## _cr0766

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### Executive summary — macro and financial system context
- Real GDP expanded by 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.  
- The fiscal deficit is estimated to have fallen somewhat below the target of 2.6 percent of GDP in 2005.  
- Financial intermediation contributed about $1 billion or 7.2 percent of GDP in 2005; staff estimates financial intermediation will increase to 7.5 percent of GDP in 2006.  
- Banking system assets (nonconsolidated) were $39.6 billion, and consolidated assets were $45.8 billion at end‑March 2006.  
- There are about 9,000 lawyers and company service providers and about 12,000 accountants.

### Financial sector structure and regulatory framework — overview
- Banking system is the largest in the Central America region; consolidated assets exceed three times Panama’s GDP.  
- Other financial sectors (securities, insurance, cooperatives, savings and credit institutions) are small by comparison.  
- Regulatory agencies: Superintendency of Banks (SdB), National Securities Commission (CNV), Superintendency of Insurance and Reinsurance (SSRP), Panamanian Autonomous Institute for Cooperatives (IPACOOP), and Banco Hipotecario Nacional (BHN).  
- AML/CFT obligations are imposed under Law 42-2000; SdB supervises trust companies. Lawyers and accountants are not covered by Law 42-2000 or regulations.

### Banking sector — soundness, supervision, and recommendations
- System scale and composition (selected statistics):
  - Number of banks at Mar-06: 73 (including 2 state-owned banks, 37 general license private banks, 34 international license banks).  
  - General license banks account for about 83 percent of banking system assets and liabilities.  
  - About one half of banking system assets are invested outside Panama; about one half of banking system liabilities are from abroad.  
  - Nonconsolidated general and international license banks total assets by Mar-06: $39,556 million.  
  - General license banks nonconsolidated total assets by Mar-06: $32,862 million; foreign assets by Mar-06: $13,320 million; advances and loans by Mar-06: $19,896 million; total deposits by Mar-06: $23,092 million; non-resident deposits by Mar-06: $7,075 million.
- Financial soundness indicators and trends:
  - Bank balance sheet growth: 2004: 7 percent; 2005: about 12 percent; First quarter 2006 (annualized): 10 percent.  
  - Return on assets: 2.1 percent for all of 2005; 2.4 percent (annualized) through first quarter 2006.  
  - Return on equity: 15.7 percent for all of 2005; 20.2 percent for first quarter 2006 (annualized).  
  - 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; provided a cover of 126 percent of past due loans.  
  - Liquid assets to total deposits: 24 percent (end-March 2006).  
  - Loans represent 59 percent of assets and 84 percent of deposits (end-March 2006).  
  - System regulatory capital (Basel I rule) at end-March 2006: 17.2 percent.  
  - Private Panamanian owned banks regulatory capital: 14.7 percent.  
  - Equity to assets for the system: 12.9 percent (end-March 2006).
- Financial soundness indicator series (selected values):
  - Return on assets: 2003: 2.0; 2004: 2.3; 2005: 2.1; Mar-06: 2.4.  
  - Return on equity: 2003: 17.1; 2004: 17.9; 2005: 15.7; Mar-06: 20.2.  
  - Liquid assets to deposits: 2003: 33.2; 2004: 30.1; 2005: 25.0; Mar-06: 24.3.  
  - Loans to deposits: 2003: 74.4; 2004: 81.1; 2005: 84.5; Mar-06: 83.8.  
  - Loans to assets: 2003: 54.4; 2004: 57.5; 2005: 59.3; Mar-06: 59.1.  
  - Regulatory capital to risk-weighted assets: 2003: 18.4; 2004: 17.8; 2005: 17.2; Mar-06: 17.2.  
  - Equity to assets: 2003: 12.4; 2004: 13.4; 2005: 13.0; Mar-06: 12.9.  
  - Nonperforming loans to total loans: 2003: 2.3; 2004: 1.7; 2005: 1.6; Mar-06: 1.6.  
  - Loan-loss provisions to nonperforming loans: 2003: 150.6; 2004: 147.0; 2005: 131.0; Mar-06: 126.3.
- Supervisory assessment and gaps:
  - A revised banking law and creation of the SdB in 1998 modernized banking regulation; Panama is largely compliant with the Basel Core Principles.  
  - Weaknesses limiting higher compliance: (i) insufficient legal protection for SdB supervisors acting in their official capacity; (ii) underdeveloped processes for the measurement and monitoring of market risk—including incorporating market risk where significant into the current capital adequacy requirement.  
  - SdB processes: on-site examinations about every 18 months (large banks annually); monthly off-site analyses; weekly liquidity reporting; quarterly consolidated reporting for groups.
- Key banking recommendations (selected):
  - Harmonize supervisory and regulatory arrangements for nonbank deposit-taking institutions (cooperatives and savings and credit institutions).  
  - Develop policies for market risk that consider complexity among larger institutions, including use of value-at-risk and/or building-block approaches.  
  - Amend the banking law to provide SdB with the same clarity for consolidated supervision of financial activities by holding companies as for direct oversight of banks and subsidiaries.  
  - Develop clear processes for working with distressed entities, including remedial measures, and for insolvent banks, guidelines for winding up and transferring assets and liabilities.  
  - Implement legal protection (insurance policy or other administrative/legal instruments) for SdB staff acting in their official capacity.

### Securities markets and CNV — structure, weaknesses, and recommendations
- Market characteristics and statistics:
  - Securities markets are small and illiquid; activity is concentrated mostly in the primary market for government debt and corporate bonds.  
  - Total market capitalization: 2004: $3.9 billion (increase of 28 percent over 2003).  
  - Proportion of market capitalization represented by the three largest companies averaged 58 percent (2004).  
  - Number of issuers: End-2004: 81 issuers (decline of 15 during the year); 2005: 83 issuers.  
  - Market activity by volume: Primary issues: about 68 percent; Secondary market: about 25 percent; Repurchases: about 6 percent.  
  - Securities issued: Total in 2004: $518 million; Additional issued through end-May 2005: $460 million.  
  - Domestic mutual funds: 17 with total assets of $422 million. International collective investment schemes: 3 with total assets of $20 million.  
  - Securities houses registered: 33 with total transaction volume about $7.3 billion in 2004; about 55 percent of transaction volume concentrated in five securities houses.  
  - Licensed stockbrokers at end-May 2005: 265.
- CNV operational and legal constraints:
  - Securities law and regulations are generally effective, but resources for securities markets oversight are insufficient.  
  - A key commissioner post at the CNV has been vacant since 2004, affecting CNV independence.  
  - Legislative impediments limit CNV’s ability to implement the IOSCO multilateral MOU and to share nonpublic information with foreign counterparts; bank secrecy law also restricts information sharing on bank accounts.  
  - CNV cannot initiate an investigation solely on behalf of a foreign authority.  
  - CNV staff and commissioners lack sufficient legal protection when acting in bona fide performance of functions.
- CNV enforcement and oversight facts:
  - 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; and 18 in 2005.  
  - Bolsa de Valores: authorized capital of $1 million, divided into 180,000 shares; no individual shareholder owns more than 2.5 percent of the capital.  
  - At end-2004 LatinClear held 43 percent of the total capitalization of securities in Panama.
- CNV recommendations (selected):
  - Appoint a new commissioner as provided under current law; the commissioner’s position has remained vacant since December 2004.  
  - Grant the CNV the right to direct administrative matters, including hiring and firing its staff, and grant additional resources urgently for recruitment of skilled staff.  
  - Strengthen CNV authority regarding corporate governance, liability of auditors, and code of conduct.  
  - Amend securities legislation to allow sharing of information with foreign securities counterparts for market abuse investigation and to enable Panama to meet IOSCO MMOU commitments.  
  - Strengthen oversight and monitoring programs for SROs, intermediaries, and collective investment schemes; implement risk-based inspection programs and improve technological tools for analysis.

### Insurance sector (SSRP) — structure, weaknesses, and recommended reforms
- Market and size indicators:
  - Insurance penetration measured as premiums to GDP: around three percent.  
  - Total premiums subscribed: 2005: $430 million (up 1.9 percent from 2004).  
  - Total assets (2004): $765 million (around five percent of GDP); investments represent 69 percent of total assets.  
  - Life insurance business share: 35 percent of total market.  
  - Nonlife insurance composition (share of total premium subscriptions): Automobile insurance: 16 percent; Health insurance: 17 percent.  
  - Market concentration: Five largest companies account for around 74 percent of the market.  
  - Number of authorized insurance companies: Total authorized: 18; Life specialists: 4; Surety specialist: 1; Both life and nonlife: 13.  
  - Reinsurer premiums (2003): represented 11 percent of premiums issued by insurers.  
  - Of 18 insurance companies, five are subsidiaries of foreign firms and four are affiliates of local banks.  
  - There are five companies authorized to operate exclusively in reinsurance.
- Supervisory and legislative weaknesses:
  - Regulatory framework for insurance remains underdeveloped; compliance with IAIS core principles is weak due to outmoded laws and underdeveloped supervisory framework.  
  - SSRP lacks independence from the industry and the executive branch; industry participation on SSRP Board and MICI influence should be discontinued.  
  - SSRP lacks resources, compensation, and staff (no actuaries employed); industry fees are not substantially available to SSRP.  
  - SSRP has not issued rules on corporate governance, internal controls, or responsibilities of board members and senior managers.  
  - Accounting and disclosure: SSRP does not require IAS for regulatory purposes; disclosure to policyholders is weak; commissions to brokers not disclosed; companies prevented from employing their own agents.
- Prudential framework issues:
  - Technical reserves: nonlife calculated as proportion of net retained premiums; life according to actuarial value of expected losses; actuarial standards not issued by SSRP.  
  - Investment rules: 75 percent of investments covering technical reserves must be within the country; remaining 25 percent may be invested abroad with at least “investment grade” rating.  
  - No diversification or liquidity requirements and no asset valuation rules.  
  - Reinsurance: no minimum ratings for reinsurers or exposure limits toward single reinsurers; reinsurers not fully subject to the solvency regime.
- SSRP recommendations (selected per IAIS):
  - Strengthen SSRP independence from industry and executive; discontinue industry participation on SSRP Board; ensure Board is independent from MICI.  
  - Provide more staff and resources; compensation sufficient to attract and retain skilled staff; hire an actuary.  
  - Provide legal protection for SSRP staff acting in their official capacity.  
  - Apply actuarial standards to technical reserve calculation methods; enforce timely presentation of audited financial statements; introduce asset–liability matching requirements; subject reinsurance companies to solvency requirements; widen on-site supervision beyond financial aspects; develop processes for cooperation with foreign supervisors.  
  - Permit insurance firms to employ brokers and agents directly, and require disclosure of fees and commissions.

### Cooperatives and savings & credit institutions
- Supervisory arrangements less developed than for banks.  
- At end-2004 there were 276 deposit-taking cooperatives with assets of $860 million (about 2 percent of banking system assets).  
- At end-2004 there were 4 savings and credit institutions with assets of $70 million (less than 0.2 percent of banking system assets).  
- Different regulatory treatment creates an uneven playing field, as some cooperatives have asset sizes comparable to smaller banks.  
- Recommendation: consider regulatory framework modifications, including size thresholds for SdB oversight, outsource off-site monitoring on a full cost recovery basis to SdB, and strengthen reporting for cooperatives and savings and credit institutions.

