Panama leaks leave nation scrambling to defend its reputation

[GUATEMALA CITY] The leak of millions of documents that show how a Panamanian law firm helped set up shell companies in tax havens threatens to sink the reputation of the Central American country, just as a crackdown on financial crime had led to its removal from the money laundering gray list.

"There is reputational damage," former finance minister Frank de Lima said Tuesday in a phone interview. "There are going to be governments that want to sanction our country."

Panama's lax regulations have never been popular with other governments. It's secrecy and the use of instruments such as "bearer shares", which enable owners of companies to conceal their identity, have been a boon to drug traffickers and tax evaders, according to Juan Ricardo Ortega, who was head of Colombia's tax and customs agency between 2010 and 2014. Virtually all major Colombian cases of money laundering and tax evasion have a connection to the country, Mr Ortega said.

"In all the investigations that we carried out, it's always there," Mr Ortega said Wednesday, speaking by phone from Washington DC. "Everything that we looked at that was significant, we would always end up in Panama."

Still, the country was removed from the Financial Action Task Force's money laundering gray list in February, meaning it will no longer be subject to monitoring in its on-going compliance process.

Hiding Assets

Panama's financial services are used by Colombians to hide assets from their spouses ahead of divorce cases, according to Mr Ortega. More legitimately, they are used to hide assets by people who fear that they would become targets for kidnappers if the extent of their wealth were known in Colombia, he added.

Colombia's government in 2014 briefly included Panama on a list of tax havens, meaning investors from there would face higher taxes. Revenues from personal income tax in Colombia are 0.8 per cent of gross domestic product, according to the OECD, compared with an average of 8.5 per cent for the 34-nation bloc.

France has also complained that some of its citizens use Panama's lax regulations to dodge taxes. French finance minister Michel Sapin today said he wants the Organization of Economic Co-operation and Development to put Panama back on its list of non-cooperative tax havens.

Damage Limitation

Panama's government is moving into damage-limitation mode. Deputy foreign minister Luis Miguel Hincapie said this week that "Panama has changed" and the country is "implementing drastic reforms".

Chief-of-staff Alvaro Aleman on Tuesday said Panama would be open to the exchange of tax information as several other nations announced plans to investigate individuals who are named in the leaked data.

The nation's economy will grow 6 per cent this year, according to the International Monetary Fund, the most in the Americas, as it inaugurates a US$5.3 billion expansion of its canal in June and starts other major infrastructure projects, such as a new train line.

The flow of money into the country has helped GDP more than double since 2009. Some of the construction boom, which has led to a glut of offices which now lie empty in the capital, was a means to launder money, according to Mr Ortega.

The Panama papers do "cast a shadow over their entire economy and it plays to the lingering doubts people always had about Panama's secretive banking laws," said Christopher Sabatini, an adjunct professor at Columbia University's School of International and Public Affairs. President Juan Carlos Varela "will have to do something to demonstrate he is serious".

BLOOMBERG

For more coverage of the Panama Papers, visit bt.sg/panama_papers.