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Why Panama? A small country located in the southernmost part of Central America, Panama (75,420 sq. km) has capitalized on its pivotal and privileged geographic location between two continents, North and South America and the Atlantic and Pacific Oceans. By exploiting its location, Panama has developed an unrivalled transportation and communication network that includes the famous Panama Canal, the two busiest ports in Latin America and the world's second largest free trade zone. The local economy is primarily composed of a highly competitive services industry (contributing to over 75% of the GDP) developed around its world renowned financial sector, as well as by transportation and commerce activities generated by the Panama Canal traffic and the Colon Free Zone. Matías Mora Simoes is a Senior Managing Director of the FTI Consulting Forensic and Litigation Consulting practice and is based in Panama City. CRITICAL THINKING AT THE CRITICAL TIME™ For numerous years, Panama’s economy has been one of the fastest growing economies in the Latin American region. This can be attributed to its location at the heart of the rapidly growing Latin American market, which makes it a natural base for world business operations. Worth mentioning facts are that Panama is the country with the second highest level of technology in Latin America and the country with the greatest air connectivity in the region with roughly 70 routes in 31 countries. All of this has made Panama an exciting and fast-growing hub for trade, finance, business, shopping and tourism. With an average annual growth rate of 8.5 percent, Panama’s per capita GDP has more than doubled over the past decade, sitting at $35.642 billion USD and $11,037 per capita. This impressive growth performance has been driven by a steady rise in public and private investment in a stable economic and political environment. The International Monetary Fund’s (“IMF”) latest assessment of the Panamanian economy indicates that the country’s economy will continue to grow strongly, buoyed by the FTI Consulting, Inc. • 1 WHY PANAMA? Panama Canal expansion and large public infrastructure projects like the third bridge over the Canal and the second line of the Panama Metro. Economic stability and growth has been favored by the country’s fully dollarized economy, which in turn has also helped keep inflation very low, averaging a growth of only 1.4 percent in the past 30 years. Panama performed relatively well during the global financial crisis of the late 2000’s, including a growth of 4 percent in 2009, when many other countries in the region suffered a contraction. The Panamanian economy accelerated in the following years, reaching double-digit growth rates in 2010 and 2011. This impressive growth performance has been driven by a steady rise in public and private investment in a stable economic and political environment. The International Monetary Fund’s (“IMF”) latest assessment of the Panamanian economy indicates that the country’s economy will continue to grow strongly, buoyed by the Panama Canal expansion and large public infrastructure projects. Foreign direct investment (FDI) in Panama has averaged a stunning 9 percent of GDP a year since 2008, helping raise overall investment levels to 30 percent of GDP, nearly double the average in Latin America. After the world economic slowdown observed in 2009, FDI started to rise again in 2010, maintaining their annual dynamic growth and reaching almost 4 Billion USD in 2013 and the historic figure of almost 4.7 Billion USD in 2014. Large investments in the mining and energy sectors, along with continuing investments in the Colon Free Zone, logistics, financial, maritime, construction and transportation fields have been the main contributors to the impressive figures observed during the most recent years. Over the past eight years, the main foreign contributors to the Panamanian economy have come from more than 200 companies from Colombia and Venezuela, which after the United States are the countries with the largest FDI in the country. Panama’s strong financial system is regulated by a firm legal framework which complies with international and local banking laws. Financial intermediation accounts for almost 10 percent of the country’s GDP, which means that Panama’s International Banking Center (“IBC”) is one of the economy’s biggest contributors. Created in 1970 with the First Banking Law, the Panama IBC is the largest in Latin America and it owes its success to the application of international banking standards and the facilitation of free flow of capital. The IBC offers investors over 100 Banks from approximately 35 countries from around the world, of which there are 7 North American banks, 14 European banks, 6 banks from Asia and the Middle East and 2 from the Caribbean. Panama’s economy boasts of high cash reserves, maintaining liquidity levels close to 60 percent in the Banking System, and its banks are traditionally very conservative, two reasons for why they CRITICAL THINKING AT THE CRITICAL TIME™ were not hit by the credit derivatives market. Even in 2007, when the world was facing an economic crisis, the Panamanian banking system remained strong and there were no effects of this crisis on their operations. The soundness and resilience of the IBC, which can be compared to that of first world countries such as the U.S., is demonstrated by the constant growth of domestic and foreign assets since its creation, as well as by the impressive fact that it was not hampered by the Asian Crisis of the late 90’s, the Dot Com crisis of the early 2000’s, the Subprime Crisis of 2007-09 and neither by the most recent European Crisis. The trust of the international community in Panama’s economy is evidenced by the fact that a large portion of total deposits in banks in the Panamanian territory