Can Panama Shed Money Laundering Notoriety?

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Panama’s legislation is designed to remove the country’s notoriety as a regional money laundering hub. But there are powerful reasons to believe this Central American nation will remain a popular destination for criminals to launder illicit proceeds.

A legislative proposal designed to combat money laundering in Panama has reached the final stages of the lawmaking process, reported La Prensa. In early March, Panama’s presidential cabinet approved the proposal, and it has now been passed to the country’s National Assembly.

The legislation is part of the government initiative “Panama United Against Money Laundering.” The goal of this initiative is to remove Panama from the Financial Action Task Force’s (FATF) “grey list,” which identifies countries that are not taking sufficient steps to combat money laundering. The inter-governmental body added Panama to its grey list in June 2014.

However, there is some controversy over whether the law will be enough to lift the FATF designation. Two Panamanian newspaper headlines from early March read: “Anti-Money Laundering Law, Key to Getting Off the FATF List” and “Anti-Money Laundering Law is Not Sufficient to Get Off the FATF List.”

The legislation is intended to strengthen supervision and control of the banking sector and the stock-market, as well as enable better reporting of suspicious financial transactions.

Panamanian lawmakers reportedly worked with private sector leaders and incorporated FATF recommendations in the drafting of the legislation.

InSight Crime Analysis

There is no doubt that Panama has strengthened its state and financial institutions since the heyday of dictator Manuel Antonio Noriega in the 1980s when it was a banking center for the Medellin Cartel. In 1988, money laundering, drug trafficking, and corruption were so rampant, then-US Senator John Kerry coined the term “narco-kleptocracy” to adequately characterize Panama. Noriega himself was on the payroll of Pablo Escobar before his ouster in 1989 following a US invasion.

Since then, Panama has vastly improved state mechanisms to fight money laundering. According to the US State Department’s March 2014 report on money laundering (pdf), Panama has enacted legislation on 19 out of 20 anti-money laundering standards. This includes domestic actions, such as the creation of a financial intelligence unit, as well as cooperation with the international community, like being party to UN conventions on terrorism and transnational organized crime.

SEE ALSO: Coverage of Panama

Nevertheless, failure to enforce these laws has kept Panama from cleaning up its image as a money laundering hub. Panama’s placement on the FATF grey list was reportedly largely based on a February 2014 assessment report (pdf) by the International Monetary Fund (IMF), which criticized the country’s anti-money laundering efforts.

“Statistics on the number of investigations, prosecutions and convictions of money laundering/terrorism financing are incomplete or missing,” the report reads. According to the report, authorities in Panama stated drug trafficking was the principal source of money laundering, yet they “have not conducted any study or assessment of the risks of money laundering or terrorist financing associated with drug trafficking.”

Panama’s economic system is also inadvertently built to attract shady financial dealings, and removing official corruption from the equation won’t change that.

The State Department’s 2014 report added “a lack of collaboration among government agencies, inconsistent enforcement of laws and regulations, and a weak judicial system susceptible to corruption and favoritism,” have hindered Panama’s efforts to fight money laundering.

Indeed, recent corruption cases involving high-level government officials suggest effective implementation of new money laundering reforms would be an uphill battle. In 2014, President Juan Carlos Varela was accused of receiving laundered money as campaign funds, however it appears little was made of the allegations. Varela’s predecessor, Ricardo Martinelli, has been dogged by accusations of misusing state coffers. In March 2015, the former head of Panama’s Supreme Court pleaded guilty to corruption charges.

But Panama’s economic system is also inadvertently built to attract shady financial dealings, and removing official corruption from the equation won’t change that. Just as sophisticated drug cartels were arguably part and parcel of Mexico’s fiscal liberalization, Panama’s maverick economic policies have drawn the attention of foreign investors and money launderers alike.

SEE ALSO: Coverage of Money Laundering

Panama’s economy grew on average 8.2 percent per year from 2002 to 2013, and its economic growth continues to outstrip that of other Latin American nations. However, some of the same factors that have helped its economy thrive — such as a dollarized economy and lax financial regulations — are also what make Panama a popular place for criminals to launder their ill-gotten money. (Its geographic positioning is also to blame; for years, Colombian trafficking groups have used Panama as a place to launder proceeds from the transnational drug trade.)

“Money laundering follows countries with fairly liberal or open banking systems. And Panama’s economic model is dependent on an open economy… and the ability of investors to bring their money in without a significant amount of regulations and barriers,” Dr. Orlando Perez, Associate Dean of the School of Humanities and Social Sciences at Millersville University, told InSight Crime.

The tweet below by a Latin America correspondent to the Washington Post, Nick Miroff, succinctly illustrates this dynamic.

On the flip side, there are signs Panama’s notorious money laundering reputation could eventually hurt its economic standing.

“The delay in the introduction of reforms in the field of financial transparency could restrict access to external capital and the international payment systems, which would have negative repercussions for the economy,” the IMF mission chief for Panama, Luca Ricci, said recently. Small and medium-sized financial institutions have already lost access to some intermediary banks that enable them to conduct international transactions, according to Dulcidio De La Guardia, head of Panama’s Economics and Finance Ministry.

Panama is tasked with finding a middle ground in which it adequately protects against money laundering but maintains the comparative advantage its economic system provides.

This means Panama is tasked with finding a middle ground in which it adequately protects against money laundering but maintains the comparative advantage its economic system provides. “[Panama] needs to balance the interest of the economy and attracting investment…versus trying to cooperate with the United States and Interpol and other agencies to clamp down on the illegal movement of money,” Perez told InSight Crime.

In the end, the level of vigor behind Panama’s ensuing money laundering reform will likely depend not on the enforcement capability of state institutions, but rather what’s in the country’s best economic interest. It’s a simple cost-benefit analysis.

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