## Detailed Assessment of the Observance of the Basel Core Principles and Related Financial Sector Assessments (IMF cr0767) ## Source details **Canonical URL:** [Detailed Assessment of the Observance of the Basel Core Principles and Related Financial Sector Assessments (IMF cr0767)](https://www.imf.org/-/media/files/publications/ofca/english/cr0767.pdf) ## Other formats - [Markdown version](/-/media/files/publications/ofca/english/cr0767.pdf.md) - [Structured JSON version](/-/media/files/publications/ofca/english/cr0767.pdf.json) --- ### Basel Core Principles — SdB mandate, governance, market structure, and soundness indicators - The assessment evaluates observance of the Basel Core Principles (BCPs) for Effective Banking Supervision as part of an evaluation of Panama’s observance of regulatory standards for the financial sector (IMF assessment). - SdB mandate, governance, and resources: - SdB created by Decree-Law No. 9 1998 (the Banking Law) with objectives including: promote public trust and integrity of the banking sector; prevent unauthorized people from running banks; ensure soundness and efficiency of banks; contribute to development of the international financial center; control adequacy of capital and liquidity ratios; develop procedures for coordination with other supervisory bodies; sanction contraventions. - Legal protections: Article 14 and Article 15 provide removal protections and a closed list of six reasons for removal. - Organizational structure: Superintendent (five-year term, renewable only once) and Board of Directors (five Directors with eight-year mandates, renewable). - Staffing: 236 employees; about 200 employees have completed university studies in law or finance. - Funding: independent resources derived from fees charged to supervised entities; on-site inspection charging most relevant revenue source. - Market structure and scope: - License counts: - 39 general license banks (including two government-owned banks); - 29 international license banks; - 5 representative offices of foreign banks. - Banking system assets: - $39.6 billion on a nonconsolidated basis at end-March 2006; - $45.8 billion on a consolidated basis at end-March 2006. - General license banks represent about 83 percent of banking system assets and liabilities. - Other deposit-taking institutions: about 276 credit cooperatives with assets $860 million; four small saving and credit institutions with assets $70 million. - Financial soundness indicators (selected): - Return on assets: 2.4 percent (annualized) through the first quarter 2006, up from 2.1 percent for all of 2005. - Return on equity: 20.2 percent for first quarter 2006, up from 15.7 percent for all of 2005. - Past due loans at end-March 2006: $373 million or 1.6 percent of system loans (unchanged from end 2005). - Provisions for loan losses: 2 percent of the loans, providing a cover of 126 percent of past due loans. - System regulatory capital (Basel I) at end-March 2006: 17.2 percent; private Panamanian owned banks: 14.7 percent; regulatory minimum requirement: 8 percent. - Equity to assets for the system: 12.9 percent. - Accounting and governance requirements: - Financial reporting must conform to IAS or US GAAP. - 2005 fiscal reform law established IAS as the only accounting standard for commercial firms. - Every bank must designate a compliance officer and establish corporate governance rules. ### Prudential framework, market risk, credit risk, liquidity, and supervisory practices - Macroeconomic backdrop: - Real GDP growth: 6.4 percent in 2005 (7.6 percent in 2004). - Unemployment: 9.8 percent of the labor force. - Inflation: 3.4 percent. - Fiscal deficit: estimated to have fallen somewhat below target of 2.6 percent of GDP in 2005. - Safety net and payment system: - No depositor protection scheme. - No central bank to serve as lender of last resort. - Compensating measures: strict liquidity requirements and close liquidity monitoring by the SdB. - Limited deposit protection in liquidation: depositors have priority on the bank’s assets for up to $5,000 per depositor. - Domestic payment system located in Banco Nacional de Panama; U.S. dollar equivalent to Balboa and recognized as legal tender by law. - Capital adequacy and market risk (Principles 6 and 12): - Capital rules implemented by Accord 5-98 and Accord 6-98 consistent with Basel I; Tier 1 and Tier 2 recognized; Tier 3 not recognized. - Material shortcomings and deviations from Basel identified: - Risk weights and other elements not fully consistent with Basel capital accord. - Counterparty risk poorly defined; forward and derivatives contracts not included in capital computations. - Certain asset classes inadequately risk-weighted; available-for-sale equities and cash-flow hedging balances considered regulatory capital without prudential reduction. - Market risk regulation lacks specific capital charge or mandatory methodologies; Accord 5-2001 obliges allocation for market risk but does not specify a capital charge. - Assessment for market risks: Materially non-compliant. - Credit risk, provisioning, and exposure limits (Principles 7–11): - Loan classification: five categories required (Normal, Special Mention, Substandard, Doubtful, Loss) under Accord 6-2000 — Assessment: Compliant. - Minimum provisions: at least 1 percent of the loan portfolio at all times — Assessment: Compliant. - Large exposure limits: 25 percent of consolidated capital for lending activities (Accord 1-1999) — Assessment: Compliant. - Connected lending: single related-party limit of 5 percent of consolidated capital and total related-party cap of 25 percent — Assessment: Compliant. - Country risk: Resolution 7-2000 (modified by Resolution 1-2001) defines country risk using ratings; Assessment: Largely compliant. - Other risks, liquidity, and governance: - Liquidity requirements: minimum of 30 percent of qualifying liquid assets to deposits; weekly reporting to SdB. - Maximum 85 percent ratio between domestic assets and domestic deposits. - Interest-rate risk: nine buckets; net interest income drop > 10 percent of capital triggers corrective measures. - Operational risk and governance: Accord 4-2001 and Accord 10-2000 require corporate governance, internal control, and Compliance Officer appointment — Assessment: Largely compliant. - Supervisory practices: - Supervision Department: on-site and off-site functions with around 70 people. - All banks examined on average every 18 months; large banks examined once a year. - On-site exam durations: from two weeks for a small bank to more than two months for a large bank. - CAMELS-based classification introduced (Resolution 2-2005, August 2005) — Assessment: Compliant for on-site/off-site supervision; comments note focus on volumes over controls and restricted distribution of inspection reports (since July 2005). ### Regulatory gaps, harmonization needs, and remedial powers (Principles 1, 16, 22–25) - Regulatory arbitrage: - Differences in regulatory treatment across banks, cooperatives, and savings & credit institutions produce regulatory arbitrage; cooperatives with assets $860 million compete with banks without meeting equivalent requirements. - SdB does not supervise cooperatives and savings & credit institutions; recommendation to harmonize supervisory arrangements and consider SdB oversight. - Intervention framework: - Three intervention processes: appointment of an advisor; substitution of managers and intervention; liquidation. - Since SdB creation, an advisor appointed on five occasions; in one instance bank subsequently failed. - Currently three banks in process of being liquidated. - Article 76 authorizes designation of advisor; Article 95 authorizes intervention for reasons including noncompliance with capital/liquidity or endangering depositors. - Enforcement powers and remedial measures: - Article 17 authorizes intervention, reorganization, liquidation, and removal of directors/executives. - Article 137 authorizes sanctions including private/public reprimand and civil penalties up to $50,000. - Article 38 establishes grounds for cancelling a banking license. - Assessment for remedial measures: Largely compliant — comments: lack of clear operational guidelines for dealing with distressed entities; recommendation to develop guidelines and contingency plans. ### Selected key statistics (preserved exactly) - Banking system assets (nonconsolidated): $39.6 billion at end-March 2006. - Banking system assets (consolidated): $45.8 billion at end-March 2006. - General license banks: 39 (including two government-owned banks). - International license banks: 29. - Representative offices: 5. - SdB staffing: 236 employees. - Past due loans at end-March 2006: $373 million or 1.6 percent of system loans. - Provisions for loan losses: 2 percent of the loans, cover 126 percent of past due loans. - System regulatory capital (Basel I): 17.2 percent at end-March 2006. - Private Panamanian owned banks regulatory capital: 14.7 percent. - Regulatory minimum requirement: 8 percent. - Equity to assets for the system: 12.9 percent. - Return on assets (Q1 2006): 2.4 percent (annualized). - Return on equity (Q1 2006): 20.2 percent. ### Attribution - The findings and assessments above are those of the Detailed Assessment of the Observance of the Basel Core Principles as applied to the Superintendency of Banks (SdB) and the Panamanian banking legal and supervisory framework (IMF assessment). --- ### Recommended Action Plan (selected BCP findings and actions) - Harmonize supervisory and regulatory arrangements for nonbank deposit-taking institutions (cooperatives and savings and credit institutions). - Strengthen Regulatory Department capacity to address regulatory capital, market and country risk, and investment activities; consider reorganization and expert staffing ahead of Basel II. - Develop career plans and retention measures to reduce loss of senior SdB officials. - Implement an insurance policy to provide legal protection for SdB staff acting in their official capacity. - Clarify and amend law to provide SdB the same level of clarity for consolidated supervision of holding companies as for direct oversight of banks and subsidiaries. - Develop clear guidelines for dealing with distressed entities, including remedial measures and insolvency/winding-up procedures. --- ### Intervention framework and supervisory outcomes (selected) - Three intervention processes: (i) appointment of an advisor; (ii) substitution of managers and intervention; (iii) liquidation. - Appointment of an advisor authorized under Article 76; intervention authorized under Article 95 for specified grounds. - Since SdB creation, advisor appointed on five occasions; one of those banks subsequently failed. - Currently three banks in liquidation. --- ### National Securities Commission (CNV) — IOSCO Principles assessment (selected findings) - Institutional setting: - CNV responsible for supervision and regulation of securities markets under DLMV. - Commissioners: appointed by the president, five-year term, removal require Supreme Court decision. - CNV operational constraints: dependence on central government subsidy; MEF involvement in personnel selection; one commissioner position vacant since end-2004. - Market structure and activity statistics (selected): - 33 securities houses registered with total transaction volume about $7.3 billion in 2004. - At end-May 2005, 265 licensed stockbrokers. - Total market capitalization in 2004: $3.9 billion, an increase of 28 percent over 2003. - 81 issuers of listed securities at end-2004 (decline of 15 during the year); 83 in 2005. - Total amount of securities issued in 2004: $518 million; additional $460 million issued through end-May 2005. - 17 domestic mutual funds and 3 international collective investment schemes with assets $422 million and $20 million, respectively. - Bolsa de Valores authorized capital: $1 million divided into 180,000 shares; no individual shareholder owns more than 2.5 percent of capital. - Pension funds: by end-2004, two administrators with 17,000 members and combined assets under management of $55 million. - Regulatory and enforcement activity: - CNV produced 66 regulations (Accords) and 70 opinion letters through mid-2005. - CNV authorized 16 formal investigations from 2001 to mid-2005. - Administrative penalties imposed: 153 in 2000; 119 in 2001; 67 in 2002; 25 in 2003; 21 in 2004; 18 in 2005 (through May). - Example enforcement: 2001 fine of $300,000 each against issuer CEO and CFO for false/misleading information. - Key institutional weaknesses: - Limited resources and staffing; CNV reliant on temporary professional staff; goal to convert positions to permanent and reach 50 positions. - Dependence on MEF for budget and personnel decisions limits operational independence. - Legal restrictions on sharing nonpublic information with foreign counterparts limit participation in IOSCO multilateral MOU. - Lack of formal investigation procedure approved as Executive Decree (draft pending since September 9, 2004). - Assessments of selected IOSCO Principles: - Principle 1 (Responsibilities): Broadly implemented. - Principle 2 (Independence and accountability): Partially implemented. - Principle 3 (Powers and resources): Partly implemented (resource constraints; staffing increased from 12 to 24 positions; further staffing needs remain). --- ### Market intermediaries, SROs, disclosure, and enforcement (selected) - SRO oversight: - CNV supervises Bolsa and LatinClear; SROs must present internal rules and be authorized by CNV. - Bolsa internal rules and LatinClear procedures set operational and market integrity requirements. - First on-site inspection of the Bolsa occurred in 2004; CNV plan for ongoing inspections exists. - Disclosure and reporting (Principle 14): - Prospectus and continuing disclosure rules detailed; CNV must revise financial statements within 20 working days and notify interested parties (Agreement No.10-2000). - Failure to respond to observations within required terms leads to accumulated administrative sanctions; 60 working days delay triggers license suspension. - Material events disclosure required "at the moment that they occur" (Section 77, DLMV). - Market intermediaries and capital adequacy: - Minimum capital and entry standards set but CNV lacks a comprehensive ongoing capital adequacy regime. - Draft capital adequacy rule under discussion; assessment: Not implemented for capital adequacy prudential framework for intermediaries. - Trading systems, surveillance, and market abuse: - CNV requires SROs to maintain trading transparency; Bolsa electronic system provides pre- and post-trade information. - CNV lacks a market surveillance program based on an electronic system to monitor activities and risks; assessment for continuous oversight: Not implemented. - Market abuse: DLMV Title XII prohibits manipulation and insider trading; enforcement reactive and constrained by resource limitations; assessment for prevention/detection: Partly implemented. ### CNV recommended actions (selected) - Strengthen operational independence and staffing; appoint vacant commissioner seat. - Adopt risk-based supervision and increase technical training in market surveillance, clearing and settlement, and valuation rules. - Implement capital adequacy rules for intermediaries and early warning mechanisms. - Improve SRO oversight and require Bolsa to assume direct surveillance responsibilities for its trading platforms. - Address legal limits on sharing confidential information with foreign counterparts to enable full IOSCO multilateral MOU participation. --- ### Collective Investment Schemes and Agreement 5/2004 (selected provisions) - Agreement 5/2004 (effective September 1, 2004) regulated collective investment schemes and investment managers with transitional provisions: - Minimum net worth for investment managers: $150,000.00 (Section 66.14), adjusted once Agreement on Proper Resources and Prudential Supervision issued. - If an investment manager already has a Value House license: minimum paid-in capital $300,000.00. - Investment managers must have a compliance officer, administrative and accounting structure, and technical/human resources commensurate with trading volume. - No self-managed investment company had been registered at time of assessment; no appraisal possible for Section 14 standards for self-managed companies. - Offering documents and investor protection: - Mandatory prospectus contents include: date of issuance; legal constitution; investor rights; operator information; valuation methodology; purchase/redemption/pricing procedures; audited financial information; custodian information; investment policy; external manager/advisor appointments; fees and charges. - Reporting requirements: monthly statements to investors; quarterly provisional reports; annual audited accounts within three months of fiscal year-end. - Net asset value publication and redemption rules: open funds must pay redemptions within 15 working days unless prospectus allows extension. - Custody and asset segregation: - Custodians required; permissible custodians include banks, brokerage firms (per business plan), central securities depositories, and fiduciary trustees authorized by SdB. - Regulatory framework does not require segregation of scheme assets from operator assets — assessment: should be considered for future modification. - Assessment: Broadly implemented overall, with practical gaps in supervision capacity, valuation oversight, and ongoing monitoring due to CNV resource constraints. --- ### Insurance supervision (SSRP) — IAIS assessment (selected findings) - Institutional capacity and legal framework: - SSRP supervises insurance and reinsurance under Laws No. 59, No. 63, and No. 60 (1996); draft insurance law dated April 2005 under preparation. - SSRP suffers weak independence, limited resources, low staff compensation, absence of on-staff actuaries, and constrained supervisory capacity. - Industry fees/taxes: tax on net premiums from local risks 2 percent; fire insurance tax 5 percent — tax revenues not substantially available to SSRP. - Market size and composition: - 18 authorized insurance companies: 4 life specialists; 1 surety; 13 operate both life and nonlife; 9 of 13 have reinsurance licenses. - 5 companies authorized exclusively in reinsurance. - Captive sector: two captive insurers. - Insurance penetration ~3 percent of GDP. - Total premiums in 2005: $430 million (up 1.9 percent from 2004). - Total assets 2004: $765 million (about six percent of GDP); investments 69 percent of assets. - Life business: 35 percent of total market; nonlife: automobile 16 percent, health 17 percent. - Five largest companies account for around 74 percent of total business. - Licensing, fit-and-proper, corporate governance, and technical reserves: - Law prohibits license if shareholder/director/manager convicted for drug dealing, fraud, or related crimes during previous ten years. - "Control" not defined; changes in shareholders/board must be reported within 30 days; no prior authorization required. - Corporate governance requirements weak; no SSRP verification of governance or internal controls. - Technical reserves: mathematical reserves for life; nonlife reserves as a proportion of net retained premiums; prevision reserve no less than 1 percent and no more than 2.5 percent of net retained premiums; project of law does not change technical reserve methods. - Investments covering technical reserves: 75 percent must be invested in-country; remaining 25 percent may be invested abroad in like instruments with at least "investment grade" rating. - Solvency and capital adequacy: - MRSM calculations (solvency margin) detailed in the law and Resolución No. 576-A (1996) — formulae preserved in assessment; reporting: companies file solvency margin every trimester (20 days after trimester). - Assessment: Largely observed for solvency framework; comment: fixed figures in local currency may require periodic revision. - Supervisory shortcomings and recommendations: - SSRP lacks actuarial staff and adequate on-site/off-site supervision resources; inspections focus on financial aspects rather than management or risk systems. - Draft law proposes SSRP financial autonomy and board reconstitution; recommendations include strengthening SSRP independence, hiring actuary(ies), introducing corporate governance rules, fit-and-proper tests, asset-liability matching, and inclusion of reinsurance companies in solvency regime. - Assessment: varied — many Principles Partly observed, Not observed, or Largely observed depending on specific item. --- ### AML/CFT assessment — FATF/CFATF findings and UAF performance (selected) - General context: - Panama constitutional republic; population approximately 3 million; territory 78,200 square kilometers; legal parity USD/Balboa; financial sector prominence with banks, ZLC, and services sector. - Financial sector scale (selected): - Banking system assets (end-March 2006): $39.6 billion (nonconsolidated); $45.8 billion (consolidated). - Number of banks (end–March 2006): 73 (2 state-owned; 37 general; 34 international). - Legal framework and predicate offenses: - Money laundering criminalized through Articles 389–393 of Penal Code (Law 41 of October 2, 2000; Law 1 of January 5, 2004). - Predicates: Article 389 lists 11 felony predicate offenses; assessors note omissions relative to Palermo Convention and FATF Recommendation 1 — recommendation to amend Article 389 or move to a serious-crimes approach. - Terrorist financing criminalized under Article 264(b) (Law 50 of July 2, 2003) — assessors recommend including FT among ML predicate offenses. - Financial Intelligence Unit (UAF): - UAF structure: attached to Public Security and National Defense Council; staff total 22 (19 professionals); uses Analysis Notebook software. - UAF MOUs: member of Egmont Group since 1997 and has signed 37 MOUs (source lists 27–37 MOUs across different passages). - STRs received/disseminated (2001–2004): - 2001: 708 received, 663 disseminated, 1 reached the courts. - 2002: 343 received, 290 disseminated, 2 reached the courts. - 2003: 329 received, 309 disseminated, 2 reached the courts. - 2004: 719 received, 717 disseminated, none reached the courts. - Total STRs 2001–2004: 2,103. - ML criminal cases since ML criminalization to May 2005: 10 investigations of ML; 1 conviction; 7 cases tried to conclusion; 1 active; 2 dismissed; average prosecution time 18.9 months. - Major UAF problems: insufficient technical resources, insufficient funding and personnel, limited analytical value-add, mismatch between UAF outputs and prosecutors’ needs. - FATF assessments: R.26 Largely Compliant; R.30 Partially Compliant; R.32 Largely Compliant (noting need for budget/independence clarity and enhanced coordination). - Preventive measures and coverage gaps: - Law 42-2000 requires CTRs and STRs for designated reporting entities; scope gaps: - Savings & Loans Associations: subject to MICI/BHN oversight and not effectively covered by Law 42-2000 in practice. - Insurance brokers/agents, lawyers, accountants, company-service providers: not fully subject to CDD/STR obligations in Law 42-2000. - Casinos, trust service providers, real estate agents: subject to CTRs and some AML measures; implementation weak for STRs. - CTR threshold: $10,000 for reporting cash transactions (many assessors recommend lower thresholds for certain sectors). - SdB revised agreements to strengthen bank CDD, PEP measures, correspondent banking, and wire-transfer rules (Agreement 12-2005, Agreement 2-2005, Banking Circular No. 001-2005). - FATF compliance summaries for selected Recommendations: - R.4 — Compliant (financial secrecy provisions overridden for AML/CFT reporting). - R.5 — Largely Compliant (coverage gaps in some sectors). - R.9 — Partially Compliant (third-party/introducer reliance unaddressed). - R.10 — Largely Compliant (supervisory gaps for insurance and savings & loans). - R.11 — Largely Compliant (monitoring obligations, but gaps for insurance and savings & loans). - SR.III (freezing for FT) — Partially Compliant (FT not on ML predicate list limits provisional freezing authority). - SR.IX (cross-border declarations) — Partially Compliant (declaration applies only to incoming travelers; outbound and freight declarations not covered). - Cash couriers and cross-border controls: - Cabinet Decree No.10 of 1994: written declaration required for passengers entering with cash in excess of $10,000; in practice only Tocumen Airport declarations fully entered into database shared with UAF. - Seizures in 2004: $2,038,442. - DNFBPs, trusts, and legal persons (selected): - Trust companies: 53 licensed by SdB; 7 owned by law firms; fiduciaries supervised by SdB but potential conflicts where fiduciary and law firm are affiliated and STRs historically not reported by fiduciaries. - Real estate: transactions rose 18.32 percent and dollar amount rose 23 percent from January to April 2005; only 20 percent of sales intermediated by licensed legal persons; no STRs reported by real estate sector. - Casinos: large betting volumes (first three months of 2005 reported bets approximately $666,500,000) but very low STRs filed (four in 2004). - Company formation and bearer shares: resident agents (lawyers) must be appointed; shareholder identity not required in public registry; assessors highlight risks and recommend extending AML obligations to lawyers/accountants/company-service providers when they perform R.12 activities. - National coordination and legal instruments: - Executive Decree 29 of February 16, 2005: High Level Presidential Commission against ML and FT established but not fully operational at assessment time. - Panama ratified multiple international instruments: Vienna Convention; Palermo Convention (Law 23 of July 7, 2004); UN Terrorist Finance Convention (Law 22 of May 9, 2002); other UN instruments noted. - Selected FATF/CFATF assessments and recommendations: - Amend Article 389 to cover Palermo Convention predicates or adopt serious-crimes approach. - Insert financing of terrorism into ML predicate list to enable provisional freezing/seizure authorities. - Extend AML/CFT obligations and supervisory coverage to lawyers, accountants, company-service providers, insurance brokers/agents, leasing and factoring companies, and savings & loans associations. - Strengthen UAF budget, technology, outreach, and feedback mechanisms. - Improve Customs controls and extend cross-border declaration rules to outbound and freight shipments. - Strengthen supervision and enforcement for DNFBPs, ZLC merchants, casinos, and remitters; revise CTR thresholds where appropriate. --- ### Trusts, fiduciary companies, nonprofit organizations, and company-service providers (selected) - Trusts and fiduciaries: - Law 1-1984 requires written trusts; trust companies must maintain registry of trusts and include specified trust instrument information (founder, trustee, beneficiaries, assets, trustee powers, resident agent, domicile, etc.). - SdB authority: Article 20 allows disclosure to competent administrative and judicial authorities; Executive Decree No. 213 of 2000 amended to allow UAF access to trust secrecy information. - Practical concerns: fiduciaries owned by law firms may not report suspicious transactions involving common clients; no STRs historically reported by fiduciary companies. - Assessment: R.34 Largely Compliant on paper but implementation weaknesses exist. - Nonprofit organizations (NPOs): - Not subject to AML/CFT except Article 3 of Law 50, 2003 requires documentation of donations (not implemented). - Decree 524 of 2005 (entered into force November 2, 2005) reportedly grants Ministry of Justice power to revoke legal personality and creates registration obligation — assessors recommend Ministry create NPO registry and conduct risk assessment. - SR.VIII assessment: Partially Compliant. - Company formation and bearer shares: - Resident agents (lawyers) required; shareholder identity not public; bearer shares permissible; assessors recommend legal and supervisory changes to ensure access to beneficial ownership and control information for investigations. --- ### Selected numerical and factual items preserved exactly - Banking system assets nonconsolidated: $39.6 billion at end-March 2006. - Banking system assets consolidated: $45.8 billion at end-March 2006. - SdB staffing: 236 employees; about 200 employees with university studies in law or finance. - Number of banks end–March 2006: 73 (2 state-owned; 37 general license private banks; 34 international license banks). - Past due loans at end-March 2006: $373 million or 1.6 percent of system loans. - Provisions for loan losses: 2 percent of the loans; cover 126 percent of past due loans. - Return on assets (Q1 2006): 2.4 percent (annualized). - Return on equity (Q1 2006): 20.2 percent. - SdB on-site inspection frequency: all banks on average every 18 months; large banks once a year. - Number of securities houses (2004): 33; transaction volume about $7.3 billion in 2004. - Total market capitalization (2004): $3.9 billion (increase of 28 percent over 2003). - STRs received by UAF 2001–2004: 708; 343; 329; 719 (total 2,103). - ML criminal cases since ML criminalization to May 2005: 10 investigations; 1 conviction; average prosecution time 18.9 months. - CTR threshold in Law 42-2000: $10,000. - Investment manager minimum net worth under Agreement 5/2004: $150,000.00. - Investment manager paid-in capital threshold if Value House license: $300,000.00. - Custodian/redemption rule for open investment companies: pay redeemed units no longer than 15 working days after the redemption (Article 21, Agreement 5-2004). - Insurance technical reserve prevision range: no less than 1 percent and no more than 2.5 percent of net retained premiums. - Insurance total premiums in 2005: $430 million (up 1.9 percent from 2004). - Insurance total assets 2004: $765 million (about six percent of GDP). - ZLC merchant count: more than 1,800 merchants; ZLC annual goods introduced and re-exported approximately $11 billion. - Casino reported bets (first three months of 2005): approximately $666,500,000. - Number of trust companies licensed by SdB: 53 (seven owned by law firms). - Number of banks present including major foreign banks listed: e.g., HSBC Bank, Banco Bilbao Viscaya Argentaria BBVA, BNP Paribas, Dresdner Bank A.G. (listed in source). --- *Source: Detailed assessments and related IMF findings and recommendations contained in the IMF assessment (cr0767).* ### 1.1 Detailed Assessment of the Observance of the Basel Core Principles ..............................7 ### 1.1 Detailed Assessment of the Observance of the Basel Core Principles ### Assessment scope and methodology - The assessment evaluates observance of the Basel Core Principles (BCPs) for Effective Banking Supervision as part of an evaluation of Panama’s observance of regulatory standards for the financial sector. - The assessment is a follow up to the 2001 BCP assessment that reviewed regulation and supervision by the Superintendency of Banks (SdB). - Assessors were guided by the 1998 Basel Core Principles assessment methodology. - Sources used included: - interviews with private sector managers and the bankers association; - interviews with officials from the National Bank of Panama; - meeting with a private auditing firm; - intensive discussions with SdB staff; - reviews of laws, accords, and regulation issued by the SdB since 1998. ### SdB mandate, governance, and resources - The SdB was created by Decree-Law No. 9 1998 (the Banking Law) with objectives to: - promote public trust and integrity of the banking sector; - prevent unauthorized people from running banks; - ensure the soundness and efficiency of banks; - contribute to the development of the international financial center; - control the adequacy of capital and liquidity banking ratios; - develop procedures to facilitate national and international coordination with other supervisory bodies; - sanction banking activities carried out in contravention of legal provisions. - Legal independence and removal protections: - Article 14: “...Once appointed, neither the Directors nor the Superintendent can be removed with the only exceptions of the reasons included in this Decree-Law, according to the decision of the Supreme Court of Justice... .” - Article 15: provides a closed list of six reasons for removing the Superintendent and Directors. - Organizational structure and staff: - Two ruling bodies: the Superintendent and the Board of Directors. - Superintendent mandate: five-year term, renewable only once. - Directors: five Directors with eight-year mandates, renewable. - Superintendent responsible for technical supervision and day-to-day administration; Board responsible for regulatory framework development and counseling the Superintendent. - SdB staffing: 236 employees; about 200 employees have completed university studies in law or finance. - Funding: - SdB has independent resources derived from fees charged to supervised entities. - On-site inspection charging is the most relevant service to collect funds. ### Market structure and scope of banking system - Types and counts of banking licenses: - 39 general license banks (including two government-owned banks) able to conduct the full range of domestic and international banking activities; - 29 international license banks able to carry out banking activities only with nonresidents; - 5 representative offices of foreign banks limited to liaison, research, and marketing. - System size and concentration: - Banking system assets on a nonconsolidated basis: $39.6 billion at end-March 2006. - Banking system assets on a consolidated basis: $45.8 billion at end-March 2006 (including local and foreign subsidiaries of Panamanian-headquartered banks). - General license banks represent about 83 percent of banking system assets and liabilities. - Other deposit-taking institutions: - About 276 credit cooperatives with assets $860 million. - Four small saving and credit institutions with assets $70 million. - Credit cooperatives are supervised by IPACOOP; saving and credit institutions are supervised by the National Mortgage Bank (BHN). ### Financial soundness indicators and reporting - Profitability and asset quality: - Banking system reported 2.4 percent return on assets (annualized) through the first quarter 2006, up from 2.1 percent for all of 2005. - Return on equity for the first quarter 2006: 20.2 percent, up from 15.7 percent for all of 2005. - Past due loans at end-March 2006: $373 million or 1.6 percent of system loans (unchanged from end 2005). - Provisions for loan losses: 2 percent of the loans, providing a cover of 126 percent of past due loans. - Capital adequacy: - System regulatory capital (Basel I rule) at end-March 2006: 17.2 percent. - Private Panamanian owned banks regulatory capital: 14.7 percent. - Regulatory minimum requirement: 8 percent. - Equity to assets for the system: 12.9 percent. - Accounting and governance requirements: - Financial reporting must conform to International Accounting Standard (IAS) or U.S. Generally Accepted Accounting Principles (US GAAP). - 2005 fiscal reform law established IAS as the only accounting standard for commercial firms. - Every bank must designate a compliance officer and establish corporate governance rules. ### Prudential framework, market conditions, and safety net - Macroeconomic setting: - Real GDP growth: 6.4 percent in 2005 following growth of 7.6 percent in 2004. - Unemployment: fell to 9.8 percent of the labor force. - Inflation: rose to 3.4 percent (pass-through of increases in oil prices). - Fiscal deficit: estimated to have fallen somewhat below the target of 2.6 percent of GDP in 2005. - Payment system and currency regime: - Domestic payment system is located in the Banco Nacional de Panama, which also acts as dollar provider to the banking industry. - By law, the U.S. dollar is equivalent to the national currency (the Balboa) and is recognized as legal tender. - Safety net limitations: - No depositor protection scheme. - No central bank to serve as lender of last resort. - Compensating measures: strict liquidity requirements and close liquidity monitoring by the SdB. - Limited deposit protection in liquidation: depositors have priority on the bank’s assets for up to $5,000 per depositor. ### Regulatory gaps and supervisory concerns - Regulatory arbitrage and harmonization needs: - Differences in regulatory treatment for banks, cooperatives, and savings and credit institutions lead to regulatory arbitrage. - Examples: - Large cooperatives compete with banks for deposits and loans but do not meet the same requirements as banks. - A savings and credit institution was established after owners had been sanctioned by the SdB for nonauthorized banking activities. - The assessment notes a need for greater harmonization and exploration of whether some activities could be brought under SdB supervision. *Source: Detailed Assessment of the Observance of the Basel Core Principles (IMF assessment).* ### 18. To deal with banking crisis, three broad processes exist for intervention: (i) the ### 18. To deal with banking crisis, three broad processes exist for intervention: (i) the ### Intervention framework and outcomes - Three broad intervention processes: (i) appointment of an advisor; (ii) substitution of managers and intervention; and (iii) liquidation. - Since the creation of the SdB, an advisor has been appointed on five occasions and in only one of these instances did the bank subsequently fail. - Currently, three banks are in the process of being liquidated. - Article 76 of the Banking Law authorizes the SdB to designate an advisor to the bank’s board to implement corrective measures. - Article 95 authorizes intervention (take control) of a bank for reasons including: (i) lack of compliance with capital requirements; (ii) the continuance of operation of the bank endangers the interests of the depositors; and (iii) lack of compliance with liquidity requirements. ### SdB objectives, mandate, and institutional arrangements (Principle 1) - SdB created by Decree-Law 9 1998 (the Banking Law) as an autonomous body with objectives to: - Promote public trust on the Panamanian banking sector; - Promote integrity of banking system; - Prevent unauthorized people to run banks; - Ensure the soundness and efficiency of banks; - Contribute to the development of the Panamanian International Financial Center; - Control the sufficiency of capital and liquidity banking ratios; - Control the adequacy of banking procedures in order to facilitate national and international coordination of supervisory bodies; - Sanction banking activities carried out contravening legal provisions. - SdB governance and terms: - Two ruling organs: the Superintendent and the Board of Directors. - Superintendent: five-year mandate renewable just on one occasion. - Five Directors: eight-year mandate, also renewable. - Autonomy and resources: - Article 14 and Article 15 establish removal protections and a closed list of six removal reasons. - SdB manages its own budget; vast majority of funding comes from supervised entities; on-site inspection is the most relevant service to collect funds. - Legal protections and indemnity: - Executive Decree 49 of 1998 establishes a veracity presumption in favor of supervisory personnel. - Assessment: Materially noncompliant due to lack of statutory protections and outstanding procurement/approval issues for an indemnity insurance policy (included in 2005 budget but not approved by the General Controller’s office due to budgetary constraints). ### Inter-agency cooperation and information sharing (Principle 1(6)) - Legal authorizations to cooperate: - Article 4 of Law 36 of 1995 authorizes SdB to collaborate with the Financial Intelligence Unit (FIU). - Article 264 of Decree Law 1 of 1999 allows CNV to solicit assistance from the SdB on securities issues of a bank. - Article 17 and Article 31 of the Banking Law authorize cooperation and memoranda of understanding with foreign supervisors based on reciprocity and confidentiality. - Memorandum of Understanding: - In May 2005, SdB, CNV, and SSRP signed an MOU for information exchange and collaboration. - Comment: Differences in resources and supervisory approaches (notably severe resource constraints at SSRP) create inconsistent supervision across financial groups. ### Licensing, permissible activities, ownership, and investment limits (Principles 2–5) - Definitions and licensing: - Article 3.3 defines “bank”; Article 3.16 defines “business of banking”. - Three license types: (i) general license; (ii) international license; (iii) representative office license. - Article 21: prohibited to carry out banking operations without license; foreign banks require prior home supervisor approval. - Provisional authorization for new licenses has a nonrenewable time period equal to 90 days. - Licensing process and fit-and-proper assessment: - Accord 3-2001 and Resolution 1-2005 provide internal procedures and staff committee review. - Assessment: Largely compliant; comments note acceptance of uncertified personal financial statements and letters of support from unknown third parties as weaknesses. - SdB does not routinely require an opinion from the home supervisor when applicant shareholders own banks abroad—risk of parallel banks. - Ownership transfer and control: - Accord 1-2004 requires SdB approval for change in managerial control representing 25 percent or more of the capital. - SdB can deny applications for reasons including lack of home-country consolidated supervision ability, inability to obtain information/cooperation, public interest concerns, reputation/integrity doubts, or doubts about source of funds. - Assessment: Largely compliant; note that less-than-25 percent holdings can be controlling in practice. - Investment limits: - Article 67: a bank may not invest more than 25 percent of its consolidated capital in any business not related to banking. - Accord 2-2002 clarifies the 25 percent cumulative investment limit and lists banking-related investments excluded from the limit. - When computing capital adequacy, banks fully deduct remaining investments in non-banking shares. - Assessment: Compliant. ### Capital adequacy and market risk (Principles 6 and 12) - Capital framework: - Accord 5-98 (general license) and Accord 6-98 (international license) implement a capital adequacy algorithm consistent with Basel I rules, recognizing Tier 1 and Tier 2 but not Tier 3. - Tier 1 includes paid-in capital, retained net income, and certain reserves; Tier 2 includes subordinated debt, general loan loss provisions, latent reserves, revaluation reserves, and preference shares with restrictions. - Goodwill and other items are deducted when computing the capital adequacy ratio. - International license banks that are subsidiaries in Basel-accepting jurisdictions can qualify for consolidated compliance under certain conditions. - Shortcomings and specific deviations from Basel: - Assessment: Largely compliant for capital adequacy; material issues identified include: - Risk weights and other elements not fully consistent with the Basel capital accord. - Counterparty risk poorly defined; forward and derivatives contracts not included in capital computations. - Commercial mortgages, certain inter-banking assets, and certain residential mortgages inadequately risk-weighted. - Equity balances corresponding to available-for-sale portfolios are considered regulatory capital without prudential reduction. - Cash flow hedging equity balances are considered regulatory capital. - Certain liabilities matched with employee benefits are fully deducted from risk assets before capital computations. - A weighting conversion factor should apply to credit lines included as off-balance sheet items as per Basel Accord. - Accord 5-2001 obliges allocation of capital for market risk but does not specify a capital charge; Accord 5-1998/Accord 6-1998 do not impose a specific capital charge or mandatory methodologies (building-block or VaR). - Assessment for market risks: Materially non-compliant. Comment: Panamanian regulation falls short given potential growth in market activities and bond portfolios; need