come from foreign investors. For instance, on the year 2013, close to 40 percent of total assets deposited in banks located in the IBC came from foreigners (a little under the $40 Billion USD mark). This statistic could easily be higher, as all Panamanian corporations are considered domestic, even if the Ultimate Beneficiary is Foreign. Additional to this, at least 60 percent of the clients of brokerage houses in Panama are foreigners. Panama has a long standing legal framework of corporate law. The incorporation of Panamanian legal vehicles is a relatively easy and inexpensive process, which is used for many reasons such as tax and estate planning purposes. Bearer Shares are still permitted in Panama, but with the passing of a new law that will come to effect at the end of 2015, bearer shares will have to be in custody of authorized institutions in order for them to properly identify the Ultimate Beneficiary of all Panamanian companies. This information will still be strictly confidential. After a review by the IMF, Panama was added to a list of countries with deficiencies in their strategies regarding AML/CFT. Since then, the Panamanian Government and Private sector have been working together to correct this situation and restructure the AML/CFT regime. One of the most important advances in this issue was the recent passing of a new AML/CFT law, which among others, includes non-financial entities to the list of supervised entities, enhances KYC and other monitoring obligations and provides regulators with access to client information of regulated entities. Even after the recent changes made to meet international requirements by the FATF, local Panamanian laws do not consider Tax Fraud as a criminal activity under its Criminal Code, but fines can range from 5 to 10 times the amount defrauded. It is important to emphasize that Bank Secrecy in Panama is still in force, and that any client information can only be shared with Securities Market regulators as part of international investigations in related matters. The aforementioned information cannot be triangulated or disclosed to any other parties and cannot be used for any other purpose apart from investigations regarding money laundering, terrorist funding and proliferation of weapons of mass FTI Consulting, Inc. • 2 WHY PANAMA? destruction. This addition was established in order to comply with a Multilateral Memorandum of Understanding (“MMoU”) of the International Organization of Securities Commissions (“IOSCO”), in which out of 129 member countries, at the moment 105 are signees. Due to its Territorial Tax Regime, which differs from the Universal Regimes in the U.S. and E.U., taxes in Panama are to be paid only on earnings perceived in Panamanian territory. Local or foreign securities acquired through the Panamanian Stock Exchange and fixed-term deposits are tax exempt. Even after the recent changes made to meet international requirements by the FATF, local Panamanian laws do not consider Tax Fraud as a criminal activity under its Criminal Code, but fines can range from 5 to 10 times the amount defrauded. More importantly, Tax Fraud is not considered as an underlying offense for Money Laundering, even after the recent AML laws passed by the Panamanian Government. For many years Panama has been a well-conceived and developed "offshore center" for conducting business and developing investment plans in a hassle-free manner. The concept of an international offshore center implies an economic and juridical structure designed to promote commercial, financial and service activities in an expedient and simple manner. This structure, put together by the Panamanian government to promote foreign investment, not only considers special tax legislation, but other legislation as well, including incentives and facilities to attract foreign investment in a large number of activities of interest and lenient migration laws for investors. Since 2010, Panama holds various Double Taxation Avoidance Agreements (“DTAA’s”), as well as Tax Information Exchange Agreements (“TIEA’s”) with the US. Due to the following characteristics, these treaties were designed to protect investors in Panama: • Information may only be shared with prior request (never in an automatic fashion). • Speculative information requests are not admissible (A.K.A. “fishing Expeditions”). • The requesting party must demonstrate that it has exhausted its internal resources for the obtention of said information. • Shared information maintains its confidentiality and cannot be triangulated. In October 2013, Panama ratified its latest DTAA’s. The following countries are included in the list of countries who share this agreement with Panama at the moment: Barbados, South Korea, UAE, Spain, France, Netherlands, Ireland, Israel, Luxembourg, Mexico, Portugal, Qatar, UK, Czech Republic, and Singapore. On the same year, Panama also ratified its TIEA´s with the following group of countries: Canada, United States of America, Finland, Greenland, Iceland, Faroe Islands, Norway and Sweden. Matias Mora Simoes Senior Managing Director +507 297 3460 The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals. [email protected] About FTI Consulting FTI Consulting, Inc. is a global business advisory firm dedicated to helping organizations protect and enhance enterprise value in an increasingly complex legal, regulatory and economic environment. FTI Consulting professionals, who are located in all major business centers throughout the world, work closely with clients to anticipate, illuminate and overcome complex business challenges in areas such as investigations, litigation, mergers and acquisitions, regulatory issues, reputation management and restructuring. CRITICAL THINKING AT THE CRITICAL TIME™ www.fticonsulting.com ©2015 FTI Consulting, Inc. All rights reserved. CRITICAL THINKING AT THE CRITICAL TIME™ FTI Consulting, Inc. • 3