### AML/CFT assessment — overall findings and prioritized actions
- Overall assessment:
  - Panama is largely compliant with a majority of the FATF 40+9 Recommendations.  
  - Law 41, 2000 criminalizes laundering of proceeds; Law 42-2000 imposes AML/CFT obligations on numerous financial and nonfinancial businesses and professions.  
  - UAF (Financial Analysis Unit) is an administrative FIU, member of the Egmont Group, functionally independent, but requires additional personnel and budgetary resources.
- Key strengths:
  - Adequate legal authority for law enforcement to carry out AML/CFT responsibilities.  
  - High level of international cooperation; Panama a member of CFATF and the Egmont Group.  
  - Financial institutions largely subject to preventive and reporting obligations; most STRs received by UAF are passed to prosecutors.
- Main weaknesses and capacity constraints:
  - Resources and expertise shortages for law enforcement, prosecutors, and the judiciary; UAF requires additional financial, human, and technological resources.  
  - Preventive regimes for several DNFBPs are underdeveloped; lawyers, accountants, and corporate service providers are not covered by AML/CFT regulations.  
  - Low quality of STR reporting and tendency toward formalistic compliance; many CTRs filed state “no CTRs to be filed.”  
  - Colon Free Trade Zone (ZLC) identified as an area of vulnerability for money laundering.
- Legal/predicate offense gaps and asset recovery:
  - AML law lists specific predicate crimes but does not include all offenses required by the Palermo Convention; financing of terrorism is not listed as a predicate offence for money laundering.  
  - Penal Code (Law 41) sanctions for money laundering: prison from 5 to 12 years and 100 to 200 days of imprisonment or the assigned value of a fine.  
  - Forfeited assets for general money laundering cases go to the Special Fund for the Retired and Pensioned; drug-case forfeitures go to CONAPRED.
- Key FATF 40+9 recommendations (selected):
  - Criminalization of Money Laundering—Amend Article 389 to criminalize all money laundering predicate offenses in accordance with the Vienna and Palermo Conventions; expand the predicate list for the AML law to include financing of terrorism.  
  - Urgently review staffing and training requirements for law enforcement, prosecution, and other competent authorities (including the Financial Analysis Unit) to increase capacity for investigations and prosecutions.  
  - Amend the AML law to impose monitoring obligations on insurance and savings and credit institutions; SSRP and BHN should implement customer identification and record-keeping requirements in these sectors.  
  - Amend the AML law and regulation to subject lawyers and accountants to AML/CFT requirements, including obtaining and maintaining accurate information on beneficial owners of legal vehicles.  
  - Strengthen enforcement of preventive requirements for Free-Trade Zone (ZLC) merchants, especially in higher risk areas; improve auditing capabilities and training for the ZLC administrator and ensure close cooperation with the UAF and Customs.  
  - Review funding arrangements for UAF and strengthen protection of information reported to UAF; UAF to undertake more outreach and awareness-raising.

### Free Trade Zone (ZLC), DNFBPs, and fiduciary services — risks and reforms
- ZLC findings and recommendations:
  - Law requires ZLC merchants to report transactions above $10,000 in cash and to report suspicious transactions; however, most companies are not aware of what makes a transaction suspicious.  
  - Administration ZLC must strengthen audit procedures, increase inspections, cooperate closely with the UAF and Customs, and acquire adequate technology (current issuance of importation and re-exportation documents is still done without computerized tools).  
  - Recommendation: Strengthen enforcement of preventive requirements for Free-Trade Zone merchants; provide auditing capabilities and training for the ZLC administrator; ensure close cooperation with the UAF and Customs.
- Lawyers, accountants, and company service providers:
  - Lawyers are not covered by STR, customer due diligence, or record-keeping obligations.  
  - Lawyers provide offshore corporate structuring services using bearer-share corporations and private interest foundations; all companies must have a resident agent who is a lawyer. Resident agent disclosure obligations are limited to judicial requests in narcotics investigations.  
  - Recommendation: Extend customer due diligence and recordkeeping obligation to lawyers, accountants, and dealers in precious metals and stones; provide guidance and training to DNFBPs; extend legal protection against liability for good faith reporting; clarify DNFBP supervision and legal powers.
- Fiduciary companies and trust service providers:
  - Trust service providers are supervised by SdB and subject to AML/CFT requirements; 7 of 57 licensed fiduciary companies are subsidiaries of law firms, creating conflicts for reporting suspicious transactions.  
  - Recommendation: Ensure company incorporation and related services are subject to AML/CFT reporting obligations and that legal persons’ ownership information is accessible for beneficial ownership identification.
- Nonprofit organizations and private interest foundations:
  - NPOs and private interest foundations must register; the Ministry of Government and Justice has begun creating a database and should undertake risk assessment and update regulatory framework and oversight as needed.

### Cross-border cooperation, information exchange, and mutual evaluations
- SdB and CNV have good records of cross-border cooperation and have signed MOUs with counterparts in the region and in Spain; SdB has entered numerous MOUs with countries where Panamanian financial institutions have affiliates.  
- CNV is a party to the IOSCO Multilateral MOU (Annex B only) but faces legislative impediments limiting full implementation: inability to share nonpublic information with foreign counterparts; bank secrecy law constraints; inability to initiate investigations solely on behalf of foreign authorities.  
- UAF can share information with other Egmont members through the Egmont Secure Web.  
- Panama is a member of CFATF and the Egmont Group; Palermo Convention ratified through law No. 23 of July 7, 2004, but full implementation requires inclusion of additional predicate offenses.

### Institutional coordination, authorities’ responses, and follow-up actions
- Authorities’ main responses and actions taken:
  - SdB: introduced a disclaimer rule (July 2005) that inspection reports are for exclusive use of bank and SdB; introduced classification system based on CAMELS (August 2005); approved Accord 12-2005 and related resolutions to upgrade Know-Your-Customer rules and AML/CFT compliance (December 2005). SdB indicated plans to develop staff retention programs, evaluate legal protection measures, hire a technical advisor for market risk, and develop guidelines for distressed entities.  
  - CNV: acknowledged resource constraints, staff turnover, and vacancies; reported judicial clarifications supporting CNV powers; concluded consultancies that produced regulatory accords including Accord 11-2005 and manuals for pension and retirement fund supervision. CNV seeks legislative changes to enhance independence and staffing.  
  - SSRP: working on regulation and a new insurance law to strengthen independence from MICI and improve supervisory capacity; SSRP requests financial and political support and IMF cooperation.  
  - AML/CFT: Government established a Tripartite Coordination Commission (UAF, Public Ministry, Judicial Branch); Training and supervisory cooperation programs underway; a specialized AML/CFT department in the Administration of the Colón Free Trade Zone established and operational; risk analysis unit within Customs expected operational on or around December 2006. Legislative and supervisory reforms in progress for pawnshops, accounting profession regulation, and DNFBP oversight.
- Recommended institutional reforms (selected cross-cutting):
  - Provide legal protection against civil or criminal suits to staff of all regulatory agencies when performing official functions and acting in good faith.  
  - Strengthen operational independence and resource bases for CNV and SSRP; provide CNV control over administrative decisions including hiring; remove industry representation from SSRP board and ensure SSRP budgetary autonomy.  
  - Strengthen accounting profession governance: empower the Accounting Technical Board with enforcement powers and adopt IAS for regulatory reporting where appropriate.

*Source: Executive Summary and selected sections of IMF country report _cr0766.*

### Executive Summary ......................................................................................................

### Executive Summary

### Financial system structure and recent macroeconomic context
- Real GDP expanded by 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.  
- The fiscal deficit is estimated to have fallen somewhat below the target of 2.6 percent of GDP in 2005.  
- Financial intermediation contributed about $1 billion or 7.2 percent of GDP in 2005; staff estimates financial intermediation will increase to 7.5 percent of GDP in 2006.  
- Banking system assets (nonconsolidated) were $39.6 billion, and consolidated assets were $45.8 billion at end‑March 2006.  
- There are about 9,000 lawyers and company service providers and about 12,000 accountants.

### Overview of the financial sector and regulatory framework
- The banking system is the largest in the Central America region; consolidated assets exceed three times Panama’s GDP.  
- Other financial sectors (securities, insurance, cooperatives, savings and credit institutions) are small by comparison.  
- Regulatory agencies: Superintendency of Banks (SdB), National Securities Commission (CNV), Superintendency of Insurance and Reinsurance (SSRP), Panamanian Autonomous Institute for Cooperatives (IPACOOP), and Banco Hipotecario Nacional (BHN).  
- AML/CFT obligations are imposed under Law 42-2000; SdB supervises trust companies. Lawyers and accountants are not covered by Law 42-2000 or regulations.

### Key findings — banking sector
- A revised banking law and creation of the SdB in 1998 modernized the regulatory and supervisory framework for banking.  
- The 2001 IMF assessment and this assessment show a high level of observance with the Basel Core Principles for banking supervision.

### Key findings — capital markets and securities supervision
- Securities law and regulations are generally effective, but resources for securities markets oversight are insufficient.  
- A key commissioner post at the CNV has been vacant since 2004, affecting CNV independence.  
- Legislative impediments limit CNV’s ability to implement the IOSCO multilateral MOU and to share information for market-abuse investigations.

### Key findings — insurance sector
- Regulatory framework for insurance remains underdeveloped.  
- SSRP lacks independence from the industry and the executive branch and lacks resources for prudential supervision; legislative revision is required.  
- The legislative framework does not define cooperation with home-country supervisors for foreign-owned insurance companies.

### Key findings — cooperatives and savings & credit institutions
- Supervisory and regulatory arrangements for cooperatives and savings and credit institutions are less developed than for banks.  
- At end-2004 there were 276 deposit-taking cooperatives with assets of $860 million (about 2 percent of banking system assets).  
- At end-2004 there were 4 savings and credit institutions with assets of $70 million (less than 0.2 percent of banking system assets).  
- Different regulatory treatment creates an uneven playing field, as some cooperatives have asset sizes comparable to smaller banks.

### Cross-border cooperation
- Cross-border arrangements exist to facilitate information sharing for SdB and CNV; both agencies have good records of cross-border cooperation.  
- CNV faces legislative impediments limiting information sharing and MMOU implementation.  
- Insurance legislation does not define the level of cooperation with home-country supervisors for foreign-owned insurers.

### AML/CFT assessment
- Essential components for AML/CFT are in place, but resources (financial, human, information technology) are a concern for law enforcement authorities (investigators and judges) and for DNFBPs.  
- Supervision of AML/CFT is generally sound for banks, securities firms, and cooperatives, but weak for the insurance industry, reflecting SSRP resource constraints.

### System scale and composition (selected statistics)
- Number of banks at Mar-06: 73 (including 2 state-owned banks, 37 general license private banks, 34 international license banks).  
- General license banks account for about 83 percent of banking system assets and liabilities.  
- About one half of banking system assets are invested outside Panama; about one half of banking system liabilities are from abroad.  
- Nonconsolidated general and international license banks total assets by Mar-06: $39,556 million.  
- General license banks nonconsolidated total assets by Mar-06: $32,862 million; foreign assets by Mar-06: $13,320 million; advances and loans by Mar-06: $19,896 million; total deposits by Mar-06: $23,092 million; non-resident deposits by Mar-06: $7,075 million.

### Summary of key recommendations (Box 1)
- For all regulatory agencies: provide protection against legal action to staff performing official functions and acting in good faith.