to reform capital-adequacy framework and market-risk reporting. ### Credit risk, provisioning, and exposure limits (Principles 7–11) - Credit policies and classification: - Accord 6-2000 requires loan policies, independent evaluation unit, and classification into five categories: Normal, Special Mention, Substandard, Doubtful, and Loss. - Banks must report classification details to the SdB quarterly. - Assessment: Compliant. - Loan-loss provisioning: - Accord 6-2000 sets methodologies for specific and general provisions. - Minimum provisions: at least 1 percent of the loan portfolio at all times (combination of general and specific provisions). - Assessment: Compliant. Comment: Regulation department should assess IAS 39, FAS 5, and FAS 114 impacts on provisioning and capital ratios. - Large exposure limits: - Accord 1-1999 establishes a 25 percent limit of consolidated capital for lending activities; every risk greater than $25,000 is to be included. - Article 63 requires including balance sheet assets, guarantees, and other obligations in the 25 percent computation. - Assessment: Compliant. Comment: Equity shares not included in the limit; potential 50 percent combined limit in some cases; off-balance sheet counterparty risk should be included. - Connected lending: - Article 64, Accord 2-1999 and Accord 10-1999 prohibit lending to related parties above 5 percent of consolidated capital, with total related-party operations capped at 25 percent of consolidated capital. - Related parties include top managers, their relatives, and affiliated entities. - Assessment: Compliant. Comment: Inter-group banking deposits are not included—room for regulatory arbitrage. - Country risk: - Resolution 7-2000 (modified by Resolution 1-2001) defines country/transfer/political/sovereign risk, categorization, and provisioning criteria using ratings from credit-rating agencies. - Assessment: Largely compliant. Comment: Need to modify resolution to address cross-border banking subsidiaries and establish clear policies to impede regulatory arbitrage and minimum provisioning. ### Other risks, operational risk, liquidity, and governance (Principles 13–15, 17, 18) - Risk-management requirements: - SdB has authority under Article 17 to set operating standards; banks required to maintain comprehensive risk-management processes. - Liquidity: minimum of 30 percent of qualifying liquid assets to deposits; weekly reporting to the SdB. - Maximum 85 percent ratio between domestic assets and domestic deposits as an additional liquidity prudential rule. - Interest-rate risk: assets/liabilities categorized into nine buckets; net interest income drop > 10 percent of capital triggers corrective measures (measured quarterly). - Operational risk and governance: Accord 4-2001 sets corporate governance and internal control requirements; Accord 10-2000 mandates a Compliance Officer. - Electronic operations: Accord 5-2003 regulates electronic banking operations and establishes security/audit measures. - Assessment for "Other Risks": Largely compliant. Comment: Actuarial risk not adequately measured in supervisory activities on fiduciaries. - Internal control and audit: - Accord 4-2001 requires internal controls, delegation arrangements, and independence of internal/external audit and compliance functions. - Assessment: Compliant. - Money laundering (AML/CFT): - Law 42 of 2000 establishes the AML/CFT framework; SdB delegated to ensure compliance by reporting institutions. - Accord 9-2000 (replaced post-assessment by Accord 12-2005) required internal controls, appointment of Compliance Officer, reporting of cash transactions in excess of $10,000, ongoing monitoring, and reporting suspicious transactions to the FIU. - SdB conducts comprehensive AML/CFT on-site inspections and requires external auditors to assess AML/CFT risk in internal control evaluations. - Assessment: Compliant. Comment: Current legislation does not provide for Suspicious Transaction Report to be communicated to the Superintendency of Banks; Accord 12-2005 updates to FATF 2003/2004 standards. ### Supervisory practices: on-site, off-site, validation, and consolidated supervision (Principles 16, 18–21, 23–25) - On-site and off-site structure: - Supervision Department comprises on-site and off-site functions with around 70 people. - All banks examined on average every 18 months; large banks examined once a year. - On-site exam duration: from two weeks for a small bank (four examiner team) to more than two months for a large bank (15–20 examiner team). - On-site inspections use a manual; SdB introduced CAMELS-based classification system (Resolution 2-2005, August 2005). - Assessment: Compliant. Comment: On-site exams review large volumes of operations rather than focusing on internal controls and risk management; inspection reports now restricted for exclusive use of SdB and inspected bank (procedure introduced July 2005). - Off-site supervision and reporting: - Electronic framework for collection of financial information supports off-site monitoring. - Liquidity returns collected weekly; balance sheets monthly; consolidated information quarterly. - Capital adequacy return collected quarterly; credit portfolio information collected monthly and verified by specialized team. - Assessment: Compliant. Comment: Off-site monitoring team does not have direct access to detailed credit portfolio data; specialized team analyzes credit and hands discrepancies to on-site for verification. - Validation of supervisory information: - On-site inspections verify off-site reporting and audited statements; Article 55 requires audited financial statements within three months of fiscal year end under SdB technical specifications (IAS or US-GAAP). - SdB may contract outside independent auditors under Article 74. - Assessment: Compliant. - Consolidated and global supervision: - Article 17 and Article 30 authorize consolidated supervision of economic groups and banks respectively; Article 31 enables agreements with foreign supervisors. - SdB has signed supervisory agreements with many jurisdictions and is negotiating with others. - General Resolution 1-2005 (March 2, 2005) established criteria for defining home and host supervisor for Panamanian holding companies. - Assessment: Compliant for consolidated supervision and Largely compliant for globally consolidated supervision. Comments: - Trend of regional financial groups adopting Panama holding company model; legislative clarity lacking for supervision of holding companies of financial institutions. - Need to clarify SdB’s consolidated supervision powers for Panamanian financial holding companies with Panama bank subsidiaries and improve coordination with foreign supervisors. - Host country and supervision over foreign banks’ establishments: - Article 31 requires agreements with host country supervisors; Article 40 requires prior approval to open establishments outside Panama. - Article 29 permits SdB to share information with home country supervisors; experience exists of home supervisors conducting on-site inspections in Panama. - Supervision of local branches and subsidiaries of foreign banks follows same prudential and inspection standards. - Assessment: Compliant for host country supervision; Largely compliant for supervision over foreign banks’ establishments due to licensing consultation weaknesses. ### Remedial measures and enforcement (Principle 22) - Enforcement powers: - Article 17 authorizes the Superintendent to declare intervention, reorganization, or liquidation and to remove directors or executive personnel. - Article 137 authorizes sanctions including private/public reprimand and civil penalties up to $50,000. - Article 38 establishes grounds for cancelling a banking license. - Assessment: Largely compliant. Comment: While legal powers exist, SdB lacks clear operational guidelines for dealing with distressed entities, transferring assets/liabilities of insolvent banks, and consistent application of remedial measures; recommends development of guidelines for remedial action plans and contingency plans. *Assessment and findings are those of the Detailed Assessment of the Observance of the Basel Core Principles as applied to the Superintendency of Banks (SdB) and the Panamanian banking legal and supervisory framework.* ### 1. Objectives, Autonomy, Powers, and Resources ### 1. Objectives, Autonomy, Powers, and Resources ### Summary of Basel Core Principles Assessment and Compliance - The assessment provides a summary table of compliance with the Basel Core Principles (BCP), presenting classification codes: C (Compliant), LC (Largely compliant), MNC (Materially non-compliant), NC (Non-compliant), NA (Not applicable). - Key supervisory topics evaluated include: - Objectives (CP 1.1) - Independence (CP 1.2) - Legal framework (CP 1.3) - Enforcement powers (CP 1.4) - Legal protection (CP 1.5) - Information sharing (CP 1.6) - Permissible activities, licensing, ownership, investment criteria, capital adequacy (CP 6), credit policies, loan evaluation and provisioning, large exposure limits, connected lending, country risk (CP 11), market risk (CP 12), other risks, internal control and audit, money laundering, on-site and off-site supervision, bank management contact, off-site supervision, validation of supervisory information, consolidated supervision (CP 20), accounting standards, remedial measures (CP 22), globally consolidated supervision (CP 23), host country supervision, supervision over foreign banks’ establishments (CP 25). ### Recommended Action Plan (Selected Findings and Actions) - Strengthen regulatory reporting information for cooperatives and savings and credit institutions; SdB currently lacks an off-site monitoring process for these institutions. Consider outsourcing on a full cost recovery basis to the SdB to develop systems and process regulatory reporting. - Require confidential treatment of SdB inspection reports; inspection reports are currently issued without confidentiality stipulation and are being shared by banks with rating agencies and correspondent banks. - Strengthen the Regulatory Department to address regulatory capital, market and country risk, and investment activities; consider enhanced hierarchical positioning and expert staffing ahead of Basel II capital rules implementation. - Build capacity and retain experienced staff; develop specific career streams and retention measures, including potential contractual reimbursement provisions for educational costs if employees leave for the private sector. - Table 1.3 — Recommended Action Plan in Relation to the Basel Core Principles (selected entries): - Objectives and powers (CP 1.1): Harmonize the supervisory and regulatory arrangements for nonbank deposit taking institutions (cooperatives and savings and credit institutions). - Independence (CP 1.2): Develop a career plan to reduce the risk of losing senior SdB officials. - Legal protection (CP 1.5): Implement an insurance policy to provide legal protection for SdB staff acting in their official capacity. - Licensing and supervision over foreign banks (CPs 3 and 25): Closer coordination with other country supervisors is warranted in the establishment of parallel banks as recommended by Basel Committee. - Capital adequacy (CP 6): Adapt capital charges according to Basel Accord. - Country risk (CP 11): Develop and revise as appropriate current supervisory policy for country risk. - Market risk (CP 12): Develop policies for market risk that consider the evolution in the complexity in activities among larger financial institutions, including the adoption of VaR and/or building-block approaches. - Remedial measures (CP 22): Develop clear guidelines for working with distressed entities, including use of remedial measures, and for insolvent banks, guidelines for winding up, and transferring assets and liabilities. - Global consolidated supervision (CP 23): Amend the banking law to provide the same level of clarity for the consolidated supervision of financial activities by holding companies as is currently the case for SdB direct oversight of banks and their subsidiaries. ### Superintendency of Banks of Panama (SdB) — Response to Assessment (as of January 19, 2006) - SdB expressed appreciation for the IMF Mission and noted that the banking supervisory regime is largely compliant with the Basel Core Principles. - SdB implemented regulatory and procedural updates after the Mission visit in May 2005: - July 2005: Introduced a disclaimer rule stating inspection reports are for the exclusive use of the bank and the SdB. - August 2005: Issued General Resolution No.2-2005 implementing a classification system for banks and economic groups based on CAMELS structure. - December 2005: Approved Accord No. 12-2005, Accord No. 12-2005 E, and Resolution of the Board of Directors No. 32-2005 to upgrade Know-Your-Customer rules, increase AML/CFT compliance for banks and trust company administrators, introduce obligations for correspondent banks, and establish Know Your Employee Policy in line with FATF Recommendations. - Response on specific recommended actions: - CP 1.1: Supervision of cooperatives and savings and credit institutions is not within SdB’s faculty. - CP 1.2: SdB will develop a program for financial stability of professionals to reduce loss of senior officials. - CP 1.5: SdB will evaluate administrative and legal instruments to provide legal protection for staff. - CPs 3 and 25: SdB has established consultation procedures with home country supervisors to prevent parallel banks. - CP 6: SdB will complete technical studies to update capital adequacy regulations; some recommendations will require impact evaluations. - CP 11: SdB will conduct an integral review of asset quality regulation to include measures regarding country risk. - CP 12: SdB is hiring a technical advisor to support implementation of new market risk regulations and practices including VaR and/or building-block approaches. - CP 22: Regulatory Department (Departamento de Normas) is developing a guideline for working with distressed entities. - CP 23: Legal Department will analyze regulations to clarify SdB’s power to execute globally consolidated supervision. - The structure of the Regulatory Department will be analyzed and measures taken to strengthen its capacity. ### IOSCO Principles Assessment — National Securities Commission (CNV) and Securities Markets (Selected Findings) - The assessment used the 2003 IOSCO objectives and principles and methodology, and considered DLMV law, CNV policies and procedures, and CNV self-assessment. - Institutional setting: - The National Securities Commission (CNV) is responsible for supervision and regulation of securities markets. - The DLMV provides for independence of CNV commissioners, including appointment by the president, a five-year term, and removal criteria requiring a decision of the Supreme Court. - Market structure and activity statistics: - 33 securities houses registered with a total transaction volume of about $7.3 billion in 2004. - About 55 percent of transaction volume was concentrated in five securities houses. - At end-May 2005, there were 265 licensed stockbrokers. - CNV licensed 50 stockbrokers in 2003, 38 in 2004, and 42 until end-May 2005. - Total market capitalization in 2004 was $3.9 billion, an increase of 28 percent over 2003. - The three largest companies averaged 58 percent of market capitalization. - There were 81 issuers of listed securities at end-2004 (a decline of 15 during the year); in 2005 the number increased slightly to 83. - Primary issues comprised about 68 percent of market activity by volume; secondary market about 25 percent; repurchases about 6 percent. - Total amount of securities issued in 2004 was $518 million, with an additional $460 million issued through end-May 2005. - There are 17 domestic mutual funds and 3 international collective investment schemes with total assets of $422 million and $20 million, respectively. - LatinClear held 43 percent of the total capitalization of securities in Panama at end-2004. - The Bolsa de Valores has authorized capital of $1 million, divided into 180,000 shares; no individual shareholder owns more than 2.5 percent of the capital. - Pension funds: by end-2004, two fund and pension administrators with 17,000 members and combined assets under management of $55 million. - Market characteristics and concerns: - Securities markets described as small and illiquid; activity concentrated in primary market for government debt and corporate bonds. - Investment culture underdeveloped; preference for bank safekeeping over local securities markets; investor preference historically for foreign capital markets (usually the United States). - Corporate structures often influenced by significant family ownership, affecting local market development. - CNV regulatory activity and enforcement: - CNV became operational in early 2000 and produced 66 regulations (Accords) and 70 opinion letters through mid-2005. - CNV supervised Bolsa and LatinClear (both SROs). - CNV licensed credit rating agencies (four registered). - CNV has investigatory and administrative powers: authorized 16 formal investigations from 2001 to mid-2005. - Example enforcement: in 2001, CNV fined an issuer and its CEO and CFO $300,000 each for providing false or misleading information. - Administrative penalties imposed: 153 in 2000, 119 in 2001, 67 in 2002, 25 in 2003, 21 in 2004, and 18 in 2005. - Legal and institutional weaknesses identified: - Some gaps in legal provisions limit the CNV’s powers to fully perform duties. - CNV decisions are subject to administrative and judicial review; affected persons may file complaints at the Sala de lo Contencioso Administrativo of the Supreme Court of Justice. - Sala de lo Contencioso Administrativo decided only 5 of the 19 complaints since 2001 as of the assessment. ### AML/CFT and Regulatory Measures (CNV) - CNV issued multiple accords and opinions to implement AML/CFT laws (Law 42-2000), including: - Agreement 4/2001: codes of conduct for reporting entities. - Agreement 8/2002: obligation for reporting institutions to provide AML/CFT training. - Opinion 1/2003: scope and content of know-your-customer policies. - Agreement 1/2004: modifies Agreement 4/2001 and establishes Compliance Officer functions per DLMV. - Agreement 1/2005: modifies Agreement 4/2001, establishes codes of conduct for SROs to comply with Law 42-2000, and modifies CFT requirements. - Regulatory requirements include: identifying customers, reporting currency and suspicious transactions, providing personnel training, and retaining customer information and transaction records. - Financial reporting requirements: - Accord 2-2000 requires issuers and intermediaries to provide periodic financial information in accordance with IAS or US GAAP. - Accord 7-2002 mandates a declaration by company president, treasurer, and/or CFO regarding reasonability of financial statements filed with CNV. - Concerns remain about capacity of the accounting profession and limited framework for regulating the accounting profession. *Source: IMF assessment and related documents, including the Superintendency of Banks of the Republic of Panama (SdB) response and CNV assessment.* ### 37. The CNV is building the capacity of its staff (albeit with limited resources) and ### The CNV is building the capacity of its staff (albeit with limited resources) and ### Capacity building, technical competence, and training - The CNV is building the capacity of its staff but faces scarcity of resources that limit progress. - Proposed medium-term training program areas: - supervision procedures for intermediaries, investment firms, collective investment schemes, and SROs - risk management techniques - internal control methods - capital-adequacy methods - The CNV needs to improve its technical competence and abilities to execute oversight effectively. ### Self-regulatory organizations (SROs) and secondary market (Principles 6–7 and 25–30) - The CNV oversees SROs to ensure implementation of CNV regulations and rules. - Clarification of responsibilities and better coordination between the CNV and the Bolsa is needed to reduce duplication or inconsistency in enforcement operations. - Scarcity of CNV resources impairs the ongoing oversight program of SROs, including prudential supervision of LatinClear (the clearance and settlements system). ### Cooperation (Principles 11–13) - The CNV may share publicly available information with local and foreign authorities. - Information obtained during inspections or investigations is confidential and may only be shared: - with judicial powers in class action cases - with the attorney general’s office where there are reasonable grounds to believe a criminal violation has occurred - Article 22 of the DLMV permits the CNV to enter into arrangements with local or foreign, public or private entities to fulfill oversight functions. - The CNV has memoranda of understanding with regulators in Latin America (El Salvador, Dominican Republic, Honduras, Chile, Mexico, Argentina, Costa Rica) and in Europe (Spain). - The CNV is a party to the IOSCO Multilateral MOU (Annex B only) but cannot comply with all provisions: - the CNV is not permitted to share nonpublic information held on its files with overseas counterparts - the CNV cannot initiate an investigation or inspection solely on behalf of a foreign authority; it may act only for purposes of its own investigations - Despite legal restrictions, the CNV has assisted foreign regulators within those limits. ### Issuers (Principles 14–16) - CNV regulations require registrants to use either IAS or US GAAP accounting standards. - The president, treasurer, and/or CFO must declare that the financial statements filed are correct. - The accountancy profession and its representative body are underdeveloped: - The Accounting Technical Board needs to reinforce rules and powers to enforce its code of professional ethics and establish an effective oversight system. - A draft law was introduced to the National Assembly in April 2005 to modify existing statutes regulating the accounting profession and the Accounting Technical Board. ### Collective investment schemes (Principles 17–20) - The DLMV requires the CNV to regulate investment companies, both Panamanian and foreign, and establishes categories of investment funds (open- or close-ended and by redemption offer). - The law grants the CNV authority to establish procedures and issue detailed regulations. - The new regulatory framework provides clear power to establish and enforce entry criteria for open-ended funds. - Because the law is recent, the CNV has not yet introduced an ongoing monitoring program for collective investment schemes or their administrators, including enforcement of eligibility, licensing, registration, or authorization requirements. ### Market intermediaries (Principles 21–24) - The CNV supervises market intermediaries under Article 263 and 264 of the DLMV. - Securities houses are licensed intermediaries in primary and secondary markets; most are owned by banking groups. - Banking entities may deal in securities under Article 23 of DLMV once they obtain a securities house license from the CNV. - The CNV has supervision and enforcement manuals and technical resources, but: - reporting and inspection programs are not in place to ensure prudential and risk-management requirements are observed - monitoring of compliance with prudential requirements, internal control, and risk-management standards is weak - With increased enforcement staff and pending regulations on internal control systems, capital adequacy requirements, and asset valuation, supervision should improve. - The CNV can compel financial intermediaries to reconstruct securities transactions and, during ordinary inspections, request and obtain records from intermediaries in accordance with Article 264 of the DLMV. ### Detailed Principle-by-Principle Assessment (overview and Principles 1–3) - IOSCO assessment categories: implemented; broadly implemented; partly implemented; non-implemented; not applicable. - Principle 1 — The responsibilities of the regulator should be clear and objectively stated. - Description highlights: - CNV responsibilities and powers derive from the DLMV; Article 8 assigns powers to the CNV as sole government agency authorized to regulate and administer securities laws. - Title XV of DLMV requires publication in two newspapers of national circulation not less than fifteen days before adopting agreements. - Opinion 17-2000 sets form and content for applications seeking specific dispositions of the DLMV or the Regulations. - Article 22 allows the CNV to enter into agreements with public or private, national or foreign entities. - CNV has memoranda of understanding with the Attorney's office of the Administration and with the Panama SdB and the Panama Insurances and Reinsurances Superintendence concerning supervisory cooperation and exchange of information. - Act 42 of October 2, 2000 authorizes supervisory agencies to collaborate with the Financial Analysis Unit (UAF) to prevent money laundering. - Assessment: Broadly implemented. - Comment: Formal arrangements for cooperation exist but suffer significant limitations. - Principle 2 — The regulator should be operationally independent and accountable. - Description highlights: - DLMV contains mechanisms to provide independence for commissioners: Article 3 (appointment by the president), Article 6 (five-year term), Article 7 (removal only by Supreme Court after judicial process), Article 9 (routine decisions require favorable vote of two commissioners). - CNV must be transparent, submit financial statements to the legislative branch or other public office, and submit accounts to the General Controller, MEF, and Legislative Assembly. - Agreement with the ombudsman to submit schedule, expenses, and sworn statements supports transparency. - The CNV lacks a specific investigation procedure but must comply with Administrative Procedures Act 38 of July 31, 2000. - Factors affecting operational independence: - (i) Under DLMV Article 22, the CNV must act through the MEF in dealings with the executive branch; MEF must approve selection and appointment of technical and administrative personnel (described in Law 54 of 2004). - (ii) MEF must approve CNV’s code of conduct pursuant to DLMV Article 13; draft submitted in 2002 and still awaiting approval. - (iii) CNV depends on a subsidy from the central government because fees do not cover regulatory costs; this conflicts with DLMV Article 2 which envisages separate funds and independent administration; limited funding impedes CNV responsibilities. - (iv) One commissioner position vacant since end of 2004; an acting commissioner (a director) has assumed duties, adding substantial responsibility while in acting capacity. - (v) Recent court challenges have questioned CNV enforcement decisions; only 3 of 20 complaints since 2001 decided by the Supreme Court, creating uncertainties about CNV authority; judicial delays are exceptional. - (vi) CNV staff and commissioners lack sufficient legal protection when acting in bona fide performance of duties, making them potentially vulnerable to private legal actions. - Assessment: Partially implemented. - Comment: CNV is not sufficiently independent due to reliance on MEF/Executive Branch for resources, hiring, code of ethics approval, and appointment of a new commissioner; visa judicial challenges and funding instability. - Recommendations stated: - Amend legislation to provide greater budgetary and administrative control, including independent hiring and firing of staff. - Amend legislation to reduce adverse judicial interference and to grant staff legislative protection from liability for acts carried out in good faith. - The CNV intends to hire an independent accounting firm to audit its annual financial statements; selection will comply with Law 56 of 1995. - Principle 3 — The regulator should have adequate powers, proper resources and the capacity to perform its functions. - Description highlights: - The legislative and regulatory framework is broad and allows compliance with most IOSCO Principles, but judicial and extrajudicial aspects can compromise the CNV’s role and independence. - Financial resources are constrained; fees and taxes do not cover regulatory costs, creating dependence on a central government subsidy. - Article 12 of the DLMV states the CNV can nominate and hire staff and fix remuneration, but this conflicts with Article 267 of the Constitution which incorporates the CNV’s budget into the General State Budget submitted by the executive branch. - Lack of resources affects attracting and retaining experienced staff. - At inception of the reconstituted CNV there were 12 positions, later increased to 24 positions. - Assessment: (Assessment text starts in the source beyond the provided excerpt; description and factual constraints preserved above.) *Source: IMF/IOSCO assessment of the Comisión Nacional de Valores (CNV) and the DLMV-based regulatory framework.* ### 2000. The CNV is reliant on significant number of temporary professional staff that was ### cr0767 - 2000. The CNV is reliant on significant number of temporary professional staff that was ### Staffing, resources, and independence - The CNV relies on a significant number of temporary professional staff hired for up to 12 months with the possibility to renew. - The CNV is looking to convert these positions into permanent positions, with the goal of having 50 positions. - Current salary levels make it hard to compete with the securities market; key personnel have migrated to the private sector seeking better salary options, stability, and benefits. - Assessment: Partially implemented. - Comments: - The CNV does not currently have proper resources, adequate funding, and the capacity to attract and retain experienced staff, which affects regulator independence. - The CNV is undertaking a review of its needs to achieve effective supervision of the securities market. - Areas where further resources are needed include more auditors; more authorized public accountants; and finance staff to enable deeper oversight. - Staff should be properly remunerated so they must compete with the private sector over these qualified resources. ### Authority gaps and recommended legal amendments - The CNV lacks authority in the following areas: the authority to investigate (inspect and compel testimony from) issuers, and the authority to set rules in corporate governance. - Consideration should be given to amending the DLMV to grant the CNV greater authority over corporate governance, liability of auditing firms, and members of the board of issuers. - Key elements for amendment should consider the CNV ability to: - (i) establish mandatory rules on corporate governance; and - (ii) investigate external auditors and members of the board of companies registered with the CNV for violations to the securities laws and regulations. ### Principle 4 — Clear and consistent regulatory processes - The DLMV authorizes the CNV to issue regulations, agreements, and opinions; key structures are in place and the CNV has issued regulatory guidance. - The CNV observes internal procedures for review of licensing requests; these could include a public consultation depending on the magnitude of public interest. - Publication and transparency: - The CNV publishes and explains its policies, except those regarding questions of inspection and vigilance, in several periodicals according to the Act 38 of July 31, 2000, the General Administrative Procedure Act, and the Act 6 of 2002, law of transparency. - Article 267 of the Act requires that documents provided to the CNV be available for public examination, unless they contain industrial or commercial secrets, or were obtained by the CNV under its investigative/inspection authority. - The CNV can furnish nonpublic information and documents to the courts of justice in a collective Class Action or to the Public Department. - The CNV reveals to the public all the changes in the norms or politics as well as the reasons on which they are based. - The CNV informs the public about proposed and final rules and agreements through various media channels and via its web presence; final agreements are published in the Official Gazette. - Procedural safeguards: - Decisions to deny or revoke a license are made by a resolution signed by the three commissioners; the interested party must be notified and may interpose reconsideration within five work days following notification. - Final resolutions that sanction must mention only the names of people proven to have violated the Securities Act; names of those investigated but not sanctioned should not be included. - Investor education: - An Educational Unit was established to provide the general public with information on investor protection and development of the stock market. - Assessment: Fully implemented. - Comments: The CNV should explore whether additional arrangements could enhance the timeliness and certainty that information important to oversight of conduct of business is shared as needed. ### Principle 5 — Professional standards and confidentiality - Staff obligations and codes: - CNV staff are obliged to observe laws, regulations, codes of conduct/ethics, and other written guidance to avoid conflicts of interest. - Law 9 of June 1994, Article 137, No 18 requires public servants to inform superiors of administrative procedures involving relatives up to the fourth degree of consanguinity or second of affinity; Article 138 prohibits privileged treatment of relatives. These requirements are transcribed into internal regulation. - Article 30 of the CNV’s code of conduct defines conflict of interest; Article 31 requires declaration of impediments. The DLMV Article 13 required the CNV establish a code of conduct; the code was presented to MEF/Executive Branch in 2002 but has not been approved, so no formal or specific regulation on possession or negotiation of securities by staff exists. - Confidentiality and sanctions: - DLMV Title XVI Article 268 restricts use of information by CNV staff and others: no agent, official or external consultant, director, dignitary or employee of an SRO may use information presented to the Commission or negotiate registered securities making use of such information. - The internal regulation (Chapter 4, Article 31) transcribes the confidentiality provisions. - DLMV Title XVI Article 267 determines access to information and confidentiality requirements; internal regulations require reports and similar documents be kept confidential until authorized disclosure. - Files in investigations are maintained under strict reserve by the National Direction of Enforcement and Audit. - Article 209 imposes confidentiality requirements on broker dealers, investment advisors, investment administrators, SROs, stock brokers, and analysts; breaches can result in fines ranging from $1,000 to $100,000. - Article 268 establishes sanctions to CNV staff and temporary staff ranging from $1,000 to $100,000. - Law 9 of June 1994, Article 152 allows for immediate dismissal of public employees for failure to maintain confidentiality of information. - Assessment: Broadly implemented. - Comments: The code of conduct is an important document to assure high professional standards including appropriate standards of confidentiality. Those actions necessary for formal approval should be undertaken. ### Principle 6 — Appropriate use of SROs - The CNV oversees two SROs: the Bolsa de Valores de Panama (the Bolsa) and Central Latinoamericana de Valores, S.A. (LatinClear); both are supervised by the CNV which reviews compliance with securities laws and regulations. - Bolsa and membership: - The Bolsa is a publicly held corporation whose shares are traded on the Bolsa itself; as an issuer it is subject to the same disclosure and updating requirements as other issuers. - Bolsa members who hold a stock exchange seat are corporations engaged in stock market operations as brokerage houses; each must be authorized by the CNV and observe Bolsa rules. - At end-2004, the Bolsa had 60 registered shareholders, who in turn held 43 percent of the shares of the Bolsa. - To operate as a Bolsa seat holder an applicant must: (i) have a securities broker dealer license granted by the CNV; (ii) have qualified and properly authorized staff by the CNV; (iii) have the infrastructure and necessary technical team to receive and carry out exchange transactions; and (iv) be the owner of at least 2,500 equity shares in the Bolsa. - LatinClear: - Created in 1997 to provide clearing and settlement services for stock exchange operations through electronic systems. - SRO rulemaking objectives: - Under Article 54, internal rules for the Bolsa must (i) prevent deceptive and manipulative acts; (ii) promote proper conduct in the sale of securities; and (iii) stimulate the development of an efficient market. - LatinClear rules must ensure (i) operation of an accurate, safe and efficient custody, clearing and settlement securities system; and (ii) adoption and use of procedures and international standards for safekeeping, compensation and liquidation of securities, as well as integration with national and international clearing houses. - Assessment: Fully implemented. - Comments: No comments. ### Principle 7 — Oversight of SROs; fairness and confidentiality - Authorization and standards (Article 52, DLMV and Act 7-2003): - SROs must demonstrate technical, administrative, and financial capacity; technical capacity is measured by a two-year business plan; financial capacity requires presentation of financial statements for the last two tax periods by an authorized independent public accountant. - Internal rules must meet securities regulations standards, including a code of conduct for directors, principals, employees, and representatives; draft internal rules are presented for CNV review and monitoring. - Senior personnel must have had no convictions in the last 10 years nor had their license to act as an SRO member revoked in the last 5 years; each dignitary, director and principal executive must present a sworn statement confirming compliance with these requirements. - Disciplinary rules and sanctions must be established; SRO sanctions are in addition to CNV administrative sanctions. - Bolsa Stock Exchange Supervision Manual provisions: - Chapter III: compliance officer monitors compliance with internal rules and anti-money laundering obligations. - Chapter IV: procedure for investigation of violations against securities legislation and Bolsa internal rules. - Chapter V: disciplinary procedure and when it will not be initiated. - Chapter VII: procedure on noncompliance of transactions and fines for failure to deliver securities or money for a clearance transaction. - Chapter IX: preventive measures, including immediate suspension of an intermediary or its personnel while investigating facts that could entail a sanction. - Rule modification and CNV oversight: - The two SROs must remit any modifications, additions, or abolition of internal rules to the CNV with an explanation (Article 57, DLMV); the CNV verifies and may require corrections or deny proposed modifications if they do not meet standards in Articles 54, 55, and 56 or if the SRO lacks necessary capacities. - SROs must promote cooperation and coordination among those responsible for securities information, negotiation, custody, settlement, and clearing (Article 54, DLMV). - SROs will notify the CNV about sanctions imposed on their members and their directors, dignitaries, and employees (Article 61, DLMV). - Depending on seriousness, SROs can: (i) expel, suspend, or limit rights of a member, director, dignitary or employee; (ii) prohibit a person from being associated with any SRO; and (iii) sanction a member, director or dignitary. - SROs can impose sanctions for presentation of false or misleading information; failure to comply with membership requirements; or dishonest practices against exchange industry ethics. - Assessment: Fully implemented. - Comments: No comments. *Source: IMF assessment (cr0767 - 2000).