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