Basel Core Principles
- Rationalize supervisory and regulatory arrangements for nonbank deposit-taking institutions (cooperatives and savings and credit institutions).  
- SdB should develop policies for market risk that consider complexity among larger institutions, including use of value-at-risk and/or building-block approaches for risk measurement, in conjunction with Basel II preparations.  
- Amend the banking law to provide SdB with same clarity for consolidated supervision of financial activities by holding companies as for direct oversight of banks and subsidiaries.  
- SdB should develop clear processes for working with distressed entities, including remedial measures, and for insolvent banks, guidelines for winding up and transferring assets and liabilities.

IOSCO Principles
- Strengthen CNV operational independence; address lack of resources, technical capacity, and the unfilled CNV commissioner post (vacant since 2004).  
- Give CNV control over administrative decisions, including hiring of staff.  
- Legislation should address recent adverse judicial decisions that undermine CNV authority.  
- Amend securities legislation to allow sharing of information with foreign securities counterparts for market abuse investigation.  
- Formulate a new framework for governance of the accounting profession; the Accounting Technical Board needs enforcement powers over the accounting industry.

IAIS Principles
- SSRP should have greater operational independence from industry and the executive branch; independence is adversely affected by insufficient staffing and resources (including technology). Hire an actuary.  
- Strengthen prudential capacity, including regulations: (i) apply actuarial standards to technical reserve calculation methods; (ii) enforce timely presentation of audited financial statements; (iii) introduce asset-liability matching requirements; (iv) subject reinsurance companies to solvency requirements; (v) widen on-site supervision beyond financial aspects; (vi) develop processes for cooperation with foreign supervisors.  
- Remove legislative impediments to a more competitive insurance market: permit insurance firms to employ brokers and agents directly, and require disclosure of fees and commissions.

FATF 40+9 Recommendations
- Criminalization of Money Laundering—Amend Article 389 to criminalize all money laundering predicate offenses in accordance with the Vienna and Palermo Conventions; expand the predicate list for the AML law to include financing of terrorism.  
- Urgently review staffing and training requirements for law enforcement, prosecution, and other competent authorities (including the Financial Analysis Unit) to increase capacity for investigations and prosecutions.  
- Amend the AML law to impose monitoring obligations on insurance and savings and credit institutions; SSRP and BHN should implement customer identification and record-keeping requirements in these sectors.  
- Amend the AML law and regulation to subject lawyers and accountants to AML/CFT requirements, including obtaining and maintaining accurate information on beneficial owners of legal vehicles.  
- Strengthen enforcement of preventive requirements for Free-Trade Zone (ZLC) merchants, especially in higher risk areas; improve auditing capabilities and training for the ZLC administrator and ensure close cooperation with the UAF and Customs.

*Source: Executive Summary.*

### 21.      Securities markets are small and illiquid. Activity is concentrated mostly in the

### _cr0766 - 21.      Securities markets are small and illiquid. Activity is concentrated mostly in the

### Securities markets: overview and structural features
- Securities markets are small and illiquid.
- Activity is concentrated mostly in the primary market for government debt and corporate bonds.
- Investment culture underdeveloped; users of financial services generally prefer banks for safekeeping of savings.
- Historically, investors have preferred investment options provided by foreign capital markets, usually the United States.
- Limited promotion of securities markets and significant family ownership in corporate structures have weighed on development of the local markets.

### Market statistics and trends
- Total market capitalization:
  - 2004: $3.9 billion (increase of 28 percent over 2003).
- Concentration:
  - Proportion of market capitalization represented by the three largest companies averaged 58 percent (2004).
- Number of issuers:
  - End-2004: 81 issuers (decline of 15 during the year).
  - 2005: 83 issuers.
- Market activity by volume:
  - Primary issues: about 68 percent.
  - Secondary market: about 25 percent.
  - Repurchases: about 6 percent.
- Securities issued:
  - Total in 2004: $518 million.
  - Additional issued through end-May 2005: $460 million.
  - For the first five months of 2005, pace of issuance substantially ahead of 2004.
- Mutual and collective investment schemes:
  - Domestic mutual funds: 17 with total assets of $422 million.
  - International collective investment schemes: 3 with total assets of $20 million.
- Securities houses and stockbrokers:
  - Securities houses registered: 33 with total transaction volume about $7.3 billion in 2004.
  - About 55 percent of transaction volume concentrated in five securities houses.
  - CNV licensed three securities houses in 2004.
  - In 2005, five firms applied for securities house licenses; one firm applied for an investment advisor license.
  - Licensed stockbrokers at end-May 2005: 265.
  - Stockbroker licensing by year: 50 in 2003, 38 in 2004, 42 up to end-May 2005.

### Selected table indicators (highlights from Table 2)
- General index at year-end (in percent, 2002=100): 2001: 94.4; 2002: 100.1; 2003: 109.1; 2004: 130.3; 2005: 147.7.
- Number of listed issuers: 2001: 125; 2002: 107; 2003: 96; 2004: 81; 2005: 83.
- Total market capitalization (millions of US dollars): 2001: 2,602; 2002: 2,950; 2003: 3,075; 2004: 3,934.
- Proportion of market capitalization represented by the three largest companies (in percent): 2002: N/A; 2003: 49.9; 2004: 57.8; 2005: 57.9.

### Insurance sector: structure and indicators
- Insurance penetration measured as premiums to GDP: around three percent.
- Total premiums subscribed:
  - 2005: $430 million (up 1.9 percent from 2004).
- Total assets (2004): $765 million (around five percent of GDP).
  - Investments represent 69 percent of total assets.
- Life insurance business share: 35 percent of total market.
- Nonlife insurance composition (share of total premium subscriptions):
  - Automobile insurance: 16 percent.
  - Health insurance: 17 percent.
- Market concentration:
  - Five largest companies account for around 74 percent of the market.
- Number and types of authorized insurance companies:
  - Total authorized: 18.
  - Life specialists: 4.
  - Surety specialist: 1.
  - Both life and nonlife: 13.
  - Nine of the life/nonlife companies also licensed to operate reinsurance.
  - Further five companies authorized to operate exclusively in reinsurance.
- Reinsurer premiums (2003): represented 11 percent of premiums issued by insurers.
- Ownership:
  - Of 18 insurance companies, five are subsidiaries of foreign firms and four are affiliates of local banks.
- Captive insurance sector: immaterial; no data available.
- Net premiums (millions of US dollars) by year (Table 2 totals):
  - Total premiums: 2001: 361; 2002: 368; 2003: 388; 2004: 422; 2005: 430.

### Banking system: financial soundness indicators and trends
- Banking sector a key strength; benefited from favorable economic and business climate.
- Fully dollarized economy and completely open capital account have helped keep inflation low and interest rates stable.
- Market discipline important: no lender of last resort or deposit insurance.
- Bank balance sheet growth:
  - 2004: 7 percent.
  - 2005: about 12 percent.
  - First quarter 2006 (annualized): 10 percent.
- Growth primarily from increased lending in the local market—primarily mortgages and consumer credit—funded by increased deposits, retained earnings, and new capital.
- Earnings and asset quality:
  - Return on assets: 2.1 percent for all of 2005; 2.4 percent (annualized) through first quarter 2006.
  - Return on equity: 15.7 percent for all of 2005; 20.2 percent for first quarter 2006 (annualized).
  - 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; provided a cover of 126 percent of past due loans.
- Liquidity and capital:
  - Liquid assets to total deposits: 24 percent (end-March 2006).
  - Loans represent 59 percent of assets and 84 percent of deposits (end-March 2006).
  - System regulatory capital (Basel I rule) at end-March 2006: 17.2 percent.
  - Private Panamanian owned banks regulatory capital: 14.7 percent.
  - Equity to assets for the system: 12.9 percent (end-March 2006).
- Financial soundness indicator series (Table 3 highlights):
  - Return on assets: 2003: 2.0; 2004: 2.3; 2005: 2.1; Mar-06: 2.4.
  - Return on equity: 2003: 17.1; 2004: 17.9; 2005: 15.7; Mar-06: 20.2.
  - Liquid assets to deposits: 2003: 33.2; 2004: 30.1; 2005: 25.0; Mar-06: 24.3.
  - Loans to deposits: 2003: 74.4; 2004: 81.1; 2005: 84.5; Mar-06: 83.8.
  - Loans to assets: 2003: 54.4; 2004: 57.5; 2005: 59.3; Mar-06: 59.1.
  - Regulatory capital to risk-weighted assets: 2003: 18.4; 2004: 17.8; 2005: 17.2; Mar-06: 17.2.
  - Equity to assets: 2003: 12.4; 2004: 13.4; 2005: 13.0; Mar-06: 12.9.
  - Nonperforming loans to total loans: 2003: 2.3; 2004: 1.7; 2005: 1.6; Mar-06: 1.6.
  - Loan-loss provisions to nonperforming loans: 2003: 150.6; 2004: 147.0; 2005: 131.0; Mar-06: 126.3.

### Findings from earlier assessments (BCP, CFATF)
- IMF 2001 assessment (Basel Core Principles) identified two material weaknesses for SdB:
  - Off-site monitoring (BCP 16).
  - Investment activities (BCP 5).
- Recent Basel Core Principles assessment: SdB processes strengthened and earlier concerns viewed as addressed.
- CFATF mutual evaluation (July 2001) recommendations and follow-up:
  - Amplification of money laundering to include asset forfeiture initially not effective; Public Prosecutor advised process now in place via AML law adopting freezing, seizing, and forfeiture powers in the Unified Text of Drug Laws.
  - Palermo Convention ratified by Panama through law No. 23 of July 7, 2004; full implementation requires inclusion of additional predicate offenses.
  - Panama adopted regulations on money remitters; implementation and supervision not yet effectively implemented.
  - Money laundering criminal law has not been changed to expand list of predicate crimes to include those required by article 6(2)(b) of the Palermo Convention.
  - Panama has complied with CFATF recommendation to negotiate and sign Mutual Legal Assistance Treaties (MLATs) and has signed various other conventions and treaties supporting fight against money laundering and financing of terrorism.

### Main findings and recommendations (sectoral and AML/CFT assessments)
- Overall observance:
  - High level of observance with regulatory standards for systemically relevant banking sector.
  - Securities markets and insurance have lower levels of compliance with respective regulatory standards.
  - Supervisory and regulatory arrangements for cooperative credit institutions and savings and credit institutions underdeveloped.
  - For AML/CFT, Panama is largely compliant with a majority of FATF recommendations.
- Legal protection:
  - Legal protection for staff when performing official functions and acting in good faith is not sufficient across banking, insurance, and securities regulators; lack of protection exposes staff to lawsuits.
- Operational independence:
  - Operational independence at the CNV and SSRP is weak.
    - CNV lacks full control over operating budget and staffing decisions; a key commission board position unfilled.
    - SSRP does not control its budget and its board includes government ministry and industry representatives.
  - Reputation of Panama as a well regulated financial center depends on achieving operational independence in regulatory and supervisory functions.
- Accounting and reporting:
  - SdB and CNV require use of IAS or US GAAP for banks and publicly traded firms.
  - SSRP does not require use of international accounting standards for regulatory purposes and this should be modified.
  - Oversight mechanism for accountants/auditors is underdeveloped.
  - Draft legislation pending to reinforce rules and powers of the Accounting Technical Board.
- Securities regulator (CNV) operational weaknesses:
  - Insufficient funding for development and retention of qualified professional staff.
  - Selection and appointment of technical and administrative personnel requires MEF approval.
  - One of three commissioner positions vacant since end-2004.
  - CNV staff and commissioners lack sufficient legal protection when acting in bona fide performance of functions.
  - Judicial actions have called into question certainty of the CNV's decisions.
  - Legislative impediments limit information sharing and ability to implement IOSCO MMOU; despite this CNV has provided substantial assistance to foreign regulators within limits of Panama legislation.
- Insurance regulator (SSRP) weaknesses:
  - Compliance with IAIS core principles weak due to outmoded legal regime and underdeveloped supervisory framework.
  - SSRP lacks independence from industry and executive branch; industry and MICI participation on SSRP Board should be discontinued.
  - SSRP needs more staff and resources; industry fees not substantially available to SSRP for regulation purposes.
  - SSRP has not issued rules on corporate governance, internal controls, or responsibilities of board members and senior managers.
  - Disclosure to policyholders is weak; commissions to brokers not disclosed; companies prevented from employing their own agents.
- Banking sector recommendations (high-level):
  - Strengthen processes for measurement and monitoring of market risk and incorporate market risk where significant into capital adequacy requirements.
  - Consider regulatory framework modifications for cooperative credit institutions: establish size threshold (or other objective criteria) beyond which cooperative would receive oversight by SdB as primary regulator; strengthen off-site monitoring mechanisms.
  - Consider greater harmonization for savings and credit institutions overseen by Banco Hipotecario Nacional (BHN), including exploration of bringing some or all activities under SdB supervision.