* ### Chapter VII from the exchange transactions supervision manual, and point 8.5 from the ### Chapter VII from the exchange transactions supervision manual, and point 8.5 from the Bolsa internal rules ### SRO governance and internal rules - Bolsa internal rules and point 8.5 indicate possible sanctions the Bolsa could impose for violations of internal or stock exchange rules. - SRO internal rules should foster fair and representative participation of members on the administrative board (Article 54, DLMV). - Bolsa internal rule point 3.5: all members should enjoy the same rights of access and services regarding use of the exchange. - The SRO cannot disclose client information, investor accounts, nor securities transactions they manage, unless done with the client’s consent. - The DLMV forbids use of nonpublic material events obtained by privileged relationships for personal benefit (Article 196, DLMV). - DLMV does not specifically regulate SRO conflicts of interest; it requires the commission to enact conduct rules for intermediaries and stockbrokers to avoid conflicts (Article 39, DLMV). - Bolsa Code of Conduct Item No. 3: measures may be adopted to avoid conflicts of interest due to professional, family, economic, or other relations involving stock exchange members. ### CNV supervisory activity, inspections, and SRO oversight - CNV historically lacked an efficient supervisory program that includes inspections; first on-site inspection at the Bolsa occurred in 2004 covering the latest four years of operations, and a plan for future inspections exists. - Inspection areas at the Bolsa included: - Organization and human resources - Legal aspects (conduct rules, arbitration proceedings, discipline proceedings) - Information Systems - Financial/profitability analysis - Accounting aspects - Supervision about money laundering contingency plans - Supervision about privileged information use and price manipulation - No on-site inspection of LatinClear to date; LatinClear is subject to a periodic review program where SROs present audits and draft financial statements (Article 66, DLMV), daily operations reports (Article 18, Act 7-2003), and global monthly summaries (Article 18, Act 7-2003). - CNV may require SROs to enclose reports as needed to enforce observance of Stock Exchange Laws. - Article 64, DLMV: regulator can suspend or revoke an SRO license or any principal executive from an SRO, including revision and revocation of government instruments and SRO rules. - Article 65, DLMV: CNV can take enforcement action, including sanctions against entities also subject to SRO regulation. - Article 263, DLMV: CNV can obtain from any registered person all information (documents or declarations) necessary for investigation when there are well-founded reasons to believe a violation occurred. - Article 65, DLMV: CNV can assume control of SRO responsibilities when the SRO’s powers are inappropriate to investigate misconduct or conflicts of interest. Assessment - Partly implemented - Comments: regulatory framework and self-regulation norms are adequate but deficiencies exist in CNV’s capacity to supervise SROs due to serious lack of technical staff; cooperation between CNV and SROs should be enhanced to promote market and investor education. ### CNV inspection, investigation, surveillance powers (Principles 8–11) - CNV has comprehensive enforcement powers including inspection, investigation, and criminal referral; can require information in ordinary course, inquiries, reporting cycles, or carry out inspections without judicial action or suspicion of misconduct (Art. 8, No 6, DLMV). - CNV can obtain information on administrative aspects, security, ordinary business operations, clients, portfolio management, accounting, internal controls, file revision, registers, electronic transaction system, and accounting books. - CNV can conduct surveillance and supervise SROs and has system and access codes to observe real-time exchange transactions; daily transaction reports are received daily. - Client identification: Agreement 5-2003 (Code of Conduct), Article 11; follows parameters in Agreement No. 4-2001 modified by Agreement 1-2004; AML rules based on Act 42, 2 October, 2000. - Entities must keep client identification records from account establishment until five years after finalization; inspections will check customer files for required identification documents. - Agreement 5-2003 (Title II) requires intermediaries to require clear and precise orders, chronologically record orders with corresponding numbers, include transfer orders represented by notes in accounts or titles, and keep records by electronic means with adequate codes; at CNV request a paper print signed by an executive officer must be produced. - Article 8 and 264 of DLMV: daily inspections for anti-money laundering and countering terrorist financing were recently included. - AML legal framework: Act 41 of October 2, 2000 added money laundering felony to Title XII; money laundering felony stated in Article 389 and sanctions in Articles 390–393. Agreement 4, 2001 developed AML obligations in the securities market. - Inspections implemented since 2002 (on-site supervision program): - Regulated Entity inspections: 2002: Securities broker-dealers 25; Investment Administers 6; SROs 1; Total 32 - 2003: Securities broker-dealers 29; Investment Administers 12; SROs 0; Total 41 - 2004: Securities broker-dealers 18; Investment Administers 5; SROs 1; Total 24 Assessment - Broadly implemented - Comments: CNV should adopt its own administrative proceedings for investigations; CNV submitted a draft administrative proceedings document and adopted an internal proceeding for preliminary matters and complaints only. ### Enforcement powers, sanctions, investigations, and due process (Principle 9) - CNV investigative powers: Article 263 of DLMV (modified by Act 45, 2003). - CNV duty to submit penal investigations per Penal Code Article 234; Article 267 DLMV allows CNV to submit cases to penal authority. - Act 45, 2003 amendments broadened scope of investigations, distinguished individuals vs registered individuals, allowed suspension of activities to minimize market damage, and extended examination authority to subsidiaries and branches. - CNV can demand accounting books, records, correspondence, and other documents and ascertain veracity of information from various sources. - Legal rules for supervision and investigation are contained in multiple DLMV Titles (Intermediaries, SROs, Securities Register and Reports, Public Offering, collective investment schemes, Forbidden Activities). - Investigation process: National Direction for Supervision and Audit opens file, prepares preliminary report; decisive stage passed to commissioners with Legal Affairs Department support. - CNV lacks formal procedure approved as an Executive Decree for investigations; drafted project submitted to MEF on September 9, 2004 (pending). - CNV authority: Article 266 DLMV to examine books and documents if a legal person operates as intermediary without CNV license. - Article 208 of DLMV 1/99 as amended by Act 45, 2003: CNV can impose administrative sanctions with a maximum penalty amount of $300,000, and apply different criteria for administrative violations. - CNV enforcement actions have faced legal challenges; lawsuits in Supreme Court of Justice include external auditors contesting CNV investigative powers; final judgment outstanding since April 2004. - Administrative decisions are subject to revision by the Third Room of the Administrative Contentious Court; sanctioned individuals often do not pay fines while court decides. - Civil remedies: Article 204, DLMV attributes civil responsibilities up to three times the profit obtained or loss avoided and does not permit contract cancellation; Article 204 also allows affected parties to request contract cancellation instead of legal damages. Article 210 deals with collective class action and allows CNV to recover damages and transfer amounts to a trust for equitable distribution. - Enforcement activity since 2001–2005: - CNV carried out 97 inspections in the last 3 years (securities houses, collective investment schemes administrators, and SROs) since 2002. - Since 2001, CNV launched 16 formal investigations of individuals and corporations for false/misleading disclosures. - Administrative penalties imposed: 2000: 153; 2001: 119; 2002: 67; 2003: 25; 2004: 21; through May 2005: 18. Assessment - Broadly implemented - Comments: CNV powers are clear and executed but subject to due process and court review, which delays finality; some powers broadened by Act 45, 2003 have not yet been used. ### Inspection, surveillance, compliance programs, and sanctions procedure (Principle 10) - CNV enforcement powers derived from Art. 264 (Ordinary Inspections) and Art. 263, DLMV. - CNV can start investigations for noncompliance with the DLMV and agreements. - Inspections: ordinary (periodic) and special (no prior notice) inspections; special inspections used when risk situations detected (non-liquidity, unusual transactions). - Financial statements and reports are periodically checked; cases in 2004 addressed noncompliance with minimum capital; entities were granted 15 days to adjust to at least $150,000.00 minimum capital; entities complied within the granted term. - CNV carries out supervisory inspections of three types: (i) general; (ii) risk-based; (iii) complaint-based. - CNV can establish mechanisms to detect and investigate price manipulation (rule 201, Law Decree 1, l999 Title XII), but to date no formal investigation into price manipulation has been initiated by commissioners resolution. - Agreement on own resources and prudential supervision has not been approved. - Suspension or revocation of licenses: Rule 5 of Agreement 5, 2003 and Rule 25 of the DLMV allow CNV to suspend/revoke licenses, restrict transactions, admonish firms/individuals; affected parties must be given notice and opportunity to be heard unless immediate action required to avoid further damage. Summary proceedings for suspension/cancellation do not permit application of monetary sanctions concurrently. - CNV has an internal procedure for handling reports of misconduct and complaints; CNV web section “Center for Reporting of Misconduct” states basic requirements for complaints. - Agreement 5-2003 requires intermediaries to adopt and carry out a code of conduct and periodically present information to CNV; compliance officers' role and functions established by Agreement 9-2001 (modified by later agreements). - CNV lacks a rule allowing an audit of execution and negotiation of all transactions in an authorized market, though SROs have member supervision rules. - Inspections use Manual of Supervision and Inspection which foresees on-site verification of administrative, operative, accounting, and technological aspects. - Inspections have been satisfactory in identifying deficiencies but often delayed due to resource constraints. Assessment - Partially implemented - Comments: credible application of CNV powers exists, but shortage of staff, resources, skills, and technology limit CNV’s impact; judicial delays (Supreme Court) have slowed resolution of key issues; supervision program and manual are not fully effective without additional staff resources. ### Information sharing, confidentiality, and cross-border cooperation (Principles 11–13) - CNV legal capacity to cooperate domestically: Article 264 DLMV permits CNV to request assistance from the SdB during inspections of banking entities holding CNV licenses. - May 13, 2005: CNV, SdB, and SSRP signed a cooperation and exchange of information MOU limited to related parts of supervised entities, not including client information. - General rule: information obtained by CNV is public except information in Article 267, Law Decree 1, l999. - CNV can share public information about permits, licenses, records, and relevant market conditions; must preserve confidentiality for information in Article 267 (industrial/commercial secrets; information obtained in investigations/inspections; where CNV agreed not to disclose; documents agreed to be non-disclosed). - Confidential information may be provided only to judiciary, public ministry, SdB (in specific inspections), and the UAF (for AML purposes); recipients must not disclose such information. - Article 2, Law 42, 2000: CNV expressly authorized to collaborate with the Financial Analysis Unit (UAF) and provide any information available to prevent money laundering. - CNV practice: applications for information are often referred to public information; CNV limited in sharing nonpublic information with foreign counterparts under Article 267; foreign requests must normally proceed through judicial/diplomatic channels or Mutual Legal Assistance Treaties. - Domestic cooperation limitation: CNV cannot obtain bank account records independently; memorandum between SdB and CNV not yet operational in practice. - Code of Commerce Article 89 limits forcing businessmen to provide copies of books/correspondence for foreign litigation; penalty up to fine not greater than 100 balboa ($1000.00). - CNV has signed MOUs with several jurisdictions (El Salvador, Dominican Republic, Honduras, Chile, Costa Rica, Argentina, Spain, México) and is negotiating with Puerto Rico and Ukraine. - CNV has petitioned to be signatory of IOSCO multilateral MOU but must address sharing limitations first. - CNV posts warnings on its website about persons without CNV licenses; these warnings sometimes reflect foreign counterpart information. Assessments - Principle 11: Not implemented (Code of Commerce Article 89 and Article 267 obstruct sharing confidential information with foreign authorities; CNV cannot provide bank account information or share investigation/inspection materials with foreign counterparts except via judicial/diplomatic channels.) - Principle 12: Partially implemented (CNV can sign MOUs for public information; legal restrictions limit sharing of confidential information; CNV has signed MOUs domestically and with some foreign regulators.) - Principle 13: Not implemented (CNV cannot provide timely and efficient assistance to foreign regulators for reconstructing transactions or obtaining bank records; information obtained during investigations/inspections is confidential per Article 267 and cannot be supplied to foreign authorities except through mutual legal assistance or judicial channels.) Comments - Despite legal restrictions, CNV has shown positive cooperation with foreign regulators within capabilities and has been active in AML efforts; legal changes are needed to align CNV with international practices and enable full participation in IOSCO multilateral MOU. ### Disclosure, reporting, and investor information (Principle 14) - Regulatory framework sets full, timely, and accurate disclosure requirements for public offerings: conditions for offering, prospectus content and distribution, listing documents, and supplementary offering documents; securities register procedures in Agreement 6-2000 modified by Agreements 15-2000, 12-2003, and 8-2004. - Required documents accompanying a registration application: - Certificate of existence and representation submitted by the public registry within the previous 30 days of application - Copy of the public deed containing the social contract and amendments and proof of registration - Audited financial statements for the last fiscal year, submitted by an independent and authorized public accountant - Provisional financial statements for the previous trimester prior to the presentation date - Chart indicating adoption (full/partial) of CNV corporate governance principles (Agreement 18-2000) - Public access: all above documentation and supplementary materials are public; National Department of Securities Registry enters application into electronic system and carefully revises the prospectus. - Annual Update Report requirements: - Detailed description of issuer activities and subsidiaries - Financial summary of operational outcomes and annual balance account of the three previous fiscal years - Audited annual financial statements - Identification of communication media used for publication - Annual Update Report must be available within three months of fiscal year close - CNV added disclosure requirements such as adoption status of CNV governance guidelines and audited annual financial statements of collateral/guarantors where applicable - Quarterly Update Report requirements: - Summary of most important aspects of the trimester - Financial summary of operational outcomes and annual balance account of current trimester and previous three trimesters - Provisional financial statements for the current trimester - Identification of communication media used - Must be presented four times a year within the two months following the end of the trimester - Voting procedures for shareholders provided in Title VII of the DLMV; Agreement 5-2000 on proxy voting was declared unconstitutional in May 2002 on form, not content; CNV prepared a Project of the Law Decree for proxy voting procedures submitted to the executive branch (not yet approved). - Regulatory framework provides specific and comprehensive requirements related to timely disclosure of material information affecting the price or value of a listed security. *Chapter VII from the exchange transactions supervision manual, and point 8.5 from the Bolsa internal rules* ### Section 77 of The DLMV indicates that disclosure of material events should be made at ### Section 77 of The DLMV indicates that disclosure of material events should be made at ### Disclosure timing and issuer obligations - Disclosure must be made "at the moment that they occur." - The issuer must report any event or changes of relevance: - as a note when the event occurs, and - on the Update Report corresponding to the period in which the event occurred. - Every relevant event communicated to the CNV is disclosed on a weekly basis by the CNV in the weekly bulletin that the CNV publishes. - When the issuer does not fulfill the obligation to disclose the material event and the CNV has knowledge of this, a note is submitted to the issuer asking for explanations for the non-fulfillment of Article 77. ### Discretion, definitions, and guidance - The decree allows the issuer discretion to omit disclosure if there are reasonable grounds to believe that disclosure would go against the issuer’s interests in a significant way and persons with non-public knowledge have not negotiated nor will negotiate securities of the issuer. - The concept “immediately” has not been defined in the law. - A project is revising the criteria for fulfillment of the obligation to make public knowledge of material events, using the IOSCO document published by the Emerging Markets Committee in September 1996 as a guide. ### Publicity for public offerings and advertising materials - Agreement No 14-00 of August 16, 2000 adopts publicity criteria applicable to advertising materials or information that entities registered with the CNV may distribute. - Objective: advertising information for public offerings must be clear, certain and not misleading or fraudulent. - The CNV is not obliged to supervise advertising materials but may order suspension of advertising use that violates Art. 80 of The DLMV or the adopted advertising criteria. ### CNV reviews, timelines, and sanctions for financial statements and reports - The CNV must revise financial statements within 20 working days after receiving them and inform the interested party of their observations (Agreement No. 10-2000, modified by Agreement No. 10-2003). - Observations must be taken into account within the next ten (10) working days, counted from the submission of such observations. - Registered persons whose financial statements and reports are found incomplete by the CNV are required to respond within a term of 10 working days starting from the date of submission of the observations. - Failure to respond results in non-observance of Agreement 2-2000 and No. 8-2000 as modified by Agreement No. 7-2002, and the license for public offering and negotiation of listed securities will be removed. - Administrative sanctions accumulate for each working day of delay in presentation of financial statements and special reports. When the delay reaches 60 working days, the license is suspended; suspension is ordered by a commissioner’s resolution and voids automatically once the delayed issuer presents the financial statements/reports. - Issuers must sign a sworn statement accompanying the Annual Update Report signed by the president, treasurer, general manager and financial director of the issuer (Agreement No.8-2000 of May 22, 2000, amended by Agreements 10-2001 and 7-2002). ### Requirements when prospectuses contain outdated financial information - Adequate measures may be taken when financial statements included in an issuing prospectus are outdated (e.g., presentation of financial information not subject to a recent audit). - Audited financial statements should also be submitted to the CNV for the public in general. - If a fiscal term has passed, the CNV requires an update of the numbers; provisional financial statements are required for the trimester immediately previous to the date of presentation of the application. - If the CNV determines that the financial information corresponds to an earlier trimester given the market date, it may require updates and, if necessary, special reports. ### Confidentiality, omissions, and foreign issuers - Circumstances permitting omission or postponement of disclosure are limited to commercial secrets, intellectual property rights, or other commercial objectives such as incomplete negotiation processes. - Agreement No. 6-00, Article 12 allows an entity to request the CNV in writing to maintain as confidential information or documents submitted to the CNV but omitted from the prospectus; the request must justify confidentiality and explain why information is not essential to protect public investors; the CNV must determine acceptance. - Foreign issuers must observe CNV regulations and complete an additional prospectus section; they must nominate a representative with offices located in Panama with capacity to represent it before the CNV and receive administrative and judicial notifications. - Panama has recognized certain jurisdictions and accepted their licenses or registers without additional requests after reviewing their regulations; listed countries/states include France, Spain, UK, Japan, Switzerland, Germany, Sweden, Québec and Ontario, Hong Kong, Netherlands, Mexico, Australia, Italy, all those whose commissions belong to the IOSCO Technical Committee, and El Salvador and Costa Rica after a revision of their legislation. ### Enforcement tools and limits on CNV authority - Measures available to the regulator include revisions, certifications, auxiliary documentation, and sanctions to ensure full, timely, and accurate disclosure. - The CNV can require restatements, special reports, and may suspend licenses for non-compliance. - Some legal uncertainties limit CNV powers: - The Supreme Court of Justice has declared an agreement on substantial holdings unconstitutional on the basis of form, not content. - Lawsuits have been filed by external auditors contesting the CNV’s authority to investigate and sanction auditors; such suits have been admitted by the Supreme Court of Justice and have in some cases halted CNV investigative processes. - The regulatory framework does not provide for an organization responsible for establishment and timely interpretation of accounting standards; the Accounting Technical Board has been given oversight tasks to enforce International Financial Reporting Standards and International Auditing Standards beginning in 2006. ### Requirements and standards for accounting and auditing - Since 2000 the CNV has adopted international standards: International Financial Standards (previously NIC) and U.S. GAAP via Agreement No. 8-2000, modified by Agreement 7-2002; Agreement No. 2-00 also demands such adoption. - Agreement No. 2-00, Article 3: auditors of issuers whose financial statements are registered with the CNV must observe: - (A) American audit standards if prepared according to U.S. GAAP, - (B) international audit standards if prepared according to international accounting standards, or - (C) the general accepted audit standards in the foreign jurisdiction referred in Second Article of the agreement. - Agreement 8-2000 (modified by Agreement 7-2002) requires: - consolidation of subsidiary accounts (Article 7); - disclosure of related parties information including independent related party transactions; - financial statements to include an opinion of the authorized and independent public accountant and explanation of adverse opinions or abstentions. - Audited financial statements must be comparative for the latest three fiscal terms, include the auditor’s opinion, general balance, outcome results, changes in patrimony, cash flow, accounting policies, explanatory notes, and, for consolidated statements, annexes showing controllers and subsidiaries (DLMV Article 8, No 5). - Article 9 and Article 10 (Opinion and Content of the Opinion) specify required elements of the auditor’s opinion: date of the opinion; name of the financial statements; accounting term; the verification took place; the report itself; and the financial statements that were made. ### Assessments and identified gaps - Assessment: Fully implemented (with respect to disclosure of financial results and other information material to investors’ decisions). - Comments: Disclosure appears to meet requirements; CNV has substantial authority; prospectuses and continuing information are readily available; regulatory framework describes information requirements and timing clearly. - Assessment: Broadly implemented (Principle 15 — equitable treatment of shareholders). - Comments: Issues include insufficient disclosure in practice; capacity to identify beneficial owners and their exact stakes; simplifying shareholder redress; proxy solicitation regulation; mandatory audit committees; clearer fiduciary duties and liabilities of directors. - Agreement 7, 2001 requires total disclosure for takeover bids and sets acceptance terms not less than 30 days counted from the following day of announcement publication in a national newspaper. - Assessment: Broadly implemented (Principle 16 — accounting and auditing standards). - Comments: Regulatory framework lacks an organization responsible for establishing and interpreting accounting standards; the Accounting Technical Board must improve processes and work cooperatively with or under oversight by the CNV. - Lawsuits by external auditors contesting CNV powers have temporarily suspended some CNV due process. - The Enforcement and Auditing Direction noted non-compliance with full disclosure of related parties by issuers; banks among issuers sometimes disclose only what the Superintendence of Banking requires. *International Monetary Fund — cr0767 (Table 2.1 detailed assessment excerpts).* ### Section 14 of the Agreement 5/2004. ### Section 14 of Agreement 5/2004 ### Standards for investment managers and conduct codes - Investment manager standards referenced in Agreement 5/2003 as amended by Agreement 4/2004, in provisions referring to the conduct of market intermediaries. - Investment managers have been requested to file their conduct codes with the CNV. - No self-managed investment company has been registered; therefore, no appraisal of the sufficiency of Section 14 standards for self-managed investment companies has been possible. ### Licensing, staffing, and organizational requirements - Sections 66.4, 66.5 and 66.6 of Agreement 5/2004 require investment managers to have "the number of managers that the trading volume of the company requires." - Appointment of at least one main executive is compulsory; that executive must hold the “Licencia de Ejecutivo Principal de Administrador de Inversiones” (“Principal Executive Licenses”) and meet conditions set in Section 75 of Agreement 5/2004. - Investment managers must have: - a compliance officer; - an administrative and accounting structure; - the technical and human resources necessary to provide the licensed services. - As of the execution of Agreement 5/2004 on September 1, 2004, investment companies and investment managers were granted a six (6) month period (deadline February 2005) to adapt to the new regulation; some managers are undergoing this process. - To request a new license, form DMI-4 must be filed, detailing general information and professional experience of directors, dignitaries, and applicants for the Principal Executive License. - To date, no request for an investment manager license has been filed under Agreement 5/2004. - Four licenses of Principal Executive Licenses have been granted since the execution of Agreement 5/2004. ### Financial capacity and capital requirements - Section 14 of Agreement 5/2004 regulates the financial capacity of self-managed investment companies; no appraisal possible due to absence of registered self-managed companies. - Section 66.14 requires investment managers to have a minimum net worth of $150,000.00, including capital share and shareholder reserves. - The agreement states this net worth will be adjusted once the commission issues the Agreement on Proper Resources and Prudential Supervision. - If the investment manager already has a Value House license, it must have a minimum paid-in capital of $300,000.00. - General suitability standards for collective investment schemes await further sector development for fuller evaluation. ### Sanctions, supervisory powers, and examinations - Effective, proportional, and dissuasive administrative sanctions exist for unauthorized management of a collective investment scheme or breach of agent obligations: - Section 208 of DLMV, as amended by Law 45 dated June 4, 2003, authorizes fines amounting to a million Balboa for prohibited activities indicated in the Decree-Law. - Fines up to three hundred thousand Balboa for violating any other provision of the Decree-Law. - To date, no sanctions have been applied against any investment company. - Regulatory framework grants the commission responsibilities and clear powers on registration/authorization of collective investment schemes (Agreement 5/2004 as amended by Agreement 2/2005). - All investment companies making a public offering in Panama, or managed in or from Panama, must be registered in the CNV. - DLMV enables the commission to examine, investigate, and execute proceedings envisaged in Sections 8.8 and 110 of the Decree-Law. - To date, no examinations of either investment companies or investment managers have been conducted. - An examination instructions manual/handbook has been issued; an examination according to that manual is planned for the year 2005. - Financial statements review is executed according to the schedule in Agreement 8/2000, as amended by Agreements 10/2001 and 7/2002. - Section 66 of Agreement 5/2004 lists requirements to be fulfilled at all times for license retention, but, aside from submission of financial statements, no ongoing monitoring or follow-up of intermediaries has occurred. ### Reporting, disclosure, and investor protection obligations - Collective investment scheme agents must report a priori or a posteriori every important organizational or statutory change during their management. - Investment companies must file with the commission for authorization any amendment to their prospectus or articles of incorporation, and any direct or indirect change of control; required documentation is detailed in Agreement 5/2004. - Section 77 of the DLMV, regulated by Section 48 of Agreement 5/2004, requires immediate written communication to the CNV of any "relevant fact" affecting market value; examples include: - any reduction in assets or capital share representing a variation greater than 20 percent; - any retirement of debts or a group of debts in a three-month period representing a reduction greater than 40 percent of assets; - any indebtedness transaction creating an obligation to any third party for more than 10 percent of the assets or capital share at execution. - Sections 66 and 72 of Agreement 5/2004 require investment managers to keep updated "all the information referred to the investment manager filed with the commission." - Sections 72.1; 72.2; and 72.13 require communication to the commission of any changes in conditions under which authorization was granted. - Section 72.12 requires honest and sufficiently detailed communication of the details of the managed funds. - Section 46 of Agreement 5/2004 requires investment managers to keep and update: - accounting records; - an investments registry; - an investors registry; - a promoters, bank entities, and intermediaries agents registry; - a registry of persons who directly or indirectly work with the company; - a transactions registry; - a complaints registry. ### Conflicts of interest, conduct codes, and delegation/sub-management - Measures to forbid, restrict, or manage conflicts of interest appear in Sections 6, 7, 8, and 9 of Agreement 5/2004. - These conditions are also included in conduct codes submitted by investment managers to the CNV for approval. - No examinations have been performed to evaluate compliance with these measures. - Section 66.8 requires every company seeking a license to adopt and maintain an internal regulation of conduct according to Agreement 5/2004. - Agreement 5/2004 includes a General Conduct Code of Securities Markets (GCCSM) with rules including: - Better Execution; - Appropriate and On Time Execution of Transactions; - Prohibition of Unjustified Increase of Number of Transactions with Customers Accounts to Obtain More Fees; - Rules on Transactions with Related Parties or Companies; - Rule 3: entities shall act with diligence and care. - Customer information duties: information must be "clear, correct, precise, and sufficient and delivered on time," and include risk statements. - Entities must collect and update information about possible employee conflict-of-interest situations (family relationships, personal assets, or other reasons). - Section 3 of Agreement 5/2004 prohibits dignitaries, directors, main executives, employees, and representatives from using information obtained by the entity for personal benefit or providing it to selected customers or third parties without consent. - Delegation of functions (Section 70): - Investment managers may appoint sub-managers or subcontract administration services. - Sub-contracts must be partial; the investment manager is not released from management responsibility and must disclose sub-management conditions in the prospectus. - Management sub-contracts may only be entered into with intermediaries authorized and supervised by their origin regulator, meeting: 1. authorization to operate and supervision by securities market regulator; 2. at least five (5) years of experience in the management of collective portfolios; 3. no prior convictions for crimes against property or public trust, money laundering, violation of confidentiality, or preparation of untruthful financial statements. - In case of sub-management, the investment manager must immediately notify the commission and file a copy of the contract. - If a foreign entity is hired to sub-manage, the prospectus must state this, include general information about the entity, conditions of the sub-contract, and control mechanisms. ### Custody, safekeeping, asset segregation, and liquidation - Each collective investment scheme must appoint a custodian where securities, financial assets, and cash belonging to the scheme will be deposited; only legal persons can be appointed as custodians. - Permissible custodians: banks, brokerage firms that can carry out those services per their business plans, central securities depositories, and fiduciary trustees properly authorized by the SdB. - Cash must be deposited in a bank, either as custodian or sub-custodian. - Each scheme should appoint only one custodian but may have several deposits and sub-custodians. - Custodians for registered collective investment schemes are subject to audits, cash counts, and inspections by their external auditors annually to verify existence and status of assets under custody (Article 83, Agreement 5/2004). - Agreement 5/2004 contains bookkeeping, documentation, and audit requirements for scheme transactions and assets (Articles 45, 50). - Article 62 and Article 80 and following address halting of transactions, suspension of an investment manager’s license, and liquidation/dissolution procedures; no liquidations have been required to date. - Assessment note: The regulatory framework does not require segregation of scheme assets from assets of the operator and its managers; the separation/segregation of assets under management from assets of the operator and its managers is "not required by regulation" and "should be considered for a future modification of Agreement 5-2004." ### Disclosure, reporting frequency, and investor information - Prospectus and subscription documents must disclose material information to assess suitability and value of investor interests. - A registered collective investment scheme must provide to each investor, prior to subscription, a copy of the prospectus, the last annual statement, and the last published semester report (Article 48, Agreement 5/2004). - For self-managed schemes, prospectus must describe the management board, structure, organization chart, latest annual report, latest published semester report, and, on a monthly basis, a statement of account reflecting at minimum: - details of investments made; - changes in the value of net assets; - number of participation quotes issued and in circulation as of the date of the statement. - Article 126 of the DLMV requires prior notification to nonvoting investors before changes in: (i) significant changes in objectives or investment policies; (ii) change of investment manager, investment assessor or custodian; (iii) creation of a new type or series of units; (iv) significant changes in indebtedness limits; (v) significant changes in profit policy; (vi) significant changes in redemption policy of units; (vii) increase in commissions and charges paid by investors; (viii) significant increases in commissions and charges paid by the scheme to manager, investment assessor, custodian, issuer, or other service providers. - Modifications to prospectus or rules governing the scheme must be presented to the CNV for authorization; rules are effective from the moment they are registered before the CNV (Article 24, Agreement 5/2004). ### Supervisory assessment and implementation status - Assessment: Broadly implemented. - Comments: - New regulation (Agreement 5/2004) is recent, applied since September 1, 2004; ongoing monitoring of conduct and continuous compliance across the life of funds is not yet in place. - CNV is enhancing its collective investment scheme supervisory program and plans to review redemption practices and on-site inspection capabilities. - No ongoing monitoring of continued fulfillment of eligibility, licensing, registration, or authorization requirements has been conducted except for submission of financial statements. *Source: Section 14 of Agreement 5/2004* ### 1. The date of issuance of the offering document ### 1. The date of issuance of the offering document ### Required contents of offering documents and disclosure obligations - Mandatory information items for collective investment scheme offering documents: - 1. The date of issuance of the offering document - 2. Information concerning the legal constitution of the collective investment scheme - 3. The right of investors in the collective investment scheme - 4. Information on the operator and its principals - 5. Information on the methodology of asset valuation - 6. Procedures for purchase, redemption, and pricing of units - 7. Relevant, audited financial information concerning the collective investment scheme - 8. Information of the custodian, if any - 9. The investment policy of the collective investment scheme - 10. The appointment of any external administrator or investment managers or advisors who have a significant and independent role in relation to the collective investment scheme (including delegates) - 11. Fees and charges in relation to the collective investment scheme - Regulator powers and controls: - The regulator (CNV) may hold back or intervene in an offering if information is inaccurate, misleading, false, or does not satisfy filing or approval requirements. - CNV powers include suspension of operations and negotiations of securities in event of violation of laws contained in the DLMV and related rulings. - Advertising and prospectus content rules: - Section 25 of Agreement 5-2004: advertising outside offerings must not use words that may be confusing, misleading, or inadequately describe investor/public risks. - Section 26 of Agreement 5-2004: advertising content must follow CNV criteria and must be submitted to the CNV before publication; CNV may prohibit or suspend advertising that violates criteria. - Prospectus update and material event disclosure: - Amendments to the prospectus or the rules establishing the collective investment scheme must be presented for authorization to the CNV and are in force from the date of registration in the CNV (Section 24, Agreement 5-2005). - Collective investment schemes must immediately communicate in writing to the CNV any material event affecting their situation or performance. Material events include: - (i) any asset or capital reduction of the collective investment scheme which results in a variation greater than 20 percent; - (ii) any redemption or group of redemptions in the previous quarter resulting in a reduction of 40 percent in the collective investment scheme’s assets; and - (iii) any debt operation that creates an obligation to a third party of more than 10 percent of the asset or capital of the collective investment scheme. ### Reporting, accounting and audit requirements - Periodic reporting requirements: - Monthly: submission to investors of a statement of account reflecting, as a minimum, details of investments made, changes in net asset value, number of units issued and in circulation as of the date of the statement of account (Article 48, Agreement 5-2004). - Annual: within three months from the end of the fiscal year, an annual report must be submitted containing details of the companies whose securities are admitted to negotiation in the exchange. - Semi-annual: two months after the conclusion of every semester, an indicator report must be presented as an update to the annual report. - Provisional financial statements: presentation of provisional financial statements, semi-annual and annually audited (Article 49). - Accounting standards: - Accounts must be prepared in accordance with International Accounting Standards or US General Accepted Accounting Principles. - Presentation and format requirements are set by Agreement 8-2000, modified by Agreement 10-2001 and Agreement 7-2002 of the CNV. - Audit and verification practice: - Investment companies and administrators must hire external auditors to express opinions about transaction results; in practice external auditors verify by means of a list that asset valuation is correct. ### Assessment and identified weaknesses (regulatory observance) - Assessment: Fully implemented - Comments: - CNV is unable to gather information about the number of participants in the licensed investment funds. - Regulatory system does not address delegation of responsibilities, creating potential conflict of interest risks between delegates and investors. ### Asset valuation, pricing and redemption (Principle 20) - Valuation and pricing framework: - Agreement 5-2004 (Arts. 36-39) establishes specific requirements for asset valuation and recognition/knowledge of financial instruments; modified by Agreement 2-2005. - Net asset value calculation must follow specific requirements and high quality accepted accounting standards applied consistently (Article 36 and following, Agreement 5-2004). - Specific regulatory requirements exist for fair valuation of illiquid securities where no readily available market price exists; the self-administered investment company or investment administrator should fix a fair price following bona fide prescriptions. - IIC price must be published or regularly communicated to investors or potential investors; the selling price of units listed at the Bolsa can be seen in the newspaper the following day. - Rules do not explicitly consider possible mistakes in pricing. - Redemption timing and deferral/suspension rules: - Open investment companies registered at the CNV must pay redeemed units no longer than 15 working days after the redemption, except where CNV allows an extension provided this possibility was noted in the prospectus (Article 21, Agreement 5-2004). - Investment companies can temporarily suspend redemption or defer payment in the following cases: - During periods when the exchange is closed, when a significant amount of securities in which the scheme’s assets are invested have their negotiation suspended. - During periods when an emergency makes it impractical or inconvenient to dispose of assets or to determine fairly the net value of each unit. - In case of the dissolution of a collective investment scheme. - When amendments to the prospectus are taking place that may affect the interests, charges or commissions of the company. - During any other period that the commission establishes on this or other agreements. - Assessment: Partly implemented - Comments: - Appropriate rules for valuation are in place and the CNV has powers to ensure application, but there has been little practical experience with the rules. - Serious concerns regarding CNV staff resources and expertise to properly supervise and interpret valuation rules; staff resources and training are urgently needed. - Most domestic investment companies reportedly adopt conservative valuation policies, usually valuing below market price. ### Principles for Market Intermediaries (Principles 21–23) — entry, prudential and internal organization - Minimum entry standards and licensing (Principle 21): - Intermediaries overseen by CNV require prior authorization; DLMV (Arts. 24, 49 and 50) establishes entry standards and ongoing requirements. - Licenses and registration: - Stockbrokers, managing executives, and securities analysts must be registered in the National Registry of Securities. - Individuals may practice independently as a stockbroker or investment advisor only if they have obtained the appropriate license (Article 23, DLMV). - Only people with the corresponding license issued by the commission may hold positions of responsibility as an executive, analyst, or stockbroker (Article 47). - Licensing statistics and timelines: - Since DLMV came into force, 43 operational licenses have been granted to brokerage firms and 4 to investment advisors. - The average time taken to obtain the license is from three to six months. - Corporate governance and application requirements: - Minimum capital and liquidity requirement determined by CNV (Article 28, DLMV). - Agreement 2-2004: members of brokerage board and investment advisors should have professional and business integrity, knowledge, and appropriate experience; applicants must complete Form DMI-1 for each board member. - Agreement 5-2003: applicants must provide a code of conduct and business plan including risk controls and supervision systems; all stockbrokers and investment advisors have an approved code of conduct. - Supervision and enforcement: - CNV has power to refuse, restrict, suspend, or cancel licenses (Article 25, DLMV) and has applied these powers. - CNV’s Market Directorate and Enforcement Division have conducted inspections; inspection counts cited: - As of December 2004: Markets Directorate completed 11 brokerage firm inspections (3 ordinary, 4 specific, 2 for license cancellations, and 2 for investigations); Enforcement Division undertook 22 money laundering inspections (16 brokerage firms, 5 investment administrators, and 1 SRO). - From January to April 2005: Markets Directorate made three inspections (one ordinary, one specific, and one for license cancellation); no money laundering inspection during that period. - Assessment: Fully implemented - Comments: No comments. - Capital and prudential requirements (Principle 22): - Legal and regulatory framework: - Article 28, DLMV: securities houses required to comply with minimum initial capital necessary to fulfill obligations to customers and creditors, calculated according to net worth standards. - Article 5, Agreement 2-2004: minimum net worth corresponds to company’s capital and reserves. - Minimum capital requirement for intermediaries offering investment services cannot be lower than 1/1000 of the total volume of the managed investment portfolios (Second Paragraph of Art. 5 in Agreement 2-2004). - Current gaps and supervisory practice: - CNV does not have rules on determination and control of minimum resources applicable to securities houses. - Ongoing capital requirements are limited to ongoing compliance with initial capital calculations; full range of risks (market, credit, liquidity, operational, legal, reputational) are not fully considered. - Intermediaries must supply CNV with quarterly and annual reports on capital adequacy; annual financial report audited by external auditors and registered within three months of the end of the fiscal year. - Auditors submit opinions on annual accounts but are not required to provide additional assurance that financial position reflects risks or to review internal control systems. - CNV can impose restrictions, more stringent capital monitoring, reporting requirements, or withdraw/suspend a license where capital deteriorates (Article 25; Articles 229 and 266 confirm these powers). - Assessment: Not implemented - Comments and recommended improvements: - CNV lacks a meaningful compliance program for capital adequacy standards—no reporting or enforcement mechanism in place. - CNV needs capital adequacy requirements structured to consider the full range of risks to which market intermediaries are subject. - CNV desires to improve skills and resources for prudential supervision; a draft capital adequacy rule is under discussion and, if approved with additional resources and training, would address deficiencies. - Current quarterly reporting periodicity is insufficient to detect breaches of required capital levels in a timely manner. - Technological infrastructure improvements are needed for supervisory systems adapted to evaluate intermediaries’ risk levels. - Internal organization and operational conduct (Principle 23): - Organizational and control requirements: - Agreement 2/2004, Section 8.7: “Casas de Valores” must have proper administrative and accounting organizational structure, appropriate technical and human resources, internal control procedures, and electronic security to ensure sound management and client confidentiality. - Governance and accountability gaps: - Legislation does not require the chief executive or Board members to be explicitly responsible for ensuring company compliance with regulations. - Civil responsibility of the legal representative for regulatory violations is established, and sanctions are set out under the DLMV. *Source: IMF detailed assessment of observance of IOSCO principles and the CNV regulatory framework (Agreement 5-2004, Agreement 2-2005, Agreement 5-2003, Agreement 8-2000, Agreement 10-2001, Agreement 7-2002, and the DLMV) contained in the assessment tables.