Shelf companies, Arrears, Registered Agents & Compliance

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Shelf companies, Arrears, Registered Agents & Compliance

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:

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.

Arrears

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.

Registered Agents

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.

Accounting Records:

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.

Shelf companies

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.

Accounting Records in Panama – your 2017 update

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Accounting Records in Panama – your 2017 update

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.

Who?

  1. 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
  2. Private Interest Foundations – irrespective of what assets or holdings the foundation have
  3. Holding companies – even companies whose sole purpose is to hold share in other companies are required to have accounting records

What?

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.

Accounting records for Panamanian corporations and Foundations

Accounting records for Panamanian corporations and Foundations

How?

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.

Where?

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:

  1. who is the person that will be responsible for keeping these accounting records?
  2. where will the accounting records be kept?
  3. how will the accounting records be kept – format?

The Registered Agent’s responsibilities:

The registered agent of a company is expect to:

  1. Have from each client that does not have their accounting records with the law office, a sworn declaration as mentioned above
  2. 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
  3. 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:

  1. 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.
  2. Shareholder Register – the register which shows who is(are) the current shareholder(s), and any previous shareholder(s).  This should include details such as:
    1. the number of shares issued
    2. the share certificate number
    3. the payment made for the shares (fully paid or partially paid)
    4. the date of issue
    5. the name and address of the shareholder

Bearer Shares

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.

Bearer share custody

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beth-grayPanama 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:

  1. 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
  2. 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:

  1. Those custodians authorised by the Banking Superintendence
  2. 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
  3. Banks and foreign administrators of countries which are members of the Financial Action Task Force (FATF)
  4. 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.