Panama has been removed from an international money laundering watch list, a major step towards cleaning up the Central American nation's reputation as a safe haven for illicit financial transactions.

In a February 19 press release, the Financial Action Task Force (FATF) announced it has taken Panama off its money laundering and terrorism financing watch list. Known as the "gray list," it identifies the countries that lack sufficient anti-money laundering legislation and regulations.

FATF placed Panama on its watch list in June 2014 after a 2012 International Monetary Fund delegation found significant flaws in Panama's anti-money laundering practices.

Panama has since introduced legal and regulatory framework to address anti-money laundering deficiencies identified by FATF. "Panama is therefore no longer subject to the FATF’s monitoring process," the release states.

President Juan Carlos Varela celebrated FATF's announcement on Twitter, thanking Panama's civil society and private sector for working "shoulder to shoulder" with the government to improve the country's anti-money laundering standards. 

InSight Crime Analysis 

Panama's removal from the gray list is significant considering its reputation as a money laundering hub that stretches back decades. 

Under military dictator Manuel Noriega in the 1980s, Panama became known as a major safe haven for criminal proceeds, with organizations like Colombia's powerful Medellín Cartel stashing and laundering illicit profits there. 

Panama's reputation as a financial safe haven was built on corruption, a dollarized economy and geographical proximity to Colombia, a major drug producing nation that has a large criminal economy.

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But powerful incentives also kept Panama from shedding its money laundering notoriety. The country's lax financial regulations are credited with facilitating Panama's robust banking sector and shipping industry, which have helped deliver an impressive six percent growth in gross domestic product (GDP) in recent years. 

Nonetheless, Panama's anti-money laundering advances come with their own financial incentives. Some Panamanian banks may now be able to attract international business opportunities that were lost after the country was placed on the gray list.