LAWYERS VS. EVERYONE ELSE - GOP STRIVES TO PREEMPT

C O N F I D E N T I A L PANAMA 000255 SIPDIS WHSC PLEASE PASS TO USTR E.O. 12958: DECL: 03/25/2019 TAGS: ECON EFIN ETRD PM PREL SNAR SUBJECT: LAWYERS VS. EVERYONE ELSE - GOP STRIVES TO PREEMPT OECD BLACKLIST Classified By: CHARGE DAVID R. GILMOUR FOR REASONS 1.4 (b) & (d) ¶1. (C) Summary. The Government of Panama intends to announce financial transparency measures before the April 2 G20 Meeting to ensure that Panama is not placed on the OECD Blacklist of "tax havens." In a March 25 letter to the OECD, the GOP acknowledged that it does not want its financial center to be used by citizens of other nations to defraud their respective tax authorities and offered to enter into bilateral accords to avoid double taxation conforming with the OECD Model Convention. However, wrangling among domestic interest groups continues, with some powerful lawyers groups digging in their heels against reform. Minister of Commerce and Industries Gisela de Porras leads the effort to conform Panama's practices with OECD standards. She shepherded discussion of this challenge at a Cabinet meeting on March 16 and subsequently chaired meetings with various interest groups, including the Association of International Lawyers and the Banker's Association last week. End summary. -------------- GOP TAKES PROACTIVE STANCE -------------- ¶2. (C) Last week, Minister de Porras told Ambassador Stephenson that the GOP was considering a menu of options including immobilizing bearer shares in the manner of the British Virgin Islands, tightening regulation of cash transactions, issuing tighter regulations over the insurance industry, and/or entering into some mechanism for the exchange of financial information with other governments (such a mechanism could take the form of a clause in a tax treaty to reduce double taxation, a separate tax information exchange agreement, or another type of arrangement). In a March 25 letter to the OECD Secretary General, Minister de Porras offered to enter into bilateral accords to avoid double taxation conforming with the OECD Model Convention (which includes provisions for exchange of information in Article 26). She also acknowledged that the GOP does not want its financial center to be used by citizens of other nations to defraud their respective tax authorities. ¶3. (C) These measures are opposed principally by groups of lawyers (there is no unitary bar association in Panama) who earn substantial revenues from secrecy aspects of Panama's corporate and financial architecture. Under Panamanian law, only lawyers are allowed to establish corporations, and the revenue from an estimated 400,000 corporations and annual maintenance fees is compelling. They have recycled the sovereignty and 'big countries picking on the little Panama' arguments. Some have urged use of a retaliatory law, the Ley de Retorcion, which would bar firms of governments applying sanctions from being selected for public procurement. Panama's leading dailies have carried a volley of articles for and against compromise with the OECD for the past week. Former Bank Superintendent Delia Cardenas denied that Panama is a tax haven (she is a member of leading presidential candidate Ricardo Martinelli's economic team). ¶4. (C) Nonetheless, the GOP understands that the grounds for these arguments have drastically diminished given concessions by Switzerland, Austria, and Luxembourg and further steps toward openness in some Caribbean financial centers. Also, Panamanians understand that the placement on the OECD/FATF Blacklist in 2000, while traumatic, led to necessary reforms. Current Bank Superintendent Olegario Barrelier supports reaching an accord with the OECD. President of the Panamanian Bankers Association, Moises Cohen, has urged the government to get ahead of the blacklist issue. A broad constituency exists for the GOP's initiative. Domingo Latorraca, Economy and Finance Vice Minister under President Moscoso, opined in La Prensa that Panama should evolve in its cooperation on tax evasion, "always thinking of the greater interests of the Nation and not in that of those of a few." -------------- TIMES HAVE CHANGED -------------- ¶5. (C) In 2008, Panama has much more to lose from being blacklisted than it did in 2000. During the past nine years, marquee U.S. firms have established regional headquarters in Panama, including Dell, Caterpillar, Procter & Gamble, 3M, and Hewlett-Packard. The harm to Panama's reputation if it is blacklisted, as well as the possibility of counter-measures such as loss of the U.S. foreign earned income exclusion for these firms, up the ante on making transparency improvements. Ironically, the physical presence of these corporations via employees and bricks and mortar - using Panama as a platform to expand market share - contradicts one of the elements commonly cited as a factor in a tax haven - lack of physical presence. ¶6. (C) Comment. The Torrijos government is highly motivated to avoid OECD opprobrium and to leave on July 1 having fulfilled all of its major goals. It understands that too much in the Panamanian economy is now at stake, including strong outcries against the pending FTA with the United States, should their efforts fail with the OECD. Thus far, the tax haven issue has been debated in a Panama vs. OECD framework. This government also understands that shifting the debate to a Panama vs. United States framework would be especially counterproductive. The incoming government - be it Balbina Herrera or the more likely Ricardo Martinelli - offers much more uncertainty. Finally, should the GOP agree to immobilize bearer shares and/or regulate anonymous corporations, it would address their single area of FATF 40 9 non-compliance in the 2006 IMF/FATF Financial Sector Review and represent a significant step forward in achieving greater transparency. End Comment. GILMOUR