, Panama has adopted laws under which lawyers (as registered agents) are required to fulfill certain basic “Know Your Client” (“KYC”) or “Due Diligence” requirements, similar to those imposed on banks and other financial institutions. Since 2011, these rules have been in place for all new incorporations (corporations, foundations, trusts and other legal entities), and in February 2016 all Registered Agents in Panama must have the KYC documentation in place for all active corporations under their management, irrespective of the date of incorporation.
In this post, I will present the historical and legal background of these requirements, as well as a brief synopsis of the political and economic reasons for compliance with these new rules. I will then enter into detail regarding the requirements of Law 2 (2011) – What does it require? Who must comply? and What does compliance entail? This post will then present how lawyer-client privilege is maintained under these laws, and how information may be legally requested (due process). Finally, I will close looking briefly at the effects of non-compliance on the Registered Agent.
Background laws and regulations
Law 32 (1927), which establishes the legal framework for incorporation of corporations in Panama, establishes in Article 2, subsection 7, that all corporations must have a Registered Agent in Panama. Until 1966, the Registered Agent could be any person or legal entity, and it did not need to be a lawyer. However, Decree 147 (1966) changed this, indicating that since the Registered Agent may be required to exercise some responsibilities that were reserved specifically for lawyers, it was necessary that the Registered Agent be either a lawyer or a law firm.
While Panama has been under scrutiny for many years for failing to comply with international investigations and cooperation against drugs and money laundering, the rules in Panama have actually required compliance and generally been effective. There have been a number of international studies which have run practical exercises to test compliance, and they have generally found that Panamanian lawyers and Professional Service Providers are more compliant than their US, UK or Australian counterparts. For examples, please see:
- US Vulnerabilities to Money Laundering
- 2007 Project on money laundering in the US; and
- 2012 – Global Shell Games
In 1994, Panama enacted Executive Decree 468 which established the obligations and responsibilities of Registered Agents to “Know Your Client”. These regulations were originally limited to money laundering relating to drugs, but this was expanded in 2006, by Executive Decree 124, to include Drugs, Money Laundering and Terrorism. The purpose of this regulation was to protect the reputation of Panamanian corporations, to ensure that they could not be used for drug-related money laundering. This established that all lawyers or law firms who acted as registered agents for corporations were required to “know your client” and have sufficient information to be able to identify the client to the “competent authorities” when so required. Lawyers were required to provide this information to the Prosecutor or to a Court, if such information was requested because of an investigation being underway in Panama or a request through an MLAT. These regulations protected the lawyer, or law firm, that provided this information, stating that this was not considered to be a breach of the lawyer-client privilege and confidentiality that the lawyer was required to maintain. It further provided that the lawyer or law firm would be considered to be in contempt of court for failure to identify the client without just cause (such as failure to follow due process).
Pressure to comply
For over twenty years, Panama has been under pressure to become compliant with the FATF 40 Recommendations, which include rules regarding banking, holding of records and exchange of information. It is also under pressure for the exchange of information for tax purposes, as can be seen by the 30 treaties negotiated as of the 14th of September 2014, by Panama on Double Taxation or Exchange of Information, of which 25 are already in force (Tax Treaty page, MEF). Furthermore, Panama is becoming FACTA compliant, having already agreed in substance to the terms of the model 1 IGA (see Count down to FATCA, FATCA archive, IGA under FATCA, IGA monitor and Panama complies with FATCA). To this end, Panama has established in the Ministry of Economy & Finance an International office to handle all requests for information.
The principal pressure applied to Panama is through the banking sector, where in 2014, after being placed on the FATF grey list, Panamanian banks lost 21 correspondent banking relationships. Banks have, however, been reporting suspicious transactions to the UAF (Financial Analysis Unit of the Ministry of Economy & Finance) since its inception in 1995. Nevertheless, this is not sufficient for compliance with FATF, and following a review and being placed on the grey list, one US bank cancelled all its correspondent relationships with Panamanian banks, and at the time there were 14 banks who only had 1 correspondent banking relationship left. This pressure lead the banking sector to push strenuously for compliance from all sectors of the economy, in order to release the pressure that they were under. At that time, the principal issue at stake was the Immobilisation of Bearer Shares, which was not to come into effect until 2015, with some parts of the law coming into effect in 2018. One of the results of this was that the introduction of Law 18 (2015), which sped up the implementation of Law 47 (2013).