*Source: _cr0766 - 21.      Securities markets are small and illiquid. Activity is concentrated mostly in the*

### 51.      The legislative and institutional frameworks are generally effective. Law 41, 2000

### _cr0766 - 51.      The legislative and institutional frameworks are generally effective. Law 41, 2000

### Legislative and institutional frameworks; AML/CFT framework
- Law 41, 2000 criminalizes the laundering of proceeds.
- Law 42-2000 imposes AML/CFT obligations on financial and nonfinancial businesses and professions.
- Under Law 42, cash transactions and suspicious transaction reports must be made to the Financial Analysis Unit (UAF).
- The UAF receives and analyzes these reports to provide appropriate referrals to the prosecutors for criminal investigation.
- The UAF requires additional personnel, and budgetary resources to carry out its functions more effectively.
- Areas needing strengthening:
  - Resources and expertise for law enforcement and the judiciary.
  - Implementation of preventive measures in sectors outside of the banking and securities sectors.
  - More active reporting of suspicious transactions.
  - Training and coordination of the regulatory bodies.
- Preventive regimes for the DNFBP sectors remain underdeveloped.
- In the DNFBP area of corporate service providers, regulation is needed to clarify the obligation that owner information should be retained by the resident agent for Panamanian corporations.
- Lawyers in general are not subject to customer identification, record keeping, or reporting obligations as required by the FATF standard.

### Cross-border cooperation and information exchange
- Cross-border arrangements facilitate information sharing for financial sector regulation, except in the area of insurance.
- The SdB has entered into numerous memoranda of understanding (MOUs) with countries where Panamanian financial institutions have affiliates or where Panama is host to foreign-controlled financial institutions.
- For the securities regulator, MOUs are in place with counterparts in Latin America and Spain.
- Agreements permit expedited registration in Panama of securities also registered in El Salvador and Costa Rica.
- There is a good record of cross-border cooperation by the SdB and by the CNV.
- The CNV is a party to the IOSCO Multilateral MOU (Annex B only) that promotes cross-border cooperation and information exchange to deter securities market abuse.
- Legislative impediments limiting the CNV’s ability to fully meet multilateral MOU requirements:
  - (i) the CNV is unable to share nonpublic information held in its files with its overseas counterparts;
  - (ii) the bank secrecy law prevents the CNV from sharing with foreign authorities information and records that it obtains pertaining to bank accounts; and;
  - (iii) the CNV cannot initiate an investigation or inspection solely on behalf of a foreign authority but only for the purposes of its own investigations.
- A framework for cooperation among the three key financial sector regulators was formalized in May 2005 for coordinating oversight of financial groups that carry out banking, insurance, and securities activities.
- Differences in resources and supervisory approaches create inconsistent levels of supervision across the dominant banking groups.
- The SdB already considers risks on a consolidated basis for many insurance and securities firms included within larger banking groups.

### International AML/CFT cooperation and mutual evaluations
- The government has a very good level of international cooperation through adoption of international conventions and numerous mutual legal assistance treaties.
- For extraditions, formal and informal cooperation exists involving the UAF, the police, and their counterparts in other countries.
- Panama should ensure that it can enforce other countries’ forfeiture orders.
- Panama is a member of the Caribbean Financial Action Task Force (CFATF) and the Egmont Group.
- The UAF is able to share information with other Egmont member countries through the Egmont Secure Web.
- A team from CFATF members conducted a mutual evaluation of Panama's compliance with the FATF and CFATF anti-money laundering recommendations in July 2001.

### Annex: scope of assessments and methodology (summary)
- The annex contains summary assessments of observance of international standards and codes relevant for the financial sector, to identify adequacy of regulatory and supervisory frameworks and priority areas for legislative changes and recommendations.
- The overall evaluation of the financial sector was led by Michael Moore of the IMF’s Monetary and Financial Systems Department.
- Individual assessments undertaken:
  - Basel Core Principles for effective banking supervision (BCP) using the 1998 BCP methodology.
  - IOSCO objectives and principles of securities regulation using the 2003 methodology.
  - IAIS Insurance Core Principles using the Insurance Core Principles methodology adopted in October 2003.
  - The Financial Action Task Force Recommendations using the 2004 FATF methodology.
- The assessments were carried out during a main mission from May 16 to June 1, 2005 and a second mission from November 15 to 22, 2005.
- Assessments were based on: self-assessments by supervisory authorities; reviews of legislation, decrees, regulations, policy statements, and other documentation; and detailed interviews with supervisory authorities.

### Summary assessment of observance of the Basel Core Principles (selected findings)
- The assessment reviewed the legal framework and policies and practices of institutions responsible for banking supervision; the assessment team received full cooperation.
- Panama is largely compliant with the BCP standard.
- The body of banking laws and regulations is appropriate.
- The SdB’s ongoing supervision program includes monitoring foreign activities of Panamanian banks and on-site inspections of subsidiaries of banks, both domestic and foreign.
- Under the SdB’s on-site program, local offices of foreign banks receive similar supervisory treatment as locally headquartered banks, including banks that hold the international license.
- Weaknesses limiting higher compliance with Basel:
  - (i) insufficient legal protection for SdB supervisors acting in their official capacity; and
  - (ii) underdeveloped processes for the measurement and monitoring of market risk—including incorporating market risk where significant into the current capital adequacy requirement.
- The SdB has substantial autonomy supported by:
  - Article 14 of the Banking Law: neither the directors nor the superintendent can be removed except for reasons included in the banking law and according to a decision of the Supreme Court of Justice.
  - Article 15 provides a closed list of six reasons for removing the superintendent and directors.
  - Independent resources that derive from fees charged to supervised entities; quantitatively charging for on-site inspection is the most relevant service to collect funds.

### Institutional setting, market structure, and key statistics
- Three types of banking licenses and counts:
  - (i) 39 general license banks (including two government-owned banks) able to conduct the full range of domestic and international banking activities;
  - (ii) 29 international license banks able to carry out banking activities only with nonresidents; and
  - (iii) 5 representative offices of foreign banks, whose activities in Panama are limited to liaison function with the head office, research, and marketing.
- Other deposit-taking institutions:
  - About 276 credit cooperatives (assets $860 million).
  - Four small savings and credit institutions (assets $70 million).
- Financial reporting:
  - Banks and banking groups must conform to international accounting standard (IAS) or U.S. Generally Accepted Accounting Principles (US GAAP).
  - The 2005 fiscal reform law established IAS as the only accounting standard for commercial firms.
- Safety net and crisis tools:
  - No depositor protection scheme or central bank to serve as lender of last resort.
  - Banks are subject to strict liquidity requirements and close liquidity monitoring by the SdB.
  - Limited deposit protection: depositors have priority in liquidation on the bank’s assets for up to $5,000 per depositor.
  - Three broad processes for intervention: (i) appointment of an advisor; (ii) substitution of managers and intervention; and (iii) liquidation.
  - Since creation of the SdB, five instances when an advisor was appointed and only in one instance did the bank subsequently fail.
  - Currently, three banks are in the process of being liquidated.

### Main findings (selected CP topics)
- Objectives, autonomy, powers, and resources (CP1):
  - SdB objectives: (i) promote public trust and integrity of the banking sector; (ii) prevent unauthorized people from running banks; (iii) ensure soundness and efficiency; (iv) contribute to development of the international financial center; (v) control adequacy of capital and liquidity ratios; (vi) develop procedures to facilitate national and international coordination with other supervisory bodies; and (vii) sanction banking activities contrary to legal provisions.
  - SdB has 236 employees; about 200 employees have completed university studies in law or finance.
  - The superintendent has a five-year mandate renewable just on one occasion; the five directors have an eight-year mandate, also renewable.
  - The banking law does not provide for legal protection for SdB personnel acting in their official capacity.
- Licensing and structure (CPs 2–5):
  - The banking law provides broad powers to issue or deny licenses, full access for inspections, and sanctioning powers.
  - The use of the word “bank” is defined by Article 24 of the Banking Law (Decree-Law 9/1998).
- Prudential regulations and requirements (CPs 6–15):
  - Banking law requires capital adequacy consistent with Basel capital rules considering Tier 1 and Tier 2 items.
  - Elements of capital calculation not consistent with the Basel capital accord:
    - No additional consideration of market risk.
    - Nonconforming risk weighting for some assets (e.g., risk weight for commercial mortgages is 50 percent instead of 100 percent).
  - SdB requires policies for country risk and market risk but has not developed its own risk parameters.
  - Loan-loss provisioning: level of provisioning must equal the higher of a minimum level as prescribed by the provisioning guideline or 1 percent of the portfolio.
  - SdB imposes a limit on bank exposures to related parties and to single borrowers of 25 percent of capital.
  - SdB regulations set corporate governance and internal control procedures consistent with Basel guidance.
  - AML/CFT framework set out under law 42 of 2000 (AML/CFT Law) establishes prevention measures for customer identification, transaction reporting, and record retention.
  - SdB reviews compliance of reporting institutions and obligates that reporting institutions appoint a compliance officer.
  - SdB issued Accord 12-2005 following the assessment mission to take account of the 2003 revision to the FATF recommendations and address prior regulatory gaps.
- Methods of ongoing supervision (CPs 16–20):
  - All banks examined by on-site team about every 18 months; large banks examined annually.
  - Financial information and credit portfolio details collected monthly; liquidity information gathered weekly.
  - Consolidated information of financial groups is collected quarterly.
  - Off-site analyses carried out monthly; SdB meets with relevant banks’ management yearly to discuss trends and strategies.
- Information requirements (CP 21):
  - SdB requires all banks to file audited financial statements within three months and verifies consistency with regulatory information.
  - Banks may prepare financial statements under IAS or U.S. GAAP.
- Formal powers of supervisors (CP 22):
  - Article 17 provides regulatory power for intervention, reorganization, or liquidation, including removal of directors or executive personnel.
  - Articles 38 and 76 provide the superintendent with power to cancel a banking license and appoint an advisor to the bank’s board.
  - Article 95 establishes reasons for SdB to take control of a bank: (i) lack of compliance with capital requirements; (ii) endangering the interests of the depositors; and (iii) lack of compliance with liquidity requirements.
  - Article 137 establishes the SdB’s sanctioning authority, allowing penalties ranging from an oral reprimand (private or public) to civil penalties up to $50,000; additional sanctions may be imposed for certain specific violations.