* ### Section 44 of the DLMV establishes that the CNV may require that securities houses ### cr0767 - Section 44 of the DLMV establishes that the CNV may require that securities houses ### Compliance officer and supervisory powers - Section 44 of the DLMV establishes that the CNV may require that securities houses appoint a compliance officer. - The compliance officer will be in charge of monitoring the entity and its directors, board members, brokers, and employees to ensure compliance with the rules of conduct and due procedures. - The compliance officer will undertake the periodic evaluation of the internal control mechanisms and risk management processes. - The CNV, through the National Direction of Markets and Intermediaries, carries out examinations of the efficiency and functioning of the procedures and internal control mechanisms adopted by the entities for the development of intermediation activities. - The protection of assets must be verified by the compliance officer, and at the same time supervised by the CNV through on-site inspections. ### Client identification, investor profile, and information to clients - The General Conduct Code of Securities Markets, Rule 5 “Information about the Customers,” requires entities to request clients’ identification, financial situation, investment experience, and investment purposes when relevant. - A form shall be completed including the necessary information to identify relevant data for the investment and for the recommendation to the client, according to the requirements of the CNV. - Section 5 of Agreement 1/2005 obliges intermediaries to “know” their customers before giving them specific advice and regulates the identification of the investor profile. - Section 19 of Chapter 3 of Agreement 5/2003 “Information to the Customers,” sets out the requirement for the intermediary to maintain effective communication with its clients. - Under Section 19, intermediaries are obliged to give general and specific information to their clients, including: - Submit at least quarterly, clear, and concrete information about the value of their investment account and any cash deposited. - Send to clients by the next business day following the execution of a transaction a document stating the amount of the transaction, the interest rate, the charges or fees applied, detailing the due amount (“concepto de devengo”), and any other cost or specification relating to the financial terms of the transaction. - Inform the client of any change in fees or charges applicable to the contract, as well as of any matter concerning any transaction, unless expressly forbidden by Law 42 dated October 2, 2000. - Provide, at the request of the client, all the information related to the transactions purchased by them. - The CNV may request the amendment of the forms used by the entities to inform clients when those forms are not clear enough. ### Client asset protection and recordkeeping - Section 14.2.f of Agreement 5/2003: “The entities shall at all times maintain a record of the securities, cash, and ongoing transactions of each client, and shall keep such information separate from the records of other clients and of their own managers. The securities account and cash related to the management must be clearly identified in the contract clauses or in its exhibits.” - Section 33 of the DLMV states that securities houses and securities agents shall maintain their books, registries, and other documents related to the transactions. - Agreement 8/2000 dated May 2, 200 concerns the Format and Content of the Financial Statements. - “Casas de Valores” shall establish and maintain adequate systems for client protection, risk management, internal control, and operational and policy matters related to all aspects of their business. ### Contracts, standard forms, and transactional documentation - Intermediaries are obliged to sign a General Conditions Agreement with their clients. - Section 13 of Agreement 5/2003 requires use of a standard contract, which shall be previously filed by the intermediary with the CNV for its review. - Sections 6, 7, 8, and 9 of Agreement 5/2003 set out the compulsory registration and transaction execution orders. ### Segregation of duties and conflicts of interest - Rule 4 of the General Conduct Code (Agreement 5/2003): “Information obtained from the respective activities in the different areas should not be, directly or indirectly, accessible to the other areas, so that each area of activity will operate autonomously. In addition to the establishment of appropriate barriers, necessary measures shall be adopted to ensure that in the decision process, no conflict of interest will arise inside the entity itself or between the different entities of the same group.” - Section 14 of Agreement 5/2003 (Conduct Regulations applicable to the Value Intermediaries) requires that in managing investment accounts, stockbroker firms and, if applicable, investment advisors “shall avoid any conflict of interests between the manager-and its group- and the customer, or between different customers. In case of a conflict, the priority shall always be the client’s interests over their own interest.” - Section 20 of Agreement 5/2004 “Information to clients about conflicts of interest” requires entities to warn clients about conflicts of interest that may appear during their business activities. - In practice, compliance with conflict-of-interest rules is verified during CNV inspections when examining sample files. ### Identified weaknesses and regulatory gaps (Assessment: Partly implemented) - Some weakness appears in the mechanism to ensure proper management of risk. - Market intermediaries are required to comply with standards for internal organization and operational conduct but they are not forced to implement risk management procedures. - No rules or procedures are currently in place to reduce risk exposures. - Any exposure of a market intermediary to significant risk arising from the activities of other entities in its group(s) should be addressed. - The CNV has drafted an Agreement on capital requirement that will soon be presented for public consultation. - The current reporting system is inadequate: there is no early warning system or mechanism other than quarterly reports to inform the regulator about a possible situation of insolvency. - Revision and examination of the provisional and annual financial statements filed under Agreement 7/2000 enable the regulator only to know about the past, making timely action difficult. ### Procedures for dealing with intermediary failure (Principle 24) - Title XVI “About Intervention and Settlement,” Chapter III “About Intervention,” grants the CNV the ability to manage the insolvency or failure of a securities market intermediary. - The CNV is empowered to appoint a controller and to transfer customer assets held by the intermediary (see Sections 218-221). - Chapter IV “About the Organization” empowers the CNV to undertake a reorganization plan (Section 228 ff.). - Section 229 expressly establishes the power of the commission to order the reorganization of the intermediary without the necessity of any previous intervention. - The CNV does not have a formal action plan to deal with these situations; once a case is identified it is examined, evaluated, and a decision made together with the commissioners. - Title XIV “About Intervention and Liquidation” of the DLMV, Sections 215, 241, 244, 245, 249, and 251, include measures that the CNV may take to prevent the loss of the investors’ money and securities which are in the custody of an intermediary facing insolvency. *Source: IMF assessment of CNV regulations under the DLMV and Agreements 1/2005, 5/2003, 5/2004, 7/2000, and 8/2000.* ### Section 25 “Suspension and Revoking of Licenses and Other Measures,” Section 229 ### Section 25 “Suspension and Revoking of Licenses and Other Measures,” Section 229 ### Appointment and powers of the controller; dissemination of failure information - In the resolution ordering an intermediary’s liquidation, the CNV shall appoint a controller to exclusively carry out the legal representation, administration, and financial control of the intervened registered institution. - The controller must keep the commission continuously informed of the progress in the intermediary’s liquidation. - The commission shall require that a copy of the resolution ordering the compulsory liquidation of the registered institution be shown in a public and visible place in the main office and its branches. - The CNV shall order the publication of the resolution for five (5) business days in a national journal. - The legislation does not include insurance plans or security funds for liquidation events. - Chapter II, Title XIV of the DLMV addresses “Dissolution and Voluntary Liquidation” of the “Casas de Valores,” including protection of investors’ rights. - Communication and cooperation with other national and foreign regulators is not regulated; there is no documentation on contact procedures or cooperation mechanisms. Assessment (as stated in the source) - Not implemented Comments (as stated in the source) - The CNV has sufficient authority to take all appropriate action in the case of a financial failure. - Current frequency of reporting and monitoring is insufficient to ensure early identification of firms experiencing financial difficulties. - A formal insolvency plan would assist authorities to be prepared to exercise their authority; this plan should include formal agreements with relevant domestic authorities on cooperation. ### Principle 25 — Establishment and authorization of trading systems and exchanges - Establishment of exchanges and trading systems in Panama requires prior authorization; Article 51 of the DLMV mandates authorization. - Agreement No-2003 regulates self-regulated organizations (SROs) and assesses initial and ongoing propriety and competence of market operators. - Only legal entities authorized by the CNV may operate as a stock market or clearing and settlement institution. - Agreement No.7-2003 (July 4, 2003) regulates SROs; SRO obligations include: - Protect the interests of investors. - Promote cooperation of market agents. - Report violations against the securities law. - Not unreasonably limit or discriminate regarding membership. - Avoid deceitful or market-manipulating actions affecting transparency and investors. - License grant conditions (Article 52 of the DLMV) require evidence that the applicant: - a) has technical, administrative, and financial competences and necessary staff; - b) fulfills the initial capital requirements established by the commission.; - c) fulfills the requirements for granting the corresponding license and operation of the business; - d) adopts internal rules fulfilling DLMV and Article 15 of Agreement 7-2003. - The Bolsa de Valores de Panama operates under a license granted by the CNV by Resolution No.349-90 of March 30, 1990, and continues to operate under the present regime. - Article 54 requires internal rules of the exchange to be approved by the commission and prohibits arbitrary limitations on number of members or unfair admission requirements. - Article 7 of Agreement No.7-2003 sets detailed requirements and documentation for applying for an exchange license; criteria include technical capacity, financial and administrative resources, and appropriate staff. - The regulated trading system operates through an electronic system linked to Casas de Valores’ members with trading terminals; all members enjoy identical rights for access. - Agreement No.5-2003 (June 25, 2003) requires “Casas de Valores” to apply fair and not inconsistent order execution procedures (e.g., front running/trading ahead). - CNV has established rules and procedures for registration of securities; all securities subject to a public offering are subject to CNV approval except: - (a) bonds issued or guaranteed by the state; - (b) bonds issued by international organizations where the state participates. - Article 39 of Agreement No.7-2003 obliges the exchange to establish rules, policies, and procedures ensuring correct conduct and transparency of trading, fairness, efficiency, transparency, and compliance with securities legislation. - Article 40 requires internal rules to: - (i) prevent breaches and fraudulent acts affecting market transparency; - (ii) promote right practices in trading; - (iii) stimulate development of an efficient market. - The Bolsa has developed manuals and internal controls (Internal Rules, Manual for the Committee for the Supervision of Exchange Operations, Good Governance Code, By-Laws, Operating Manuals). - Internal procedures prohibit: (i) negotiating on the basis of confidential and/or privileged information; (ii) actions to artificially adjust; (iii) making false declarations to the exchange or investors. - Operational failure procedures: SITREL programs and databases backed up daily, weekly, and annually; contingency plans exist. - CNV inspects the Bolsa to evaluate compliance with internal rules and securities legislation, including reliability of systems and procedures. - Trading information access: identical for participants; trading information updated throughout the trading session; Bolsa sends e-mail notifications to members; Operating Manuals specify information dissemination and confidentiality safeguards. - Issuers must register securities and file interim reports and audited financial statements; “Casas de Valores” must: - report daily securities transactions made outside the stock market; - report monthly all buying and selling transactions their brokers carry out. - Bolsa’s Manual of Compliance assigns a compliance officer responsibility to supervise directors, staff, and members for adherence to internal rules, securities legislation, and anti–money laundering dispositions; compliance officer must prepare reports for the Board and provide requested documents to the CNV. - The Bolsa created the Supervision Committee of Exchange Operations (members named by the Board) to investigate violations and impose sanctions; committee comprises three ex-chairmen and two directors. - No legislation exists to detect and deal with unusual or disorderly trading conditions; the CNV acts reactively under DLMV powers. - All rules of operation are communicated to the regulator and market participants and applied consistently; Bolsa’s Manual of Sessions and CNV internal procedure govern amendments to SRO rules. - The Bolsa maintains a complete registry of all historical transactions with detailed fields (issuer name; title or trade security; amount; price; bid position; offer position; stockbrokers; sequential transaction number; transaction date; liquidation date; commissions) and sequential transaction filings with liquidation documentation. - Agreement No.5 of 2003 (Article 6) requires “Casas de Valores” to request clear and precise client orders; orders could be recorded with prior client authorization; Article 8 sets rules on order registry; Article 10 states the file of orders and registry of operations will be available to the CNV at any moment. - CNV’s first inspection of the Bolsa was made in July 2004; it recommended adoption of a specific arbitration system for dispute resolution; the Bolsa implemented appropriate actions. Assessment (as stated in the source) - Broadly implemented ### Principle 26 — Ongoing regulatory supervision of exchanges and trading systems - The CNV requires SROs to submit periodic reports, particularly about trade volumes and related information. - The Regulator has not put in place specific programs or procedures for monitoring day-to-day trading activity to verify operational conditions. - Agreement 2-2004 requires regulated entities to provide daily reports of transactions made off the Bolsa (Panamanian instruments) and a full report of transactions within the first 15 days of the end of each month. - Until the monthly report is registered by the CNV, only partial revisions are possible; CNV can verify only the part corresponding to the local market or what is traded through the Bolsa. - CNV obtained interconnection and technology to monitor day-to-day trading activities on the exchange in the first trimester of 2005; to date it is not being used. - Agreement 7-2003 empowers the CNV to assess Bolsa internal procedures and to supervise compliance through ongoing and special inspections. - CNV does not have a market surveillance program based on an electronic system to monitor activities and risks or verify that Bolsa and trading system fulfill regulations and administrative responsibilities. - DLMV Article 57 requires SRO internal rule amendments to be provided to the CNV before they come into effect; CNV may request revisions and approve or deny changes. - CNV by resolution can re-examine an SRO if it cannot comply with internal rules or legal requirements or if changes would improve market efficiency, transparency, and fairness. - Article 64 of the DLMV grants the commission powers to: - a) suspend or withdraw authorization granted to an SRO or revoke the license granted to its chief executive; - b) restrict transactions that the SRO or its chief executive can make; - CNV may suspend or withdraw authorization if SRO incurs sanctions under Article 64. Assessment (as stated in the source) - Not implemented Comments (as stated in the source) - CNV has sufficient authority and licensing requirements and a basic supervision program. - CNV does not have sufficient resources to carry out meaningful oversight. - Current program gives no assurance the exchange complies with current requirements; current requirements are inadequate to ensure operational and technical standards. - The CNV should develop a stronger oversight program through additional human resources and training; stronger oversight could include more day-to-day involvement in market monitoring. ### Principle 27 — Promotion of transparency of trading - Regulatory framework requires pre-trade information (bids and offers) and post-trade information (last prices and volumes) to be provided timely. - “Manual of Sessions,” point III – Electronic System of Negotiation – requires all transactions be registered with volumes and prices and disclosed daily by the Bolsa. - Bolsa electronic trading system provides market information on bids and offers and volumes and prices of completed trades; users can access platform to find comprehensive trading information and relevant post-transaction events. - “Casas de Bolsa” and their brokers have full real-time access; Bolsa website information appears with some delay from real time, without apparent adverse effect on transparency relative to market size and trade volume. - System includes statistical information members can consult for historical transactions. Assessment (as stated in the source) - Fully implemented Comments (as stated in the source) - CNV lacks arrangements for continuous collection and analysis of trading activity information; CNV has not had access to complete information in real time nor been able to assess transparency of trading. ### Principle 28 — Detection and prevention of market manipulation and unfair trading practices - DLMV Title XII – Prohibited Activities – Articles 195 to 202 prohibits: - manipulation of prices of any registered security; - use of misleading information; - negotiation with insider trading; - other fraudulent and deceptive conduct. - It is prohibited for all persons to make public offers of listed securities, or to buy or sell these securities, contravening CNV agreements designed to prevent market manipulation. - Articles set out rules concerning insider trading, false declarations, omissions of issuers, and other fraudulent conduct or market abuses. - Bolsa arrangements for continuous monitoring of trading: Supervisory Committee of Trading Activities (“Comité de Supervisión de Operaciones Bursátiles”) monitors day-to-day trading and has sanctioning powers for potential violations of internal rules or securities laws. - Bolsa internal rules require members to establish administrative, technical, and physical controls to prevent insider trading and fraud. - Internal prohibitions on members (as noted in the source). Assessment - (Assessment details provided above under relevant principles.) *Source: Section 25 “Suspension and Revoking of Licenses and Other Measures,” Section 229 (cr0767).* ### 1. Trading on the basis of confidential and/or privileged information. ### 1. Trading on the basis of confidential and/or privileged information. ### Market-abuse behaviors identified - 1. Trading on the basis of confidential and/or privileged information. - 2. Acting with the objective of varying artificially the quotation of a registered equity. - 3. Filing simulated operations. - 4. Conducting nominal operations without real transference of securities or money at the time of settlement. - 5. Disclosing deceptive information to the stock market and investors. - 6. Adopting behavior that creates a false impression on the market or on the price. - 7. Disclosing confidential information on the transactions that are made, with the - 8. exception of the information that must be communicated to the stock exchange or - 9. the authorities, in accordance with the current national legislation. - 10. Conducting transactions with an excessive volume or frequency in relation to the amount and nature of the portfolios they handle. - 11. Committing with a client to share the gains or losses of the client or of committing itself to compensate the client for any losses suffered. ### Regulatory provisions and Codes - The Code of Conduct (Agreement 5-2003) establishes in Rule No.1, Point 2, obligations to prevent front running whereby intermediaries may use information to trade in a security in advance of client based on information obtained from the client. - Article 208 of the DLMV establishes the power of the CNV to impose administrative fines on any person who violates the DLMV or its regulations. - Article 204 deals with violations of Article 196 (Insider Trading). - Internal Rules of the Bolsa, Chapter VIII, Control and Sanctions, detail investigative powers, disciplinary process and prescribed sanctions. ### Supervision, monitoring, and enforcement—findings and shortcomings - To date, supervision of the intermediaries registered by the CNV is undertaken through periodic or special inspections to determine fulfillment of rules and requirements for filing periodic financial information. - There are no requirements about position limits, and the procedures do not indicate any requisites on the matter. - There are adequate rules regarding price disclosure: a real time screen in the Bolsa website, a daily bulletin of the Bolsa and the requirement to provide information about off-market transactions. - The CNV receives daily and monthly information that is analyzed once filed, but there are no arrangements for continuous collection and analysis of that information. - Results from analyses are not provided to regulatory officials to allow remedial action. - No systems exist for monitoring the conduct of market intermediaries participating in the market; the CNV does not have a specific procedure or system for supervision and acts only when there is suspicion of an irregularity. - In relation to foreign links, there are Memoranda of Understanding for cross listings with Costa Rica and El Salvador; the CNV can share information with foreign regulators but subject to Panamanian legal limits that impose difficulties on information sharing. ### Assessments of implementation (selected) - Assessment: Partly implemented — The CNV has authority to deal with market abuses and may impose effective and reasonable sanctions, but lacks continuous monitoring systems and proactive oversight. - Principle 29: Regulation should aim to ensure the proper management of large exposures, default risk, and market disruption. - Assessment: Partly implemented — Neither the regulator nor the operators have the resources to enforce effective risk management or ensure capital and prudential requirements sufficient to address risk, absorb some losses, and check excessive risk taking. - Principle 30: Systems for clearing and settlement of securities transactions should be subject to regulatory oversight and designed to ensure they are fair, effective, and efficient and that they reduce systemic risk. - Description: The CNV oversees LatinClear; however resource constraints limit effectiveness. - Assessment: Not assessed — Comments note CNV lacks demonstrated technical expertise and technological tools to assume oversight responsibilities. ### Clearing, settlement, LatinClear, and default procedures - Agreement No.9-2003 and Agreement 11-2003 extend applicable requirements to clearing and settlement systems and set general rules for LatinClear to carry out custody, clearing, settlement, and electronic administration of securities. - Art. 1 (Agreement No.9-2003) compels LatinClear to fulfill applicable capital requirements to ensure system viability and to minimize member default risk. - Article 6 requires LatinClear to establish suitable financial mechanisms and a guarantee system; members may be required to provide prior custody of securities, certification of sufficient financial resources, and other guarantees the CNV considers necessary. - Article 16 (“Market Guarantees”) establishes characteristics, amounts and guarantees for LatinClear members. - LatinClear’s Management and Risk Administration Committee (Art. 12 of By-law) sets criteria to mitigate risks and recommend international best practices. - LatinClear internal procedures, Section 14.10, allow acquisition of insurance or guarantees to protect against (i) financial incapacity of a participant; (ii) robbery, theft, embezzlement, loss or destruction of assets in physical safekeeping or cash handled by LatinClear; or (iii) any other shock that could affect LatinClear, its participants or their operations. - Agreement No. 11-2003, Article 2 and Article 6, require delivery against payment mechanisms, member insurance policies to cover lack of cash or assets on liquidation date, and other safeguards (prior delivery of assets, accreditation of sufficient funds, guarantees of fulfillment, sale of assets). - Article 218 of DLMV and Section 14.02 of LatinClear Internal Procedures provide sanctions including: expulsion of a participant; suspension or limitation of rights; prohibition of participation; admonishment; fines up to the sum of one hundred thousand Balboa; and other penalties where a person enters or is about to enter bankruptcy, intervention, reorganization, liquidation, or dissolution or lacks financial standing to pay debts. - Article 266 of the DLMV empowers the CNV to order suspension of any act, practice, or transaction, including negotiation of values, when there are well-founded reasons to think it violates the DLMV or its regulations; refusal to comply can lead the CNV to seek court orders and penalties for noncompliance. - Article 62 of Agreement 5-2004 allows measures including suspension of transactions, liquidation, and dissolution of an intermediary and refers to Title XIV of Intervention and Liquidation, DLMV, and Article 80 and following of Agreement 5-2004 regarding suspension of transactions of an intermediary. - Article 179 of DLMV: all positions held on behalf of customers cannot be confiscated, burdened, or embargoed, nor subjected to claims by creditors of an intermediary in bankruptcy, liquidation, reorganization, or similar proceedings; exception: Article 192 gives creditor of a market intermediary who has a claim on the financial assets of the intermediary preference over indirect creditors. - Market operator would have powers only for suspension of assets; operators lack automatic monitoring tools to consult positions held by direct clients of market intermediaries. ### Systemic-risk monitoring and information-sharing gaps - CNV and Bolsa can access information on the size and beneficial ownership of positions held by direct clients of market intermediaries when needed, but lack automated monitoring and continuous evaluation systems. - No mechanisms exist to monitor open positions or credit exposures on unsettled trades that are sufficiently large to pose a market or compensating-entity risk. - The CNV lacks information about activities and procedures of LatinClear’s Management and Risk Administration Committee to confirm active risk monitoring. - Formal or informal procedures do not exist to share information on major risk exposures by common participants or related products between markets and regulators. - Consequently, CNV cannot establish appropriate trigger levels for intervention or promote mechanisms to facilitate exchange of information on major risks. ### Compliance summary (Table 2.2) - Assessment Grade: Implemented — Count: 6 — List: 4, 6, 14, 19, 21, 27 - Assessment Grade: Broadly Implemented — Count: 9 — List: 1, 5, 8, 9, 15, 16, 17, 18, 25 - Assessment Grade: Partly Implemented — Count: 10 — List: 2, 3, 7, 10, 12, 20, 23, 28, 29 - Assessment Grade: Not Implemented — Count: 5 — List: 11, 13, 22, 24, 26 ### Recommended action plan—selected recommendations - Operational independence and resourcing of the CNV - A new commissioner should be appointed as provided for under current law (the commissioner’s position has remained vacant since the term of the prior commissioner ended in December 2004). - The CNV should be able to direct administrative matters, including the right to hire and fire its staff. - Additional resources should be granted to the CNV on an urgent basis, particularly for the recruitment of skilled staff. - Legislative protection should be extended to staff against liability for good faith acts carried out in the course of duty. - Strengthen CNV authority and capacity - The authority of the CNV should be strengthened with regard to corporate governance, liability of auditors, and code of conduct. - Training programs should be put in place in areas including risk management and prudential supervision, supervision of collective investment schemes, intermediaries, and SRO supervision. - SRO oversight, monitoring, and technical training - The CNV should work with the Bolsa to develop a comprehensive oversight program for market intermediaries and to put in place SRO staff examination, inspection, and enforcement programs augmented with additional training and assistance. - CNV staff needs technical training specifically on trading systems, monitoring risks, detection of deceptive conduct, market abuses, and clearing and settlements systems. - Enforcement capacity - Although CNV has strengthened enforcement powers, it lacks human and technological resources to provide effective prudential oversight for inspections, investigations, and sanctions other than when a breach has been identified. *Source: International Monetary Fund assessment (cr0767).* ### 1. Improvements in the implementation of an effective system of inspections ### Improvements in the implementation of an effective system of inspections ### Strengthening inspection practices and information systems - The CNV should carry out inspections not only based upon complaints but on a routine periodic basis or based upon a risk assessment. - Technology tools must be improved to allow more efficient use of information gathered in the National Securities Registry. ### Recommended action plan in relation to the IOSCO Principles (selected highlights) - Principles for Cooperation in Regulation (P 11–13) - The law limits sharing of information with foreign securities counterparts when investigating market abuse, significantly constraining Panama’s ability to cooperate internationally. - CNV has signed Memoranda with Superintendency of Banks and Superintendency of Insurance; practical rules and procedures are needed to implement those accords. - Legislative changes and modifications to procedures are needed to improve information exchange domestically and internationally, including meeting commitments to the IOSCO multilateral MOU before 2010. - Principles for Issuers (P 14–16) - A new framework for governance of the accounting profession should be formulated. - The Accounting Technical Board needs authority to enforce rules, including compliance with the code of professional ethics and establishing an effective oversight system. - Authorities are encouraged to implement recommendations of the ROSC on Corporate Governance prepared by the World Bank and published in 2004. - Principles for Collective Investment Schemes (P 17–20) - Ongoing monitoring of administrators of Collective Investment Schemes should be strengthened without delay. - Although appropriate rules on valuation of assets exist (Accord 5-2004, arts. 36–39), CNV has not applied the tool due to scarcity of resources and lack of technical skills training. - Introduce minimum conduct standards for administrators and better reporting mechanisms to enhance trustees’ and private supervisors’ monitoring ability. - Principles for Market Intermediaries (P 21–24) - Review staffing resources to improve quality and breadth of supervisory work. - Prepare draft regulations without delay to raise standards in (i) internal control systems; (ii) capital adequacy requirements; and (iii) asset valuation. - Pass the agreement on ongoing capital based on a capital adequacy test addressing risks to intermediaries; develop an early warning system or other mechanism to notify CNV of potential default. - Develop risk-based inspection programs and criteria related to integral systems of internal control; current frequency of reporting/monitoring may be insufficient to identify institutions in difficulty before more serious financial exposures occur. - Principles for the Secondary Market (P 25–30) - Bolsa should be required and empowered to assume direct regulatory oversight and surveillance responsibility for participants using its trading platforms; develop self-regulatory organizational capabilities including broker-dealer examination and risk management. - CNV should reinforce resources to determine operational competence of exchange or trading system operators and implement mechanisms to identify and address disorderly trading conditions. - CNV must establish arrangements for continuous collection and analysis of trading activity information and provide results of such analysis to inspection officials able to take remedial action. - Consider an industry-wide guarantee fund to facilitate orderly settlement of transactions and limit ripple effects of a failure. - Exposure to systemic risk for intermediaries should be consistent with risk analysis and any completed assessment of the CPSS/IOSCO Recommendations for Securities Settlement Systems. - Resource constraints at the CNV limit capacity in this specialized technical area; corrective action is recommended. ### Authorities’ response and key developments (CNV) - The CNV considers the assessment to accurately reflect the current situation of securities market regulation and oversight in Panama. - Increase in regulated entities since the on-site work through December 2005: - 34 securities houses (including 3 undergoing voluntary liquidation) - 294 brokers - 5 investment advisors/corporations - 2 natural persons - 13 investment administrators - 2 self-regulated organizations - 4 risk rating agencies - Growth in participants increases enforcement challenges for the CNV due to limitations in autonomy, human resources, and training. - Staff movement and vacancies: - Four staff members in the National Directorate of Markets and Enforcement resigned in the last quarter of 2005, most taking positions in the private sector. - The only auditor in place at the time of the assessment resigned to take a private sector position. - The commissioner’s position has remained vacant since the prior commissioner’s term ended in December 2004; CNV work has been directed by two named commissioners with the third seat temporarily filled by rotating acting directors. - Judicial and enforcement developments: - At the end of 2005, seven judicial cases were solved, compared to four in 2004. - November 11, 2005: court clarified that the CNV has expressed power to prescribe form and content of financial statements of entities regulated by the CNV. - A $300,000 fine imposed against chairman and manager of an economic group (false presentation of financial/account information) remains pending since June 2001. - April 26, 2006: courts confirmed CNV’s $100,000 fine against an internal accountant involving the same group. - Consultancy and regulatory development: - July 31, 2005: international consultancy with Novaster Grupo Empresarial, S.L. concluded following approval of Accord 11-2005 (August 5, 2005; published in Official Gazette No. 25,370, on August 24, 2005) that developed regulation for Law 10 of April 16, 1993, on pension funds, retirement funds, and other benefits and activities of investment administrators; consultancy helped elaborate manuals for authorization, control, and supervision of administrators of pension plans and retirement funds. - December 15, 2005: GC de Panama, S.A. (Infosgroup) concluded consultancy for development and implementation of supervision and control system for retirement and pensions funds regulated by Law 10 of 1993. --- ### Assessment of observance of the Insurance Core Principles (IAIS) — Superintendency of Insurance and Reinsurance (SSRP) ### Institutional capacity and legal framework - The assessment analyzed compliance with IAIS Insurance Core Principles using existing laws (insurance, reinsurance, captive insurance), specific regulation, and a new draft insurance law; interviews were held with supervisory officials and market participants. - The SSRP supervises insurance and reinsurance sectors; compliance with IAIS core principles is weak due to an outmoded legal regime and underdeveloped supervisory and regulatory framework. - SSRP lacks independence from the industry and the executive branch; to strengthen supervision (on-site and off-site), more staff and resources are needed and compensation must be sufficient to attract and retain skilled staff, including filling the actuary’s position. - The industry pays a fee for regulation; the fee/tax revenues are not substantially available to the SSRP for regulatory purposes. ### Legal regime and draft law - Insurance is regulated by Law No. 59, reinsurance by Law No. 63, and captive insurance by Law No. 60, all issued in 1996. - A draft law (dated April 2005) is under preparation to address weaknesses, but shortcomings remain: (i) SSRP would remain dependent on MICI; (ii) market conduct requirements would continue to favor industry and brokers; (iii) accounting and disclosure practices for insurance firms do not meet international standards. - The draft law seeks to incorporate reinsurance and captive operations. - Proposed draft law features: - Strengthens SSRP financial autonomy from MICI though MICI would remain represented on the board. - Sets qualifications for the superintendent, a seven-year term, and explicit dismissal procedure. - Eliminates the Technical Council and National Reinsurance Commission in favor of a board composed of the minister of MICI, the insurance superintendent, and three independent members with staggered fixed terms. - Alternative considerations for board makeup could include a representative from the Superintendency of Banks given substantial bank-owned insurance participation. ### Sector structure and key statistics - The insurance sector is small compared with the banking sector. - Composition and market figures: - 18 authorized insurance companies. - Of 18: 4 specialize in the life business; 1 in surety; 13 operate both life and nonlife; of these 13, 9 have licenses to operate reinsurance. - Of the 18 insurance companies: 5 are subsidiaries of foreign firms; 4 are subsidiaries of local banks. - 5 companies are authorized to operate exclusively in reinsurance. - In 2003, premiums issued by reinsurers represented 11 percent of the premiums issued by insurers. - The captive insurance sector is insignificant; there are two captive insurers. - Market size and concentration: - Insurance penetration measured as premiums subscribed to GDP is around three percent. - Total premiums subscribed in 2005 were $430 million, up 1.9 percent from 2004. - Total assets for 2004 were $765 million, about six percent of GDP, with investments representing 69 percent of total assets. - Life insurance business represented 35 percent of the total market. - Within nonlife, automobile insurance represented 16 percent of total premium subscriptions and health insurance represented 17 percent. - Market concentration: the five largest companies account for around 74 percent of total business. ### Main findings and supervisory weaknesses - Legislative framework for insurance supervision is weak. - Industry fees and taxes: - Tax on net premiums from local risks is 2 percent; fire insurance tax is 5 percent; tax revenues are not substantially available to SSRP. - SSRP objectives emphasize enhancing and strengthening the insurance industry; SSRP is responsible to ensure insurers comply with technical reserves and solvency requirements. - Budgetary and autonomy constraints: - Overall SSRP budget is strained and dependent on MICI, making it difficult to implement structural changes, higher wages, retention of skilled staff, and infrastructure for supervision. - SSRP has little or no autonomy from industry or MICI; SSRP is part of MICI and does not have a separate budget. - The Technical Council composes nine board members including minister of MICI, legal director, SSRP actuary, a director of the National Securities Commission, and four industry representatives (two from insurance companies and two from brokers). - Staffing and resources: - Staff salaries at SSRP are significantly below industry levels and below other financial supervisors (e.g., Superintendency of Banks), affecting ability to retain qualified staff. - There are currently no actuaries working for the SSRP, although one was contracted to train two staff members. - No legal protection exists for actions taken by staff while discharging duties. - Other resources are limited, hampering ability to gather/analyze financial reporting and address reinsurance activities, valuation of assets and technical provisions, risk management and assessment, and consolidated supervision of insurers within financial groups. - Accounting and governance: - SSRP does not require companies to use International Accounting Standards (IAS) for regulatory purposes, though IAS is required by securities law for publicly traded companies and for fiscal purposes. - SSRP has not issued rules regarding corporate governance, internal controls, or responsibilities of board members and senior managers. - Disclosure to policyholders is weak; commissions paid to brokers are not disclosed and companies are prevented from employing their own agents. ### Licensing and changes in control - A license is required to carry out any insurance business in Panama. - Foreign investment is allowed through a local subsidiary (not a branch). - Licenses to sell life, nonlife, and surety products are issued separately in the sense that authorization is needed for each line of business a company intends to offer, but composite licenses allow operation across lines (including reinsurance). - To receive an insurance license, applicants must provide information on shareholders and board members, documentation on products, reinsurance programs, and feasibility of business plan in the medium and long term. - Once required information is complete, the Technical Council or National Reinsurance Commission has 90 days to grant the license. *Source: IMF assessment of securities and insurance supervision in Panama (assessment text provided by the IMF).