In 2017 Panama will be under review for compliance with the FATF 40 recommendations, and this review will place particular importance not only on the adoption of laws (which Panama has already done), but the effectiveness of these laws, the regulations and structures that the country has in place to actually be able to comply. Therefore, in addition to having adopted the necessary laws, it is necessary for Panama to have put into place any regulations of how the law will be implemented, who will implement the law and the budget that these offices require in order to be effective. It should be noted that Panama has rejected automatic exchange of information (i.e. that foreign government offices can directly request information from our banks or lawyers), and has implemented systems for exchange of information following due process, in order to avoid fishing (or phishing) expeditions.
Law 2 (2011)
In February of 2011, Panama adopted Law 2 “which regulates the measures for Know Your Client for registered agents of legal entities existing according to the laws of the Republic of Panama”. This law applies to all registered agents (lawyers or law firms), to ensure compliance with Know Your Client rules, to prevent money laundering, terrorism financing and any other illegal activity according to the laws of the Republic of Panama, as well as to satisfy Panama’s obligations under international treaties or conventions. This law enables Panama to require information from a Registered Agent regarding the owner of a corporation for the purposes of the Double Taxation and Information exchange treaties that it has signed.
What does it require?
This law requires that the Registered Agent:
- Identify who is really the client and verify their identity
- Obtain information from the client regarding the purpose of the legal entity – what is it being set up for?
- Provide this information to a “competent authority” in the case of a legitimate request.
Under this law, a “competent authority” who may request information from a Registered Agent is defined as:
- Ministerio Público (public prosecutor) or Courts, in the case of money laundering, financing of terrorist activities and any other illegal activities according to the laws of Panama
- Administration Office for Supervision of Non-Financial Subjects (under Law 23 of 2015)
- General Direction of Income of the Ministry of Economy & Finance, for compliance with international treaties or conventions which have been ratified by Panama.
What does compliance entail?
Compliance under this law means that before even establishing a relationship with the client, the law or law firm must identify who the client is and verify their identify, as well as get the information necessary to know what the purpose of the legal entity is. Without this information, the lawyer should not proceed to undertake any work for the client. In the event that the lawyer is unable to obtain updated information, they should abstain from any new work requested. It is also necessary to have the processes in place to be able to update this information, should the client transfer or assign their interest in the company to another person, or where the client’s information has changed (such as a passport expiring) and needs to be updated. It is also necessary to know who holds the bearer shares of a company.
The minimum requirements for compliance are the following:
|Natural person||Legal Entity||Professional Intermediary|
|For the professional intermediary, this applies in the case of those persons (lawyers, bankers, trust companies, insurance companies, brokerage houses and CPAs) who belong to professional associations whose best practices require that they adopt and maintain professional standards to prevent and detect money laundering.|
This information may be kept in physical or electronic files, and must be held for at least five years by the registered agent. In the event that the registered agent loses contact with the client, after three years of no contact (and failure to pay the annual license fees for the client), the lawyer should resign as registered agent of the company, and is only required to keep the records for a further two (2) years.
In summary, compliance entails the following responsibilities:
- identify the client
- identify the purpose of the company or legal entity
- cooperate with due process (a competent authority requesting the identify information of a company owner in a due case)
- update the client information and maintain records
- train staff with respect to KYC rules (in house)
- apply the KYC policy across the board in their office
- comply with any request from a competent authority for informationi
- maintain confidentiality of the information
Lawyer-Client Privilege and Confidentiality
The general rule provided by Law 2 is that the information provided to the Registered Agent (or to any public servant belonging to a competent authority) is considered too be confidential and maintained in strict reserve. Article 8 provides for fines from $1,000 to $25,000 in the case of breach of this confidentiality, without prejudice to any civil or criminal proceedings that may be brought for breach of the confidentiality. Nevertheless, the public interest of disclosure under due process outweighs the right to non-disclosure of the name of the beneficial owner when properly and duly requested. The Registered Agent is specifically exempted in the disclosure of the information requested under this law.
Due Process and Requests for Information
The law establishes, in Article 12, the process for a request for information. This request should be made in writing by the “competent authority”, upon fulfilling the due process required by Panama’s rules, requirements and procedures, to the registered agent:
- To provide the information that they hold regarding the client; and
- To provide the documentation that backs up this information in any format (physical or digital) that they have.