*Source: _cr0766 - 51.      The legislative and institutional frameworks are generally effective. Law 41, 2000*

### 79.      The SdB possesses adequate enforcement powers and there is a history of their use.

### _cr0766 - 79.      The SdB possesses adequate enforcement powers and there is a history of their use.

### Enforcement powers and remedial guidance
- The SdB possesses adequate enforcement powers and there is a history of their use.
- Existing guidance for working with distressed entities and for resolution of an insolvent bank is insufficient.
- Recommendation: The SdB should develop guidelines for use of remedial and contingency plans when there are violations of legal and regulatory requirements.
- Additional need: There may be a need for some legislative revision to support prompt, consistent application of remedial measures.

### Cross-Border Banking (CPs 23–25)
- The SdB is empowered to supervise economic groups and their bank and nonbank affiliates on a consolidated basis.
- SdB powers include the right to require audited financial statements and other reporting information from bank and nonbank affiliates of economic groups.
- The SdB requires that offices of foreign banks be subject to consolidated supervision by their home country supervisor.
- The SdB has signed agreements with foreign supervisors to facilitate cross-border information flows with most countries in the Western Hemisphere; several agreements are pending with European jurisdictions.
- Several regional banking groups have established their holding companies in Panama, and the SdB has become the home supervisor of these groups for consolidated supervision purposes.
- March 2005: Resolution 1-2005 established practical and legal criteria for the definition of home and host supervisor under the Panamanian holding companies.
- Recommendation: Modifications to legislation should be considered to limit reliance on interpretive regulation to clarify the SdB’s consolidated supervisory powers for Panamanian financial holding companies that have a Panama bank subsidiary.

### Recommendations and capacity strengthening
- Table 1 identifies recommended actions to better achieve compliance with the Basel Core Principles (BCP). Additional considerations include:
  - Strengthen regulatory reporting information for cooperatives and savings and credit institutions.
    - Current weakness: no process for off-site monitoring for cooperatives and savings and credit institutions.
    - Consideration: outsource off-site monitoring on a full cost recovery basis to the SdB to develop systems and process regulatory reporting information.
  - Require confidential treatment of SdB reports.
    - Inspection reports are issued to the bank without stipulation of confidentiality; banks have shared SdB reports with rating agencies and correspondent banks.
    - Concern: expectation of access to SdB reports even when a bank’s condition is not favorable.
  - Strengthen the Regulatory Department.
    - Underdeveloped for its functions; needs high-level and expert contributions in regulatory capital, market and country risk, and investment activities by banks.
    - Looming implementation of Basel II capital rules warrants strengthening.
    - The department demands an important hierarchical position within SdB’s organizational structure.
  - Build capacity and retain experienced staff.
    - Consider specific career streams for professional staff and strengthen retention of experienced staff.
    - Consider employment-contract provisions for reimbursement of SdB educational costs if the employee is hired by the private sector.

- Table 1. Recommended Action Plan in Relation to the Basel Core Principles (selected entries preserved verbatim)
  - 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, which is becoming increasingly significant.
  - 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.

### Authorities’ Response (January 23, 2006, Response by the Superintendency of Banks of the Republic of Panama)
- The SdB expressed appreciation for the IMF Mission assessment and noted the supervisory regime is largely compliant with the Basel Core Principles.
- SdB actions taken after the Mission Visit in May 2005:
  - July 2005: SdB introduced a disclaimer rule expressing that the reports of inspections are for the exclusive use of the bank and the SdB.
  - The structure of the Regulation Department (Departamento de Normas) will be analyzed and measures taken to strengthen its capacity.
  - August 2005: General Resolution No.2-2005 implemented a classification system for banks and economic groups based on the structure of the CAMELS.
  - December 2005: Accord 12-2005, Accord 12-2005 E and Resolution of the Board of Directors No. 32-2005 approved to upgrade Know-Your-Customer rules and compliance with AML/CFT regulations for banks and trust companies administrators; regulate correspondent banks; and establish the Know your Employee Policy.
- Response to Recommended Actions (preserved verbatim):
  - CP 1.1. The SdB is not responsible for the supervision of cooperatives and savings and credit institutions.
  - CP 1.2. The SdB will develop a program for financial stability of professionals in order to reduce the risk of losing senior officials.
  - CP 1.5. The SdB will evaluate the administrative and legal instruments that need amendment to provide legal protection for SdB staff acting in their official capacity.
  - CPs 3 and 25. The SdB has already established a procedure of consultation with home country supervisors to prevent parallel banks.
  - CP 6. The SdB will complete the necessary technical studies to update the regulations concerning capital adequacy on certain aspects recommended by the IMF. Other recommendations will require evaluations about the impact on the banking and monetary system.
  - CP 11. The SdB will conduct an integral review concerning the regulation about asset quality to include, among others, an adequate measure regarding country risk.
  - CP-12. The SdB is hiring a technical advisor that will support the implementation of new regulations and practices including VaR and/or building-block approaches to market risk.
  - CP 22. The Regulation Department (Departamento de Normas) is developing a guideline for working with distressed entities.
  - CP 23. Our Legal Department will analyze the corresponding regulations in order to clarify the SdB’s power to execute globally consolidated supervision.

### IOSCO assessment highlights (contextual summary)
- The IOSCO assessment of the National Securities Commission (CNV) found a generally effective legislative and regulatory regime but significant operational issues due to resource and staffing constraints.
- Key operational concerns identified:
  - Insufficient resources for the development and continued retention of qualified staff.
  - Selection and appointment of technical and administrative personnel requires approval of the Ministry of Economy and Finance (MEF).
  - One of three commissioner positions remained vacant since end-2004.
  - CNV staff and commissioners lack sufficient legal protection when acting in bona fide performance of their functions and powers.
  - Judicial actions have called into question the certainty of CNV decisions.
- Market and institutional facts:
  - 33 securities houses registered with a total transaction volume of about $7.3 billion in 2004; about 55 percent of transaction volume concentrated in five securities houses.
  - End-May 2005: 265 licensed stockbrokers. The CNV licensed 50 stockbrokers in 2003, 38 in 2004, and 42 until end-May 2005.
  - Bolsa de Valores: authorized capital of $1 million, divided into 180,000 shares; no individual shareholder owns more than 2.5 percent of the capital.
  - At end-2004 LatinClear held 43 percent of the total capitalization of securities in Panama.
  - Pension funds: by end-2004, two fund and pension administrators with 17,000 members and combined assets under management of $55 million.
- CNV enforcement activity (2000–mid-2005):
  - Authorized 16 formal investigations from 2001 to mid-2005.
  - In 2001 imposed fines in one case of $300,000 each on an issuer, its CEO, and its CFO.
  - Administrative penalties imposed: 153 in 2000; 119 in 2001; 67 in 2002; 25 in 2003; 21 in 2004; and 18 in 2005.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr0766.pdf*

### 101.     The CNV oversees the SROs to ensure that they implement the CNV’s

### _cr0766 - 101.     The CNV oversees the SROs to ensure that they implement the CNV’s

### Oversight of SROs and CNV capacity
- The CNV oversees the SROs to ensure that they implement the CNV’s regulations and rules; however, clarification of responsibilities and coordination between the respective roles of the CNV and the Bolsa in enforcement operations is needed in order to reduce duplication or inconsistency in the exercise of supervisory powers by the various authorities.
- The scarcity of resources at the CNV is also a factor that has an impact on the ongoing oversight program of the SROs, including the ability of the CNV to exercise prudential supervision over the operations of LatinClear which provides the clearance and settlements system.

### Cooperation (Principles 11–13)
- The CNV may share information that is publicly available in its files or other public records with local and foreign authorities.
- Information obtained during the course of inspections or investigations is deemed confidential and may only be shared with the judicial powers in class action cases or with the attorney general’s office in cases where there are reasonable grounds to believe that a criminal violation of law has occurred.
- Article 22 of the DLMV provides that the CNV may enter into arrangements with local or foreign, public or private entities to fulfill its oversight functions.
- The CNV has signed memoranda of understanding with regulators in Latin America, including El Salvador, Dominican Republic, Honduras, Chile, Mexico, Argentina, and Costa Rica, and in Europe (Spain).
- The CNV is a party to the IOSCO Multilateral MOU (Annex B only) that promotes cross-border cooperation and information exchange to prevent securities market crime.
- Limitations noted:
  - The CNV is not permitted to share nonpublic information held on its files with its overseas counterparts.
  - The CNV cannot initiate an investigation or inspection solely on behalf of a foreign authority but only for the purposes of its own investigations.
- Despite restrictions, the CNV has assisted foreign regulatory authorities within these restrictions of Panamanian law.

### Issuers (Principles 14–16)
- CNV regulations require registrants to use either IAS or US GAAP accounting standards and the president, treasurer, and/or CFO must declare that the financial statements filed are correct.
- Capacity constraints:
  - The capacity and skill of the accountancy profession and its representative body are underdeveloped.
  - The Accounting Technical Board needs to reinforce its rules and powers to permit it to enforce its code of professional ethics and to establish an effective oversight system.
- A draft law was introduced to the National Assembly in April 2005 to modify the existing statutes that regulate the accounting profession and the Accounting Technical Board.

### Collective investment schemes (Principles 17–20)
- The DLMV requires that the CNV regulate investment companies, both Panamanian and foreign, and establishes categories of investment funds according to whether they are open- or close-ended and according to the redemption offer.
- The law grants the CNV authority to establish procedures and to issue detailed regulations.
- The new regulatory framework sets out authority and responsibility for regulation of collective investment schemes, including clear power to establish and enforce entry criteria for open-ended funds.
- Because the law is recent, the CNV has not yet introduced a program for the ongoing monitoring of the conduct of collective investment schemes or their administrators, including enforcement of compliance with eligibility, licensing, registration, or authorization requirements.

### Market intermediaries (Principles 21–24)
- The CNV exercises supervision and oversight of compliance over market intermediaries through Article 263 and 264 of the DLMV.
- Securities houses are licensed intermediaries, both in the primary and secondary markets, with most owned by banking groups.
- Banking entities are allowed to deal in securities under Article 23 of DLMV, once they obtain a securities house license from the CNV.
- The CNV has a full range of supervision and enforcement manuals and technical resources; however:
  - Reporting and inspection programs are not in place to ensure that prudential and risk-management requirements are observed.
  - Monitoring of compliance with prudential requirements and internal control and risk-management standards are weak.
- With an increase in current enforcement staff, the CNV should be able to improve its supervision efforts.
- Further improvement will come when regulations raising standards for internal control systems, capital adequacy requirements, and asset valuation are passed.
- The CNV is able to compel financial intermediaries to reconstruct any securities transaction and during the course of an ordinary inspection is duly authorized to request and obtain records from intermediaries in accordance with Article 264 of the DLMV.