* ### 64. The law states that a license for insurance should not be granted if a ### cr0767 - 64. The law states that a license for insurance should not be granted if a ### Fit-and-proper requirements and licensing - The law prohibits granting a license for insurance if a shareholder, director, or senior manager has been convicted for crimes related to drug dealing, fraud, or other related crimes during the previous ten years. This requirement applies to both insurance and reinsurance companies. - The SSRP undertakes a limited fit-and-proper review of shareholders, board members, management, auditors, and actuaries. - Legal filing requirements for board members and shareholders: - Company board members must submit their curriculum vitae and “recommendation letters” along with other documents for obtaining a license. - Companies must provide information on who the shareholders are. - The SSRP checks the information on shareholders and board members with the Financial Analysis Unit (UAF) prior to granting any license. - Definition and reporting of control: - The term “control” over an insurer is not defined in legislation. - Changes in shareholders or board members must be reported to the SSRP within 30 days after these changes take place; the law does not require prior authorization for changes in control. - Insurers by law are required to receive prior approval of the Technical Council or National Reinsurance Commission before they transfer all or any part of their business, and the requirements to another insurer. - The draft law includes a definition of “control” and would require that any transfer implying more than 10 percent of the total outstanding shares be reported to the SSRP in advance. ### Corporate governance and internal controls - Current legal framework: - The insurance law does not impose measurable requirements for corporate governance. - The SSRP does not verify compliance with corporate governance principles. - The law does not set out responsibilities for the board of directors or for senior management. - The SSRP does not play a role in companies’ internal organization. - Audit and actuarial requirements: - An external financial audit is required once a year. - An actuary is required to certify the proper constitution of mathematical reserves in the life insurance business. - Mathematical reserves must be calculated and presented to the SSRP by an independent and certified actuary, and these calculations must be certified by another independent actuary once a year. - SSRP supervisory powers and practice: - The SSRP has no power to oversee or verify internal controls within companies and does not require companies to have internal controls in place. - Some firms, at least the big ones that belong to financial or economic groups, have internal controls and corporate governance rules. - Draft law recommendation: - The draft insurance law could be modified to require that insurance and reinsurance firms have in place a framework for corporate governance and internal controls. - The law should include provision that the SSRP have sanctioning authority if there is noncompliance. ### Prudential rules and technical provisions - Product and risk-management oversight: - The SSRP verifies that the design of insurance products relies on a technical basis for their feasibility. - The SSRP neither requires nor verifies that insurers have in place comprehensive risk-management systems able to control, monitor, and report risks. - There are no provisions on minimum ratings for reinsurers or for exposure limits towards single reinsurers. - Actuarial standards and reserve calculations: - Actuarial standards are not issued by the SSRP, but general international standards are applied. - Technical reserves for nonlife business are calculated as a proportion of net retained premiums. - Technical reserves for life business are calculated according to the actuarial value of expected losses according to accepted actuarial principles. - Mathematical reserves must be calculated and presented by an independent and certified actuary and certified by another independent actuary once a year. - Investment and asset rules related to technical reserves: - The law specifies that 75 percent of all investments that cover technical reserves must be within the country, and it lists the type of instruments allowed. - The other 25 percent is allowed to be invested abroad but in the same type of instruments listed and with a rating of at least “investment grade.” - There are no diversification or liquidity requirements and no asset valuation rules. - Although there is currently no regulated market for derivatives, restrictions on the use of these instruments should be addressed and discussed in the context of the insurance industry. - Footnote: At least 50 percent of the capital exceeding the minimum required capital has to be invested in the country as well. - Solvency regime: - There is a solvency regime specified in the law and detailed through specific regulation. - Capital requirement must be calculated according to procedures dictated by the SSRP and it is verified by the supervisor and published every trimester. - Solvency control levels are established, and publicly disclosed actions are taken by the authority in case companies fail to comply. - Draft law changes: - The draft law does not change the way in which technical reserves are calculated, but it introduces some comment on the liquidity of assets aiming to improve matching of assets and liabilities. ### Market conduct, disclosure, and consumer protection - Intermediary licensing and conduct: - The supervisory authority requires insurance brokers to be licensed; to have adequate knowledge; and to have passed a licensing examination. - The insurance law lists the requisites, obligations, and prohibitions for insurance brokers and gives the SSRP the power to cancel a broker’s license when appropriate. - Policy documentation and consumer complaints: - The law sets minimum requirements for insurance policy models such that these are easy for consumers to read and understand and have all necessary information (benefits, limitations, exclusions, etc.). - Policy models need authorization from the SSRP prior to their use. - The SSRP has a legal department that receives claim-related complaints from consumers. - The draft law could provide the requirement that a regulation be issued for the disclosure of fees/commissions paid to brokers or agents. - Financial disclosure and statistics: - Insurers are required to publish audited statements annually and in accordance with regulatory accounting principles. - The SSRP publishes the solvency margins quarterly. - Statistical information is gathered by the SSRP and available for consultation by interested parties. ### Monitoring, inspection, sanctions, and exit frameworks - Reporting and monitoring: - Market analysis includes monitoring the amount of premiums, number of policies issued, and claims on a monthly basis. - There is no qualitative analysis or off-site monitoring of trends in prudential indicators. - Insurance companies are required by law to submit audited financial statements during the first four months of every year. - Statistical information must be submitted to the SSRP on a monthly basis. - Information on the solvency margin must be submitted quarterly. - There is no requirement to report outsourced functions. - On-site inspections and resources: - The supervisory authority has the power to carry out on-site inspections to examine compliance with legislation and supervisory requirements. - There are currently four auditors working for the SSRP, which makes it hard to cover all insurance companies. - Inspections focus only on financial aspects rather than on wider managerial factors. - Reinsurance companies have one year to submit their audited financial statements and are not subject to the solvency regime. - Although the SSRP has authority to conduct on-site inspections of reinsurance companies, staffing resources do not allow consistent inspections. - Corrective measures and sanctions: - The supervisory authority takes preventive and corrective measures, mainly triggered when companies fail to achieve the minimum solvency margin. - Measures range from a reorganization plan, including an increase in capital levels, to intervention or revoking the license to operate. - The law establishes the reasons and amounts of fines that can be imposed by the SSRP against different market participants. - Exit mechanisms: - The legal framework defines a range of options for the exit of insurers and reinsurers from the marketplace, giving priority to the protection of policyholders. - Draft law regularization process: - Introduces a new regularization process allowing the SSRP to impose conditions on insurance firms when specific weaknesses pose a risk for policyholders: - (i) problems in the constitution and/or coverage of technical reserves; - (ii) when the solvency margin or minimum required capital is not maintained; - (iii) when the financial auditors or the independent actuary refrain from giving an opinion; and, - (iv) when liquidity conditions are not met. - In the event of a weakness, the regularization plan must be submitted by the board of directors of the company, outlining board responsibility and improving prospective supervision. ### Cross-border operations, supervisory coordination, and confidentiality - Cross-border operations: - Cross-border insurance operations are prohibited. - If an insurance product needed is not offered in the local market, the interested party may obtain an authorization from the SSRP to get the product abroad; these authorizations need to be registered at the SSRP. - Group supervision and coordination: - The SSRP does not have powers to supervise any financial entity other than the regulated insurance company that forms part of a group. - Responsibilities of each supervisory authority are well defined. - The SSRP recently signed a memorandum of understanding with the Superintendency of Banks and the National Securities Commission to share information and coordinate supervision efforts of financial groups. - The insurance law does not allow for supervision by a home supervisor. - Confidentiality: - The law specifies a sanction for public officials who improperly provide information on companies or brokers under the SSRP’s supervision. *Source: IMF assessment of insurance supervision in Panama and SSRP practices.* ### 0.25 percent of total income perceived the previous year within a range that goes from ### 0.25 percent of total income perceived the previous year within a range that goes from ### Fees, charges, and entity-specific levies - Brokers (natural persons) will be charged 0.25 percent of total income perceived the previous year within a range that goes from $100 to $1,000. - Brokers (legal entities) will be charged 0.50 percent of total income perceived the previous year within a range that goes from $500 to $10,000. - Reinsurance brokers will be charged $300. - Fees will also be charged to insurance and reinsurance appraisers. ### Institutional structure and governance changes proposed - The draft eliminates the Technical Council of Insurance and National Reinsurance Commission. - In place of those bodies, the draft proposes a board of directors composed of: - the minister of MICI, - the insurance superintendent, and - three independent members of the society with experience in the insurance sector, but no links to neither the government (except university teachers) nor to any insurance, reinsurance, captive insurance company or broker. - Independent board members will have fixed terms that are staggered. - Alternative consideration: include a representative from the SdB given substantial participation of bank-owned insurance firms. ### Supervisory process (Principle 4) — scope, transparency, and procedural tools Findings: - SSRP has elaborated a manual containing supervisory procedures for: - on-site inspections, - verification of solvency margins, - balance of reserves and investments (insurance and reinsurance), - calculation of financial indexes, and - anti-money laundering (AML) verification. - Administrative decisions by the SSRP can be subject to revision by the Supreme Court of Justice according to the Judicial Code. - Appeals of superintendent decisions may be brought before the Technical Council of Insurance or National Reinsurance Commission, raising potential independence and conflict-of-interest issues. - SSRP provides solvency margins every trimester via newspapers; a statistical bulletin exists but is not published. A SSRP magazine contains some sector data and agenda information. Assessment: - Partly observed. Policy recommendations / comments: - Revise on-site inspection procedure to include a wider scope and more detailed auditor focus. - Discuss AML procedures with UAF. - Implement ongoing training to ensure consistent procedure application. - Incorporate additional procedures in the manual: revision of reinsurance contracts, verification of technical reserves, claims-related complaints, operations of reinsurance companies, among others. ### Supervisory cooperation and information sharing (Principle 5) Findings: - In May 2005 an MOU was concluded by the CNV, the SdB and the SSRP to foster cooperation among financial sector supervisors, requiring confidentiality. - No MOUs exist governing cooperation between the SSRP and insurance supervisors abroad; nothing in law rules such cooperation. Assessment: - Partly observed. Recommendation: - New law should define if and how SSRP cooperates or shares information with home supervisors of foreign firms operating in Panama, including terms and conditions. ### Licensing (Principle 6) — requirements and process Findings: - Insurance, reinsurance, and captive insurance legislation require licenses to operate and define permissible legal forms and licensing responsibilities. - SSRP reviews applications and forwards to: - Technical Council of Insurance for insurers, or - National Reinsurance Commission for reinsurers. - SSRP issues captive insurance licenses directly. - Requirements are stated in: - Articles 15–17 of insurance law (No. 59), - Articles 18–19 of reinsurance law (No. 63), - Articles 3–6 of captive insurance law (No. 60). - Applicants must hold required capital; insurers/reinsurers must submit projected development/business plan, reinsurance/retrocession policies, lines of business, and detailed product descriptions including actuarial technical notes. - Shareholders/board member documentation: - Insurers: list with curriculum vitae and reference letters. - Reinsurers: reference letter from a bank for shareholders, board members, and senior managers. - License denial if any shareholder, director, or senior manager was convicted for drug dealing, fraud, or related crimes during the previous ten years. - SSRP internal procedures send shareholder and board member information to UAF prior to granting any license. - Foreign entities must provide confirmation from their home supervisory authority, financial statements, other company information, and certification of authorization to do business in Panama. - Foreign investment allowed but insurance and reinsurance sectors should operate under a local subsidiary rather than a branch. - Licenses for life, non-life, surety and reinsurance products are given separately; composite licenses are possible. Assessment: - Partly observed. Recommendations: - Homogenize requirements for shareholders, board members and managers of insurance and reinsurance companies. - Require minimum information on risk management systems, internal control systems, information technology systems, and suitability of senior managers, auditors and actuaries prior to licensing. ### Suitability of persons (Principle 7) Findings: - Legislation does not require fit and proper tests for key functionaries; SSRP has no authority to disqualify appointments or require dismissal of employees (except via licensing provisions in Principle 6). - Independent actuaries must hold an actuarial degree; financial auditors must be authorized and registered. Assessment: - Partly observed. Recommendation: - New law should set minimum qualifications for senior managers and board members, grant SSRP power to verify qualifications, and require companies to verify these qualifications. ### Changes in control and portfolio transfers (Principle 8) Findings: - “Control” over an insurer is not defined in legislation. - Changes in shareholders or board members must be informed to SSRP within 30 days after changes occur (article 22 of the insurance law); no prior authorization required. - Portfolio transfers require prior approval from Technical Council of Insurance or National Reinsurance Commission; receiving company must be licensed and demonstrate financial, economic and administrative capacity to guarantee policyholder rights and solvency. Portfolio transfer contract must be provided to SSRP. Assessment: - Partly observed. Draft law changes and recommendations: - Draft law defines “control” and requires that any transfer implying more than 10 percent of total outstanding shares be informed to SSRP prior to taking place. - Clarify whether formal authorization is required for control transfers, conditions for new shareholders, and time frame for the process; SSRP should be able to verify moral and financial solvency and raise objections if changes might affect the company or policyholders. ### Corporate governance and internal control (Principles 9–10) Findings: - Insurance law does not require corporate governance measures; SSRP does not verify compliance or set board/senior management responsibilities. Assessment: - Principle 9: Not observed. - Principle 10: Not observed. Recommendations: - New insurance law should incorporate corporate governance rules for insurance, reinsurance and captive insurance companies and grant SSRP sanctioning authority for non-compliance. - Article 67 of the insurance draft law dated June 2005 mentions SSRP will set general rules for corporate governance and internal controls. - Require internal controls appropriate to nature and scale of the business and SSRP sanctioning power for non-compliance. ### Market analysis, reporting, and off-site monitoring (Principles 11–12) Findings: - SSRP monitors solvency margins, technical reserves and investments; analysis is quarterly and SSRP takes action on non-compliance. Some market statistics published by SSRP and APADEA. - Human resources are scarce; staff focus on quantitative financial solvency indicators; no prospective supervision. - Insurance companies must submit audited financial statements during the first four months of every year; reinsurance companies within the following year. - Insurers submit monthly statistical information (premiums, policies issued, claims) and solvency margin information every trimester. - Insurers are not required to report outsourced functions or financial performance of related companies. - No rules on asset valuation. Assessment: - Principle 11: Partly observed. - Principle 12: Partly observed. Recommendations: - Ensure prompt submission of audited financial statements for both insurance and reinsurance companies. - Establish rules for asset valuation. - Strengthen systems for receiving, processing and analyzing information. - Enhance human resources to allow prospective supervision beyond present-focused quantitative analysis. ### On-site inspection, corrective measures, and enforcement (Principles 13–15) Findings: - Law grants SSRP authority to conduct on-site inspections (Article 42); companies must give full access to required information. - SSRP has four auditors, a capacity constraint causing inspections to focus on financial aspects rather than wider managerial factors. Assessment: - Principle 13: Largely observed. Recommendation: - Widen scope of inspections to include technical reserves, internal controls, and risk management systems. Findings on corrective measures: - SSRP can impose corrective measures and fines; escalated actions available when solvency levels not met, including reorganization plans, intervention and license revocation. Assessment: - Principle 14: Partly observed. - Principle 15: Partly observed. Comments and recommendations: - Draft law adds preventive measures such as a regularization plan approved by the board with a time frame. - SSRP lacks authority to replace directors or managers; law should provide means to address management problems. - Incorporate sanctioning process within the manual of procedures to ensure consistency, given fines may be amounts within an interval. ### Winding-up, exit, and insolvency protection (Principle 16) Findings: - Law provides exit framework for voluntary or insolvency-induced exits; company wishing to exit requires SSRP authorization and must have enough assets to meet obligations. - SSRP authorization must be published and each policyholder notified. - Payments to policyholders must be met before any distribution to shareholders. - SSRP can intervene for failure to comply with solvency margins, minimum paid capital, technical reserves, or when illegal operations/fraud are suspected. Assessment: - Observed. ### Group-wide supervision and risk management (Principles 17–18) Findings: - SSRP supervises only insurance, reinsurance, captive insurance companies and brokers. - No definition of insurance group or financial conglomerate; no group-wide supervision. - Insurance and reinsurance laws do not require comprehensive risk management policies and systems. Assessment: - Principle 17: Not observed. - Principle 18: Not observed. Recommendations: - Enhance efforts on group-wide supervision: improve coordination among supervisors, set rules for consolidation, group management structures and intra-group transactions. - Include minimum risk management policy requirements in the law or regulation; recognize that large insurers already have such systems. ### Insurance activity and liabilities (Principles 19–20) Findings: - Insurers must submit policies, insurance plans and actuarial technical notes; SSRP reviews premium-setting methodology and requires reasonable assumptions to meet commitments. Reinsurance contracts/programs must be sent to SSRP. Assessment: - Principle 19: Partly observed. Comments: - Law does not require underwriting and pricing policies to be reviewed and monitored by the board, though large insurers usually do so. - Limits on risk retention, risk transfers to reinsurers and diversification measures would be useful. Findings on technical provisions (Article 27): - Required technical reserves include: - mathematical reserves for life insurance products, calculated according to actuarial valuation following international actuarial standards; - technical reserves for non-life risks, calculated as a fixed proportion of total retained premiums during the previous 12 months; - prevision reserve for statistical deviations that should be no less than 1 percent and no more than 2.5 percent of net retained premiums; - catastrophic reserve that should be no less than 1 percent and no more than [text cuts off]. Assessment: - Principle 20: [Assessment present in source but cut off in provided content]. *Source: International Monetary Fund* ### 2.5 percent of net retained premiums. ### cr0767 - 2.5 percent of net retained premiums. ### Technical reserves (Liabilities / Principle 20) - A certified independent actuary must valuate mathematical reserves once a year. - Other technical reserves are calculated as fixed proportions of retained premiums and "do not necessarily reflect the present value of future obligations to be met by insurers." - The project of the law does not include changes to the technical reserves. - Recommendation highlighted: "It would be useful to promote the actuarial profession in Panama in order to participate in the development of actuarial standards and principles on which the determination and valuation of technical reserves should rest." - Exact numeric requirement referenced in header: 2.5 percent of net retained premiums. ### Investments (Principle 21) - Legal requirements: - "75 percent of all investments that cover technical reserves must take place within the country." - "At least 50 percent of the capital exceeding the minimum required capital has to be invested in the country as well." - Allowed investments include: - Bonds, obligations and other securities issued by the State or by national autonomous entities guaranteed by the State; - Bonds and mortgage securities registered at the CNV and local bankers acceptances; - Bonds, and asset backed obligations registered at the CNV; - Equity of local companies with profits over the last three years; - Guaranteed loans on life insurance products; - Urban real [estate] either producing rental income or used by the company (they have to be insured), and land for construction of property with these characteristics; - Loans guaranteed with bonds or securities issued by the State, titles, bond or mortgage promissory notes, or equity in local companies with profits over the last three years, "up to 70 percent of its quoted value as of the date of the transaction"; - Loans on real estate guaranteed by first mortgage "up to 80 percent of its value according to an appraisal"; - Deposits on local banks; - "Any other investment authorized by the SSRP." - The remaining "25 percent is allowed to be invested abroad" in similar instrument types and with a rating of at least "investment grade." - Gaps identified: - "There are no diversification or liquidity requirements, no asset valuation rules, and no asset- liability matching requirements." - SSRP does not require an overall strategic investment policy approved and reviewed by the board of directors, nor the implementation of appropriate risk management systems. - Recommendations / comments: - Project of the law "incorporates a comment on the liquidity of assets aiming to improve matching of assets and liabilities." - Suggested to incorporate board responsibility for investment policy and internal controls. - Suggested clarification whether the domestic investment proportion "includes securities issued by foreign entities in Panama, or is it restricted to local issuers." ### Derivatives and similar commitments (Principle 22) - Context: "Although there is not a regulated market for derivatives in Panama, and no mention is made on insurance and reinsurance laws, the SSRP has the discretion to authorize any other investment not specified in the law." - Assessment: Not applicable. - Comment: "A specific mention on the use of derivatives would be useful." ### Capital adequacy and solvency (Principle 23) - Solvency framework: law and "Resolución No. 576-A" dated November 1996 set the detailed procedure to calculate the Minimum Required Solvency Margin (MRSM). - MRSM calculations: - A. For all insurance types except individual life policies, whichever amount is larger of: 1. As a function of premiums: - "18 percent of the first 7 million of the total subscribed premiums of the last 12 months + 15 percent of the amount that exceeds 7 million up to the total premiums subscribed in the last 12 months." - "The retention factor is calculated as the claims retained divided by total claims, considering 50 percent as a minimum." - "Multiply the result of a. by the result of b." 2. As a function of claims: - "Calculate total claims of the last 36 months, and find an annual average." - "Calculate 29 percent of a. up to the first 4 million of claims + 25 percent of the amount that exceeds the first 4 million up to the average claims calculated in a." - "Multiply the result of b. by the retention factor calculated in 1.b." - B. For individual life policies: "the MRSM is determined as 5 percent of the mathematical reserve (including additional benefits) for the same period of time." - "Whichever amount (1 or 2) results larger from A, must be added to the amount in B in order to get the MRSM." - Reporting and supervisory actions: - "Companies are required to file every trimester (20 days after the trimester is over) their solvency margin which is verified by the supervisor and published." - When solvency falls below the control level, companies cannot expand operations or offer new products; fines, required recapitalization or re-organization, SSRP intervention, and license revocation are possible remedies. - Assessment: Largely observed. - Comment: "Using fixed figures (in local currency) to calculate capital requirements might require periodical revisions and changes to the regulation." The last resolution dates from 1996 and "could be revised." - Project of the law "incorporates reinsurance companies to the solvency regime." ### Intermediaries (Principle 24) - Licensing and conduct: - Brokers must be licensed, have adequate knowledge, good reputation, and pass a licensing examination (Articles 86 through 109 of the insurance law). - A surety bond of $10,000 must be granted to the government. - A license is not granted to employees of insurance or reinsurance companies, banks, fiduciaries, financieras, and to reinsurance brokers or claims appraiser. - Fees determined between broker and insurance company and "should be included in the premium charged." No disclosure of commissions is required. - SSRP may cancel a license for one to six months, or revoke when appropriate. - Reinsurance brokers: - Must be licensed, not allowed to intermediate insurance or be shareholders of insurance or reinsurance companies. - Must be constituted as legal persons, have a minimum paid capital of at least $100,000 and place a deposit guarantee of $150,000. - Assessment: Largely observed. - Recommendation: "The project could usefully provide the requirement for disclosure of fees paid to brokers." ### Consumer protection (Principle 25) - Policy design and disclosure: - "Insurance policy models should be easy to read and understand and have all the necessary information (benefits, limitations, exclusions, etc)." Policy models need prior authorization from the SSRP before commercialization. - If policyholder fails to pay premium, company must send notice prior to cancellation; otherwise contract remains in effect. - Assessment: Largely observed. - Comment: Insurers and brokers are not required to have policies on how to treat consumers fairly or to provide training, although larger companies have training centers for employees and brokers. ### Information, disclosure & transparency (Principle 26) - Requirements: - Insurers and reinsurers must publish audited financial statements once a year. - SSRP publishes solvency margins every trimester; SSRP gathers information on premiums, claims and number of policies and makes it available for consultation. - Assessment: Partly observed. - Comment: Project of the law requires publication of audited financial statements "with the corresponding notes if there were so." Suggestion: disclosure should include "all financial statements and other relevant information such as financial position and performance, corporate governance structures and statistics." ### Fraud (Principle 27) - Legal framework: - Insurance/reinsurance laws mention fraud grounds for SSRP intervention. - Penal code, article 191: destroying/damaging/disappearing an insured object to claim insurance payment or self-injury to claim insurance "could be put into prison from one to three years and with a fine." - Assessment: Largely observed. - Comment: While not legally required, larger companies include internal procedures to detect and control fraud. ### Anti-money laundering and countering financing of terrorism (AML/CFT) (Principle 28) - Legal framework: - AML/CFT legislation: "Law No. 42 of October 2, 2000 (AML law)" applies to insurance companies, re-insurance companies and re-insurance agents/brokers. - Law requires client identification and due diligence; reporting to the UAF (Panama’s FIU) all currency transactions "in the amount of $10,000 or above, and multiple transactions that when aggregated add up to $10,000 or exceed this amount." - SSRP is the competent authority responsible for ensuring compliance with Law 42. - Supervisory capacity gaps: - SSRP auditors focus on reporting cash and cash-equivalent transactions. - SSRP lacks a supervision manual for AML/CFT, limited understanding of ML/TF trends and typologies in the insurance sector, needs training, and needs to develop a risk-based supervisory approach. - Assessment: Partly observed. - Comments: Regulated entities, especially large companies and foreign-owned firms, have developed internal control systems including: - "know-your-customer" policies; - procedures for customer identification and due diligence; - reporting mechanisms for currency and suspicious transactions; - independent internal audit functions; - appointment of an AML/CFT compliance officer (CO). - Assistance expectation: "It is anticipated that the completion of the IDB technical assistance program, together with the implementation of recommendations resulting from this assistance will provide the SSRP with enhanced supervisory capacity." ### Summary of Compliance and Key Supervisory Actions - SSRP publishes solvency margins every trimester. - Companies file solvency margin "every trimester (20 days after the trimester is over)." - Regulatory sanctions include fines, required capitalization, re-organization, SSRP intervention, and license revocation. - Core Principle compliance assessments range from Observed (C) to Not applicable; examples given in the summary table include Principles assessed as Largely observed, Partly observed, Not applicable, or Observed. ### Recommended Action Plan (selected key measures) - Strengthen SSRP independence: discontinue industry participation on SSRP Board; board independence from MICI. - Provide more staff and resources; ensure compensation to attract and retain skilled staff. - Hire an actuary and provide protection against legal action for staff members. - Publish SSRP’s audited financial statements. - Revise internal procedures manual to incorporate additional supervision processes. - Require prospective licensees to have internal control, information technology, and risk management systems prior to licensing. - Require fit-and-proper tests for shareholders, senior managers, board members, actuaries, and auditors. - Disclose process for changes in control over insurers/reinsurers in law or regulation. - Develop regulatory framework for corporate governance and minimum internal controls; clarify board responsibilities and consider board composition requirements, compliance officer appointment, and committee creation. - Revise technical reserve regulation to implement actuarial standards for calculation methods. - Require prompt submission of audited financial statements and introduce asset-liability matching requirements. - Include reinsurance companies in the solvency regime. - Allow agents to be employed by a specific company; require disclosure of brokers’ fees and commissions. - Require institutions to disclose information on financial performance. - Broaden objectives of on-site supervision beyond financial aspects; improve SSRP IT systems for data intake and analysis. - Define supervisory coordination and conditions for cooperation and information sharing with home supervisors of foreign firms. ### Authorities’ response (summary) - SSRP expressed gratitude for IMF interest and noted that recommendations are under review; many have been amended and progress continues. - SSRP is working on appropriate regulation and enforcement of a new insurance law intended to achieve independence from the Ministry. - SSRP requested IMF cooperation for assessor opinion to review the financial framework of the new law. *Source: International Monetary Fund* ### 87. This assessment of observance of the Financial Action Task Force (FATF) ### Assessment of observance of the Financial Action Task Force (FATF) Recommendations for anti-money laundering and countering the financing of terrorism (AML/CFT) — Panama ### General - Panama is a constitutional republic with a democratically elected president who is both chief of state and head of government. The current government began its four-year period in September 2004. - The country has a unicameral legislative assembly elected by popular vote and an autonomous judicial branch. - The legal system is based on the civil law tradition, with some commercial legislation influenced by United States common law (e.g., regulation of trusts). - Population: approximately 3 million. - Territory: 78,200 square kilometers. - The Panama Canal was transferred from the United States to Panama in 1999 and is a major economic driver, together with the Colon Free Trade Zone (ZLC), a booming real estate market and a well developed services sector, including banking and financial services. - Currency: legal parity between the Balboa and the U.S. dollar exists, but in practice no local currency circulates and all commercial payments and financial transactions are made in U.S. dollars. - Panama is a member of many international organizations, including the Caribbean Financial Action Task Force (CFATF), which it currently presides. ### Financial sector scale and market structure - Banking system assets (end-March 2006): $39.6 billion (nonconsolidated basis). - Banking system assets (end-March 2006): $45.8 billion (consolidated basis, including local and foreign subsidiaries of Panamanian-headquartered banks). - Number of banks (end–March 2006): 73, including: - 2 state-owned banks; - 37 general license private banks; - 34 international license banks. - Major Panamanian local banks: Primer Banco del Istmo, Banco General, Banco Continental, Global Bank. - Largest foreign banks present include: HSBC Bank, Banco Bilbao Viscaya Argentaria BBVA, Banco Atlantico, BNP Paribas, Dresdner Bank A.G., Banco Latinoamericano de Exportaciones. ### Legal professionals and DNFBP membership - Lawyers and accountants are not required to belong to a professional association to practice; associations’ codes of ethics are not legally enforceable. - Ethical rules for lawyers established by law are subject to investigation and sanction by the Supreme Court, although there have been very few sanctions in practice. ### General situation of money laundering and financing of terrorism - Reporting and preventive requirements in the money laundering law have had a dissuasive effect on money laundering activity in financial institutions, according to information from various criminal investigations and the UAF. - The UAF reported that money laundering has moved towards other parts of the economy to avoid banks’ capacity to detect illicit capital. - Prosecuted money laundering cases to date: 10, all based on narcotics-related predicate crimes. - Money laundering cases have resulted from internal efforts in the Public Ministry (Ministerio Público) and from international cooperation. - Other financial crimes cases have mainly resulted from foreign investigations of corruption where funds were later deposited in Panamanian financial institutions. - The Free Zone of Colón (ZLC) is an area of great concern as a potential originating or transshipment point for goods purchased with proceeds of narcotics trafficking, including use of the Black Market Peso Exchange. - Criminal proceeds also arise from smuggling of currency, drugs, and prohibited chemical materials; introduction and transshipment of counterfeit merchandise; and several forms of customs fraud. - The Panamanian jungle border with Colombia is occasionally penetrated by illegal armed groups active along the common border; officials did not consider this to pose a terrorist threat to Panama. - Known cases of financing of terrorism: none. ### Overview of Financial Institutions and DNFBPs; regulatory coverage (from Box 4.1) - Banks: 73 total (By license type: 37 General, 34 International, 2 State owned). Activities: Deposit-taking; lending; funds transfers; payment services; guarantees; securities; managing of currency and/or securities for third parties; currency exchange. Regulator/Supervisor: SdB. Subject to AML/CFT Law: Yes. - Savings and Loans Associations: 4. Activities: Deposit-taking and lending, including mortgage lending. Regulator: BHN. Subject to AML/CFT Law: NO. - Financial Cooperatives: 276 Deposit taking cooperatives (i) savings and credit cooperatives, and (ii) multiple services cooperatives. Regulator: IPACOOP. Subject to AML/CFT Law: Yes. - Brokerage Houses: 30. Activities: Deposit taking; funds transfers; securities; investments management; assets administration. Regulator: CNV. Subject to AML/CFT Law: Yes. - Investment Societies: 11. Activities: Participation in securities, and provider of related financial services; loan collections, investments. Regulator: CNV. Subject to AML/CFT Law: Yes. - Finance Companies: 137. Activities: Consumer lending (not deposit-taking). Regulator: MICI. Subject to AML/CFT Law: Yes. - Leasing Companies: 105. Activities: Asset-backed lending. Regulator: MICI. Subject to AML/CFT Law: NO. - Remittances and