Five years after the Panama Papers were first published following a document leak from Mossack Fonseca – then one of the largest offshore law firms in the world – governments have recovered more than US$1.36 billion in back taxes and penalties. Authorities around the world continue to pursue civil and criminal cases against those accused of money laundering and corruption.
The release of the Panama Papers in 2016 was a watershed moment for global financial transparency. The leaked documents provided vast evidence on the use of anonymous companies by politicians, executives, billionaires and criminals to game the system and hide illicitly acquired funds.
The Panamanian firm Mossack Fonseca was just one of many law firms that still operate as corporate service providers, incorporating companies in offshore jurisdictions on behalf of clients, serving as nominee shareholders and directors and administering these companies for a yearly fee. Other corporate service providers have also been in the spotlight in recent years for allegedly aiding clients to launder dirty funds.
Transparency loopholes in corporate ownership in Panama’s regulations still in place
In Panama, corporate service providers like Mossack Fonseca are key as they serve as “resident agents”. Offshore companies set up in Panama need a resident agent and the obligation to identify the actual people – beneficial owners – behind companies lies with them.
Once these companies are successfully incorporated, authorities usually do not collect any information on the real owners of companies. In case of suspicions or investigations against a particular company, law enforcement or tax authorities would have to request information from the corporate service provider. If the authorities are lucky, the corporate service provider will disclose the information in a timely manner, this information will be accurate, and the provider will not tip off their client in the meantime.
Given what we know about corporate service providers’ role thanks to the Panama Papers, such an arrangement is far from ideal as it allows resident agents to shield offshore companies embroiled in corruption.
In the case of Panama, other gaps also severely impact the efficacy of these rules. For instance, resident agents are only obliged to collect beneficial ownership information at the beginning of their relationship with a client and there is no obligation for them to update this information. Authorities also need to indicate to resident agents the reasons why they need information on the owner, which could result in resident agents tipping off their clients.
Furthermore, as of 2018, only 12 per cent of resident agents were registered for supervision with the country’s financial intelligence unit (FIU). This limits effective supervision and the ability of the responsible authorities to ensure that resident agents are complying with their obligations.
Five years after the Panama Papers it seems unthinkable that such a flawed model is still in place in Panama and that it is considered a viable option in a country’s anti-money laundering framework.
Flawed framework, inertia in implementation thwarting transparency efforts
In January 2020, the government of Panama approved Law 129 which established a regulatory framework to create a beneficial ownership register in Panama. While this was an important step towards detecting and fighting corruption, this framework was riddled with gaps.
At that time, Libertad Ciudadana – Transparency International’s chapter in Panama – raised red flags that the system, as proposed by the government, would leave important loopholes which would adversely impact its effective implementation. Two major drawbacks of the proposed system are the limits on access – it would not be a public register, which are more effective than private registers – and the lack of a responsible party to ensure the truthfulness or accuracy of the information provided. The approved legislation also ignores important issues like trusts (fideicomisos), effective supervision, and sanctions for non-compliance or for filing incorrect information.
The problem is, however, much more serious than anticipated. Almost two years since the adoption of Law 129, the Panamanian beneficial ownership register still exists only on paper. The government has taken no steps to adopt the regulation and it does not seem likely that any steps will be taken in the near future.
Panama also continues to rely on resident agents that are poorly supervised – and Panamanian companies continue to be seen as a secret weapon to commit crimes and launder money.
Further, Libertad Ciudadana found that the law passed by the government in 2020 was hastily designed and approved mainly to satisfy the Financial Action Task Force (FATF) and ensure that Panama would be removed from the grey list of countries with anti-money laundering deficiencies.
The Panamanian government’s inertia in implementing the regulatory framework for the creation of a beneficial ownership register seems to stem from their misplaced focus on removing the country from such grey lists rather than from an understanding of the need for an effective beneficial ownership transparency regime. This also explains the inadequacies in the proposed framework – it did not stem from a need to meaningfully address the underlying issues that led to Panama being featured on such grey lists in the first place.
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The corrupt should have nowhere to hide
A campaign by Libertad Ciudadana – Que no se Puedan Esconder (nowhere to hide) – shows the value of beneficial ownership registers in not only fighting financial crime and corruption in Panama but also globally.
An effective beneficial ownership regime would do a lot more than just help Panama to have its name removed from grey lists. There is growing evidence from countries that have already implemented effective beneficial disclosure systems that such a system would also help authorities to be better equipped to detect and fight corruption, fraud and conflicts of interest in public procurement. It would also support businesses and help to increase trust and integrity in the business and financial sectors.
To ensure that contracts are awarded based on best offered value, performance in previous awards and in the best interest of taxpayers, fair and open selection processes are required, where the identity of the people receiving public funds is disclosed as a safeguard against the ineffective and corrupt use of resources.
Beneficial ownership registers & privacy: No reason to panic
By Ivy Solís Valdés, co-author Panama: Beneficial Owners Registry
In Panama, there are serious concerns that the implementation of a beneficial ownership registry could violate the privacy rights of individuals. However, publicity offers legal security of private property. The Public Registry of Panama collects, updates and integrates data and guarantees the authenticity of documents, titles and acts, ranging from the transfer of ownership of real estate to an individual’s legal capacity. For example, for the minutes of a meeting of co-owners in horizontal properties to be registered, a list of attendees and data about their property must be included.
Risks associated with the disclosure of information will depend on the context of each case. Depending on these, exceptions could be implemented. Such is the case in the United Kingdom, where only the authorities have access to certain data and suppression of information can be exceptionally requested if, due to the company’s activity or personal characteristics of the beneficial owners, they could be at risk of violence or intimidation if their data were made public.
On 29 March 2021, Law 81 on protection of personal data came into force which is inspired and governed by the principles of loyalty, purpose, proportionality, truthfulness and accuracy, security of data, transparency, confidentiality, legality, and portability. A public registry of ultimate beneficial owners complies with these principles. Regardless, the processing of personal data by the authorities for the purposes of prevention, investigation, detection or prosecution of criminal offenses or the execution of criminal sanctions does not fall within the scope of application of this law.
Changing the guard
The government of Panama should address the weaknesses in its proposed framework for a beneficial ownership regime in the country and move towards implementing the framework to put an end to the abuse of anonymous companies.
The international community – and in particular FATF, as the global anti-money laundering standard-setter – should once and for all review the international standards on beneficial ownership transparency. This will help in providing more clarity and guidance to countries on the measures that should be in place to ensure that accurate, adequate and up-to-date beneficial ownership information is available to competent authorities in a timely manner. In doing so, FATF should learn from the past and not insist on measures that have clearly been failing across countries.
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