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.
Wednesday, October 4th, the Ministry of Economy & Finance (read: Tax Department) published in the Gazette 174-page list of companies which have been struck off the register. This striking off is done in accordance with Article 318-A, subsections 2, 3 & 4 of the Tax Code. Article 318-A of the Tax Code deals with the payment of annual renewal fees (franchise tax) for corporations, foundations & LLCs.
This is the third such list it has published this week. The first was published on Monday. A second on Tuesday, and a fourth list was published today, just before I published this article! I almost missed that list. It’s an amazing 40,000 companies that are not in good standing. It’s estimated that these companies owe some $36 Million in government fees alone.
Effects of striking off:
Subsection 2 of Article 318-A establishes that failure to pay this annual renewal fee for 3 years consecutively results in striking off. Subsection 3 establishes the following effects of being struck off:
- blocked from initiating legal action, doing business transactions or transfering assets;
- unable to make claims or exercise rights;
- blocked from filing corporate changes of any type.
Nonetheless, if your corporation is struck off, you may do the following:
- request reactivation (paying an additional $1,000.00 penalty fee for reactivation);
- defend any legal process begun against the company;
- continue with any legal processes which started before striking off.
Automatic dissolution after striking off:
It is important to note that you only have a 2-year period after it is struck off to reactivate it, otherwise striking off leads to automatic dissolution at the Public Registry. Consequently, the company will be considered to be wound up. This means that any company that is in arrears for 5 years or more, is automatically dissolved (previously this was a 10-year period).
The lists of companies can be found in the following gazettes:
- Resolution 201-5610
- Resolution 201-5611
- Resolution 201-5612
- Resolution 201-5613
- Resolution 201-5614
- Resolution 201-5615
- Resolution 201-5616
- Resolution 201-5617
- Resolution 201-5618
- Resolution 201-5619
- Resolution 201-5620
- Resolution 201-5621
- Resolution 201-5622
- Resolution 201-5623
- Resolution 201-5624
- Resolution 201-5625
- Resolution 201-5626 (MBCL – Muren)
- Resolution 201-5627
- Resolution 201-5628
- Resolution 201-5629
- Resolution 201-5630 (Puente Hombre – Rokewood Trading)
- Resolution 201-5631
- Resolution 201-5632
- Resolution 201-5633
- Resolution 201-5634
- Resolution 201-5635 (USA – ZYXXX)
What do you need to do?
If you a corporation that owns property or has assets of any kind, and you have not been paying the annual renewal fees, then you have 2 years to reactive the company if it is on these lists. You need to pay all outstanding government fees and the $1,000 reinstatement fee (and registered agents and directors fees, if applicable). Otherwise, in 2 years from now, the Public Registry will dissolve the company automatically.
This is the first time any such list has been published since the amendment was introduced in 2016. Therefore, it contains companies that have not paid for five or even seven years, and not just those who owe 3 years in fees. This is the moment to bring your Panamanian corporation back into good standing if you are actually using it or you need it.
Finally, if you have any questions regarding your Panama Corporation and striking off, please do not hesitate to contact our office. Our staff would be happy to assist you.
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
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.