AML rules & enforcement
In July 2017 the Indendance for the Supervision & Regulation of Non-Financial Persons adopted resolution JD-REG-001-17. This resolution sets the procedures for onsite inspections, reviewing procedures and documentation for compliance with Law 23 (2015).
As explained in a previous post, Law 23 set up the Intendance and regulated the types of businesses and professionals supervised by the Intendance. This included companies in the Free Trade Zones and Panama Pacífico. Likewise, it included real estate developers, realtors, lawyers & accountants. In particular, Law23 adopts measures to prevent money laundering and financing of terrorism. Article 13 of the Law charges the Intendance with supervising and regulating “non financial persons”.
Artice 13 of Executive Decree 361 (2015), adopted following Law 23 (2015), establishes that as part of supervising, the Intendance will carry out onsite inspections of these non financial persons. It also provides for off site inspections, where there is simply delivery of documentation and reports to the Intendance’s office. The intendance requires access to relevant and pertinent information in order to measure the effectiveness of the controls put in place. This is particularly important in higher risk business models, to ensure compliance. With this in mind, the Intendance established in JD-REG-001-17 the guidelines for requesting information or documents as part of inspections.
In order to undertaken an inspection, whether onsite or offsite, the Intendance must notify in writing. The time frame for the inspection, the scope and the documentation or information being requested are required in the letter. It must also indicate the format to be used (if applicable).
The person or entity under inspection must deliver the information or documentation by the dates required, in the requested format. Originals, copies, electronic format or any other means of delivery must allow the intendance to get a clear and real view of the situation the transactions being supervised. The intendance may request documents be translated to Spanish.
Late & incomplete compliance
Compliance which is provided late or not at all will be considered to have failed to comply. If the information or documentation requrest is incomplete, illegible or in a format different to the one requested, sanctions may also apply.
Costs of inspection
At this time, we have no idea of what the actual cost of inspections will be, although it is understood that the Intendance (similar to the Banking Superintendent) charges the entities that are under supervision for doing onsite inspections. They are charged for the manpower required to be in their offices for the time spent there. Other indirect costs are space, internet & phone connections that must be provided, and the staff that need to be assigned to assist and provide the inhouse documentation that is being inspected and reviewed.
Our firm is able to assist with compliance manuals, preparation of policies and procedures and preparation for such inspections.
Opening Corporate bank accounts in Panama
Last week, our post dealt with opening personal bank accounts in Panama. This week, we will look at how to open a corporate bank account. It is important to note that there is a difference between locally operating companies and offshore corporations, especially in the banking industry. Some banks in Panama will only open accounts for corporations with an “aviso de operación” – business license. That is a company that operates locally and is subject to local taxes. On the other hand, some banks will only open accounts for offshore companies. It is no longer easy to find banks that are working with both onshore and offshore business.
Among the issues that banks consider are:
- FATCA compliance
- Cost of Know Your Client and Due Diligence
- Profile of the account – will the bank make money?
- Is this type of business in the normal line of business of the bank?
- How much money will pass through the account versus how much money will stay in the account?
Requirements: opening a corporate bank account
Many of the requirements for a corporate bank account are similar to those requested for the personal bank account. But in the case of a corporate account, the bank will want all documentation taking it back to the controlling interest or ultimate beneficial owner.
Keep it simple:
Imagine, for a moment, the following structure:
While this may look really “pretty” from the perspective of asset protection or estate planning, it is a nightmare for the compliance officer at the bank. Supposing that you are opening an account for the Panama corporation under the holding company, the bank needs to receive documentation for:
- Your Panama corporation – each one of the three directors, the account signatories, and the copies of the corporate documents;
- The share register that shows who “owns” the company – a holding company. Now they need the corporate documents for the holding company, with the due diligence and know your client details for each of the directors, shareholders, and officers of this company.
- The shareholder of the holding company: a foundation. They need the incorporation documents of the foundation, the details of each member of the Foundation Council, the Protector and possibly even the founder. And they still haven’t arrived back at the Ultimate Beneficial Owner.
- The bank ultimately wants to know:
- who has the controlling interest?
- which person is calling the shots?
- who is the decision, maker?
In conclusion, for the bank: simple is always better. Your asset protection or estate planning needs can be taken into account, but you should be able to explain the structure easily to the customer services representative at the bank.
In a corporate structure with multiple shareholders, you will need to provide know your client details for any shareholder or controlling person holding over 10%. Additionally, if the shareholder or holding company is a publicly traded entity, expect to provide proof of this. Make sure you have the proper authorization for establishing the subsidiary (resolutions) and authorized persons on the account.
Basic account opening requirements:
So, ignoring the complicated structure outlined above, what does the bank require?
- Corporate account opening forms (the bank will supply). There may be some 6-10 pages which need to be completed.
- Copies of your incorporation documents: articles of incorporation, resolutions.
- Copy of the share register
- Extract from the public registry – known by many as a Certificate of Good Standing
- Business plan – the banks are looking for something that shows what the company will be doing. Who will be the suppliers to the company? Similarly, what customers will the company have?
- If the company has been in existence for more than one year: financial statements and/or accounting records.
- Source of funds for the initial deposit and trade projections (usually provided in the actual account opening forms)
- Documentation (such as that provided for the personal account) for each person associated with the corporation:
- account signatories
- shareholders / beneficial owners / controlling interests
- FATCA forms – W8Ben, W8Ben-E, W9 – depending on the situation
The documents will vary depending on the bank that you choose to open the corporate bank account, but the above list and those indicated on the personal bank account page are pretty comprehensive of what is usually expected.
Factors to consider:
Once again, when choosing the bank there are a number of factors that you should consider:
- at the bank – your customer service representatives
- in the call center – is there a special number for English?
- what about their online system?
- Online banking platform
- Is it easy to use?
- Does it have a good security system?
- Do you need an App on your mobile phone, a token or how are passcodes generated?
- What are the minimum deposit / minimum balance requirements of the bank?
- What are your cash flow requirements?
Our office is happy to assist you with your corporate bank account needs in Panama. We are also able to offer banking options in other jurisdictions. In some cases, banks in other jurisdictions are easier to work with and offer a wider range of currencies and opportunities. Beth Gray is experienced with local and international business companies, especially the aspects of tax compliance and reporting. Betsy Moran is experienced with compliance issues, especially the AML guidelines. Joan Villanueva can assist with any relocation inquiries that you may have. Do not hesitate to contact us for more information regarding your corporate or business needs.
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.
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