Panama, whose capital is pictured above, was returned last month to the Financial Action Task Force’s “Gray List.” // File Photo: Matthew Straubmuller via Creative Commons.

The Financial Action Task Force (FATF) on June 21 placed Panama back on its international money laundering watchlist. The Central American nation was put on the so-called “gray list” in 2014 over flaws in the country’s financial practices. It was removed in 2016 after changes to its legal and regulatory framework, but the FATF has now reversed that decision despite heavy lobbying from officials in Panama. Why has Panama been placed back on the FATF’s gray list? What are the consequences of the decision for its business sector and economy? What needs to happen for Panama to be removed from the list?

Carlos Berguido, executive president of the Panama Banking Association: “Panama exited the previous version of the FATF list in record time, because of the strong commitment of the government, regulators and the financial services sector to promote the adoption of laws and regulation aimed at improving the country’s capacity to fight money laundering. However, during the last three years, a political stalemate between the executive and legislative branches of government made it very difficult to timely adopt certain key pieces of legislation, such as the criminalization of tax fraud and making tax crime a predicative of money laundering. The National Assembly passed this very important legislation in January, and it took effect in March, making it almost impossible to show evidence of enforcement in such a short time. However, supervision of the vast regulated nonfinancial sector came under scrutiny. The newly created intendency is tasked with anti-money laundering/anti-terrorist financing supervision and law enforcement of very diverse activities, from casinos to attorneys to accountants and used car dealers. This needs some time and resources to evolve and build the necessary institutional capacity in order to develop the risk-based approach to effectively supervise and enforce the law. During the last review, which focused on enforcement of the existing legal framework, the FATF recognized the enormous efforts Panama has carried out to achieve technical compliance, but the enforcement component will require more time. Though there was no direct mention of any deficiencies in the banking or financial sectors, the Banking Association has pledged to support the government in its efforts to get the country out of this list and remain out of it.”

Richard Fogarty and Larry Iwanski, managing directors at Alvarez & Marsal: “Panama continues its off-again, on-again status with the FATF’s lists as the country is named to the list of jurisdictions with strategic anti-money laundering/combating the financing of terrorism deficiencies. In its decision, FATF cited four areas (abbreviated here) in which Panama needs to improve: 1) assessing and understanding the money laundering/terrorist financing risks and mitigating those risks through national policy; 2) identifying unlicensed money remitters, applying a risk-based approach to supervision and taking action against violations; 3) verifying, monitoring, updating and granting timely access to beneficial ownership information; and 4) demonstrating the ability to investigate and prosecute foreign tax crimes, cooperating with foreign jurisdictions in the process and continuing its focus on money laundering investigations in high-risk geographies. The major impacts of this distinction may be felt in the financial services, trade finance and the shipping industries. Most immediately, financial institutions will feel direct pressure from its correspondent banking relationships and potentially face de-risking actions. This seems obvious. Less obvious may be the increased scrutiny from other regulators that are responsible for business passing by, with or through Panama. Once again, Panama becomes an extraterritorial focal point for criminal activity. Removal from the list may take Panama several years as it strives to implement changes in the law, remediate documentation supporting the law and demonstrate to FATF complete compliance. The differentiator will be the willingness and the commitment of the government, people and businesses (including the legal community) of Panama to repair the country’s anti-money laundering and counterterrorism financing program.”

José Montaño, vice president and senior analyst at Moody’s Investors Service: “The Financial Action Task Force (FATF) returned Panama to its list of countries with deficiencies in anti-money laundering and combating-terrorist-financing regimes. Panama’s placement back on FATF’s list is a negative development for offshore Panamanian banks funded mainly by foreign investors. These banks are more exposed to repricing and refinancing risk than banks with domestic operations that are funded by local clients. Panama’s return to the list will increase scrutiny from the international financial community and its interactions with Panamanian financial institutions. The most affected will be the relationships these banks have with their correspondent banks, and the resulting increase in pressure on banks’ operational costs. The FATF placed Panama back on the list after concluding that despite the country’s recent efforts, more regulatory advances are necessary. In addition to increasing negative pressure on banks’ profitability, Panama returning to the FATF list has the potential to eventually limit banks’ business development efforts as some international financial institutions curtail their interactions with Panamanian banks and other financial companies. Because the Panamanian financial system is totally dollarized, a deterioration in banks’ relationships with international financial institutions would have significant negative consequences on Panamanian banks’ funding activities, particularly offshore institutions. Since 2014, Panamanian authorities have taken measures to strengthen the country’s regulatory framework, particularly as it relates to financial and fiscal matters. Panama recently approved a new fiscal law and has improved the country’s financial reporting standards. The country also works with international financial supervisors in an effort to avoid having a reputation of a country with weak regulatory standards.”

Marco Gandásegui Jr., professor at the University of Panama and research associate at the Center of Latin American Studies (CELA): “Top Panamanian officials were surprised—if not shocked—by the move to place the country back on the ‘gray list.’ One high-ranking officer at the Ministry of Economy and Finance said it was unfair and that the FATF was acting in vengeance. Others concluded that Panama was not complying with one key element. While the financial system and nonfinancial enterprises were acting as requested, the problem was placed at the doorsteps of law firms that were still doing business as usual. Panama has an outstanding system that shares information with all other countries.”

Matías Mora, managing director for Central America at Berkeley Research Group: “Despite the efforts on a regulatory and normative level, in regards to the preservation and implementation of a culture of preventing money laundering on a national level, we could observe that the weaknesses found are related to the design and implementation of controls in the nonfinancial sector (which has more than 25 industries). Part of the weaknesses found are based in the acculturation of each and every nonfinancial sector involved, as well as the lack of effective execution in the sanctions regime for these sectors. In the financial sector, consequences are more imminent because correspondent accounts and contingency lines at credit level could be lost. It is important to mention that the practice of de-risking could recover popularity between correspondents and the different local and international entities. At the state level, there should be publications or international-level sessions regarding models, controls, methodologies and procedures that have been effectively implemented and the effectiveness of the controls regarding the prevention of money laundering.”

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