Exchange Houses: 7. Activities: Money transfer services. Regulator: MICI. Subject to AML/CFT Law: Yes. - Insurers, Reinsurers: 27. Activities: Guarantees and commitments; subscriptions and placement of life and other insurance related-investments. Regulator: SSRP. Subject to AML/CFT Law: Only CTR. - Insurance Brokers: 400. Activities: Subscriptions and placement of life and other insurance related-investments. Regulator: SSRP. Subject to AML/CFT Law: NO. - Insurance Agents: 1,550. Activities: Subscriptions and placement of life and other insurance related-investments. Regulator: SSRP. Subject to AML/CFT Law: NO. - Fiduciaries (Trust Service Providers): 52. Activities: Creation and administration of trusts (fiduciarias). Regulator: SdB. Subject to AML/CFT Law: Yes. - Full Casinos: 12 locations. Activities: Casino services. Regulator: Gaming Board. Subject to AML/CFT Law: Only CTR. - Internet Casinos: 1 (Not yet functioning). Regulator: Gaming Board. Subject to AML/CFT Law: Only CTR. - Slot Machine Businesses: 40 locations. Activities: Slot machines. Regulator: Gaming Board. Subject to AML/CFT Law: Only CTR. - Hippodrome, Bingos and Others: 23 locations. Activities: Horse racing, bingos, betting agencies, and all other gaming services. Regulator: Gaming Board. Subject to AML/CFT Law: Only CTR. - National Lottery: 1 (State-owned monopoly of lotteries, self-regulated). Subject to AML/CFT Law: Only CTR. - Companies in the Colon Free Zone: approximately 1,900. Activities: Warehousing, distributorship, importing and exporting, etc. Regulator: Administration of the Free Zone. Subject to AML/CFT Law: Only CTR. - Companies in Processing Free Zones: 84. Activities: Manufacturing of goods for exportation. Regulator: MICI. Subject to AML/CFT Law: Only CTR. - Lawyers and company service providers: approximately 9,000. Activities: Formation of companies, foundations and of any legal persons, company representation, nominee directorship, registered officer, etc. Regulator: (none). Subject to AML/CFT Law: NO. - Accountants: 11,888. Activities: Occasional operation, management, and selling of legal persons. Regulator: MICI. Subject to AML/CFT Law: NO. - Notaries: 23. Subject to AML/CFT Law: NO. - Real Estate Agents & Promoters: 284 (only legal persons need license). Activities: Development, promotion, buying and selling of real estate. Regulator: MICI. Subject to AML/CFT Law: Only CTR. - Nonprofit Organizations: Unknown. Activities: Receive and disburse donations. Regulator: Ministry of Government & Justice. Subject to AML/CFT Law: NO. - Pawn Shops: 134. Activities: Lending. Regulator: MICI. Subject to AML/CFT Law: Only CTR. - Not all listed entities are subject to the preventive and reporting obligations of Law 42-2000. - Services exclusively performed by lawyers for incorporation of companies, personal interest foundations and legal persons are not subject to Law 42-2000. - Companies and private interest foundations registered in the Public Registry during 2004: about 28,990. No information available to determine percentage that bearer share companies represent of this total. ### Gaming sector and DNFBP coverage - Gaming industry reported revenues of more than $666 million in the first three months of 2005. - One internet casino recently licensed had not initiated operations and cannot accept bets originated in Panama. - DNFBPs subject to AML/CFT obligations: casinos, trust service providers, real estate agents. - Other nonfinancial businesses regulated for AML/CFT purposes: pawn shops and businesses located in free trade zones. - Not covered by AML/CFT regulations: lawyers, accountants, corporate service providers. - Dealers in precious metals and stones are partly covered if also merchants located in the ZLC, making them subject to the free zone’s CTR requirements. ### Legal persons and company formation - Types of legal entities: corporations (sociedad anónima), special partnerships (sociedad en comandita), limited liability companies (sociedad de responsabilidad limitada). Corporations are the most widely used and may have nominative or bearer shares. - Formation procedure is the same for local or offshore activities. - Distinctive aspects: - Only lawyers admitted to practice in Panama can provide incorporation services. - All companies must have a resident agent who must be a lawyer. - All companies must be registered in the Public Registry, where identity of directors, managers and resident agents is disclosed. ### Strategy to prevent money laundering and terrorist financing - National drugs strategy for 2002–2007 addressed drug-related money laundering with objectives to: - Ensure strict compliance with regulations issued by authorities for the financial and commercial system. - Amend the AML legislation to fit the current situation. - Improve the exchange of information between law enforcement agencies, both national and international. - Establish communication links between all public sector entities engaged in the fight against money laundering. - Train, on an ongoing basis, public and private entities responsible for AML/CFT enforcement and compliance. - The government is implementing a program funded by the Inter-American Development Bank to improve transparency in the financial system; the national plan includes measures to: - Strengthen public institutions responsible for financial supervision. - Improve coordination and communication between supervisory bodies and the UAF. - Recommend improved legislation and regulation of reporting entities on financial activities. - Establish procedures of financial intelligence for the prevention of money laundering and financing of terrorism. - There is no coordinating policy body in operation on the broader subject of money laundering beyond drug-related crimes. - New legislation expanded AML/CFT responsibilities of some authorities (e.g., oversight of pawnshops assigned to the MICI) without assessment of their capacity to undertake the new task or priorities within the system. ### Institutional framework and responsibilities - Coordination of AML/CFT policies and issues was assigned to the Financial Analysis Unit (UAF) by Executive Decree of December 2004. - The Superintendency of Banks (SdB) plays a substantial role in implementation of preventive measures; many regulations and supervisory practices by SdB have served as a model for other supervisory authorities. - In 2001, a high level Presidential Commission for the prevention of money laundering and financing of terrorism was established but met infrequently. - Recent appointments by Executive Decree 29 of February 16, 2005 (public sector representative) and Executive Decree 126 of May 31, 2001 (private sector representative) were expected to reactivate the Commission. - Governmental agencies with direct AML/CFT responsibilities include: - Financial Analysis Unit (UAF), within the National Public Security and National Defense Council of the Ministry of the Presidency; - Superintendency of Banks (SdB); - National Securities Commission (CNV); - Autonomous Panamanian Cooperatives Institute (IPACOOP); - Ministry of Commerce and Industry (MICI), which includes: - Superintendency of Insurance and Reinsurance (SSRP); - National Directorate of Finance Companies (responsible for finance companies, leasing companies, money remitters and pawn brokers); - Office of Export Processing Zones; - Real Estate Technical Board; - Accounting Board (no AML/CFT responsibilities at the moment); - Gaming Control Board of the Ministry of Economy and Finance; - ZLC Administration; - Attorney General (Ministerio Público and the judicial technical police within); - Judicial Branch (no specific courts specialized in money laundering or the financing of terrorism); - National Directorate of Immigration. ### Approach concerning risk and compliance culture - Except in banking and securities sectors, compliance culture is excessively focused on filing cash transaction reports for transactions above a $10,000 threshold at the expense of more integral internal control policies and detection mechanisms. - The reporting requirement also applies to transactions involving other cash-like instruments, such as checks, money orders, etc. - No formal assessment of the various money laundering and financing of terrorism risks in Panama has been conducted. - The authorities’ approach: all reporting institutions must be subject to the same requirements established in Law 42-2000, with some graduation (comprehensive requirements for some businesses and only a CTR requirement for others). - There is no systematic analysis of risks to justify differences made in the law or to exclude other sectors completely from AML/CFT requirements. - Government officials expect the High Level Presidential Commission to foster a more strategic understanding of specific risks and facilitate adoption of risk-based policies. - Article 5 of Executive Decree No. 1 of 2001 gives competent and/or regulatory authorities ample powers to adopt additional measures “which contribute to the fulfillment of the objectives set forth in Law 42”. - Regulations of almost all reporting institutions have been modeled after those issued by the Superintendency of Banks, and little guidance exists to address different nature of risks in sectors other than banking and securities. - The lack of a risk-based focus is reflected in the fact that most fines assessed by authorities other than the SdB and CNV were the result of failing to notify that there were no transactions above the reporting threshold in a given period. - The potential misuse of the ZLC was identified as a heightened risk and some initial steps have been taken to address it; however, authorities’ oversight and awareness among businesses in the ZLC remains very weak. *Assessment conducted by Messrs. Francisco Figueroa, Ernesto Lopez, Ms. Hellen Chirino-Roosberg (all Fund staff), and Ms. Nancy Worthington (consultant to the Fund).* ### 5. A mutual evaluation was conducted by the Caribbean Financial Action Task ### 5. A mutual evaluation was conducted by the Caribbean Financial Action Task Force (CFATF) in July 2001 ### CFATF evaluation and follow-up actions - The CFATF evaluation made several recommendations that have been partially acted on. - Amplification of money laundering to include asset forfeiture was not effective. For the staff's AML/CFT assessment, the Public Prosecutor advised that the process is now in place, since the AML law refers specifically to and adopts the freezing, seizing, and forfeiture powers of the prosecutor in the Unified Text of Drug Laws. - The UN Convention Against Transnational Organized Crime (Palermo) was ratified by Panama through law No. 23 of July 7, 2004. However, full implementation will require the inclusion of additional predicate offenses. - Panama adopted regulations on money remitters, as recommended, but implementation and supervision of these new requirements are not yet effectively implemented. - The money laundering criminal law has not been changed to expand the list of predicate crimes to include those required by article 6(2)(b) of the Palermo Convention. - Panama has complied with the CFATF recommendation to negotiate and sign Mutual Legal Assistance Treaties (MLATs) and has signed various other conventions and treaties which support the fight against money laundering and financing of terrorism. ### Criminalization of money laundering (FATF Recommendations R.1 & R.2) — description and analysis - Money laundering criminalized through Articles 389 to 393 of the Penal Code, as adopted through Law 41 of October 2, 2000 and Law 1 of January 5, 2004. - Article 389 (as amended) text summary: - Criminalizes receiving, depositing, trading, converting, or transferring monies, titles, securities, goods, or other financial resources knowing the origin is related with: drug trafficking, qualified embezzlement, illegal weapons trafficking, human trafficking, kidnapping, extortion, embezzlement, public corruption, terrorism, robbery, or internal vehicle contraband established in Panamanian law, with the purpose of hiding or covering their illicit origin to assist evasion of juridical consequences. - Sanction: prison from 5 to 12 years and 100 to 200 days of fine. - Law 1 of 2004 added intellectual property violations as a predicate within Article 389. - Panama uses a predicate-list approach for money laundering. - Ratifications and gaps: - Panama has ratified the Vienna Convention and the Palermo Convention. - Vienna Convention, Article 3(1)(b)(i) is satisfied by Penal Code Articles 389 and 390. - Article 6(2)(b) of the Palermo Convention is not fully satisfied — predicate list does not include a fully comprehensive range associated with organized criminal groups. - Predicate coverage and missing offenses: - Penal Code Article 389 covers 11 felony predicate offenses but does not include all FATF Recommendations in the Glossary of Definitions. - The mission lists predicate offenses that should be included: terrorist financing, participation in an organized criminal group and racketeering, sexual exploitation including of children, trafficking in stolen goods (as opposed to only vehicles), counterfeit currency, environmental crime, murder, the general act of smuggling, piracy, fraud, and insider trading/market manipulation. - Autonomous nature and territorial reach: - ML is an autonomous offense and can be independently charged under Articles 389–393. - Authorities advised money laundering extends to conduct of predicate offenses occurring in other countries as well as in Panama; Articles 8 and 9 of the Penal Code support extraterritorial application where specified conditions are met. - Ancillary offenses and participation: - Articles 389–391 sanction aiding and abetting, facilitating, and counseling the commission of criminal offenses, including money laundering. - Penal Code Article 61: secondary accomplices punishable by no less than half the minimum and no more than half the maximum penalty established for the punishable offense. - Conspiracy provisions: - Unified Text of the Special Law on Drugs, Article 1: association of two or more persons to commit drug-related offenses (including drug-related money laundering) punishable by five to eight years in prison. - Penal Code Article 242: general conspiracy for three or more persons to commit a crime punishable by one to three years; directors or managers of the conspiracy are penalized by 25 percent (interpretation: higher sanction for leadership). - Different definitions and penalties for conspiracy may apply depending on drug-related or non-drug predicate, creating inconsistency in conspiracy law application to money laundering. - Intent and proof: - Article 44 of the Penal Code defines intent; intent may be proved directly or indirectly and may be inferred from acts. - Article 2046 of the Penal Procedure Code: proof is of equal value whether direct testimony, documents, confessions, expert reports, or other rational methods not violating human rights or prohibited by law. - Mission concern: broad wording of intent may not provide sufficient guidance to trial courts in financial crimes cases. - Scope of property and special examination powers: - Money laundering extends to all kinds of property, independent of value: money, securities, assets, or other financial resources (Articles 389–391). - Article 1 of Law 42 permits the Executive Branch to examine with special attention any operation, without regard to the amount involved, that may be particularly linked to laundering of capital arising from illicit activities. - Natural persons vs legal persons: - Articles 389–393 apply only to natural persons. - Criminal sanctions apply only to natural persons. - Civil and administrative penalties apply to legal persons based on conduct of directors, officers, or employees (Judicial Code Article 1969; banking, securities, insurance laws; Law 50 amendments including Penal Code Article 393-A). - Sanctions detail for natural persons: - Article 389: imprisonment from 5 to 12 years and a fine. - Article 391: imprisonment from 3 to 8 years for those who knowingly use their position, employment or occupation for money laundering. - Article 392: use of proceeds for financing political (and similar) campaigns — imprisonment from 5 to 10 years and disqualification from public office for an equal term. - Article 393: public official tampering with evidence, seeking evasion of the accused or receiving compensation — imprisonment from 5 to 15 years and disqualification from public office for up to 10 years. - Forfeiture: court may order forfeiture of assets resulting from laundering upon sentencing (Penal Code Articles 55, 101, 102). - Penal Code Article 55: forfeited assets defined as instruments used to commit a crime and/or proceeds of the crime, except those pertaining to an innocent third party. - Articles 101 and 102: extinguishment of penal case, suspension, or conditional suspension do not affect forfeiture action of civil responsibility derived from the same acts. - Fines for breach of preventive measures apply without prejudice to Penal Code and other laws (Law 42-2000, article 8). - Compliance summary table (as reported): - R.1: Largely compliant — ML predicates not fully consistent with Palermo Convention. Article 1 of the Penal Code defines conspiracy differently with regard to money laundering and applies a lesser penalty which is problematic for consistent enforcement. - R.2: Compliant — Although no criminal penalty applies for legal persons, civil and administrative penalties do apply to legal persons, based on conduct of its directors, officers and employees based on the Penal Code Article 125. Penal Code Article 393-A, as amended by Law 50 (Chapter VII Financial Crimes) covers this for banks, securities and insurance companies. ### Recommendations and comments on money laundering framework - Amend Article 389 to clearly criminalize all the types of AML predicate offenses as required by the Vienna and Palermo Conventions as well as FATF Recommendation 1 (see listed offenses in Paragraph 2 of the assessment). - Consider amending the money laundering law to adopt a "serious crimes approach" so that money laundering applies where a grave offense is committed rather than relying solely on a list of specific predicate offenses; this approach would satisfy the Conventions and FATF standards. - Amend appropriate laws to ensure consistency in the conspiracy law that applies to money laundering. Options include: - Amend the money laundering law to include a specific conspiracy provision; or - Select one existing law to apply uniformly to all AML offenses regardless of the predicate offense. - For the predicate offense of corruption, the mission notes the National Assembly approved the United Nations Convention against Corruption on May 10, 2005. The mission recommends that Panama takes specific actions to fully implement the Convention against Corruption. ### Criminalization of terrorist financing (Special Recommendation II) — description and analysis - Terrorism and financing classified as independent crimes in Penal Code Book I, Title VII: Chapter VI, introduced in Law 50 of July 2, 2003. - Article 264(b) (terrorist financing): - Text summary: “Anyone who intentionally finances, subsidizes, hides or transfers money or assets to be used to commit any of the acts described in 264 (a) of this Code, even though that person is not involved in its implementation or the implementation is not carried out, shall be sanctioned with 15 to 20 years in prison.” - Team advised the language covers collection of funds. - Covers funding of (i) the carrying out of a terrorist act, (ii) by a terrorist organization, or (iii) by an individual terrorist. - Article 264(b) refers to “money or assets” and does not limit form of assets, consistent with the Terrorism Financing Convention definition of “funds.” - Article 264(b) criminalizes intent to commit FT. - Article 264(a) (terrorism definition and sanctions): - Text summary: criminalizes individual or group acts aimed to subvert constitutional order or cause a serious breach of the peace, acts against persons, assets, public services or communications, or acts generating alarm, fear or terror using explosives, toxic substances, arms, fire, flood or other violent means or means of mass destruction. - Sanction: 15 to 20 years in prison. - Not tested in practice; no cases brought under Article 264(a) and no judicial interpretation exists at the time of the assessment. - Aiding and abetting, concealment, omission to report: - Article 264(c)(1): intentionally promoting or assisting persons or groups to commit terrorist financing is a crime even if not intervening in the substantive offense. - Article 264(c)(2): concealing, sheltering, or recruiting others for execution of acts described in Article 264(a) is a crime. - Article 264(e): knowing existence of persons/groups preparing or contributing to planning or execution of acts under 264(a), hiding whereabouts of authors, or intentionally omitting to denounce acts — prison term of 5 to 10 years. - Gap noted: - While “acts of terrorism” appear on the AML law predicate list, FT does not appear on the predicate list (Penal Code Article 389). - Treaties, conventions, and regional action: - Republic of Panama has signed the UN Terrorist Finance Convention. - Panama participated in the Inter-American specialized conference on terrorism (Lima, April 23–26, 1996) and adopted: - The Declaration of Lima to Prevent, Combat and Eliminate Terrorism; - The Plan of Action on Hemispheric Cooperation to Prevent, Combat, and Eliminate Terrorism; - The Framework Treaty on Democratic Security in Central America (signed by Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama). - Panama approved the Inter-American Convention against Terrorism by Law 75 on December 3, 2003, ratified on January 21, 2004. - UN Convention for the Repression of the Financing of Terrorism adopted December 15, 1999; approved in Panama on May 9, 2002 and ratified on July 3, 2002. - UN Convention of Trans-National Organized Crime (Palermo) signed December 15, 2000 and ratified by Law 23 on July 7, 2004. - Operational and security measures: - Authorities reported no experience with FT cases. - Reported incursions by Colombian narco-terrorists into the Darien region. - Panama increased security of key infrastructure and the Panama Canal: installation of surveillance technology at critical points (Bridge of the Americas and container ports); improvements in ship information collection and modernization of incident management at the Panama Canal Authority. *Source: Caribbean Financial Action Task Force mutual evaluation (July 2001) and Detailed Assessment of the Observance of the FATF Recommendations as reported by IMF staff.* ### 1988. The second, “The UN Convention Against Organized Crime and Its Complementary Protocols” was ### cr0767 - 1988. The second, “The UN Convention Against Organized Crime and Its Complementary Protocols” was ### International treaties, regional participation, and bilateral agreements - The UN Convention Against Organized Crime and Its Complementary Protocols was adopted in New York on November 15, 2000 and signed by the Republic of Panama on December 12, 2001. - Panama presides the Hemispheric Security Commission of the Organization of American States and is participating in adoption of a resolution supporting the Inter-American Committee against Terrorism. - Panama participated in the Second Inter-American Specialized Conference on Terrorism in Mar del Plata, Argentina, in November 1998; participating countries adopted rules to cooperate against terrorist acts and to eliminate funding of terrorism. - Multilateral instruments adopted by Panama include: - International Convention Against the Taking of Hostages, adopted on August 19, 1983; - Convention on Physical Protection of Nuclear Materials, adopted on April 1, 1999; - Protocol for the Repression of Illicit Acts of Violence in Airports that offer services to civil aviation, complementary to the Agreement for the Repression of Illicit Acts Against Civil Aviation Security, adopted on April 10, 1996; - Convention on the Security of the United Nations Personnel and Associated Personnel, adopted on January 15, 1999; - International Agreement for the Repression of Terrorists Acts Committed with Bombs, adopted on May 23, 2001. - Bilateral cooperation agreements in the fight against organized crime signed and approved include: - Brazil—signed in Brasilia on August 21, 2001 and approved by Law No. 62 of December 5, 2001; - Italy—signed in Rome on September 12, 2000 and approved by Law No. 31 of July 4, 2001; - Arab Republic of Egypt—signed in Cairo on October 18, 1998 and approved by Law No. 6 of May 3, 1999. ### Terrorist financing (FT) offense and legal scope - The FT offense applies to natural persons as it applies to “anyone who intentionally acts.” Criminal liability is not applied to legal persons due to a fundamental principle of Panamanian law; civil and administrative responsibility apply to legal persons for acts that would be criminal if by natural persons. - The FT offense: - Extends to all funds, whether from legitimate or illegitimate sources. - Extends to persons designated in Article 2(5) of the Terrorist Financing Convention. - Applies regardless of the country in which the terrorist organization is located or where the specific terrorist act will occur, as long as there is a nexus to Panama. - FATF criteria 2.2-2.5 apply to the FT offense in the same manner as for money laundering. - Recommendation (from assessors): - Place FT specifically on the predicate act list of the AML Law. - Ensure that all UN conventions and resolutions relating to terrorism have been ratified. - FATF compliance summary for SR.II: - SR.II — Largely Compliant - Comment: Implementation is needed on the Conventions and Treaties to which Panama is a party. FT needs to be inserted in the list of predicate crimes in Panamanian AML law or adequately addressed if Panama moves to a serious crimes approach as opposed to a list of specific predicate offenses. ### Confiscation, freezing and seizing of proceeds of crime (R.3) Findings and legal framework - Forfeiture is listed in Penal Code Article 46 as a penalty in criminal cases and applies to all criminal offenses, including money laundering, terrorism, and FT. - Penal Code Article 55 defines forfeiture as adjudication to the government of instruments used in commission of the crime and proceeds of crime, with an exception for innocent third parties; forfeited illicit assets will generally be sold and applied to cover civil and criminal sanctions. - Judicial Code Articles 2028, 2029, and 2030 protect good-faith third parties; Panama adopted the Palermo Convention. - Drug and drug-related money laundering forfeitures are treated differently via the Unified Text of Drug Laws and Law 41: - Prosecutors may order preliminary seizure of instruments, money, securities and other assets used to commit drug-related crimes and direct/indirect proceeds (Law 41, Article 6). - Article 29 of the Unified Text records freezing by the prosecutor in the Public Register; preliminary seizure of immovables must be recorded in the Public Registrar; Article 31 gives a party the right to a hearing before a judge to seek release of provisional seizure. - For money laundering cases, laws/procedures applicable to drug-related money laundering permit preliminary seizure of assets, while rules for non-drug-related money laundering do not permit such actions without court order. - Final decision on forfeiture is a criminal punishment imposed by the judge per Penal Code Articles 55, 101, 102, and 263. - Panama’s criminal system focuses on the person, not in rem asset proceedings; no civil forfeiture exists separate from a criminal case. - Burden-shifting: If assets are connected with drug trafficking (predicate offense), the accused must demonstrate that assets were acquired legally; this reversal of burden of proof does not apply to other predicate offenses. - Assets seized by the prosecutor are under control of the Ministerio Público; funds are left in accounts in financial institutions under seizure order. Practice includes permitting prosecutors and police to use seized vehicles; other non-cash assets are placed into a depository facility owned by the Ministerio Público; there is no process in place to maintain assets pending final order of forfeiture or return to owner as ordered by the court. - Post-confiscation destination: - Article 35 of the Unified Text on Drug Laws: confiscated money/assets in drug-related cases must be placed at the disposal of the Panamanian Commission for the Study and Prevention of Drug-Related Crimes (CONAPRED). - Penal Code Title XIII, Article 7: in non-drug money laundering cases, a court order to confiscate assets results in placement at the disposal of the Special Retiree and Pensioner Fund. Operational capacity and problems - Law enforcement, prosecutors and police have adequate powers to identify and trace property subject to confiscation; practical problems stem from lack of resources and training rather than lack of legal authority. - The mission could not find cases where courts had voided actions where persons knew or should have known actions would prejudice recovery of confiscable property. Recommendations (assessors) - Extend authority of investigating authority to permit provisional freezing and seizure in all criminal cases, including terrorist financing and offenses required by the Palermo Convention as predicates. - Amend forfeiture provisions to permit forfeiture where property is owned by criminal organizations without showing nexus to a particular defendant (e.g., in rem quasi-criminal forfeiture). - Establish/improve system to hold and maintain seized assets pending forfeiture orders; address potential impropriety/appearance of impropriety regarding maintenance of assets not yet determined to belong to the government. FATF compliance summary for R.3: - R.3 — Largely compliant - Comment: Steps should be taken to ensure seized assets are held under proper conditions pending final forfeiture; freezing/seizure authority of prosecuting authority should extend to other predicate offenses mandated under Palermo Convention. ### Freezing of funds used for terrorist financing (SR.III) Findings and analysis - For money laundering cases involving terrorist acts, prosecutors have authorities under the Unified Text on Drug Laws to freeze/seize assets and seek judicial forfeiture. - Financing of terrorism is not a predicate offense to money laundering under the AML law; therefore, AML law application to FT is limited. - Laws provide for provisional measures (freezing and seizure) and allow ex parte initial seizure without prior notice; law enforcement has authority to identify and trace property for seizure. - No administrative system for freezing assets related to terrorist finance exists because Panama’s constitution reserves freezing/forfeiture functions to the judicial system; freezing and forfeiture of assets are covered in the Penal Code. - Panama has a system to respond to UN Resolutions 1263 and 1373 on terrorism and terrorist finance: - The UAF publishes terrorist lists to financial authorities and created a process for this responsibility. - Banks are required to immediately report any information on terrorists on the UN lists to the UAF. - UAF immediately reports to the appropriate prosecutor’s office, which seeks a court order forthwith to freeze funds. - In one instance a Panamanian bank found an account connected to a terrorist on the UN list and the procedure was implemented in approximately 45 minutes. - Affected persons have the legal right to petition the court for return of the property. - Authorities advised that there have been no cases of terrorism or terrorist finance since Law 50 was passed in 2003. - Panama handles foreign requests to freeze assets via the Ministry of Foreign Affairs and prosecutors proceed immediately to court upon receiving the necessary information. Recommendations (assessors) - Make FT a predicate offense to money laundering to permit application of the prosecutor’s provisional freezing and seizure authority under the Unified Text on Drug Laws. - Ensure the High level Presidential Commission effectively monitors authorities’ compliance with relevant legislation and regulations. FATF compliance summary for SR.III: - SR.III — Partially Compliant - Comment: Provisional measures should be available to freeze/seize funds related to FT; not available since FT is not on predicate list for money laundering. Funds in Panamanian banks belonging to international business companies with statutory seat in another country cannot be seized/confiscated in Panama if the underlying crime in the foreign country is not a crime in Panama. ### The Financial Intelligence Unit (UAF) — functions, resources, outputs (R.26, 30 & 32) Structure, mandate and powers - UAF was created by Executive Decree No. 136 of June 9, 1995 for prevention of money laundering resulting from Drug Trafficking. - Decree No. 163 of October 3, 2000 amended Decree 136 and changed name to the Financial Analysis Unit for the Prevention of money laundering. - UAF is attached to the Public Security and National Defense Council (C.S.P.D.N.), the highest advisory body to the President on public security. - Decree 78 of June 5, 2003 amended UAF powers to include gathering from public institutions and private reporting entities all information related to financial, trading, and business transactions that may be linked to money laundering and financing of terrorism. - UAF may establish Memoranda of Understanding (MOUs) for exchange of information with foreign FIUs; Panama is a member of the Egmont Group since 1997 and has signed 37 MOUs. Operations, tools and cooperation - UAF uses Analysis Notebook as the specialized case-analysis software tool; no other analytical tools are available. - When UAF determines a STR merits investigation, information is disseminated directly to the Panamanian Attorney General under subparagraph (e) of Article 2 of Decree No. 163 of 2000. - UAF responds to prosecutors’ requests for assistance and exchanges information with officers at the SdB to support investigations. - The UAF maintains inter-institutional cooperation agreements with the Attorney General’s Office, the SdB, and signed a cooperation agreement with the Public Registry of Panama. Reporting obligations and thresholds - Law 42, Article 7: the Executive Branch determines cash transactions and cash equivalent reporting for amounts exceeding ten thousand Balboas ($10,000) for nonfinancial entities such as enterprises in the ZLC and processing zones, national lottery, casinos, promoters, real estate brokerages, insurance and reinsurance companies, and reinsurance brokerage companies. - UAF developed reporting forms for each kind of reporting entity for transactions over $10,000 or amounts adding up to this figure in one business week; UAF-STR form is used to report suspicious transactions of any amount and is sent directly to the UAF. Information access, confidentiality and dissemination - UAF has timely access to information from state authorities (economic affairs, civil registry, police, national secret service) via electronic inquiries or written requests. - Confidentiality is regulated by Executive Decree No. 78 of 2003 and previous decrees; UAF applies strict security measures at installations, including a security agent and guarded perimeters. - Despite high confidentiality, UAF disseminates information domestically by un-armed messengers, considered an unnecessary risk; projects to digitalize receipt of information and dissemination are contemplated. Organizational capacity and performance - UAF organization: Head Office and four departments (Legal, Financial Analysis, Information Gathering, Technical Support), plus Secretary General and Office Services. - Staff total: 22, of which 19 are professionals. Composition: one Head (lawyer), a deputy Head (accountant), three lawyers, five analysts (one with masters in economics and MBA), two assistant analysts (international exchange), one secretary, two administrative assistants, three data-entry persons, one IT engineer, one janitor, two drivers/messengers. - UAF lacks an autonomous operating budget; the Public Security and National Defense Council handles operating expenses. Statistics and case outcomes (2001–2004) - UAF reporting/dissemination statistics and case outcomes (mission’s assessment period): - STRs received and disseminated: - 2001: 708 received, 663 disseminated, 1 reached the courts. - 2002: 343 received, 290 disseminated, 2 reached the courts. - 2003: 329 received, 309 disseminated, 2 reached the courts. - 2004: 719 received, 717 disseminated, none reached the courts. - Total STRs 2001-2004: 2,103 (Banks: 2001 708; 2002 341; 2003 315; 2004 581; Securities: 1, 2, 8, 2; Exchanges: 2, 126; Cooperatives: 1, 4; Authorities: 1, 6; Casinos: 4; Insurance: 1). (Table in source shows breakdown per year.) - ML criminal cases since ML criminalization in 2000 to May 2005: - 10 investigations of ML - 1 conviction - 7 cases tried to a conclusion - 1 case remains active - 2 cases dismissed - Average prosecution time for ML cases: 18.9 months - All ML cases were predicated on drug-related offenses. Problems and assessment - Major problems identified: lack of sufficient technical resources, insufficient funding and personnel, lack of state-of-the-art technology, poor analysis/value added at UAF, mismatch between UAF outputs and prosecutors’ needs, and Ministerio Público’s limited capacity to use UAF information. - Recommendations (assessors): - Provide UAF with an independent budget determined after a study identifying additional personnel, tools, and training needs. - Improve protection of information reported to the FIU and disseminations by maximizing security for electronic receipt and dissemination. - Encourage reporters unable to report on-line to send reports by courier on CD, diskette, or USB memory stick rather than via UAF messengers. - UAF should research, together with Public Prosecutors and Courts, reasons for few convictions resulting from disseminations beyond resourcing/training/technology issues. - Release the annual report of the UAF publicly, including statistics, typologies, trends, and information on activities; introduce outreach and awareness program and potentially use a government public relations officer to present UAF information while protecting UAF personnel identity. FATF compliance summaries: - R.26 — Largely Compliant (Lack of clarity on budget/independence; need for coordination/outreach.) - R.30 — Partially Compliant (UAF needs more funding, training, personnel, and coordination.) - R.32 — Largely Compliant (UAF should produce more statistical data for long-term planning and feedback.) ### Law enforcement, prosecution and other competent authorities (R.27, 28, 30 & 32) Main authorities and roles - Office of the Attorney General (PGN): applies Judicial Code and Penal Code; receives UAF information and initiates formal investigations; ML investigations may be launched by special prosecutor’s offices created by resolution No. 8 of 2000; preliminary investigations launched in coordination with the Financial Investigation Unit of the Judicial Technical Police (PTJ) if triggered by UAF STRs. - Immigration Office (Ministry of Government and Justice): regulates immigration/residency. - General Customs Office (MEF): presence at points of entry, participates in control of foreign exchange, interdiction of prohibited substances, monitoring precursor chemicals; customs has police authority, customs court; maintains statistics on cross-border currency transport reports. - National Police: vigilance, monitoring, capture of suspicious persons in coordination with Attorney General; formal investigation conducted by PTJ; National Police advised they have no experts on ML/FT and have not received training. - Judiciary: Supreme Court, Courts of Appeals, Circuit and Municipal Courts; ethical norms and asset declarations for judges; limited experience with ML/TF cases. - Office of the Prosecutors: prosecutors lead investigations; Penal Procedure Code Article 1951 establishes prosecutors’ direct investigations; Article 2031 grants authority to direct police, obtain witness declarations, complete investigations, order freezing of assets. - PTJ Judicial Technical Police (SIF): acts as technical/support arm of prosecutors for financial crimes; SIF staff of 10 persons to conduct police investigation of serious financial crimes; PTJ has two specialized units (SIF and Drugs Unit). Operational issues and capacity - Prosecutors have extensive authority to cooperate with international requests for assistance; responses to most such requests are made within two to three months. - Staffing and budget constraints: many prosecutorial units have only 10−12 staff; a general lack of revolving funds interferes with long-term, complicated investigations; PTJ budget shortfall is about $3 million every year. - Courts: limited experience with ML/TF cases; 10 ML cases brought before courts (7 concluded, 1 active, 2 dismissed); average prosecution time 18.9 months. - Statistics are gathered by agencies, but there is no centralized, consistently formatted data to measure AML/CFT effectiveness across agencies. Recommendations (assessors) - Conduct in-depth budget analysis of enforcement needs and review dependence on general budget allotment. - Develop a government coordination group on AML/CFT to meet regularly and report to the High Level Commission. - Develop a central database connecting law enforcement investigative agencies on ML/FT and financial crimes; link courts’ database and permit different security/access levels. - Develop training for prosecutors and financial police, including protection of informants and investigative techniques. - Increase SIF personnel and expand technical resources and infrastructure. - Develop systematic training for the courts and consider special courts for financial crimes/ML. - Develop coordination of government statistics for AML/CFT interpretation and measurement. FATF compliance summaries: - R.27 — Compliant - R.28 — Compliant - R.30 — Partially Compliant (UAF, law enforcement, and prosecutors not adequately funded, trained nor staffed; budgetary autonomy should be clarified for UAF.) - R.32 — Largely Compliant (Government coordination group does not yet use statistics to review effectiveness; statistics maintained but not coordinated uniformly.) ### Cash couriers and cross-border currency controls (SR.IX) Legal requirements and practice - Cabinet Decree No.10 of 1994 mandates a written declaration by every passenger entering the country carrying cash or equivalent values in excess of $10,000. - Declaration obligation is mandatory at all airports, seaports and borders, but in practice only declarations collected at Tocumen Airport are entered into a database shared with the UAF via monthly update; UAF also receives a faxed copy of each declaration. - Declaration obligation does not apply to cash in freight/postal/cargo shipments or to outbound transportation from Panama; it applies only to incoming travelers. - Failure to declare or false declaration constitutes the crime of “customs fraud” (Law 30 of 1984, Article 18, as modified by Article 9 of Law 41 of 1996) sanctioned with penalty up to five times amount of fraud and one to three years imprisonment; also administrative fines under Fiscal Code Article 550. - Customs may stop and seize money pursuant to investigation of any possible crime; Customs officials are responsible for investigating and sanctioning administrative violations and criminal customs fraud. Statistics and vulnerabilities - Cash seizures in 2004: $2,038,442 seized as consequence of failures to declare or false declarations. - Tocumen Airport declarations (last three years cited): - 2002: $339.5 million declared - 2003: $266.3 million declared - 2004: $264.7 million declared - Country sources for cash declared since 1999: - Colombia: $452.3 million - Mexico: $224.1 million - Haiti: $43.9 million - ZLC (free zone) generates