PANAMA ANNOUNCES KEY TAX HAVEN SOLUTION - A PATH

UNCLAS PANAMA 000293

SENSITIVE
SIPDIS

WHSR PLEASE PASS TO USTR - DAVID OLIVER

E.O. 12958: N/A
TAGS: ECON EFIN SNAR PREL PGOV PM
SUBJECT: PANAMA ANNOUNCES KEY TAX HAVEN SOLUTION - A PATH
TO BEARER SHARES IMMOBILIZATION

REF: PANAMA 255


1. (SBU) Summary. The GOP announced on April 7 that it
intends to regulate bearer shares. This breakthrough, when
fully executed, will solve Panama's most pressing
transparency issue, fulfill the USG's most prominent
financial crimes regulatory recommendation, and remedy
Panama's sole grave remaining anti-money
laundering/counter-terrorism finance (AML/CFT) deficiency -
lack of access to beneficial ownership and control
information. How important is this step? Bearer shares serve
as an extremely powerful 'cloaking device'for financial
crimes. Held anonymously by "the bearer," these instruments
allow the persons possessing them to store and transfer funds
with little risk of detection. Without their effective
regulation through immobilization (registration),disclosures
under any future Tax Information Exchange Agreement (TIEA)
will remain incomplete - blocked by the secrecy of beneficial
ownership of the corporation. Immobilization requires the
registration of the beneficial owners of those shares -- as
opposed to mere disclosure of directors and resident agents
of anonymous corporations issuing the shares. The GOP's
statement does not specifically mention immobilization.
However it telegraphs this measure by mandating formation of
a "working team" to "propose concrete actions" to "increase
levels of responsibility and transparency with respect to the
titling of anonymous societies." End summary.

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Lawyers vs. Bankers on Bearer Shares
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2. (SBU) Panama's announcement resulted from concerns
publicly expressed by Chairman Rangel and Representative
Levin, placement of Panama on the G20/OECD tax haven "grey
list' of countries committed to yet not implementing reforms,
and - most importantly - recognition by Panamanians that they
must undertake this step in order to retain their
competitiveness and continue to attract direct foreign
investment. Ambassador Stephenson has urged key GOP and
private sector interlocutors to address this issue
proactively, both as a matter of necessary reform and as a
means of avoiding the risk of derailing FTA consideration in
Congress. In order to arrive at this announcement, the GOP
overruled objections of powerful constituencies, most
prominently lawyers, who enjoy the sole right under
Panamanian law to establish corporations and collect annual
corporate maintenance fees (reftel). Given the estimated
existence of 400,000 anonymous corporations, the GOP
presumably impacted a substantial stream of revenue. In its
September 2006 Financial Sector Assessment of Panama, the IMF
notes that lawyers "are not subject to any AML/CFT
requirement even when acting as company service providers."
By mandating a "working team" to "propose concrete actions"
to "increase levels of responsibility and transparency with
respect to the titling of anonymous societies," the GOP has
taken aim at the lawyers holding out for the status quo.


3. (SBU) On the other hand, bankers in Panama are subject to
an array of AML/CFT requirements and have little use for
anonymous corporations. Panama's generally well-regulated
banking sector views them as an impediment to "know thy
customer" requirements. In a recent meeting with Ambassador
Stephenson, Citibank Panama's General Manager Marcelo Gorrini
echoed the sentiments of all the bankers we have spoken with
- the risk of accepting anonymous corporate accounts and
associated bearer shares without knowing the beneficial
owners is unacceptable - from an AML/CFT compliance
standpoint and a risk analysis standpoint. As President
Torrijos noted to Codel Hoyer on April 5, banks in Panama are
in the business of legitimate lending for projects and
businesses that grow the economy. However, banks in other
jurisdictions might not have the same scruples in accepting
bearer bonds that are issued in Panama. When looking at
offshore deposits, other "tax havens" dwarf Panama. Indeed,
in 2002, domestic deposits overtook foreign deposits and have
remained larger through today.

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Combating Money Laundering
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4. (SBU) The authors of the 2006 IMF report grade Panama on
the Financial Action Task Force (FATF) 40 9 recommendations.
In 39 of those recommendations, Panama scores as compliant or
largely compliant; in 9 recommendations Panama is rated as
partially compliant. Panama fails ("non-compliant") only
Recommendation 33: "Legal Persons-Access to beneficial
ownership and control information." The report notes that
"disclosure is made of the identity of directors and resident
agents only," in the Public Registry, "while disclosure of
the identity of shareholders is not required." Various
Treasury Department officials have expressed concern over
bearer shares, which they have characterized as the key
outstanding issue in Panama's path toward quality. The State
Department's 2009 International Control of Narcotics Strategy
Report (INCSR) cites "commendable efforts to enhance Panama's
ability to prevent, detect, investigate, and prosecute
financial crimes, including money laundering and terrorist
financing." However, it emphasizes that, "The issuance of
bearer shares are of concern and the GOP should take adequate
steps (such as immobilization) to assure that these
instruments are not used for money laundering."


