Cleaning up after Panama Papers
How could Panama, after the fiasco of the Panama Papers, clean up its act easily and in the stroke of a pen? One way to get rid of shelf companies, non-compliant clients, and those that are in arrears is:
- passing a few new laws in 2015 & 2016, and
- then, in 2017, with some simple resolutions of the Tax Department strike off 40,000 companies from the Public Registry.
From my perspective, striking off all of these companies takes care of a number of problems. Firstly, these companies were at least 3 years in arrears. Secondly, the client is not in contact with the registered agent. This means the registered agent has not got up to date due diligence from the client. Thirdly, in 2015 bearer shares were abolished. Companies were left with registered shares only, unless action was taken. In all likelihood, this was not done. Fourthly, the company probably doesn’t have financial records. Finally, shelf companies are virtually done away with, unless the provider has kept them up to date. Hopefully all of these changes make Panama a better place to incorporate and run business from, legitimately.
If you think your corporation might have been struck off by mistake, and it holds assets (real estate or a bank account), you need to reactivate your company. For legal assistance with Panama Corporation, please do not hesitate to contact our office.
The corporations that were struck off by the Tax Department owed $30 Million plus in government fees. These are unpaid annual renewals. Not only was the government not paid, most likely the registered agent in Panama was not paid. I doubt directors were paid. Prior to the amendment of Article 318-A of the Tax Code in 2016, companies were not automatically dissolved until 10 years after they stopped paying annual renewal fees. That was 10 years that the company continued to exist without being in contact with anyone in Panama.
Unfortunately, even so, the Tax Department lacked efficiency in notifying the Public Registry of such arrears and publishing the dissolution notices. In my 20 plus years in Panama, I have only seen this 10-year notice list published once. Under the 2016 amendment, after 3 years, the Tax Department notifies the Public Registry to put these companies as “struck off”, unable to carry on any business, and two years later, if they are not reinstated, they automatically move to involuntary liquidation and dissolution. And so, in 2017, some 40,000 plus companies are struck off. In 2019, unless reactivated, these companies are automatically “dissolved”. Hence, banks worldwide are requiring, many on a yearly basis, a Certificate of Good Standing for companies.
Many registered agents will heave a sigh of relief with this list of 40,000 companies that are struck off. Those are 40,000 companies that the registered agents of Panama no longer have to be concerned about with respect to Law 2 (2011) and Law 23 (2015), as long as they had their KYC in place at the time of incorporation, or at least until 2013 or 2014. After Panama Papers, it’s time for a massive clean up! Some firms are doing this voluntarily, but the economic cost is onerous.
Law 2 (2011) provides the registered agent the option to resign from all companies where they have lost contact with the client and are not able to update due diligence. This requires preparation of public deeds (notary costs) and filing at the public registry (also cost). All up, about $100.00 per corporation. If you have 10 companies, that’s $1,000.00; for 100 companies that $10,000.00. And that’s 40,000 companies that Registered Agents will not have to resign from.
Since February 2016, all Registered Agents in Panama were required to have the KYC documentation in place for all active corporations under their management, irrespective of the date of incorporation. Additionally, registered agents are paying the costs of physical space (warehousing or offices) for all these files, as well as being administratively responsible for the companies under Law 2 (2011) and Law 23 (2015). Automatic striking off and then dissolution will liberate this space and cost for registered agents.
Bearer Shares: December 31, 2015
On December 31, 2015, by Law 47 (2013) companies which had not expressly elected to place their shares in custody, had their Articles of Incorporation changed to prohibit the used of bearer shares. If a company, on December 31st, had bearer shares, these shares were automatically cancelled. For companies which were active and properly managed, that meant that before (or on) December 31st, they passed a corporate resolution to exchange the bearer shares for registered shares. Those companies that didn’t comply were left without shareholders. Bearer shares were cancelled, but not replaced. Striking these companies off, and dissolving them in two years time, is a good way to clean up those companies that are not compliant.
As of January 1, 2017, all companies in Panama are required to keep accounting records. These records do not need to be filed. Tax returns are not required. But the registered agent must receive from all active companies a written confirmation of where and how such accounting records are kept. Obviously, for those companies that are not up to date, and in contact with the registered agent, this information is not on record.
A shelf corporation or aged company is a corporation that has had no activity. It was incorporated, with a board of directors (nominees) appointed, and left with no activity: put on the proverbial “shelf”. One of the problems with these companies is that they have no shareholders or beneficial owners: they are waiting to be purchased. Then, when sold, shares are issued – “appropriately dated”. Powers of attorney may be issued “appropriately dated”. Contracts could be signed “appropriately dated”.
The issue is not one of the company being eight years old, and new board of directors being appointed, and shares being issued with current date. The problem with the shelf company is that transactions could be back-dated to reflect having taken place around the time of incorporation, even though at that time, the client didn’t even own the company. Of course, Panama Papers focused mostly on “shell companies”, rather than shelf companies. Shell companies are those who were not actually trading, but just shells used by the client for hiding an asset or transaction.
This doesn’t mean that all shelf companies will have been blotted out with this change: if the provider who had the shelf corporation was up to date in all the government fees, the company will still exist. But in terms of compliance, it’s hard to find any legitimate way that the company could still exist and be in compliance. Shares for a new company should be issued within 30 days of incorporation. Who is the shareholder? And if the Registered Agent is required to keep all records regarding the beneficial ownership of the company from incorporation onward, there is no leeway for issuing shares to another person from the date of incorporation.