### Recommendations (summary of Table 2: Recommended Action Plan in Relation to the IOSCO Principles)
- Principles Relating to the Regulator (P 1–5)
  - Appoint a new commissioner as provided under current law; the commissioner’s position has remained vacant since the term of the prior commissioner ended in December 2004.
  - Grant the CNV the right to direct administrative matters, including the right to hire and fire its staff.
  - Grant additional resources on an urgent basis, particularly for the recruitment of skilled staff.
  - Strengthen CNV authority regarding corporate governance, liability of auditors, and code of conduct.
  - Implement training programs in risk management and prudential supervision, supervision of collective investment schemes, intermediaries, and supervision of SROs.
  - Enact legislation to address recent adverse judicial decisions and extend legislative protection to staff against liability for good faith acts carried out in the course of duty.
- Principles of Self-Regulation (P 6–7)
  - Strengthen CNV’s monitoring of the Bolsa and work with the Bolsa to develop a comprehensive oversight program for market intermediaries.
  - Put in place SRO staff examination, inspection, and enforcement programs, augmented with training and assistance.
  - Provide CNV staff technical training on trading systems, monitoring risks, detection of deceptive conduct, market abuses, and clearing and settlements systems.
- Principles for the Enforcement of Securities Regulation (P 8–10)
  - Improve human and technological resources to provide effective prudential oversight for inspections, investigations, and sanctions.
  - Implement an effective system of inspections based on routine periodic inspections or risk assessment rather than complaint-driven only.
  - Improve technology tools for efficient use of information gathered in the National Securities Registry.
- Principles for Cooperation in Regulation (P 11–13)
  - Undertake legislative changes and procedural modifications to improve information exchange at domestic and international levels.
  - In particular, legislative changes should be undertaken in order that Panama meet commitments to the IOSCO multilateral MOU before 2010.
  - Develop practical rules and procedures to implement formal accords with Superintendency of Banks and Superintendency of Insurance and stress the importance of receiving feedback in collaboration with the UAF.
- Principles for Issuers (P 14–16)
  - Formulate a new framework for the governance of the accounting profession and empower the Accounting Technical Board to enforce rules and the code of professional ethics and establish an effective oversight system.
  - 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)
  - Strengthen ongoing monitoring of the administrators of Collective Investment Schemes without delay.
  - Apply existing rules regarding valuation of assets of collective investment schemes and mutual funds (Accord 5-2004, arts. 36–39) and address scarcity of resources and lack of staff technical skills.
  - Introduce minimum conduct standards for administrators of collective investment schemes and better reporting mechanisms.
- Principles for Market Intermediaries (P 21–24)
  - Review staffing resources to improve supervisory work.
  - Prepare draft regulations 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 that addresses intermediary risks.
  - Develop an early warning system or other mechanism to give the CNV notice of a potential default and develop risk-based inspection programs.
  - Put in place criteria related to integral systems of internal control of supervised organizations; increase frequency of reporting and monitoring.
- Principles for the Secondary Market (P 25–30)
  - Require and empower the Bolsa to assume direct regulatory oversight and surveillance responsibility for all participants who use its trading platforms.
  - Develop robust self-regulatory organizational capabilities, including broker-dealer examination and risk management capabilities.
  - Reinforce CNV resources to determine operational competence of an exchange operator and to put in place mechanisms to identify and address disorderly trading conditions.
  - Put in place arrangements for continuous collection and analysis of information concerning trading activities and provide analysis results to inspection officials.
  - Consider an industry-wide guarantee fund to facilitate orderly settlement of transactions and limit ripple effects of a failure.
  - Ensure exposure to systemic risk for intermediaries is consistent with risk analysis and any completed assessment of the CPSS/IOSCO Recommendations for Securities Settlement Systems.
  - Note: Principle 30 was not assessed, but resource constraints at the CNV limit its capacity in this specialized technical area; corrective action is recommended.

### Authorities’ Response and developments since on-site evaluation (through December 2005)
- The CNV appreciates the IMF Mission’s assessment and considers it accurately reflects the current situation of securities market regulation and oversight in Panama.
- Key developments:
  - Number of regulated entities increased to:
    - 34 securities houses (including 3 that are 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 regulated entities increases oversight challenges given ongoing limitations in autonomy, human resources, and training.
  - In the last quarter of 2005, four staff members in the National Directorate of Markets and Enforcement resigned, most taking positions in the private sector.
  - The only auditor in place at the time of the assessment has resigned to take a position in the private sector (with relation to Principle 9).
  - Lack of independent authority and budgetary resources limits commissioners’ self-determination; oversight is constrained by appointees of the Presidency of the Republic.
  - 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 through rotation of directors in an acting capacity.
  - Judicial outcomes:
    - At the end of 2005, seven judicial cases were solved, compared to four in 2004.
    - On November 11, 2005, a judgment clarified that the CNV has the expressed power to prescribe the form and content of the financial statements of entities regulated by the CNV.
    - A $300,000 fine imposed against the chairman and manager of an economic group for false presentation of financial and account information remained pending before the courts (cases pending since June 2001).
    - On April 26, 2006, the courts confirmed the CNV’s $100,000 fine against an internal accountant involving the same group for the same failure.
  - Consultancies and regulatory development:
    - The international consultancy with Novaster Grupo Empresarial, S.L. concluded on July 31, 2005, following approval of Accord 11-2005 (August 5, 2005) that developed regulation for Law 10 of April 16, 1993, on pension funds, retirement funds, and other benefits and the activities of the investment administrators.
    - The consultancy helped elaborate manuals for authorization, control, and supervision of administrators of pension plans and retirement funds.
    - On December 15, 2005, GC de Panama, S.A. (Infosgroup) concluded consultancy work for development and implementation of the supervision system and control for retirement and pensions funds regulated by Law 10 of 1993.

### Summary Assessment of Observance of the Insurance Core Principles (beginning of section)
- The assessment of insurance supervision was carried out by analyzing compliance with the Insurance Core Principles of the International Association of Insurance Supervisors (IAIS).
- The Superintendency of Insurance and Reinsurance (SSRP) supervises the insurance and reinsurance sectors.
- Compliance with the IAIS core principles is weak due to the outmoded legal regime, and underdeveloped supervisory and regulatory framework.
- The SSRP lacks independence from the industry and the executive branch of government.
- To strengthen SSRP capacity for on-site and off-site supervision, 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; however, it is not substantially available to the SSRP for regulation purposes.
- Insurance and related laws:
  - Insurance is regulated by Law No. 59, reinsurance by Law No. 63, and captive insurance operations by Law No. 60, all issued in 1996.
  - A draft law is under preparation to address identified weaknesses; shortcomings in the draft include:
    - (i) the SSRP would remain dependent on MICI;
    - (ii) market conduct requirements would continue to favor the 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 insurance operations.
- Institutional setting and market structure:
  - The insurance sector in Panama is small compared with the banking sector.
  - There are 18 authorized insurance companies.
    - Of these, four specialize in the life business, one in surety business and 13 operate both life and nonlife insurance.
    - Of these 13, nine have in addition a license to operate reinsurance.
    - Of the 18 insurance companies, five are subsidiaries of foreign firms and four are subsidiaries of local banks.

*Source: _cr0766 - 101. The CNV oversees the SROs to ensure that they implement the CNV’s (excerpt).*

### 115.     There are five companies authorized to operate exclusively in reinsurance. In

### _cr0766 - 115.     There are five companies authorized to operate exclusively in reinsurance. In

### Sector overview and key statistics
- There are five companies authorized to operate exclusively in reinsurance.
- In 2003, premiums issued by reinsurers represented 11 percent of the premiums issued by insurers.
- 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, which is 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 insurance business, automobile insurance and health insurance represent 16 and 17 percent of total premium subscriptions, respectively.
- The Panamanian insurance market is highly concentrated with the five largest companies accounting for around 74 percent of total business.
- The captive insurance sector is insignificant; there are two captive insurers and no data are available for captives for 2004–2005.

### Regulatory and supervisory framework — main findings
- The legislative framework for insurance supervision is weak.
- The industry pays a fee and taxes levied on net premiums from local risks to the central government; the tax is two percent of net premiums issued for risks located in the country, and 5 percent for fire insurance. The tax is not substantially available for the SSRP.
- The stated objective of insurance supervision is to enhance and strengthen the insurance industry; the SSRP is responsible for ensuring insurers comply with technical reserves and solvency requirements stated in the law.
- The overall budget of the SSRP is strained and dependent on MICI, limiting ability to implement structural changes, raise wages, hire and retain skilled staff, and develop supervision infrastructure.
- Accounting rules exist for insurers, but the SSRP does not require companies to use International Accounting Standards (IAS) for regulatory purposes, while IAS is required by the securities law for publicly traded companies and for fiscal purposes.
- The 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.

### Organization of the SSRP
- The SSRP has little or no autonomy from the industry or MICI; it is part of MICI and does not have a separate budget. Part of the SSRP’s budget comes from a fixed rate charged to supervised companies and brokers, and part comes from MICI.
- The Technical Council is composed of nine board members and is responsible for setting SSRP policy, issuing licenses for new insurance companies, and resolving controversies arising from the superintendent’s decisions. Members include the superintendent, the Minister of MICI, its legal director, the actuary of the SSRP, a director of the National Securities Commission, and four representatives from the insurance sector (two from insurance companies and two from the brokers).
- Staff salaries at the SSRP are significantly below industry levels and below the salaries of other financial supervisory agencies, affecting staff retention. There is no legal protection for staff actions while discharging duties.
- There are currently no actuaries working for the SSRP, although one was contracted to train two staff members.
- Other resources are limited, constraining analysis of financial reporting, reinsurance activities, valuation of assets and technical provisions, risk management and assessment, and consolidated supervision of insurers in financial groups.
- The draft insurance law (dated April 2005) would strengthen SSRP financial autonomy from MICI, set superintendent qualifications and a seven-year term, eliminate the Technical Council and National Reinsurance Commission, and establish a board of directors composed of the minister of MICI, the insurance superintendent and three independent members with insurance experience. The draft keeps a MICI representative on the board and staggers fixed terms for independent members.

### Licensing, changes in control, and fit-and-proper
- A license is required to carry out any insurance business in Panama.
- Foreign investment is allowed if through a local subsidiary, not a branch.
- Licenses to sell life, nonlife, and surety products are issued separately in the sense of authorization for each line of business; composite licenses to operate every line of business (including reinsurance) exist.
- To receive a license, applicants must provide information on shareholders and board members, documentation describing products, reinsurance programs, and feasibility of business plan in the medium and long term. The Technical Council or National Reinsurance Commission has 90 days to grant the license once information is complete.
- The law prohibits granting a license 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 applies to both insurance and reinsurance companies.
- The SSRP undertakes a limited fit-and-proper review; the law requires CVs and “recommendation letters” for board members and information on shareholders. SSRP checks shareholders and board members with the Financial Analysis Unit (UAF) before granting a license.
- 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; prior authorization for changes in control is not required.
- Insurers by law must receive prior approval of the Technical Council or National Reinsurance Commission before transferring all or any part of their business to another insurer.
- The draft law defines “control” and requires advance reporting to the SSRP for transfers implying more than 10 percent of total outstanding shares.

### Corporate governance and internal controls
- The insurance law does not impose measurable corporate governance requirements; SSRP does not verify compliance with corporate governance principles or set board or senior management responsibilities.
- External financial audit is required once a year; an actuary is required to certify mathematical reserves in life business. Mathematical reserves must be calculated and presented by an independent and certified actuary, and certified by another independent actuary once a year.
- The SSRP has no power to oversee or verify internal controls and does not require companies to have them. Some larger firms have internal controls and corporate governance rules.
- The draft insurance law could be modified to require corporate governance and internal controls and to give SSRP sanctioning authority for noncompliance.