This request from the Panamanian authorities should fulfill the following requirements:
- It must indicate the reasons for this request for information (what is the legal basis – either a process being undertaken in Panama or a request from a Treaty party);
- The time period (term) in which the registered agent must provide the information (no less than 5 working days); and
- The office and address to which the information should be delivered.
The response from the law firm should be presented on plain paper (or in electronic format if so advised), in which they legibly detail the information which is required by law. The competent authority should be able to confirm that they have complied with the requirements of Article 6 (identification of the owner) simply and easily.
It should be noted that the lawyer is not required to provide any other information or documentation apart from that specifically identified in this law, including anything covered by lawyer-client privilege. This means that the lawyer is not required to identify any bank accounts, transactions or other documentation that they have, apart from the identity of the owner of the company. Furthermore, the law specifically establishes that this law does not authorise the authorities to conduct any search and seizures of law offices, nor to remove from their premises any records or files (electronic or physical), and that in order to conduct any such search and seizure all due process of the Panamanian law would need to be complied with separately and apart from this law.
Another important point is that Article 16 indicates that the registered agent is not required to provide the information where the Competent Authority fails to provide the legal basis for the request, or where due process has not be fulfilled, or whether the information leading to the investigation has been obtained by illegal means (such as illegal wire taps, illegally obtained evidence, etc.), whether by the Panamanian or international authorities. Therefore, Panamanian authorities will need to ensure that their counter-parties are fully compliant with due process in their requests for information.
Effects of non-compliance on the Registered Agent
Should a registered agent (lawyer) fail to comply with these rules, they risk fines and even having their license to practice law being suspended for up to three (3) years. Articles 18 to 31 of Law 2 (2011) deal with the process that should be followed to file a complaint against a lawyer (or law firm) who:
- provide incomplete information or fail to provide up-to-date information
- fail to deliver the information or documentation; or
- repeatedly fail to provide complete and up-to-date information or systematically fail to comply.
In closing, I hope that this article has clearly outlined the steps that Panama has taken to comply with their Gatekeeper’s Initiative, to ensure that from the outset lawyers are cooperating in the battle against money laundering and the financing of terrorism. This initiative began when the G-8 Finance Ministers in Moscow called on countries to consider means to address money laundering through the efforts of professional gatekeepers of the international financial system, in which lawyers and company formation agents form an important part.
Other interesting articles on this topic (from other jurisdictions):
- 2012 – Global Shell Games
- 2007 Project on money laundering in the US
- US Vulnerabilities to Money Laundering
- “Pleased to meet you: the new “Know Your Client” regime
- Client Identification & Verification Requirements for Lawyers
- Know Your Client Obligations – A Practical Checklist
- Customer Due Diligence
- New Zealand’s Anti-Money Laundering Law
- Australian lawyers may be required to “Know Your Customer”
- Australia – Anti-Money Laundering legislation
In part 2 of this article, I will present the technical requirements for holding the shares in custody, such as the documentation that the Authorised Custodian should request and what the client should expect to provide in order to have the shares held in custody.
This article will briefly look at the requirements for an Authorised Custodian, especially for a foreign custodian to be authorised, as well as looking briefly at their responsibilities. It will also specify the details of the affidavit that the beneficial owner (referred to as “ultimate beneficial owner” or “UBO”) will need to sign for the Authorised Custodian and other documentation, and what a UBO will need to do in the case of the sale of the shares of the company to another person or for their estate planning needs.
As mentioned in our previous article on the Custody of Bearer Shares, a local authorised custodian can be:
- Banks with a general license
- Trust Companies
- Brokerage houses
- Stock Exchanges
- Lawyers or law firms registered with the 4th Chamber of the Supreme Court
It is also possible for foreign custodians to be authorised to hold the bearer shares in custody. The requirements for foreign banks, trust companies or financial intermediaries are:
- they must be from a FATF member jurisdiction, or
- they must be from a member jurisdiction associated with FATF; and
- they must be registered before the Banking Superintendence of Panama, which will have a special registry of foreign companies.
The minimum requirements for a foreign custodian are:
- General incorporation details – incorporation date, legal details, and contact details
- Certification of licenses held (banking, trust or financial services), which should be translated to Spanish
- Designation of a Panamanian notification agent
- Affidavit which confirms that
- it has full KYC requirements that meet the standards required by Law 2 (2011)
- That it will provide the company’s registered agent with the full details of the beneficial owner of the shares whose certificates it holds in custody.