substantial cash inflows; free-zone merchants estimate cash payments for re-exported goods amount to approximately one-third of total value of sales; one bank in the ZLC reported at least one-third of deposits are made in cash. - A Banco Nacional de Panamá teller window inside Tocumen Airport accepts cash deposits for ZLC merchants; CTR form required for deposits. - Customs uses dogs to detect cocaine and cash hidden in luggage; little evidence of efforts to detect cash smuggled in cargo shipments or free zone freight. Recommendations (assessors) - Modify traveler declaration obligation to comply with FATF SR.IX to include outbound currency and bearer negotiable instruments. - Make mandatory declaration for currency mailed, transported as non-accompanied luggage, or shipped by any means. - Customs should implement systematic spot-checking of containers, especially in the ZLC. - Use available information and investigative powers (with UAF cooperation) to identify trends and vulnerabilities for detecting physical cross-border currency movements; prioritize enhancement of Customs’ intelligence capabilities and creation of a Risk Analysis Office. - SdB should promote risk-based inspection practices requiring banks dealing with ZLC customers to monitor accounts to detect inconsistency between deposits and sales. FATF compliance summary for SR.IX: - SR.IX — Partially Compliant - Reasons: declaration obligation does not apply to outgoing transportation of cash; does not apply to cash transported in non-accompanied freight; enforced only at Tocumen Airport; little control of cash smuggled in freight containers. ### Preventive measures — Financial institutions (overview and materiality) - Panama’s AML/CFT framework comprises four tiers: (i) laws (enabling provisions), (ii) agreements (SdB regulations), (iii) executive/cabinet decrees, (iv) resolutions and circulars (SdB supervisory guidance). - AML Law 42-2000 provides general framework for customer identification, beneficial owner identification, cash and suspicious transaction reporting, record retention, supervision responsibilities and sanctions. - Coverage gaps: Law 42-2000 does not extend to insurance brokers and agents, leasing, and factoring companies; supervisory authorities SSRP and Banco Hipotecario Nacional (BHN) have limited AML/CFT supervision due to limited resources. - Financial sector materiality (end-2004 assets): - Banking system assets: approximately $40 billion - Insurance sector assets: less than $800 million - Cooperative sector assets: less than $800 million - Savings and loans institutions: $70 million - Assessors weighted banking sector heavily given it accounts for approximately 90 percent of financial sector activities by assets. - Preventive measures and FATF Recommendations covered extensively in the source (R.4, R.5–R.11, R.15, R.21, R.22). Key findings on customer due diligence and related requirements (R.5–R.8) - Law 42-2000 Article 1 establishes reporting requirements and obligation to identify beneficial owners for banks, trust companies, money exchanges/remitters, finance companies, savings & loans cooperatives, stock exchanges/centers/houses/brokers, and investment administrators. - Agreement 9-2000 (revised by Agreement 12-2005 effective February 27, 2006) and other SdB instruments implement customer due diligence (CDD) rules including: - Documentation to identify customers and beneficial owners (including trusts, bearer share corporations). - Ongoing due diligence and risk profiling prior to establishing business relationship. - Record retention for at least five (5) years (Agreement 12-2005 Article 6; Agreement 12-2005 Article 4 and Article 8 for documentation). - Specific obligations for wire transfers (Agreement 002-2005, February 2005) and prohibition on processing wire transfers without the name of the originator (Agreement 2-2005). - Banks maintain numbered accounts; identity of true owner known to senior officials and available to competent authorities; customer due diligence applies to legacy and numbered accounts. - Politically Exposed Persons (PEPs): - Banking Circular No. 001-2005 (January 11, 2005) imposes PEP obligations consistent with FATF: risk management systems to identify PEPs, senior management approval, enhanced due diligence on source of wealth/funds, and ongoing monitoring. - Agreement 12-2005 Article 5(3) reinforces PEP measures for domestic and foreign PEPs. - Correspondent banking (Rec. 7): - SdB revised Agreement 9-2000 to Agreement 12-2005 and Resolution 032-2005 to clarify expectations on correspondent relationships; banks generally comply in practice though formal obligations were strengthened recently. - Electronic banking and technological risk (Rec. 8): - Agreement 5-2003 establishes requirements for electronic banking services; opening an account via internet is not permitted—client must be present. - Agreement 7-2003 addresses credit card transaction measures including internet casino accounts. Coverage gaps and supervisory issues (assessors’ notes) - The current legal framework lacks explicit AML/CFT coverage and CDD obligations for insurance brokers/agents, leasing, and factoring companies. - Supervisory authorities SSRP and BHN are not effectively conducting AML/CFT supervision due to resource constraints. - SdB has revised agreements (Agreement 12-2005 effective February 27, 2006) to address some gaps (trust companies, correspondent banking, PEP attention). FATF compliance summaries (selected): - R.5 — Largely Compliant (Lack of AML/CFT coverage and CDD obligations for insurance brokers/agents, savings & loans institutions, leasing and factoring companies.) - R.6 — Largely Compliant (Lack of specific requirements/guidelines for institutions under SSRP, BHN, MICI regarding PEPs; lack of AML/CFT coverage for PEPs in certain sectors.) - R.7 — Largely Compliant (In practice banks comply with Rec.7; SdB established obligation in Agreement 12-2005 and Resolution 032-2005; additional time needed for full compliance.) - R.8 — Largely Compliant (Lack of SSRP measures/guidelines for non-face-to-face/internet activities in insurance sector.) ### Third parties and introducers (R.9) - Law 42-2000 and Executive Agreement 1-2001 set obligations for supervisory agencies; Agreement 9-2000 requires banks/trust companies to conduct their own CDD. - Law does not explicitly prohibit use of third parties/introducers; in practice banks generally do not rely solely on third parties. - Lawyers commonly act as introducers; some banks accept lawyer-introduced account openings with certified documents but still conduct independent CDD. - CNV Agreement 1-2005 requires physical presence of true owner for account establishment in securities sector. Recommendation (assessors) - Regulations should specifically address third parties/introducers and provide guidelines for reliance on third-party CDD, particularly addressing lawyers as introducers. FATF compliance summary for R.9: - R.9 — Partially Compliant - Reason: Law/regulation do not specifically address or prohibit use of third parties/introducers; lawyers are common introducers and are not covered by existing AML law. ### Financial institution secrecy and information sharing (R.4) - Several legal provisions impose civil, administrative and criminal sanctions for breach of secrecy duties: - Banking law (Decree-Law 9-1998) restricts disclosure of customer information, with disclosure allowed to competent authorities by law (Article 85); violations subject to fines up to $100,000 plus other penalties. - Penal Code Article 170 prescribes criminal sanctions up to two years imprisonment and fines for unlawful disclosure of secrets. - Law 42-2000 explicitly overrides confidentiality restrictions in AML/CFT reporting contexts: - Article 3: information communicated to UAF or authorities in compliance with the Law does not constitute violation of professional secrecy and does not imply liability. - Article 2 authorizes reporting institutions and supervisory agencies to collaborate with UAF and provide information. - Supervisory authorities and UAF have unrestricted access to reporting institution information for supervision and investigation. - International sharing: UAF may exchange information with homologous foreign entities via MOUs and Egmont channels; SdB may enter into MOUs with foreign supervisors. FATF compliance summary for R.4: - R.4 — Compliant ### Record keeping, wire transfer rules (R.10 & SR.VII) - Record keeping: - Law 42-2000 Article 1 paragraph 9: financial institutions must maintain for at least five (5) years all customer transaction information and documentation used to identify/validate customers and account relationships. - Agreement 12-2005 Article 6: requires maintenance of documentation obtained through due diligence, verification of source of funds, and any documentation allowing reconstruction of transactions for at least five (5) years. - Wire transfer rules: - Agreement 002-2005 (February 2005) complements SR.VII obligations. - Agreement 2-2005 establishes prohibition on processing wire transfers without originator’s name. - Remittance/money transfer bureaus process transfers via banks; banks ensure all originator information accompanies the wire transfer. - Supervisory gap: SSRP and BHN are not conducting AML/CFT supervision; record-keeping compliance in insurance and savings & loans sectors may be lacking. FATF compliance summaries: - R.10 — Largely Compliant (Lack of supervision in insurance and savings & loans sectors.) - SR.VII — Compliant ### Monitoring of transactions and relationships (R.11 & R.21) - Monitoring obligations: - Law 42-2000 Article 1 paragraph 3 requires financial institutions to pay special attention to any transaction regardless of amount. - Agreement 9-2000 Article 10 lists examples of transactions inconsistent with customer profile; financial institutions implement monitoring of unusual transactions as functional equivalent of large/complex transactions. - Weekly systems identify whether successive deposits/withdrawals could exceed $10,000 within short periods. - Agreement 12-2005 provides further clarification on ongoing due diligence and monitoring and removes thresholds for ongoing due diligence. - Cross-border and high-risk jurisdictions (R.21): - Agreement 12-2005 Article 3 requires institutions to pay special attention to transactions with jurisdictions having inadequate AML/CFT measures. - SdB may impose countermeasures: enhanced due diligence; refusal to approve licenses; warnings. - Gaps: Law 42-2000 does not extend monitoring obligations to insurance companies, brokers/agents, and savings & loans associations. Recommendations (assessors) - SdB should clarify obligation for ongoing monitoring for large, complex, and unusual transactions; Law 42-2000 should be amended to extend coverage to insurance companies, brokers/agents, and savings & loans associations for special attention and record retention. FATF compliance summaries: - R.11 — Largely Compliant (Lack of specific obligation for insurance companies, brokers/agents, and savings & loans associations.) - R.21 — Compliant ### Suspicious transaction reporting and feedback (R.13-14, 19, 25 & SR.IV) - STR obligation: - Law 42-2000 Article 1 numeral 5 requires financial institutions to report to UAF any suspected acts/transactions linked to ML; Legislative Decree 5-2002 Article 18(iii) requires reporting of transactions that are complex, large, unusual, or have no apparent lawful purpose (including those linked to terrorism). - SdB Agreement 12-2005 and Agreement 12-2005 E revise Agreement 9-2000 to include FT-related STR obligations. - Reporting channels: - STRs must be sent directly to UAF, not to supervisors; supervisors forward currency transaction reports and CTR-type information to UAF. - STR volumes 2001–2004 (summary): - Total STRs 2001–2004: 2,103 (see UAF statistics above for breakdown). - Feedback and typologies: - SdB provides typologies and lists (UN/OFAC) to reporting entities via Banking Circulars; UAF and SdB have not established systematic feedback to reporting institutions on outcomes of STRs. - FT reporting: - No reporting related to FT had been reported to UAF to date of mission; UAF provides UN Counter-Terrorism Committee lists and OFAC lists to reporting institutions. - Remitters: additional oversight needed for money remitters regarding STR reporting related to FT; focus has been on cash reporting. Recommendations (assessors) - Revise Agreement 9-2000 to explicitly include reporting of suspicious transactions related to terrorist financing (Agreement 12-2005 addresses this). - Amend Law 42-2000 to impose STR obligations on entities supervised by SSRP and BHN; these supervisors should implement regulations and supervise compliance. - Supervisory/competent authorities should establish mechanisms to provide timely feedback to reporting entities (statistics, case examples, results). FATF compliance summaries: - R.13 — Largely Compliant (FT STRs covered under Legislative Decree and SdB revised agreements; SSRP/BHN coverage lacking.) - R.14 — Compliant - R.19 — Compliant - R.25 — Partially Compliant (Supervisors and competent authorities lack adequate mechanisms to provide timely feedback.) - SR.IV — Largely Compliant (Reporting of FT-related suspicious transactions covered under Legislative Decree and SdB revised agreements; additional oversight needed for remitters.) ### Internal controls, compliance, audit and foreign branches (R.15 & 22) - Law 42-2000 Articles 1(1), 1(7), 1(8), and Agreements (8-2000, 9-2000, 10-2000, 1-2005, etc.) require financial institutions to: - Establish policies, procedures, internal controls, and communication mechanisms to prevent ML. - Appoint a Compliance Officer (CO) at senior management level with authority and independence for reporting and day-to-day AML/CFT activities (Agreement 8-2000 / Agreement 10-2000). - Maintain “know-your-customer” manuals, deliver at least annual training to staff and more frequent training to Compliance Officers. - CO responsibilities include guidance on internal policies, organizing training, reporting STRs to FIU, and communicating AML/CFT requirements throughout the institution. - Training obligations: - Banks must deliver training at least once a year to staff; compliance officers should receive training at least twice a year (Agreement 1-2005 Article 13). - The source continues with further details (text ends mid-sentence in supplied content). FATF compliance implications: - Institutions are mandated to maintain internal controls, compliance structures and training programs; supervisory enforcement mechanisms exist via SdB and CNV agreements. *Source: International Monetary Fund country assessment (cr0767 - 1988).* ### 1. The CO should be at management level; ### 1. The CO should be at management level; ### Management level - 1. The CO should be at management level; ### Operational independence - 2. The CO cannot be involved in operational functions of the bank, affiliates, or financial group; ### Authority and delegation - 3. The board of directors and senior management shall delegate full authority and independence with respect to the rest of the bank staff that allows the CO the ability to implement and manage the compliance program and effect corrective action where necessary; ### Administrative structure - 4. Each bank will establish the administrative structure to support the activities of the CO, in accordance with the activities and complexity of operations of the bank; *International Monetary Fund.* ### 5. The functions stipulated by Article 2 will extend to branches and subsidiaries of the bank, domestic and ### 5. The functions stipulated by Article 2 will extend to branches and subsidiaries of the bank, domestic and ### Internal audit, governance, and staff selection - Agreement 4-2001: - Article 7 delegates surveillance of the internal control system to the internal audit function, requiring independence from the board of directors through an internal audit committee that "should meet frequently." - Internal audit must be authorized to assess compliance with risk management policies/practices individually and on a consolidated basis. - Article 20 requires Boards of Directors to consider selection, promotion, professional improvement, and mitigation measures against professional inadequacy or dishonesty. - Practice and controls: - Interviews indicated internal screening, recruiting, and hiring procedures appear adequate and include background checks (including requesting police records, "expediente policivo") and independent investigations where needed. - Competent authorities validate adequacy of procedures and sometimes propose corrective actions; SdB reviews policy and implementation through on-site inspections. - For branches/subsidiaries of foreign banks with general or international licenses, the internal audit function may be carried out by the parent/holding company or regional office internal audit group. - Reporting requirements for internal audit: - Internal audit must present, at least twice a year, to the board/audit committee and senior management a report on the overall condition of internal controls including at a minimum: - a) results of testing performed; - b) recommendations with respect to deficiencies and an action plan for corrective action; and - c) responses from individuals responsible for audited areas and corrective actions recommended. - External audit: - External auditors shall assess, at least annually, the internal control systems of the bank. - Compliance officer appointment: - Appointment of a Compliance Officer is required but "not consistently enforced"; not all fiduciaries or some savings and loans have a compliance officer due to size and personnel constraints. ### AML/CFT requirements, licensing, and consolidated supervision for foreign branches/subsidiaries - Legal and licensing framework: - Article 1 of Law 42-2000 requires all banks (general licenses (GL) and international licenses (IL)) to comply with AML/CFT requirements. - Article 12 of Agreement 3-2001: SdB requires financial institutions to satisfy licensing requirements including policies, procedures, and internal control systems addressing money laundering and terrorist financing risks before granting a banking license. These requirements apply to foreign branches and subsidiaries. - SdB verifies, prior to granting a license, that foreign branches and subsidiaries have appropriate AML/CFT and safety-and-soundness measures consistent with Panamanian requirements. - Consolidated supervision and MOUs: - SdB uses on-site consolidated supervision of foreign offices and foreign subsidiaries/branches, ensuring consistency between home and host procedures for AML/CFT. - Consolidated inspections are conducted in accordance with procedures and arrangements established in MOUs signed with foreign counterparts and permit SdB to supervise on its own or jointly with local supervisor. - To date, SdB has signed 21 MOUs with supervisory agencies in North, Central, and South America, and the Caribbean. - SdB may require execution of an MOU to facilitate cooperation, information exchange, and on-site inspection; SdB can require application of a higher standard for branches/subsidiaries in countries with weak AML/CFT regimes. - Enforcement with impediments: - SdB requires institutions to inform if local laws/regulations impede application of appropriate AML/CFT measures; in practice, if such an impediment exists, SdB would not grant a banking license to branches or subsidiaries. - Case example: - SdB identified AML/CFT weaknesses at a Panamanian institution with foreign subsidiaries during consolidated on-site inspection, issued recommendations, required reporting on corrective action, and is monitoring strengthening efforts. - Insurance and SSRP gap: - There are no measures in place within the SSRP to ensure consistency between home/host requirements when insurance companies expand outside Panama. ### Supervision capacity, coverage gaps, and inspection frequency - Supervisory capacity and gaps: - Supervision by the SSRP and the BHN is weak: limited supervision of operations and activities, only occasional SdB oversight when an institution is a subsidiary of a bank. - SSRP and BHN lack adequate resources and supervisory tools; implementing regulations for Law 42 are lacking in those agencies. - SdB inspection frequency and practice: - Law Decree 9-1998 establishes SdB should conduct inspections of each bank every two years; in practice inspections occur every 18 months. - For AML/CFT, the SdB conducts inspections to verify compliance including: KYC manuals, CO reports, board oversight, adequacy of compliance programs, STR filing, and customer due diligence. - Largest banks (based on total assets) are inspected every 12 months; others fall within the 18 month cycle. - SdB has powers to conduct inspections and impose sanctions/penalties without a judicial order. - CNV inspections: - CNV inspection program: institutions inspected at least every 18 months, more frequently depending on risk profile and activities. - Supervisory shortcomings in insurance and savings & loans: - SSRP does not conduct comprehensive AML/CFT supervision due to lack of resources, supervision manuals, training programs, and knowledge of trends/techniques. - Banco Hipotecario de la Vivienda (BHV/BHN) supervision personnel are not conducting AML/CFT inspections; similar constraints cited. - For insurance and savings and loans, SdB provides limited consolidated oversight only where entities are bank subsidiaries. - Statistical and coordination gaps: - Supervisory authorities develop annual inspection programs and maintain inspection statistics for prudential and AML/CFT matters, but there is a lack of coordination and uniformity of statistical data within and between agencies. - Competent authorities need processes for sharing statistical information to review AML/CFT effectiveness and identify enhancements. ### Sanctions and enforcement powers (R.17, R.23, R.29, R.30) - Law 42-2000 and Executive Decree 1-2001: - Article 8 of Law 42-2000 establishes administrative sanctions for noncompliance; sanctions are imposed by supervisory authorities on their own or at the request of the UAF. - Sanctions for noncompliance include fines ranging from B5,000 to B1,000,000, based on severity and frequency of violation; sanctions applicable to officers, directors, senior management, administrative/operational personnel, and legal entities. - Executive Decree 1-2001 reiterates obligation for supervisory authorities to impose sanctions and references the sanctions under Article 8. - Powers available to SdB and CNV: - SdB sanctions range: reprimand, fines, suspension, removal, intervention, and, in extreme circumstances, revocation of banking license. Compliance is tested during on-site inspections. - CNV powers include suspension or revocation of licenses for brokerage houses, investment administrators, principals, stock brokers or analysts; ability to prohibit/reprimand principals, stock brokers or analysts, and brokerage houses. - Effectiveness concerns: - Although sanctions appear adequate for SdB and CNV, lack of supervision by SSRP and lack of supervision by BHN make effectiveness difficult to assess. - Several supervisory authorities (except SdB and possibly IPACOOP) lack human, financial, and technical resources to enforce AML/CFT laws effectively. ### Licensing, fit-and-proper tests, and market entry (R.23) - Licensing procedures: - Licensing process established under multiple laws (Banking Act, Securities Act, Insurance Act, Cooperatives Act). - Measures include "fit and proper" tests of owners/beneficial owners and senior management, interviews, review of business/strategic/operational plans, obtaining references, physical inspections, and contacting counterparts abroad. - UAF solicits feedback to ascertain criminal records ("expediente policivo"); individuals with criminal background cannot establish a financial institution in Panama. - Final approval rests with respective supervisory authority; after approval, supervisory authorities visit to confirm existence and validate activities against business plans. - Insurance sector shortcomings: - Evaluation under IAIS Principle No. 6 identified shortcomings; measures for granting licenses are being strengthened under an IDB technical assistance project. - Recommendations on licensing: - SSRP needs to strengthen and formalize licensing and fit-and-proper tests to prevent criminals or associates from holding or being beneficial owners of significant or controlling interests. - Supervisory scope, frequency and quality of supervision in insurance and savings & loans are a concern; supervision currently often focuses only on currency transaction reporting rather than risk management systems. ### AML/CFT guidelines, feedback, and training (R.25) - SdB guidance and communication: - SdB issued guidelines instructing financial institutions on AML/CFT implementation; SdB evaluates mechanisms during on-site inspections. - SdB issues Banking Circulars to communicate persons/jurisdictions/activities of primary concern and new typologies/trends (including links to FATF), and requires reporting entities to inform monthly of revisions or potential matches. - Articles 10 and 11 of Agreement 12-2005 provide guidance on transactions without apparent economic lawful purpose and require written documentation of findings for supervisory authorities. - SdB coordinates and delivers periodic AML/CFT workshops/seminars domestically and regionally; SdB provides training and feedback to CNV, IPACOOP, SSRP, MICI, compliance officers, and banking association. - Gaps outside banking: - Guidelines are not in place for insurance and savings & loans sectors; except for SdB, there is no system for providing timely, constructive feedback to reporting institutions. - Recommendation: other supervisory authorities (including FIU) should develop guidelines similar to SdB’s and establish feedback mechanisms (forums, quarterly meetings, etc.). - Compliance status: - R.25: Partially Compliant — Lack of guidelines at SSRP and BHN and lack of mechanism to provide feedback to reporting entities. ### Ongoing supervision, risk-based approach, and recommendations (R.23, R.29, R.32) - Current supervisory posture: - Banking, securities, and cooperatives supervision appears adequate; insurance and savings & loans lack AML/CFT supervision due to resource and expertise constraints. - Some supervisors have adopted risk-based supervision (mostly banks and securities supervisors); others perform compliance-based supervision focused on law/regulation compliance rather than system effectiveness. - Supervisors have powers to compel document production and access customer information without court order. - Recommendations: - Supervisory authorities for insurance and savings & loans must strengthen frequency and quality of supervision and use full supervisory powers under Law 42-2000. - Authorities should adopt a risk-based supervisory approach to prioritize resources, identify risky institutions, and define inspection scopes. - Competent authorities need to create processes for sharing statistical information to review AML/CFT effectiveness and identify necessary enhancements. - Compliance assessments: - R.23: Largely Compliant — Adequate in banking, securities, cooperatives; inadequate supervision in insurance and savings & loans; supervisors lack expertise/tools. - R.29: Largely Compliant — Same coverage concerns as R.23. - R.32: Largely Compliant — Statistical information is maintained but coordination and uniformity are lacking. ### Money or value transfer services (SR.VI) - Regulatory coverage and licensing: - Money/value transfer services conducted by banks and money remittance services are covered by Law 42-2000; banks and remitters are licensed and supervised by SdB and MICI, respectively. - Non-bank remitters regulated by Law 48-2003; license application to Directorate of Finance Companies of MICI must include identification details, business plan, and evidence of minimum capital of $50,000, among other requirements. - Licensees pay a one-time application fee and an annual "fiscalization fee" to cover MICI expenses; licensees and representatives must be domiciled in Panama. - MICI maintains a registry of licensed remitters and their sub-agent contracts. - Implementation and weaknesses: - MICI Resolution 328 (2004) details identification, STR reporting, and CTR filing requirements for non-bank remitters; implementation of suspicious transaction reporting is weak and reports are largely cash-threshold–based. - The CTR threshold of $10,000 appears high given most remittance transactions are below $300; major remitter firms voluntarily request CTR forms for amounts much lower than legal threshold. - MICI auditing capacity is constrained by resources and lack of training; Directorate of Finance Companies needs enhanced auditing capabilities. - Industry size and flows (2004 figures): - Number of licensed non-bank money remitters: six. - In 2004 these licensed remitters received approximately $104 million from abroad and sent $72 million. - Recommendations for SR.VI: - Consider adjusting CTR threshold to improve detection of structured transactions in remittance area. - Prioritize enhancing auditing capabilities of MICI Directorate of Empresas Financieras to evaluate risk management, internal controls, and recordkeeping for suspicious transactions. - Provide AML/CFT training specific to the remittance industry for responsible oversight authorities. - Compliance status: - SR.VI: Largely Compliant — Implementation and supervision need strengthening; reporting is almost exclusively cash-threshold based with little suspicion detection. ### Designated Non-Financial Businesses and Professions (DNFBPs): casinos and real estate agents (R.12) - Coverage and legal status: - Three DNFBP categories subject to AML/CFT regulations: trust service providers, casinos, and real estate agents. - DNFBPs not subject to AML/CFT laws/regulations include company service providers, dealers in precious metals and stones, accountants, lawyers, notaries, and other independent legal professionals. - Law 42-2000 (article 7) requires casinos and real estate agents to report cash and cash-equivalent transactions above $10,000 and keep records; regulatory authorities lowered thresholds for casinos. - Executive Decree No. 1 of 2001 designates competent authorities and empowers them to adopt measures for reporting institutions under their supervision. - Assessors consider additional provisions issued by MICI and Gaming Board may not meet the "secondary-legislation" test; legal enforceability of some regulations is lacking given absence of court testing and few enforcement actions. - Casinos: structure and AML/CFT implementation - Licensed gaming businesses: - 12 full casinos (totaling 185 game tables and 2206 slot machines) - 27 additional slot-machine rooms (with 2495 machines) - seven betting agencies - six bingo rooms - one internet casino (not yet in operation) - 1 horse-race - 3 telematic gaming centers - National Lottery is government-owned and subject to CTR filing and files STRs by agreement with UAF. - Betting activity: - Preliminary data: in the first three months of 2005 casinos, slot machines and bingos reported bets of approximately $666,500,000. - Regulatory measures by Gaming Board (some exceed legal regulatory faculties): - Resolution 9 of 2003 (appointment of compliance officers) - Resolutions 373 and 286 of 2003 (manual and CTR reporting templates) - Resolution 18 of 2001 (AML for bingo rooms) - Resolution 19 of 2001 (AML for hippodrome) - Resolution 29 of 2003 (AML for telematic games) - Resolution 92 of 1997 (article 46) prohibits owners/managers/senior employees from playing at their own facilities. - Customer payments and monitoring: - No legal restrictions on forms of chip/token purchases or prize payments (except telematic centers); checks are considered "quasi-cash" and fall within CTR obligations. - Fit-and-proper checks: - Decree-Law No. 2 of 1998 (article 42) and Gaming Board Resolution 92 of 1997 (article 5) require background checks of applicants and owners >10 percent, but Gaming Board relies heavily on UAF, which cannot always provide necessary information; Gaming Board and UAF are not "competent authorities" under the law to obtain criminal records. - Suspicious transaction reporting: - Very low level of STRs by casinos: only four STRs filed in 2004, low relative to industry size. - Real estate businesses: - Real estate market significant; Law 42-2000 CTR $10,000 requirement applies. - Further detail on mortgages and market not included in supplied excerpt. - Legal enforceability concern: - Some Gaming Board regulations have legal enforceability questions; no enforcement actions against real estate agents and no casino sanctions other than failing to file a CTR have been tested in courts. - Recommendations: - Address legal/regulatory gaps to ensure basic FATF obligations (customer ID, recordkeeping, STR reporting) are firmly anchored in law or valid secondary legislation. - Improve fit-and-proper capacity and access to criminal record information for licensing authorities. - Strengthen STR detection and reporting in casinos, given large betting volumes and low STR filing. *Source: cr0767 — IMF assessment excerpt.* ### 18.32 percent and the dollar amount rose 23 percent just from January to April of 2005, greatly fueled by ### cr0767 - 18.32 percent and the dollar amount rose 23 percent just from January to April of 2005, greatly fueled by ### Real estate sector and DNFBPs: coverage and practices - Real estate transactions rose 18.32 percent and the dollar amount rose 23 percent just from January to April of 2005, greatly fueled by expectations of a possible elimination of certain tax incentives on real estate investments. - Licensing and AML/CFT framework - Real estate agents and promoters are subject to licensing under Law-Decree No. 6 of 1999 and to AML/CFT preventive obligations enacted by the Ministry of Commerce and Industry (MICI) via Resolution 327 of 2004. - As part of licensing, MICI has access to police records of applicants. - Only real estate agents that have legal personality are subject to AML/CFT requirements. - Market structure and reporting - Authorities estimate that only 20 percent of all real estate sales are intermediated by licensed legal persons, while 30 percent of properties involve a natural person with a realtor license, and 50 percent are sold by the owners themselves. - No STRs have been sent to the UAF by this sector and very few cash transactions of $10,000 or more are reported. - Of approximately 100 reports per month, 98 percent are simply sent to comply with the obligation to notify that “there are no CTRs to be reported.” ### Trust service providers - Legal and supervisory status - Trust service providers (“empresas fiduciarias”) are designated reporting institutions under article 1 of Law 42 - 2000 and thus subject to the core AML/CFT measures in that law. - Trust companies are under supervision of the SdB (Law 1 of 1984 and Executive Decree 16 of 1984) and subject to its regulation and inspection, even if not part of a financial group. - Sector composition and oversight - There are currently 53 trust companies licensed by the SdB, of which seven are legal persons owned and operated by law firms. - Trust service providers are subject to UAF access without limitation. ### Dealers in precious metals and stones - Regulatory gaps - Jewelers and related businesses are not obliged to identify customers, keep records, or report suspicious transactions outside the ZLC context. - High-value transactions in precious metals and stones are concentrated in the Free Zone of Colón (ZLC), making those merchants subject to CTR requirements of Article 7 of Law 42 - 2000 and ZLC Resolutions 3/97, 2/01 and 3/01. - Implementation - Most ZLC merchants report monthly that there are no cash transactions to report; oversight and sanctions for underreporting are limited. ### Notaries, company service providers, lawyers, and accountants - Notaries - FATF Recommendation 12 is not applicable to notaries in Panama because they cannot legally engage on behalf of a customer in the activities described in R.12. - There are 23 notaries, of which 12 are located in Panama City; notaries are appointed by the President for periods of 4 years. - Company Service Providers - Company incorporation services can only be provided by lawyers; company service providers form a subgroup within the category of “lawyers.” - Lawyers - Lawyers are not subject to Law 42 - 2000 and have no AML/CFT obligations under that law. - Executive Decree 468 of 1994 obliges certain resident-agent lawyers to “know the client” (basic identification: name and address) when acting as resident agents of bearer-share corporations, but this does not constitute a full AML/CFT preventive system. - There is no supervisory or self-regulatory body enforcing Executive Decree 468; scope is limited (e.g., access limited to drug-traffic related investigations). - Industry practice: many lawyers rely on banks to obtain further client information and generally accept client identification at face value. - Panamanian law requires lawyers to be Panamanian nationals and to obtain a “certificate of adequacy” from the Supreme Court; practising without it is a crime. - Professional associations: less than 10 percent of approximately 9,000 practicing lawyers belong to any association. - Accountants - Company incorporation services cannot be provided by accountants alone; some accounting firms act through attorneys in their staff. - Central Accounting Board (Junta Central de Contadores) handles ethics complaints (approximately one to fifteen complaints per year); only 6 sanctions in recent years. - Only 10 percent of approximately 12,000 licensed accountants belong to a professional association. ### Compliance gaps, reporting thresholds, and STRs - Coverage and legal basis - Law 42 - 2000 does not include lawyers, accountants, and most DNFBPs among institutions subject to the full range of AML/CFT obligations (e.g., customer due diligence and STRs as required by FATF R.12 and R.16). - Article 7 of Law 42 - 2000 establishes CTR obligations for gaming businesses and real estate agents and promoters, but not a general obligation to detect and report suspicious transactions. - Thresholds and implementation issues - Casinos and gaming businesses are subject to a $10,000 reporting threshold for CTRs; this does not comply with the $3,000 threshold recommended by FATF. - Resolution 31 of 2003 requires casinos to consolidate and report multiple operations of $2,000 or higher made by a single customer during a one-week period, but actual practice emphasizes identification only above $10,000. - STR statistics and practices - Casinos filed only four suspicious transaction reports in 2004; no sanctions have been imposed on casinos for failing to report suspicious transactions. - Real estate businesses and many DNFBPs have not reported any STRs to the UAF. - Law 42-2000 does not explicitly mandate filing STRs when transactions are suspected to involve tax matters or to be linked to terrorism or terrorist organizations. ### Internal controls, compliance programs, and supervision - Internal controls - Regulations for DNFBPs provide for reporting of suspicious transactions regardless of amount, but implementation focuses heavily on CTRs. - MICI regulations for real estate agents do not specifically address internal control policies and the role of external auditors in ML prevention. - Supervision and sanctions - Article 8 of Law 42 - 2000 sanctions non-compliance with CTR obligations (cash transactions in excess of $10,000) for casinos and real estate businesses; lack of enforceable sanctions for other preventive obligations (e.g., STRs). - No sanction has ever been imposed on any DNFBP for not reporting a suspicious transaction. - Competent authorities: - Gaming Control Board of the Ministry of Finance oversees casinos (per Executive Decree No. 1 of 2001, Article 2). - National Directorate of Commerce of the MICI oversees the real estate sector. - Gaming Board resources and practices: - Gaming Board has twenty three (23) inspectors and auditors responsible for supervision. - A training budget of $50,000 in 2005 was set aside; some training on AML/CFT provided. - High turnover of auditors and inspectors with government changes affects expertise and objectivity. - Fit and proper checks: Gaming Board performs background checks (Decree-Law No. 2 of 1998 Article 42 and Resolution 92 of 1997 Article 5) but relies excessively on consultations with the UAF and lacks legal authority to obtain criminal records. - MICI resources and practices: - General Directorate of Internal Commerce oversees 184 Real Estate Brokers (“empresas corredoras de bienes raíces”) and 108 Real Estate Promoters. - That Directorate’s only AML/CFT function is to receive CTRs and forward them to the UAF; it has no inspectors assigned and performs no supervision of regulatory compliance. - Directorate of Empresas Financieras oversees 137 financing companies, 105 leasing companies and 7 money remitters, for a total of 383 reporting institutions, but counts with only 5 inspectors (possibly adding 2 shortly); authorities hope to reach 12 staff in the longer term financed by the IADB. - Registered pawn brokers total 134 and were recently subjected to AML/CFT measures (Law 16 of May 23, 2005); no implementing regulation issued at time of visit. - Export-processing zones: 48 companies licensed and under MICI oversight; respective office has no inspectors. ### Colon Free Zone (ZLC) and other nonfinancial businesses - Risk profile and scale - ZLC has more than 1,800 merchants; generates approximately $11 billion in goods introduced and re-exported annually; receives more than 250,000 visitors per year. - Cash payments and trade-based ML typologies (including black market peso exchange) pose heightened risks in the ZLC. - Regulatory framework and implementation - All ZLC companies required to identify customers and report any cash transaction above $10,000 (Article 7 of Law 42-2000). - ZLC Administration Resolutions 3-1997, 2-2001 and 3-2001 impose additional AML/CFT requirements (knowing the customer and reporting STRs), but these exceed Law 42-2000 without clear legal basis; additional requirements are not being implemented. - ZLC Administration staffing and operations: - ZLC Administration lacks sufficient human and technological resources; issuance of import/export documents is manual. - ZLC appointed a specialized AML person, is training and reassigning its 6 auditing officers, and plans to increase audit depth. - Number of AML-focused audits low: 53 visits in 2004. - No reports of suspicious transactions filed by ZLC merchants or companies in export-processing zones. - Pawn shops and new measures - Pawn shops regulated by Law 16 - 2005 and obliged to “comply with the requirements of Law 42-2000” (article 57 of Law 16-2005); no implementing regulation at time of visit. ### Legal persons, bearer shares, and beneficial ownership (R.33 & R.34) - Corporate framework and risks - Multiple company types exist, including bearer-share companies (predominant). - Public Registry discloses identity of directors and resident agents at time of registry; disclosure of shareholders is not required. - Law 32 of 1927: only lawyers can draft and notarize incorporation contracts and minutes; company service providers are typically lawyers. - Resident agents must exist for all companies; Decree 468–1994 obliges resident agents to “know the client,” but implementation, supervision, and scope are limited. - Specific limitations increasing ML risk - Resident agents are not required to keep corporate records (only identity of immediate client). - Share certificates, stock registers, accounting records and minutes may be maintained anywhere in the world. - Annual meetings of shareholders or directors are not required. - Legal persons can act as officers and directors; nominee-directorship services are widely offered. - Identity of shareholders is not disclosed in the public registry. - Practical access to beneficial ownership - Lawyers can often obtain beneficial owner information when shareholders are Panamanian residents but have limited access when shareholders are foreign residents or foreign companies, because foreign correspondents rarely disclose ultimate clients. - Public Registry and resident-agent files are frequently insufficient to determine real ownership and control structures, especially for bearer-share companies. - Trusts - Trust service providers are included in Article 1 of Law 42 - 2000 and are subject to core AML/CFT measures and SdB supervision. ### Key recommendations (as stated) - Establish the legal obligation of lawyers and accountants to comply with appropriate AML/CFT measures when they engage, on behalf of their customers, in any activities described in FATF R.12. - Impose identification, reporting, and record-keeping requirements for all dealers in precious metals and stones. - Provide guidance to DNFBPs for the graduation of customer due diligence procedures according to the specific risks and nature of each activity. - Review DNFBP legal frameworks to ensure regulations issued by each competent authority are supported by clear legal powers and are enforceable. - Give legal status to the obligation of real estate agents and promoters to properly identify customers who meet FATF thresholds; require both casinos and real estate agents to monitor customer activity and report suspicious transactions to the UAF. - Authorities should identify DNFBP risks by industry and provide guidance and differentiated controls (e.g., different degrees for casinos vs. real estate). - DNFBPs should be clearly required to report transactions suspected to be linked to terrorism or tax matters and be legally protected from civil or criminal liability derived from good-faith reports. - Train and provide guidance to DNFBPs on sector-specific typologies; review MICI AML/CFT regulations for real estate to make them sector specific. - Clarify difference between CTRs and STRs to regulated institutions; require DNFBPs to develop ML/TF programs when circumstances of FATF R.16 apply. - MICI should implement risk-based monitoring and inspection methodology, train auditors on AML/CFT, and prioritize resources across industries. - Ensure stability and independence of Gaming Board personnel, update inspection procedures, and focus on preventing misuse of casinos by owners/operators. - Strengthen enforcement and resources of ZLC Administration; train ZLC merchants on ML typologies; improve cooperation among ZLC Administration, UAF and Customs. - Oversight of pawn shops should be risk-targeted; Directorate of Empresas Financieras needs additional inspectors and sector-specific training. - Authorities should ensure legal persons and bearer-share companies are not misused for ML by providing adequate, accurate and timely beneficial ownership and control information to law enforcement and the UAF. ### Compliance ratings and summaries - R.12: Partially compliant — Lawyers, accountants, and dealers in precious metals and stones are not covered; lack of legal basis for preventive measures other than CTRs; UAF cannot obtain information from lawyers. - Monitoring (R.12 & 16): Partially compliant — Lack of legal basis to monitor client activity; compliance programs not required for lawyers, auditors, dealers in precious metals and stones. - R.16 (STRs): Partially compliant — Reporting of suspicious transactions by casinos is very low and nonexistent for real estate agents; STR obligations in regulations not clearly supported by law. - Internal controls (R.16): Partially compliant — Internal controls by DNFBPs focused almost exclusively on CTRs; lack of comprehensive risk-based perspective. - R.17: Compliant (only with respect to sanctions for non-compliance with the preventive obligations that exist for DNFBPs in Panama). - R.24: Partially compliant — Fiscalization of real estate agents and pawn brokers not implemented; licensing of casinos requires improved due diligence. - R.25: Partially compliant — Authorities have limited capacity to provide AML/CFT feedback and guidance to DNFBPs. - R.20: Largely compliant — Regulations need to address sector-specific risks; CTR and other requirements for ZLC insufficiently implemented; new AML/CFT law for pawn shops not yet implemented. - R.33: Non-compliant — Bearer-share misuse not specifically addressed; registration system lacks ownership structure information and is not kept current; no evidence authorities can identify beneficial owners in investigations. *Source: IMF (cr0767).