### Prudential rules
- SSRP verifies that insurance product design relies on a technical basis but neither requires nor verifies comprehensive risk-management systems.
- No provisions on minimum ratings for reinsurers or exposure limits toward single reinsurers.
- 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; for life business, according to the actuarial value of expected losses per accepted actuarial principles.
- Mathematical reserves must be calculated and presented to the SSRP by an independent and certified actuary, and certified by another independent actuary once a year. A certified actuary refers to someone with an actuarial degree.
- 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 may be invested abroad in the same types of instruments listed and with a rating of at least “investment grade.” At least 50 percent of the capital exceeding the minimum required capital has to be invested in the country as well.
- There are no diversification or liquidity requirements and no asset valuation rules. There is currently no regulated market for derivatives; restrictions on derivatives should be addressed.
- A solvency regime is specified in the law and detailed through specific regulation. Capital requirement must be calculated according to procedures dictated by the SSRP and is verified by the supervisor and published every trimester. Solvency control levels are established, and publicly disclosed actions are taken when companies fail to comply.
- The draft law does not change how technical reserves are calculated but introduces comments on asset liquidity to improve asset–liability matching.

### Market conduct
- Insurance brokers are required to be licensed, have adequate knowledge, and pass a licensing examination. The insurance law lists requisites, obligations, and prohibitions for brokers and gives the SSRP the power to cancel a broker’s license.
- The law sets minimum requirements for insurance policy models to be easy for consumers and to include necessary information; policy models need SSRP authorization prior to use.
- SSRP has a legal department to receive claim-related complaints from consumers.
- The draft law could require regulation for disclosure of fees/commissions paid to brokers or agents.
- Insurers must publish audited statements annually in accordance with regulatory accounting principles; SSRP publishes solvency margins quarterly. Statistical information is gathered by SSRP and available for consultation.

### Monitoring, inspection, and sanctions
- Market analysis by SSRP includes monitoring premiums, number of policies issued, and claims monthly; it does not include qualitative analysis or off-site monitoring of prudential indicator trends.
- Insurance companies must submit audited financial statements during the first four months of every year; statistical information must be submitted monthly; solvency margin information must be submitted quarterly.
- There is no requirement to report outsourced functions.
- SSRP has the power to carry out on-site inspections, but there are currently four auditors working for the SSRP, making it hard to cover all companies. Inspections focus on financial aspects rather than wider managerial factors.
- Reinsurance companies have one year to submit audited financial statements and are not subject to the solvency regime. SSRP authority to inspect reinsurers exists but staffing does not allow consistent inspections.
- Preventive and corrective measures are specified and mainly triggered when companies fail minimum solvency margin; measures range from reorganization plans (including capital increases) to intervention or revoking licenses. Law establishes reasons and amounts of fines.
- Legal framework defines options for insurer and reinsurer exit giving priority to policyholder protection.
- The draft law introduces a regularization process allowing SSRP to impose conditions when specific weaknesses pose a risk to policyholders: (i) problems in constitution/coverage of technical reserves; (ii) solvency margin or minimum required capital not maintained; (iii) auditors or independent actuary refrain from giving an opinion; (iv) liquidity conditions not met. Regularization plans must be submitted by the board of directors.

### Cross-border operations, supervisory coordination, and confidentiality
- Cross-border insurance operations are prohibited. If needed product is not offered locally, interested parties may obtain SSRP authorization to get the product abroad; these authorizations must be registered at SSRP.
- SSRP has no 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.
- SSRP signed a memorandum of understanding with the Superintendency of Banks and the National Securities Commission to share information and coordinate supervision of financial groups.
- Insurance law does not allow supervision by a home supervisor. The law specifies a sanction for public officials who improperly provide information on companies or brokers under SSRP supervision.

### Recommendations (selected, per IAIS Insurance Core Principles)
- Organization of an Insurance Supervisor
  - Strengthen SSRP independence from industry and executive; discontinue industry participation on SSRP Board; Board should be independent from MICI.
  - Provide more staff and resources; compensation sufficient 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 manual of internal procedures to incorporate other relevant supervision processes.
  - Where applicable, align reinsurance and insurance laws.
- Licensing and Changes in Control
  - Require internal control, information technology, and risk management systems prior to issuing a license.
  - Require fit-and-proper tests for shareholders, senior managers, board members, actuaries, and auditors.
  - Disclose and clearly state process for changes in control in law or regulation.
- Corporate Governance and Internal Controls
  - Develop regulatory framework for corporate governance and minimum internal controls; clearly state board responsibilities.
  - Consider specifying board composition, requiring independent members, appointing a compliance officer, or creating committees.
- Prudential Rules
  - Revise regulation for technical reserves to implement actuarial standards.
  - Require prompt submission of audited financial statements.
  - Introduce asset–liability matching requirements.
  - Include reinsurance companies in the solvency regime.
- Market Conduct
  - Allow institutions to employ agents directly.
  - Require disclosure of brokers’ fees and commissions.
  - Require disclosure of institutions’ financial performance.
- Monitoring, Inspection, and Sanctions
  - Widen objectives of on-site supervision beyond financial aspects.
  - Improve SSRP information technology systems to receive and analyze information.
- Cross-Border Operations, Supervisory Coordination and Cooperation, and Confidentiality
  - Enforce supervisory coordination and define legislative framework for cooperation and information sharing with home supervisors of foreign firms operating in Panama, including applicable terms and conditions.

### Authorities' response
- The SSRP expressed gratitude for the IMF assessment and noted recommendations are being reviewed; many have been amended and progress is ongoing based on Observance of the IAIS Insurance Core Principles.
- The SSRP is working on appropriate regulation for the insurance sector and on enforcing a new insurance law to achieve independence from the Ministry as recommended; this process requires financial and political support and is taking time.
- The SSRP welcomes IMF cooperation for assessor opinions to review the financial framework of the new law.

*Source: _cr0766 - 115.     There are five companies authorized to operate exclusively in reinsurance. In*

### 151.     Panama is largely compliant with a majority of the Financial Action Task Force

### Panama is largely compliant with a majority of the Financial Action Task Force (FATF) Recommendations

### Summary of overall assessment
- Panama is largely compliant with a majority of the FATF 40+9 Recommendations.
- Money laundering and the financing of terrorism are crimes under the law; there have been 10 prosecutions to date.
- Most types of financial institution are subject to comprehensive preventive and reporting obligations and supervision.
- Preventative regimes for several designated nonfinancial businesses and professions (DNFBPs) are less developed.
- Active cooperation with international counterparts occurs at the supervisory, prosecutorial level, and with other financial intelligence units (FIUs).
- The assessment was conducted as part of the Offshore Financial Center (OFC) Program of the IMF using the 2004 FATF Methodology, based on information from two on-site visits in May and in November 2005.

### Institutional setting and market structure
- Financial system composition:
  - Domestic and internationally active banks, insurance companies, trust companies, and securities brokerage companies.
  - To a much lesser degree: finance companies, leasing companies, cooperatives, and savings and credit institutions.
  - Banking activities represent the most significant component accounting for more than 90 percent of the financial services sector.
- Key laws and obligations:
  - Law 42-2000 obliges banks, trust companies, remittance companies, finance companies, cooperatives, securities firms, and investment administrators to meet AML/CFT requirements.
  - AML/CFT requirements under Law 42-2000 include:
    - (i) customer identification—obligation to identify the true beneficial owner or beneficiary;
    - (ii) monitoring for unusual transactions;
    - (iii) sending to the Financial Analysis Unit (UAF) reports of suspicious transactions—regardless of the transaction amount—and reporting currency and cash-like transactions in excess of $10,000;
    - (iv) avoiding “tipping off” customers when a suspicious transaction report (STR) has been forwarded to the UAF;
    - (v) establishing internal control systems and communication mechanisms to prevent money laundering;
    - (vi) training personnel; and
    - (vii) maintaining customer records for at least five years.
- UAF (Financial Analysis Unit):
  - Established in 1995, a member of the Egmont Group; administrative FIU without enforcement or investigative police powers and functionally independent.
  - Director reports directly to the President; budget depends on distributions from the Public Security and National Defense Council.
  - Nearly all STRs received by UAF are passed to prosecutors; UAF requires additional financial, human, and technological resources.

### Main findings and capacity constraints
- Strengths:
  - Adequate legal authority for law enforcement to carry out AML/CFT responsibilities.
  - Money laundering investigations conducted by the Judicial Technical Police under direction of prosecutors.
  - High level of international cooperation in AML/CFT.
- Weaknesses and needs:
  - Shortages in resources and expertise for law enforcement and the judiciary; operating budget and staffing constraints affect effectiveness.
  - Implementation gaps for preventative measures outside banking and securities sectors.
  - Low and generally weaker quality of STR reporting despite active CTR reporting; tendency toward formalistic compliance (e.g., reporting "no CTRs to be filed").
  - Need for enhanced training and coordination among regulatory bodies.
  - Preventive regimes for DNFBP sectors underdeveloped; specifically, corporate service providers need regulatory clarity on retention of owner information by resident agents for Panamanian corporations.
  - UAF needs review for independent budgetary process and to promote interagency coordination, training, and public outreach/awareness activities.
  - Law enforcement and prosecution need additional financial resources, specialized training, and personnel to improve investigations and prosecutions; prosecution budget should be reviewed.
  - Courts should develop an appropriate case database and access to forensic accounting experts.

### Legal framework, predicate offenses, and asset recovery
- Criminalization and predicate offenses:
  - ML criminalized by both the Unified Text on Drug Crimes and Law 41-2000 (AML law); the AML law lists specific predicate crimes but does not include all offenses required by the Palermo Convention.
  - Terrorism and financing thereof are autonomous offenses in the Criminal Code consistent with international standards; financing of terrorism is not listed as a predicate offence for money laundering.
  - To date there have been no prosecutions of financing of terrorism cases.
- Sanctions and forfeiture:
  - Penal Code as amended by Law 41 applies sanctions of prison from 5 to 12 years and 100 to 200 days of imprisonment or the assigned value of a fine to money laundering cases.
  - Forfeited assets for general money laundering cases go by law into the Special Fund for the Retired and Pensioned; forfeited assets in drug cases go into a fund held by CONAPRED (National Commission for the Study and Prevention of Drug-Related Crimes).
  - Most forfeiture cases are drug-related; most of the funds are at CONAPRED’s disposal.
- Asset freezing, seizure, and confiscation legal process is largely compliant with international standards.
- Authorities should ensure ability to enforce other countries’ forfeiture orders as they relate to assets in Panama.

### General situation of money laundering and financing of terrorism (ML/TF)
- The UAF reported that reporting and preventive requirements have had a dissuasive effect on ML activity in financial institutions; money laundering has moved towards other parts of the economy to avoid banks’ detection capacity.
- The 10 prosecuted money laundering cases to date were based on narcotics-related predicate crimes.
- Other financial crime cases have mainly resulted from foreign corruption investigations where funds were later deposited in Panamanian financial institutions.
- The Colon Free Trade Zone is recognized as an area of vulnerability for money laundering.

### Overview of the financial sector supervision and DNFBP coverage
- AML/CFT supervisory authorities:
  - Superintendency of Banks (SdB);
  - Superintendency of Insurance and Reinsurance (SSRP);
  - National Securities Commission (CNV);
  - Ministry of Commerce and Industry (MICI);
  - Autonomous Panamanian Cooperatives Institute (IPACOOP);
  - Administration of the Colon Free Trade Zone; and
  - Gaming Control Board.
- DNFBP and sector coverage:
  - Lawyers exclusively can incorporate companies and private interest foundations; all companies must be registered in the public registry and must have a lawyer as resident agent.
  - About 29,000 companies and private interest foundations were registered in the public registry in 2004; registry does not provide sufficient information to determine ownership structures or the percentage of bearer share companies.
  - DNFBPs subject to AML/CFT obligations: casinos, trust service providers, and real estate agents (legal persons).
  - Other regulated businesses for AML/CFT purposes: pawnshops and businesses in free trade zones.
  - Not covered by AML/CFT regulations: lawyers, accountants, and corporate service providers.
  - Dealers in precious metals and stones are partly covered only if merchants are located in the ZLC (making them subject to free zone CTR requirements).
- Supervisory performance:
  - SdB and CNV have developed effective compliance mechanisms.
  - Deficiencies identified in SSRP, MICI, and Banco Hipotecario Nacional (BHN) including lack of AML/CFT supervision, weak internal controls and compliance systems, and minimal AML/CFT training.
  - IPACOOP is developing AML/CFT supervisory programs with SdB assistance.