How Bearer Bonds Relate to Tax Haven Status and Tax
Information Exchange - Non-Panamanians Use Them to Hide Income



5. (SBU) Most importantly, obstacles to identifying
beneficial owners in the case of bearer share companies
emerge not with Panamanians, but rather with foreign
residents or companies domiciled abroad. According to the
IMF, this phenomenon occurs because Panamanian lawyers often
only deal with foreign lawyers and company service providers,
but not the real owner of the company being incorporated. Our
law enforcement representatives at Post tell us that bearer
shares impede their investigations. When they ask to
interview the resident agent (attorney) for an anonymous
corporation, the attorney has no obligation to know - and
hence disclose - the beneficial owners. When they interview
the director of a suspect anonymous corporation, they often
end up interviewing a maid or taxi driver, while the
beneficial owners of the shares - and hence the firm - remain
undiscovered. This phenomenon occurs despite extensive rights
granted under the U.S.-Panama Mutual Legal Assistance Treaty
(MLAT) and the deep cooperation of Panamanian law enforcement
agencies. Thus, even if a Tax Information Exchange Agreemet
were in force between the United States and Panama, it would
not result in the complete exchange of information without
immobilization of bearer shares.


6. (SBU) On February 26, 54 members of Congress signed a
letter accusing Panama of being a tax haven based on a
December 2008 GAO Report titled, "Large U.S. Corporations and
Federal Contractors with Subsidiaries in Jurisdictions listed
as Tax Havens or Financial Privacy Jurisdictions." Concerning
Panama, it contains a crucial flaw: the vast majority of U.S.
corporations listed therein have NOT/NOT established
subsidiaries in Panama with a primary purpose to evade U.S.
taxation. Instead, they are using Panama as a platform to
expand market share throughout Latin America - additional
market share that often creates jobs in the United States.
For instance, on March 26, Caterpillar broke ground on a $30
million sales and training center on the former Howard Air
Base. Dell employs 1,800 people at its logistics center, also
at Howard - where it joins, among others, 3M and Singapore
Aerospace Technologies. Procter & Gamble moved its regional
operations from Caracas and is rapidly ramping up to 400
employees. Merck also conducts regional operations from
Panama. As Deloitte's Barsallo notes, Panama solicits
physical presence - the opposite of a conventionally held
view of a tax haven as solely a jurisdiction to file articles
of incorporation. Panama attracted $2.4 billion in FDI in

2008. It has embarked on a $5.25 Canal expansion project; its
privatized ports handled 3.3 billion TEU's in 2008 (up from
250,000 TEU's in 1997). Tourist arrivals reached 1.6 million
last year, up from 600,000 in 2000. Copa Airlines has
expanded dramatically in recent years, offering service to
nearly every major city in Latin America. U.S.-based Kansas
City Southern and MiJack Industries operate the railroad
paralleling the Canal. The bottom line: Panama's principal

economic activity is decidedly not encouraging tax evasion.

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COMMENT
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7. (SBU) Comment: In making today's announcement, the GOP
took a gutsy, proactive stance - and also a whole lot of heat
from a powerful, well-connected domestic constituency (two
former Panamanian Ambassadors to Washington head law firms
issuing bearer shares). The GOP, at our urging, has cast this
as a Panamanian decision to do the right thing to ensure
Panama's future as a quality destination for financial
services and foreign investment. We have worked
behind-the-scenes with the President and Vice President to
reduce the impression of gringo arm-twisting (which
unhelpfully fuels the sovereignty defense - poor Panama being
beat up by the gringos again-the lawyers are trying to
obscure the real issues, namely that Panama's economy gains
almost no benefit from rich lawyers issuing bearer shares).
While acknowledging Congressional concerns and their impact
on bringing the FTA to a vote, we have downplayed the
connection to the FTA to the extent possible to avoid fueling
the argument that the gringos keep moving the goal posts on
the FTA and really have no intention of ever approving it. We
have focused instead on the enormous downside of remaining on
the OECD grey list (or slipping to the OECD black list) and
shared our view that, with the playing field shifting as
rapidly as it is, it is inevitable that Panama will address
these tax haven issues. The only question is whether they do
it with grace and style and in time to help get the FTA
approved, or kicking and screaming later. End Comment.
STEPHENSON