* ### 1984. They require a previous license and are subject to comprehensive regulation and inspection by that ### cr0767 - 1984. They require a previous license and are subject to comprehensive regulation and inspection by that ### Trusts and fiduciary companies: legal framework, practices, and concerns - Law 1-1984 requirements for trusts (Article 4, Article 35-2, Article 9): - All trusts must be in writing (Article 4). - Trust companies must maintain a registry of the trusts that they administer (Article 35-2). - The trust instrument shall contain the following information (Article 9): 1. The complete and clear designation of the founder of trust, trustee and beneficiary; 2. When it is future beneficiaries or classes of beneficiaries, sufficient circumstances shall be expressed for their identification; 3. The sufficient designation of the trustees or substitute, if any; 4. The description of the assets or the patrimony or share thereof on which it is constituted; 5. The express declaration of the willingness to constitute a trust; 6. The powers and obligations of the trustee; 7. The prohibitions and limitations that are imposed to the trustee in the exercise of the trust; 8. The rules of accumulation, distribution, or disposition of the assets, revenues and products of the assets of the trust; 9. Place and date of the constitution of the trust; 10. The designation of a resident agent in Panama; 11. Domicile of the trust in the Republic of Panama; 12. Express declaration that the trust is constituted in accordance with the laws of the Republic of Panama. - Secrecy and access by competent authorities: - Article 20 of Law 1-1984: information obtained by the SdB and other Government entities authorized by Law to perform inspections or collect documents related to trust operations and their respective officers may be disclosed to competent administrative and judicial authorities. - Law 42 - 2000: allows the UAF to obtain additional information from all reporting institutions regardless of confidentiality or professional secrecy provisions. - Executive Decree No. 213 of 2000: modified Articles 20 and 21 of Executive Decree 16 of 1984 to allow for reporting to the UAF of information covered by trust secrecy (which previously required a judicial order). - Market structure and conflicts of interest: - Of the 53 trust companies currently licensed and supervised by the SdB, there are seven licensees which are owned by law firms. - These fiduciaries are independent legal persons normally with the form of a subsidiary of the law firm, as a means to facilitating comprehensive services to their clients. - When a law firm provides company incorporation services to a client of its own fiduciary, the service package can often involve the formation of a trust in combination with the incorporation of various company structures and advice thereof as defined by FATF R. 12. - Practical weaknesses and reporting behavior: - The mission considers it unlikely that, in these cases, a fiduciary company will report any suspicious transaction involving the grantor of a trust to whom its affiliated law firm owes a duty of confidentiality. - In practice, no STRs have been reported by any fiduciary company to the UAF. - The SdB has authority to regulate and supervise the fiduciary company for AML/CFT purposes; however: - The SdB is not entitled to inspect any company formation aspects of the same client with the law firm, even though that information may be closely related to the purpose of the trust agreement. - The UAF cannot request that type of information. - Assessment and compliance: - In brief, the fact that there are some fiduciary companies owned by law firms which are not subject to any reporting obligations, neither to supervision, poses practical and legal obstacles for full compliance with AML/CFT requirements of trust service providers. - Recommendation comment: Same as Recommendation 33 (make lawyers subject to AML/CFT requirements). - Compliance with FATF Recommendation R.34: Largely Compliant. - Observations under R.34: - AML/CFT requirements on trust service providers may be turned inapplicable when the client of a law firm is also the client of a trust service providers (fiduciaria) which is owned and controlled by that law firm. Effective supervision is also hampered in these circumstances. - Although there is a reporting obligation for trust service providers (fiduciaries), implementation remains weak. ### Nonprofit organizations (NPOs): registration, oversight, and risks - Legal and administrative characteristics: - Nonprofit organizations and commercial companies are subject to very similar requirements, mainly the intervention of lawyers and the obligation to be registered; registration is administered by the Ministry of Justice instead of the Public Registry of Companies. - They must file a petition with the Ministry of Justice to obtain their legal personality and the procedure amounts to the granting of a license which can be revoked, albeit under very limited circumstances (Executive Decree 160 of 2000). - AML/CFT requirements and reporting: - NPOs are not subject to any AML/CFT requirements, except that Article 3 of Law 50, 2003 requires them to document and maintain a book of the identity and source of all donations received. - Law 50, 2003 (article 3) has not been implemented. - Data and oversight capacity: - The Ministry of Justice is currently unable to determine how many NPOs have been licensed in Panama, what their activities are and the level of money laundering and the financing of terrorism risks associated to the numerous NPOs (and NGOs) in Panama. - The Ministry is concerned that the sector is being misused for tax evasion and fraud and has made significant advances in gathering information to enhance oversight and define a strategy, including strengthening regulation and oversight. - Recent regulatory change (prior to report conclusion): - Authorities issued Decree 524 of 2005, which entered into force on November 2, 2005; reportedly grants powers to the Ministry of Justice to revoke the legal personality of associations and foundations and creates the obligation to be registered. Assessors did not have the opportunity to evaluate the formal adequacy of this decree. - Recommendations and compliance: - Priority actions: - Create a database and registry (inventory) of these organizations at the Ministry of Government and Justice. - Assess NPO risks and, depending on assessment results, update the regulatory framework to include CFT regulations and oversight of these entities. - Compliance with FATF Special Recommendation SR.VIII: Partially Compliant. - Note: The Ministry of Justice has just began to create a database of the licensed NPOs in order to be able to assess the risk in this sector and enhance its oversight. ### National cooperation and coordination (R.31): structures, gaps, and recommendations - Institutional arrangements and meetings: - Executive Decree 29 of February 16, 2005 establishes the High Level Presidential Commission against ML and the FT. - The AML/CFT Commission is comprised of heads of relevant government bodies (such as the Attorney General’s Office, the UAF, and the Superintendency of Banks, etc.) as well as representatives of the private sector organizations who are reporting entities under the AML laws and regulations. - The UAF is a member and the Executive Secretary of the Commission. However, this commission is not yet operational. - Other coordinating bodies: - CONAPRED: a policy oversight body for narcotics and related issues, including narcotics-based ML. The National Drug Strategy has been developed through CONAPRED for the years 2002−2005, with participation by the UAF, the SdB, the MICI, the IPACOOP, the CNV, the ZLC Administration, the National Lottery, the Gaming Control Board, the Office of the Attorney General, and the High Level Presidential Commission for the Prevention of ML. - CONAPRED administers the fund of monies received from drug forfeiture cases; concerns exist that there are no mandates for the timely expenditure of funds and that a greater amount of expenditures are for prevention and health issues versus enforcement. - Existing cooperation and information-sharing arrangements: - The UAF works closely with the SdB and the Attorney General’s Office, cooperating on training and assistance in analysis and financial intelligence useful for criminal or administrative investigations linked to ML and FT. - The UAF maintains an inter-institutional cooperation agreement with the Attorney General’s Office and the SdB, and signed a cooperation agreement with the Public Registry of Panama on May 12, 2005 to have direct access to their database. - The Republic of Panama has a “Program to Enhance the Transparency and Integrity of the Panamanian Financial System” aimed at establishing better communication and coordination among oversight and control agencies with respect to the UAF. Participating institutions are listed among the program stakeholders. - Other initiatives under Ministry of Foreign Affairs: - Department of Analysis and Study Against Terrorist Activities created through Executive Decree No. 59 of June 15, 2004 to protect national and world security and develop formal links across ministries’ specialized directorates. - Proposed inter-institutional cooperation projects include agreements between the Panama Maritime Authority and the National Maritime Service, and a Proposed Safety Plan for Harbors, Cruise Ships, and Passenger Vessels. - Operational law enforcement coordination: - The Office of the Government General Counsel reports a Drug Interdiction Group made up of officials from the Directorate of Customs, the Office of Specialized examination of Drug-related Crimes, and police agents; this group coordinates with multiple law enforcement and maritime/air services. - Recommendations and comments: - Ensure the High Level Presidential Commission against ML and FT becomes operational by assigning individual working groups or task forces on specific AML/CFT issues. - Determine whether the coordinating committee may administer a non-drug related forfeiture fund, perhaps developed from asset sharing by other countries in financial crimes cases, to strengthen enforcement of AML/CFT efforts. - It is recommended that Panamanian authorities enter into asset-sharing agreements with other countries and deposit proceeds into said forfeiture fund. - Determine whether there is overlap between the authorities of the AML/CFT Commission and CONAPRED as to drug and non-drug related ML. - Develop a working group within the coordinating committee for the review of supervision or need for supervision of DNFBPs. - Review CONAPRED’s use of the drug asset forfeiture fund to determine whether current monies could be more promptly and effectively spent to combat drug and drug ML cases. - Determine whether CONAPRED could benefit from lower level task forces for specific projects to improve coordination of law enforcement efforts in drug-related ML cases. - Assessment under FATF R.31: - R.31: Partially Compliant. - Observations: While a structure exists for national cooperation on AML/CFT matters, it is not yet functioning and does not have working groups or funds to administer strengthening enforcement efforts on this subject. The existing drug-related high-level policy group also does not have formal task forces and has numerous requests for law enforcement support from its forfeiture fund which have not been addressed. ### The Conventions and UN Special Resolutions (R.35 & SR.I): ratifications and international agreements - Panama’s ratifications and laws: - Panama passed Law 20 of December 7, 1993 approving the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (Vienna Convention). Published in Official Gazette No. 22,429 of December 9, 1993. - Panama ratified the United Nations Convention Against Transnational Organized Crime (Palermo Convention) by Law 23 of July 7, 2004. - Panama ratified the International Convention for the Suppression of the Financing of Terrorism by Law 22 of May 9, 2002. - To give effect to its international commitment to combat terrorism and FT, Panama passed Law 50 (adds Chapter VI entitled Terrorism to Title VII, Book II of the Penal Code). - Multilateral and bilateral cooperation: - Panama has signed Mutual Legal Assistance and Cooperation Treaties since 1991 with several countries focusing on prevention and suppression of drug trafficking and related illicit activities. - In 2002, Panama, Colombia, Venezuela, and the United States of America signed a cooperation agreement to combat the black market economy and to prevent ML. - The United Nations Convention against Transnational Organized Crime and the Protocol to Prevent, Suppress and Punish Trafficking in Persons, Especially Women and Children was approved by Law 23 of July 7, 2004 and went into effect in Panama on July 16, 2004. - Additional conventions and instruments Panama has ratified (as listed): 1. Inter-American Convention Against Terrorism: Approved by Law No. 3 of December 2002. Published in Official Gazette No. 24,943 of December 9, 2003. Went into effect in Panama on February 19, 2004. 2. International Convention for the Suppression of the Financing of Terrorism: Approved by Law No. 22 on May 9, 2002. Published in Official Gazette No. 24,551 of May 14, 2002. Went into effect on August 2, 2002. 3. Protocol for the Suppression of Unlawful Acts Against the Safety of Fixed Platforms Located on the Continental Shelf: Approved by Law No. 21 of May 9, 2002. Published in Official Gazette No. 24,220 of May 14, 2002. Went into effect on October 1, 2002. 4. International Convention for the Suppression of Terrorist Bombings: Approved by Law No. 89 of December 15, 1998. Published in Official Gazette No. 23,703 of December 31, 1998. Went into effect on May 23, 2001. 5. Law 14 of March 13, 2002: Published in Official Gazette No. 24,512 of March 15, 2002. Approves Statute of Rome of the International Criminal Court. 6. Law 61 of December 5, 2001: Published in Official Gazette No. 24,447 of December 7, 2001. Approves Agreement between the Republic of Panama and the Government of the State of Israel on Cooperation in Combating Illicit Trafficking and Abuse of Narcotic Drugs and Psychotropic Substances and Other Serious Crimes. 7. Convention on the Safety of United Nations and Associated Personnel: Approved by Law No. 14 of January 3, 1996. Went into effect on January 15, 1999. 8. Convention on the Physical Protection of Nuclear Material: Approved by Law No. 103 of December 30, 1998. Published in Official Gazette No. 23,715 of January 19, 1999. Went into effect on May 1, 1999. *Source: IMF country report cr0767.* ### 9. Law 20 of December 7, 1993, approving United Nations Convention against Illicit Traffic in Narcotic ### 9. Law 20 of December 7, 1993, approving United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances ### Law status and implementing instruments - Law 20 of December 7, 1993 (Official Gazette No. 22,429 of December 9, 1993) approving the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances went into effect on May 1, 1999. - Panama passed Law 50 to give effect to international treaties on terrorism, adding Chapter VI entitled "Terrorism" to Title VII, Book II of the Penal Code. - Law 41 (Oct. 2, 2000) was added to the Penal Code under Title XIII; Article 7 provides that proceeds from confiscated property, except those from laundering of profits of drug-related crimes, will be placed into the Special Fund for Retired and Pensioned (Special Fund created by Law 6 of June 16, 1987, amended by laws 18 of August 7, 1989, July 15, 1992 and Law 100 of December 24, 1998). ### Criminal penalties introduced (Penal Code provisions) - Terrorism: imprisonment from 15 to 20 years (Articles 264–A and B). - Promoting or aiding terrorism: 8 to 10 years (Article 264-C). - Endangering existence or physical integrity of personnel of governments, embassies and international institutions or their physical structures: 10 to 15 years (Article 264-D). - Failing to report knowledge of actions of terrorism: 5 to 10 years (Article 264-A) as per Article 264-E. ### Compliance with UN counter-terrorism obligations - As a UN member, Panama complies with UN Security Council Resolutions 1267 and 1373. - Panama has regularly received and distributed UN and OFAC lists of potential terrorists and terrorist organizations to its financial institutions. - The SdB has distributed bank circulars periodically to all regulated institutions. - Panama has submitted reports to the UN on implementation of the resolutions and has responded to UN counter-terrorism committee requests. ### Recommendations and legislative gaps (concise) - Review newly-ratified FT Convention to determine which provisions need national enabling legislation for effective implementation. - Ensure adoption and implementation of all UN treaties and resolutions relating to terrorism. - Amend the Penal Code to add additional predicate act offenses, including FT. ### Mutual Legal Assistance (MLA): description and practice - The Mutual Legal Assistance Treaty Directorate processes requests for identification, freezing, seizure or confiscation of: - (a) the laundered property, the fruits thereof; - (b) the proceeds that are the fruits thereof; - (c) means used in; or - (d) means alleged to have been used in perpetrating a crime of ML, FT, or other predicate offenses. - Mechanisms for coordinating seizure and confiscation actions with other countries are encompassed within MLATs. - FATF Recommendation 38.1 criteria are complied with when the request references a criminal act of corresponding type, regardless of its designation. - Once MLA requests are admitted and the Prosecutor obtains the order for seizure and confiscation, the Mutual Legal Assistance Directorate determines the manner in which assets will be released to the requesting country. - Foreign non-criminal forfeiture orders (criterion 3.7) are not recognized or enforced; orders for seizure and forfeiture must be criminal orders. - Principle of dual criminality applies to mutual legal assistance, based on Article 2500 of the Judicial Code and numerous treaties. - Panama generally may provide MLA in cases where requesting countries have similar laws for terrorism and terrorism financing. ### MLA recommendations and observed operational strengths - Review adherence to the dual criminality principle to determine whether Panama might render MLA in cases normally rejected due to lack of dual criminality. - Consider potential for asset-sharing agreements with countries that have obtained forfeited assets via coordinated law enforcement. - Review the policy that non-criminal forfeiture orders will not be recognized or enforced. - The Ministry of Government and Justice National Directorate of MLATs has demonstrated impressive statistics for prompt compliance with MLATs and excellent internal coordination. ### MLA: FATF Recommendation compliance ratings and observations - R.32: Largely Compliant — Although government agencies keep statistics, these are not uniformly kept and not coordinated, so the information cannot serve well to measure effectiveness. - R.36: Compliant - R.37: Largely Compliant — Panama adheres to the principle of dual criminality and reviews each MLAT request carefully; dual criminality should not be an impediment simply because of technical differences between legal provisions, but MLA cannot be rendered in every case. - R.38: Largely Compliant — No evidence of use or effectiveness of asset-sharing provisions in MLATs with countries where coordinated law enforcement actions are common. - SR.V: Largely Compliant — Same as R37 and R38. ### Extradition: procedures and limitations - Extradition requests are processed by the Ministry of Foreign Affairs; for drug-related crimes the Ministry forwards formal requests within no more than five days to the Office of the Attorney General for legal evaluation. - If compliant with Panamanian law, the Attorney General returns the petition to the Ministry of Foreign Affairs for a substance decision within a period not longer than 15 days. - Interlocutory Bill of Objections may be submitted to the Supreme Court; final decision is sent to the President who grants or denies extradition. When granted, the person is immediately placed at the disposal of requesting authorities. - National law (Article 2505 of the Judicial Code) permits surrender of a person despite ongoing Panamanian proceedings or active Panamanian sentences for reasons of public policy and societal interests. - Extraditions follow treaties or, failing these, provisions of Article 2496 of the Judicial Code. - Panama is a party or signatory to multiple bilateral and multilateral extradition instruments, including the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (Article 6, Extradition); note: 168 States are parties. - Panama does not extradite its own nationals under Article 4 of the Political Constitution; when extradition is refused on nationality grounds, Panama may prosecute the national domestically as if the crime had been committed within Panama (Article 2506 of the Judicial Code). - Dual criminality requirement applies (Article 2500 of the Judicial Code); conduct must be classifiable domestically as crime and subject to criminal sanction. - Extradition is not used for crimes with a minimal penalty of less than two years possible prison penalty. - Simplified extradition procedure exists for consenting persons who waive formal proceedings; upon notification the defendant may accede and be provided to the requesting State within a period of 30 days. - Since ML, terrorism, and terrorist financing are crimes in Panama, the simplified extradition process is available for these offenses. ### Extradition recommendations and FATF ratings - Recommendation: Review statutory authority regarding dual criminality requirement to determine whether Panama might render mutual legal assistance. - R.32: Largely Compliant — Centralized statistics needed. - R.37: Compliant - R.39: Compliant - SR.V: Compliant ### Other forms of international cooperation (UAF, SdB, law enforcement) - AML laws (41 and 42) and law 50 do not refer specifically to international cooperation; however, treaties, executive decrees and other documents authorize international cooperation. - Panama has ratified numerous UN conventions relating to international crime and has signed numerous bilateral and multinational treaties relating to international crimes, including terrorism. - In 2002 Panama signed the Inter-American Convention on Mutual Assistance in Criminal Matters with 13 other countries. - Decree 78 of June 5, 2003, Article 2 section (f) permits the UAF to exchange information with counterpart authorities from other countries for ML and FT analysis, subject to memoranda of understanding or cooperation agreements. - Collection of information on terrorist financing was added to UAF responsibilities in the most recent version of the law authorizing the UAF; UAF thus has direct responsibility to cooperate internationally on terrorist finance information. - The UAF has signed 27 different MOUs for the exchange of information related to ML cases. - The UAF shares information with Egmont member countries through the Egmont Secure Web. - The SdB has signed 21 MOUs with foreign counterparts including the United States of America, Ecuador, El Salvador, Guatemala, Brazil, Colombia, Dominican Republic, Turk and Caicos, Anguila, Bolivia, Nicaragua, Venezuela, Antigua and Barbuda, Honduras, Costa Rica, Peru, Cayman Islands, Mexico, British Virgin Islands, Bahamas, and Canada. - Panama has an Interpol Bureau with access to Interpol General Secretariat’s Computer Database on Terrorism. - In 2002 Panama, Colombia, Venezuela and the United States of America entered into cooperation to combat the Black Market Peso Exchange and to combat ML. - Requests for cooperation are not refused on the ground that the request is considered to involve fiscal matters as long as the request involves other crimes. - Feedback from neighboring countries and other close counterparts was positive regarding cooperation by Panama. ### International cooperation recommendations and FATF ratings - Recommendation: The mission is not aware of any centralized statistics on international cooperation; centralized statistics needed. - R.32: Largely Compliant — Centralized statistics needed. - R.40: Compliant - SR.V: Largely Compliant — Centralized statistics on international cooperation needed. *International Monetary Fund — cr0767* ### 1. ML offense ### 1. ML offense ### Summary of compliance findings - Incrimination of ML: "Incrimination of ML not fully consistent with Palermo convention regarding predicate acts." (LC) - Mental element and corporate liability: "Corporate liability is against fundamental principles of Panamanian law, and appropriate civil/admin. penalties do apply." (C) - Confiscation and provisional measures: "Confiscation and provisional measures not available for crimes not included as predicate offenses; safeguarding of assets not adequate." (LC) - Palermo Convention implementation: "Palermo Convention not fully implemented regarding list of predicate offenses." (R.35) (LC) - Terrorist financing and related ML predicate list: "FT needs to be inserted in the list of predicate crimes in Panamanian AML law." (SR.II) (LC) ### Key deficiencies affecting ML offense framework - Predicate offenses - Differing treatment for the conspiracy offense depending on whether the offense is drug-related. - Financing of terrorism is not on the ML predicate list; this limits freeze/seize authority and international cooperation in some cases. - Corporate liability - Corporate liability conflicts with fundamental principles of Panamanian law, limiting criminal liability for legal persons. - Confiscation/forfeiture - Legislated powers do not permit freezing and seizure in all criminal cases; forfeiture without proving nexus to a particular crime is not permitted. - Systems to hold and maintain seized assets pending forfeiture orders are inadequate, increasing potential for improper use. - Dual criminality and MLA - Panama adheres to dual criminality but reviews MLAT requests case-by-case; "the country cannot render MLA in every case." (LC) - Institutional and procedural weaknesses - Lack of clarity on FIU (UAF) budget/independence; need for improved coordination and outreach. - Law enforcement and prosecutorial capacity needs strengthening for financial investigations and prosecutions. ### Specific recommended legal reforms (selected) - Criminalization of Money Laundering (R.1 & R.2) - "Amend Article 389 to criminalize all money laundering predicate offenses as required by the Vienna and Palermo Conventions." - "Address the differing treatment for the conspiracy offense that depends on whether or not the offense is drug-related (treatment should be consistent)." - "Implement the UN Convention against Corruption following the National Assembly’s approval May 10, 2005." - Criminalization of Terrorist Financing (SR.II) - "Expand predicate list to include financing of terrorism for the AML Law." - Confiscation, freezing and seizing of proceeds of crime (R.3) - "Amend legislation to permit the investigating authority to freeze and seize in all criminal cases to conform to Palermo Convention." - "Amend legislation to permit forfeiture of assets of criminals without necessarily showing nexus to a particular crime." - "Establish/improve systems to hold and maintain seized assets pending forfeiture orders to reduce the potential for improper use or the appearance regarding maintenance of assets which have not been determined to belong to the government." - Freezing of funds used for terrorist financing (SR.III) - "Expand predicate list to include financing of terrorism for the AML Law in order that prosecutors gain freeze and seize authority under the Unified Text on Drug Laws to this offense." ### Institutional strengthening recommendations (selected) - The Financial Intelligence Unit and its functions (R.26, 30 & 32) - "Review funding arrangements for UAF." - "Strengthen protection of the information reported to UAF to maximize the secured electronic receipt and dissemination." - "UAF undertake more outreach and awareness-raising to government agencies, UAF reporting entities, and the public." - Law enforcement, prosecution and other competent authorities (R.27, 28, 30 & 32) - "Review staffing levels and training requirements with a view to increasing capacity for investigations and prosecutions. Consider whether special courts should be created for financial crimes. Review the dependence on a general budget allotment to ensure proper distribution of funds for enforcement purposes." - "Develop training for judicial authorities, prosecutors, financial police, and UAF staff to undertake the investigation of financial crime (e.g., fraud, corruption), protection of informants, investigative skills, and use of typologies." - "Develop a process for the courts to independently obtain expert forensic and accounting assistance on complicated financial matters related to financial crimes and money laundering." - "Develop secure data base systems for investigative agencies and the courts." - "Develop process of coordination of government statistics so that AML/CFT data can be interpreted across agencies." - "Carry out more frequent coordination meetings among relevant government enforcement agencies to exchange ideas and report policy recommendations to the High Level Commission." - Cash couriers (SR.IX) - "Require the declaration in all circumstances for currency that is mailed, transported or shipped by any means of transportation." - "Consider a more systematic approach for spot checking containers for smuggled currency." - "Make better use of the current investigative powers of Customs, in cooperation with the UAF." ### Enforcement and operational implications - Without amendment of Article 389 and expansion of the ML predicate list to include FT, Panama’s ability to freeze, seize, and forfeit assets related to non-listed predicate crimes or terrorist financing remains constrained. - Corporate liability constraints and weak systems for seized-asset maintenance impede effective asset recovery and accountability for legal persons. - Strengthening UAF funding, information protection, outreach, and inter-agency coordination is critical to translate legal reforms into operational effectiveness. *International Monetary Fund (IMF) assessment and recommended action plan as summarized from the IMF's evaluation.* ### 3. Preventive Measures–Nonfinancial Businesses and Professions ### 3. Preventive Measures–Nonfinancial Businesses and Professions ### Customer due diligence and record-keeping (R.12) - Extend customer due diligence and recordkeeping obligation to lawyers, accountants, and dealers in precious metals and stones. - Provide guidance to DNFBPs for customer due diligence that considers the specific risks from money laundering. - Review the legal framework for DNFBPs to ensure regulations are supported by clear legal powers. ### Monitoring of transactions and relationships (R.12 & 16) - Extend monitoring obligation to real estate agents and promoters for customers meeting FATF thresholds, and for both casinos and real estate agents, to monitor customer activity and to report any suspicious transaction to the UAF. - Authorities should identify the risks that DNFBPs face according to their special nature and issue relevant guidance based on the risk presented. - Different degrees of control may be warranted in different industries. ### Suspicious transaction reporting (R.16) - Provide training to authorities and issue guidance to DNFBPs on the typologies of money laundering in their respective sectors. - The AML/CFT regulations for real estate businesses merit review to make them sector specific, having regard to the different risks of real estate as opposed to that of financial institutions. - Extend legal protection to DNFBPs from civil or criminal liability for reports made in good faith. ### Internal controls, compliance & audit (R.16) - Clarify the obligation of when to file cash-threshold reports or suspicious transaction reports by regulated institutions. - DNFBPs should be required to implement adequate internal controls (i.e., AML Programs) according to their specific activities. ### Regulation, supervision and monitoring (R.17, 24-25) - MICI should implement an AML/CFT oversight program that allocates resources based on money laundering risks within each sector. The program should include criteria for monitoring (off-site surveillance) and inspections. - The auditors of MICI should receive training on AML/CFT issues targeting in order to be able to identify areas of priority. - Ensure greater stability and independence of personnel of the Gaming Board, and update the regulations and inspection procedures to prevent the misuse of casinos by their own owners or operators. ### Other designated nonfinancial businesses and professions (R.20) - Strengthen enforcement of preventive requirements for Free-Trade Zone merchants, especially in higher risk areas. - Better auditing capabilities and training for the administrator in the ZLC are needed, as well as close cooperation with the UAF and with Customs. - Free Trade Zone merchants need training and awareness of the modalities by which their businesses could be misused for money laundering, in order to foster compliance with the obligation to report suspicious transactions. - MICI should ensure that the Directorate of Finance Companies (Empresas Financieras) has adequate resources and training. - Regulation and oversight of pawn shops needs to be targeted according to its identified risks to better prioritize the scarce resources available to the MICI. ### 4. Legal Persons and Arrangements & Nonprofit Organizations ### Legal Persons–Access to beneficial ownership and control information (R.33) - To the extent that lawyers are involved in the financial activities or nonfinancial activities described under the FATF recommendations, these activities should be regulated and supervised. ### Legal Arrangements–Access to beneficial ownership and control information (R.34) - Company incorporation and related services should be subject to AML/CFT reporting obligations, to avoid the negative incentive that trust companies owned by law firms do not have to report suspicious transactions. ### Nonprofit organizations (SR.VIII) - The Ministry of Government and Justice should create a registry (inventory) for NPOs, and undertake a risk assessment of the NPO sector. - Depending on the result, an updating of the regulatory framework to include AML regulations and other oversight may be appropriate. ### 5. National and International Cooperation ### National cooperation and coordination (R.31) - Ensure that the High Level Presidential Commission against money laundering and financing of terrorism is fully appointed and functioning. - Develop a coordinating government committee on AML/CFT matters, which assigns working groups to address specific issues, including sensitive internal matters. - Review overlaps between the authorities of the AML/CFT Commission and CONAPRED as to drug and nondrug-related money laundering. - Develop a working group within the coordinating committee for the review of the supervision or need for supervision of DNFBPs. - Review the CONAPRED’s use of the drug asset forfeiture fund to determine whether current monies could be more promptly and effectively spent. - Determine whether CONAPRED could benefit from lower level task forces to improve coordination of law enforcement efforts in drug-related money laundering cases. ### The Conventions and UN Special Resolutions (R.35 & SR.I) - Review newly-ratified financing of terrorism convention to determine which of its provisions need national enabling legislation for effective implementation. - Amend Penal Code to add additional predicate act offenses, including financing of terrorism. ### Mutual Legal Assistance (R.32, 36-38, SR.V) - Review dual criminality principle to determine whether Panama might render mutual legal assistance in cases where Panama would normally reject the request for mutual legal assistance due to the lack of dual-criminality. Consider eliminating the requirement of dual criminality. - Review the policy that noncriminal forfeiture orders will not be recognized or enforced. ### Extradition (R.32, 37 & 39, & SR.V) - Review the statutory authority regarding the requirement of dual criminality to determine whether Panama might render mutual legal assistance. ### Other Forms of Cooperation (R.32 & 40, & SR.V) - Ensure that all of the statistics required by R.32 are collected and maintained. ### Authorities’ Response to the Assessment - The Government of Panama, under the leadership of His Excellency, President Martin Torrijos Espino, prioritized preventing money laundering and terrorist financing and undertook an inter-institutional effort involving CNV, DGA, IPACOOP, the Gaming and Control Board, LNB, MICI, the Ministry of Government and Justice, the Ministry of Foreign Affairs, the Judicial Branch, PNP, the Attorney General, SdB, SSRP, UAF, and the Administration of the Colón Free Zone (ZLC). - The institutions cooperated to provide comments to the assessors despite translation and time constraints. Corrective actions taken following the assessment visit: 1. The Financial Analysis Unit and the Superintendency of Banks will provide training and will collaborate in the development of supervisory programs for the savings and loans associations. 2. The National Securities Commission, the Superintendency of Banks, and the Superintendency of Insurance and Re-insurance signed an inter-institutional cooperation agreement. 3. A Tripartite Coordination Commission (the Financial Analysis Unit, the Public Ministry, and the Judicial Branch) was created to address the systemic disconnection among these institutions. 4. Training seminars by, and feedback from the Financial Analysis Unit have been delivered to supervision and control agencies such as the Administration of the Colón Free Zone and the National Securities Commission; many others are scheduled to take place in the near- to medium term. 5. The risk analysis unit within the Customs Department will become operational on or around December 2006. 6. A specialized AML/CFT department was established within the Administration of the Colón Free Zone. This department was adequately staffed and is currently conducting AML/CFT on-site inspections, including imposing sanctions and collecting fines for noncompliance. 7. The legislation governing pawnshops was approved in May 2005. The Directorate of the Ministry of Industries and Commerce has received a total of 83 applications for pawnshop licenses. A currency transaction report was developed in partnership with the Financial Analysis Unit. AML/CFT training to these new reporting entities is anticipated during the month of November. 8. Modifications to the regulation that governs the accounting profession are currently undergoing its first debate at the National Assembly. 9. Measures were taken to revise and update the different reports and templates currently used by the reporting entities and the Financial Analysis Unit. - The Government of Panama agrees with the assessors’ conclusions and considers the assessment report to fairly reflect the actual situation of Panama’s AML/CFT regime. --- _Source: https://www.imf.org/-/media/files/publications/ofca/english/cr0767.pdf_