### Preventive measures — financial institutions
- Legal reporting and controls:
  - Financial institutions required to report suspicious transactions to the UAF regardless of amount and to file (through supervising authority) reports for currency and cash-like transactions in excess of $10,000.
  - Requirements include customer identification/due diligence, internal control systems, record retention, administrative sanctions, and penalties.
  - Under Executive Decree No. 1, 2001, supervision and control authorities have powers to enforce Law 42-2000 requirements.
- Supervisory capacity:
  - SdB and CNV have sound mechanisms; SSRP, MICI, and BHN have deficiencies in AML/CFT supervision and training.

### Preventive measures — DNFBPs
- Trust service providers:
  - Supervised by SdB and subject to same AML/CFT requirements as financial institutions.
  - Practical problems where trust service providers are subsidiaries of law firms, affecting effective reporting of suspicious transactions.
- Gaming, real estate, pawnshops, free trade zones:
  - Gaming and real estate businesses have regulatory requirements including customer identification and STR reporting; enforceability beyond CTR filing is unclear.
  - Pawnshops and companies in Free Trade Zones subject to filing CTRs.
  - Dealers in precious metals and stones not generally subject to AML/CFT regulations except via Free Trade Zone merchants.
- Supervision and compliance issues:
  - Government oversight of DNFBPs is not conducive to effective compliance; detection and reporting of suspicious transactions by DNFBPs minimal or nonexistent.
  - Hundreds of reports are filed only to indicate no cash transactions occurred; little targeted guidance exists for sector-specific risks.
  - MICI lacks inspection personnel, requires better training and prioritization based on risk.
  - Gaming Control Board has legal powers but independence and expertise undermined by personnel drain to regulated institutions and high turnover of auditors/inspectors.
  - Weak background checks for casino license applicants (based almost exclusively on UAF information) and limited evidence of effective supervision and sanctioning for noncompliance with AML/CFT regulations.
  - Outstanding risks from money services in gaming: currency exchange, wire-transfer of money, and payment of winnings by check.

*Source: IMF assessment report excerpt provided.*

### 179.     The authorities have initiated attempts to deal with the special risks present at

### _cr0766 - 179.     The authorities have initiated attempts to deal with the special risks present at

### Free Trade Zone (ZLC) risks and controls
- Law requires all merchants of the ZLC to report transactions above $10,000 in cash, and other regulations require them to report suspicious transactions.
- Findings:
  - Most companies are not aware of what makes a transaction in their particular business suspicious.
  - Many ZLC exporters do not appear to pay attention to potential illicit sources of payments.
  - The Administration ZLC must strengthen audit procedures, increase the number of inspections, and cooperate closely with the UAF and Customs to determine risk indicators to target oversight activities.
  - The Administration ZLC needs to acquire adequate technology; basic issuance of importation and re-exportation documents is still done without computerized tools.
- Recommendation highlights:
  - Strengthen enforcement of preventive requirements for Free-Trade Zone merchants, especially in higher risk areas.
  - Provide better auditing capabilities and training for the administrator in the ZLC, and ensure close cooperation with the UAF and Customs.
  - Free Trade Zone merchants need training and awareness of the modalities by which their businesses could be misused for money laundering, to foster compliance with suspicious transaction reporting obligations.

### Lawyers, accountants, and company service providers (DNFBPs)
- Current coverage and practices:
  - Lawyers are not covered by STR, customer due diligence, or record-keeping obligations.
  - Lawyers provide offshore corporate structuring services using bearer-share corporations and personal interest foundations, with common features including pre-established dormant shelf corporations, nominee directors, mail forwarding services, and resident agent services.
  - All companies must have a resident agent who is a lawyer; this agent is obliged to disclose the identity of his customers only upon requests from judicial authorities in the course of narcotics-related investigations.
  - Some banks report difficulties identifying beneficial owners when law firms represent or introduce foreign clients; some lawyers consider it not their responsibility to identify the ultimate customer when dealing with counterparts such as foreign law firms.
- Recommendations:
  - 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 considering specific money laundering risks.
  - Review the legal framework for DNFBPs to ensure regulations are supported by clear legal powers.
  - Provide training and guidance on typologies of money laundering for DNFBPs; extend legal protection to DNFBPs from civil or criminal liability for reports made in good faith.
  - Clarify obligations on when to file cash-threshold reports or suspicious transaction reports and require DNFBPs to implement adequate internal controls (AML Programs) tailored to their activities.
  - Regulators should review supervision or need for supervision of DNFBPs and develop working groups within coordinating committees.

### Fiduciary companies, legal persons, and company incorporation
- Findings:
  - Trust service providers (fiduciary companies) are subject to AML/CFT requirements for financial institutions and supervised by the SdB.
  - 7 of the 57 licensed fiduciary companies are subsidiaries of law firms that are not subject to the same obligations.
  - Difficulty: fiduciary companies affiliated with law firms face conflicts reporting suspicious transactions where the affiliated law firm owes confidentiality duties.
  - Unclear to what extent SdB can access necessary records when relevant information is derived from legal services provided by affiliated law firms.
  - All companies, including bearer share corporations, must have a resident agent and be registered in the Public Registry; registry keeps public records of articles of incorporation, identity and address of directors and officers as of time of incorporation (update not mandatory), and current details of the registered agent.
  - The Public Registry does not include ownership information of all companies, especially of bearer share corporations.
- Recommendations:
  - Company incorporation and related services should be subject to AML/CFT reporting obligations to avoid negative incentives for trust companies owned by law firms not to report suspicious transactions.
  - To the extent lawyers are involved in financial or nonfinancial activities described by FATF, those activities should be regulated and supervised.

### Nonprofit organizations (NPOs) and private interest foundations
- Findings:
  - NPOs, including private interest foundations used for offshore legal structures, are subject to incorporation requirements similar to corporations and must register in the Public Registry.
  - NPOs must obtain an additional authorization from the Ministry of Government and Justice, which does not supervise the sector.
  - The ministry has begun to create a database of NPOs to know their number, purpose and activities; assess their potential for misuse; update the regulatory framework; and create the currently lacking oversight mechanism.
- Recommendation:
  - The Ministry of Government and Justice should create a registry (inventory) for NPOs, undertake a risk assessment of the NPO sector, and depending on results, update the regulatory framework to include AML regulations and oversight.

### National and international cooperation
- Domestic cooperation:
  - Cooperation exists both formal and informal among government agencies involved in AML/CFT, though communication could be strengthened and regularized.
  - Only CONAPRED has regular meetings on illegal drug issues with public and private sector representatives.
  - A recently established High Level Presidential Commission is intended to provide national policy guidance on AML/CFT matters.
- International cooperation:
  - Government has a very good level of international cooperation through adoption of international conventions, numerous mutual legal assistance treaties, a good record on extraditions, and cooperation between the UAF, police, and counterparts abroad.
  - Formal cooperation could be enhanced by establishing asset-sharing agreements with international counterparts so Panama could both receive and retain funds/assets for law enforcement and judicial agencies.
  - Panama should ensure that it can enforce other countries’ forfeiture orders.
- Recommendations (selected):
  - Ensure 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 with working groups on specific issues, including supervision of DNFBPs.
  - Review overlaps between AML/CFT Commission and CONAPRED regarding drug and nondrug-related money laundering.
  - Review dual criminality principle and the policy that noncriminal forfeiture orders will not be recognized or enforced; consider eliminating the dual criminality requirement for mutual legal assistance.
  - Ensure collection and maintenance of all statistics required by R.32.

### Selected cross-cutting recommendations from the FATF 40+9 Action Plan
- Criminalization and law reforms:
  - Amend Article 389 to criminalize all money laundering predicate offenses as required by the Vienna and Palermo Conventions.
  - Address differing treatment for the conspiracy offense depending on whether the offense is drug-related.
  - Implement the UN Convention against Corruption following National Assembly approval May 10, 2005.
  - Expand predicate list to include financing of terrorism for the AML Law.
  - Amend legislation to permit investigating authority to freeze and seize in all criminal cases to conform to Palermo Convention; permit forfeiture of assets without necessarily showing nexus to a particular crime.
- FIU and operational capacity:
  - Review funding arrangements for UAF.
  - Strengthen protection of information reported to UAF to maximize secured electronic receipt and dissemination.
  - UAF to undertake more outreach and awareness-raising to government agencies, reporting entities, and the public.
  - Review staffing levels, training requirements, and consider special courts for financial crimes; develop forensic/accounting assistance processes and secure database systems.
- Preventive measures for financial institutions and other sectors:
  - SSRP and BHN should implement customer identification and due diligence requirements in insurance and savings and credit institution sectors.
  - Supervisory authorities should issue guidance on customer due diligence performed by third parties or introducers (R.9).
  - Extend record-keeping and monitoring obligations to insurance and savings and credit institution sectors; extend reporting obligations to cover terrorism-related transactions.
  - SSRP, BHN, and MICI should develop inspection programs and ensure adequate resourcing, licensing, and fit-and-proper procedures.
  - Ensure MICI is adequately resourced to supervise remittance and exchange houses; consider adjusting threshold for currency transaction reports to detect structuring in remittance area.
- DNFBP supervision and targeted measures:
  - MICI should implement an AML/CFT oversight program allocating resources based on money laundering risks within each sector, including criteria for monitoring and inspections.
  - Strengthen enforcement and supervision in sectors such as pawn shops, casinos, real estate, and Free-Trade Zone merchants, targeted according to identified risks.

### Authorities’ response and follow-up actions
- Government positioning:
  - The Government of Panama, under President Martin Torrijos Espino, treated evaluation of Panama’s AML/CFT regime as a State matter involving inter-institutional effort across numerous agencies (listed in source).
  - Authorities agree with assessors’ conclusions and regard the report as fairly reflecting Panama’s AML/CFT situation.
- Corrective actions already taken or underway (as reported):
  - The Financial Analysis Unit and the Superintendency of Banks will provide training and collaborate in development of supervisory programs for savings and credit institutions.
  - The National Securities Commission, the Superintendency of Banks, and the Superintendency of Insurance and Re-insurance signed an inter-institutional cooperation agreement.
  - A Tripartite Coordination Commission (Financial Analysis Unit, the Public Ministry, and the Judicial Branch) was created to address systemic division of responsibilities.
  - Training seminars and feedback from the Financial Analysis Unit have been delivered to agencies such as the Administration of the Colón Free Trade Zone and the National Securities Commission; many others are scheduled in the near to medium-term.
  - The risk analysis unit within the Customs Department will become operational on or around December 2006.
  - A specialized AML/CFT department was established within the Administration of the Colón Free Trade Zone; it is adequately staffed and conducting AML/CFT on-site inspections, imposing sanctions and collecting fines for noncompliance.
  - 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 for these new reporting entities was anticipated during the month of November 2006.
  - Modifications to the regulation governing the accounting profession are undergoing their first debate at the National Assembly.
  - Measures were taken to revise and update reports and templates used by reporting entities and the Financial Analysis Unit.

*Source: IMF country report extract.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr0766.pdf_