Panama Papers: How did Panama become a tax haven?

5 April 2016

From the sectionLatin America & Caribbean

A huge leak of documents from a Panamanian law firm, Mossack

Fonseca, has thrown new light on how the rich and powerful
hide their wealth. It has also brought renewed attention on
Panama itself, one of the world's best-known tax havens.

But what makes Panama different from other low or no-tax

jurisdictions and how did it become this way?

How did it all start?

According to a 2013 academic study published by the Norwegian
Center for Taxation, the history of Panama as a tax haven began in
1919 when it started to register foreign ships to help American oil
giant Standard Oil escape US taxes and regulations. Where Standard Oil
led, other US ship owners followed, some seeking to avoid higher wages
and better working conditions imposed by US legislation.

Among other applications of Panamanian registration at this time, US

passenger ships were able to serve alcohol to their customers during
Prohibition without breaking the law.

Within a few years, Panama saw the opportunity to extend the principles
it had applied to shipping of minimal tax, regulation and disclosure
requirements to offshore finance. According to the Norwegian study,
"Wall Street interests helped Panama introduce lax company
incorporation laws, which let anyone start tax-free, anonymous
corporations, with few questions asked".

For decades, offshore finance had a relatively modest profile in Panama,

but it took off in the 1970s as world oil prices surged.

What happened then?

Panama passed laws entrenching corporate and individual financial

secrecy. Strict confidentiality laws and regulations were put in place,
with severe civil and criminal penalties for violations. The names of
corporate shareholders were not required to be publicly registered.

The country also has strict banking secrecy laws. Financial institutions
are prohibited from giving information about offshore bank accounts or
account holders. The only exception is reported to be a specific
Panamanian court order in conjunction with investigations into terrorism,
drug-trafficking or other serious offences (not including tax evasion).

Furthermore, Panama has no tax treaties with other countries, providing

an extra layer of protection for foreigners. And it has no exchange
controls, so there are no limits or reporting requirements for money
transfers in or out.

By 1982, partly attracted by business opportunities deriving from the

Panama Canal and its free trade zone, more than 100 international
banks had offices in Panama City.

The result of all this?

"These laws attracted a long line of 'dirtbags' and dictators who used
Panama to hide their stolen loot, including Ferdinand Marcos, 'Baby Doc'
Duvalier, and Augusto Pinochet," wrote journalist Ken Silverstein in a
2014 expose of Mossack Fonseca for Vice.

"When Manuel Noriega, commander of the Panama Defence Forces, took

power in 1983, he essentially nationalised the money-laundering
business by partnering with the Medellin drug cartel and giving it free
rein to operate in the country."
Image copyrightAPImage captionNoriega was overthrown by the US in
1989

The following years saw setbacks to Panama's attempts to position itself

as a legitimate offshore banking centre. Global financial troubles hit
Latin America especially hard, and debts owed by regional players
including Mexico and Argentina soared.

At the same time, criticism was growing about the influence of narco-
businesses in Panama.

Eventually, the US decided to act, invading Panama in 1989 and

overthrowing Noriega. His successor, Guillermo Endara, a civilian and
lawyer, put a new complexion on Panama's international image. But
accusations that the country's financial system permitted money-
laundering, fraud and international tax evasion have persisted.

What makes Panama different from other tax havens today?

"There is no such thing as a good tax haven," Jolyon Maugham, a

barrister who specialises in tax, told BBC 5 Live. "They don't serve any
purpose for the global economy... And what is true in the general is
certainly true of Panama.

"Panama is a real standout bad guy in this story. It's a uniquely ugly
place to site your assets... notable only for the extreme and unattractive
secrecy that it offers."
Mr Maugham says Panama makes available "an especially strict form of
secrecy, a type of opacity of ownership, and (if the reports
of backdating are correct) a class of wealth management
profession[als] some of whom have especially compromised ethics.

"You go to Panama, in short, because, despite its profound

disadvantages, you value these things."
Campaign group, the Tax Justice Network, says of Panama: "In recent
years, it has adopted a hard-line position as a jurisdiction that refuses to
co-operate with international transparency initiatives."

Tax, and making legal avoidance arrangements, is a global business and

havens compete to provide the services, and secrecy, that clients may
seek.
Pascal Saint-Amans, director of the OECD's centre for tax policy, has
been quotedas saying: "From the standpoint of reputation, Panama is
still the only place where people still believe they can hide their money."

Following revelations from the Mossack Fonseca documents, Panama's

President Juan Carlos Varela said his government had "zero tolerance"
for illicit financial activities.

Panama Papers - tax havens of the rich and powerful exposed

 Eleven million documents held by the Panama-based law firm
Mossack Fonseca have been passed to German newspaper
Sueddeutsche Zeitung, which then shared them with
the International Consortium of Investigative Journalists. BBC
Panorama is among 107 media organisations - including UK
newspaper the Guardian - in 76 countries which have been analysing
the documents. The BBC doesn't know the identity of the source

They show how the company has helped clients launder money,
dodge sanctions and evade tax

Mossack Fonseca says it has operated beyond reproach for 40

years and never been accused or charged with criminal wrong-doing
Tricks of the trade: How assets are hidden and taxes evaded
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