The Banking Superintendence of Panama has full authority to regulate these requirements, which they have done by Accord No. 4 (2015), which was published in June 2015 in the Gazette. For more information, please see their page: Authorised Custodians for Bearer Shares. So far, no foreign custodians appear to have registered.
Authorised Custodian responsibilities
The authorised custodian has the following responsibilities:
- hold all documentation regarding this service at their Panamanian headquarters (or in the case of foreign custodians, at their registered address)
- have the physical custody of the share certificates at their Panamanian headquarters (or in the case of foreign custodians, at their registered address)
- hold all of the above under strict confidentiality, as required by Law 47 (2013)
- provide this information when required by the competent Panamanian authorities (which will not be considered a breach of the strict confidentiality required above or a breach of confidentiality or the right to privacy)
- issue a certification regarding who is the owner of the shares, when so required by court order, the beneficial owner of the shares or the lien holder (in the case there is a lien on the shares)
In the case of a foreign custodian, there is the additional requirement that they may either:
- put up a bond of $25,000 or
- provide the registered agent of each company for which they are holding the shares with a notice of their appointment as authorised custodian, as well as the complete name and details of the owner(s) of the shares that they hold in their custody (which will not be considered a breach of the strict confidentiality required above or a breach of confidentiality or the right to privacy).
If they put up the bond, the foreign custodian is only required to provide the registered agent with the notification that they are the designated custodian of the shares, and then will only be required to provide the information regarding the ultimate beneficial owner when there is a request from a competent Panamanian authority.
Affidavit of Beneficial Owner
Articles 8 and 9 of the law specify different information and affidavits for companies incorporated before the law entered into effect and for companies incorporated (permitting bearer shares to be held in custody, as of August 4, 2015):
Article 8: companies incorporated before August 4, 2015: At the moment of handing the bearer share certificate into custody, the following information should be provided by Affidavit:
- Details of the owner(s) – UBO:
- complete name
- nationality (or jurisdiction, in the case of another legal entity)
- cédula (national ID card), passport or registration number (in the case of another legal entity)
- phone number and email address (or fax number)
- Registered agent details:
- complete name
- physical address
- phone number and email address (or fax number)
The owner of the bearer shares will in all cases be deemed to be the person that appears in this sworn affidavit. (Please note that the Authorised Custodian may request additional information. These are merely the minimum requirements).
Article 9: companies incorporated after August 4, 2015: At the moment of handing the bearer share certificate into custody, the following information should be provided by Affidavit:
- Details of the owner(s) – UBO:
- complete name
- nationality (or jurisdiction, in the case of another legal entity)
- cédula (national ID card), passport or registration number (in the case of another legal entity)
- phone number and email address (or fax number)
- Registered agent details:
- complete name
- physical address
- phone number and email address (or fax number)
The owner of the bearer shares will in all cases be deemed to be the person that appears in this sworn affidavit.
Transfer of the Shares
One significant change in the handling of bearer shares, now that they will be in custody, is that the transfer of ownership no longer happens by the simple delivery of the share certificate to another person. Previously, to transfer bearer shares, you simply handed the share certificate to another person (no contracts or documentation required), and they were the new owner. But since the UBO will no longer have the share certificate in their power, the minimum requirement will be that the custodian must be formally notified in writing of the transfer, and the new owner must deliver to the authorised custodian the affidavit required for the beneficial owner. We would recommend to clients that they consider documenting the transfer with a contract or donation document, depending on the case.
Estate planning considerations
Likewise, for the transfer of the shares in the case of the death of the ultimate beneficial owner, it will no longer be as simple as giving the future beneficiary the location or access to the key of the safety deposit box or telling them “the share certificates are under my bed”. The UBO will need to provide the Authorised Custodian instructions in writing (we have not yet seen any regulations regarding this part, but for now would recommend to the client a notarised letter of wishes) instructions regarding how the shares are to be transferred in the event of their death. These instructions take prevalence over any hereditary rights or rules in the UBO’s country of residence, according to article 13 of Law 47 (2013).
It should be noted that this transfer does not give the heirs any rights during the lifetime of the UBO, but only upon the death of the UBO, for which the heir(s) must present the death certificate (but no court order is required).
Any specific questions regarding these clauses should be addressed to a lawyer for advice.
Panama was touted as a country where you could have bearer shares and there were little if no regulations to be concerned about. Changes adopted internationally have impacted Panama, and Panama has made a serious commitment to transparency and fighting illegal activities that take advantage of corporate structures. After an extensive consultation period with experts, practitioners and professionals, Panama finally adopted a regulatory framework in 2013 (modified in 2015) for the continued and lawful use of bearer shares, introducing the concept of Authorised Custodian, to maintain the custody of the bearer shares and comply with the minimum of information regarding the beneficial owner of said shares.
The purpose of holding the bearer shares in custody is to facilitate access, in the case of money laundering or other criminal proceedings, to the shareholder information of companies that issue bearer shares. There is still some debate regarding Panama’s immobilisation of bearer shares, as some parties in Panama consider that there is still a double standard operating with the OECD, as Wyoming (USA) still allows bearer instruments and the UK permits bearer warrants.
Innovative key features: introduction of the Authorised Custodian and automatic amendment of the Articles of Incorporation
Law 47 (2013) introduced the custody of bearer shares, allowing for a three-year grace period from the date it entered into effect (it would not come into effect for 2 years), permitting those companies that had bearer shares before the entry into effect of the law to keep their bearer share structure until August 5, 2018. However, in April 2015 this grace period was shortened for all companies, indicating that they only have until the 31st of December, 2015 to decide how they will handle bearer shares:
- either the company needs to adopt a resolution authorising the immobilisation of the bearer shares and delivery of the bearer shares to an authorised custodian
- or adopt registered shares only.
If the company does not adopt a board of director’s resolution (which should be filed at the public registry) indicating that they are keeping bearer shares and choosing to immobilise these, then the law automatically modifies the Articles of Incorporation of the company to prohibit the issuance of bearer shares and making all shares registered shares only.
One of the benefits of the April 2015 modification is that corporations will no longer have to pay to modify their Articles of Incorporation (which was a task that all registered agents and the Public Registry was seeing as monumental and costly) in order to adopt Registered Shares only. The law specifies that the change will occur automatically, unless the company specifically indicates that it will have bearer shares and that these will be immobilised and put into custody of an authorised custodian.
If you choose to place the Bearer Shares in the custody of an authorised custodian, you have a number of options:
- Those custodians authorised by the Banking Superintendence
- Banks, brokerage houses and custodians that have applied to be custodians and have presented their documentation (manuals and procedures) for the custody of bearer shares to their respective Superintendents
- Banks and foreign administrators of countries which are members of the Financial Action Task Force (FATF)
- Lawyers or law firms who are in the special register of the 4th Chamber (General Business) of the Supreme Court of Panama. You can see the list of approved lawyers and law firms on the Supreme Court’s website. Gray & Co. has already applied to be added to this list and should appear on it shortly. Once we have been approved and added to the list, we will request a certification of Authorised Custodian which may be provided to you upon request. (Gray & Co. was added to this list in August 2015).
Custodians of bearer shares will still be subject to the regular rules regarding privacy and confidentiality with respect to the ownership of these bearer shares, but may also be required by appropriate authorities through due process to reveal the information.
With respect to the issue of timing:
- Companies which were incorporated before the law came into effect will have only until the 31st of December 2015 to decide how they will handle the issue of bearer shares and to adopt a resolution deciding to hold the shares in Custody, otherwise the law provides that their Articles of Incorporation are automatically amended to indicate that no bearer shares are allowed. If you are choosing to change to Registered Shares only, you only need to coordinate with us the corporate resolution cancelling your bearer share certificate and issuing the new share certificate with registered shares.
- If you wish to keep Bearer Shares and have them held in custody, you need to contact us immediately to coordinate preparation of the Board of Directors resolution, to be filed with the Public Registry, indicating that you will have bearer shares held by an Authorised Custodian. This must be completed before the 31st of December, 2015.
- Gray & Co. will be incorporating all new companies with Registered Shares only, unless specifically requested by clients to include the option of Bearer Shares held by an Authorised Custodian. This has already been implemented with all new companies since April 2015.
- All companies incorporated as of the 4th of August, 2015 which provide that bearer shares may be issued and held in custody must deliver such bearer shares into the custody of the custodian within 20 days of incorporation.
Please contact us for more information regarding corporate structures and the use of bearer or registered shares.