The economy of Panama is service-based and heavily weighted toward maritime transportation, commerce, tourism, banking, and financial services. Panama is a major drug-transit country. Panama’s proximity to major drug-producing countries, its sophisticated international banking sector, its U.S. dollar-based economy, and the Colon Free Zone’s (CFZ’s) role as an originating or transshipment point for goods purchased with narcotics dollars through the Colombian Black Market Peso Exchange, make the country particularly vulnerable to money laundering. Despite significant progress to strengthen Panama’s anti-money laundering regime since October 2000, money laundering remains a serious threat to the stability of the country’s legitimate financial institutions. Panama is a destination for international narcotics-trafficking proceeds that include significant amounts of U.S. currency or currency derived from illegal drug sales in the United States.

Panama’s large offshore financial sector includes international business companies (over 370,000 currently registered in Panama), offshore banks (approximately 31), captive insurance companies (corporate entities created and controlled by a parent company, professional association, or group of businesses), and trust companies. Transfer of negotiable (bearer) bonds is another potential vulnerability that could be exploited by money launderers. The high volume of trade occurring through the CFZ (there are approximately 2,600 businesses established in the Zone) presents opportunities for trade-based money laundering to occur.

Law No. 41 (Article 389) of October 2, 2000, amended the Penal Code by expanding the predicate offenses for money laundering beyond narcotics-trafficking, to include criminal fraud, arms trafficking, trafficking in humans, kidnapping, extortion, embezzlement, corruption of public officials, terrorism, and international theft or trafficking of motor vehicles. Law No. 41 establishes a punishment of five to 12 years imprisonment and a fine.

In December 2002, the Panamanian Legislative Assembly approved the Financial Crimes Bill (Law No. 6 of December 6, 2002), which establishes criminal penalties of up to ten years in prison and fines of up to one million dollars for financial crimes that undermine public trust in the banking system, the financial services sector, or the stock market. The penalties criminalize a wide range of activities related to financial intermediation, including the following: illicit transfers of monies, accounting fraud, insider trading, and the submission of fraudulent data to supervisory authorities. Law No. 1 of January 5, 2004, adds crimes against intellectual property as a predicate offense for money laundering.

Law No. 42 of October 2, 2000, requires financial institutions (banks, trust companies, money exchangers, credit unions, savings and loans associations, stock exchanges and brokerage firms, and investment administrators) to report to the Unidad de Analisis Financiero (UAF), Panama’s Financial Intelligence Unit (FIU), currency transactions in excess of $10,000 and suspicious financial transactions. Law 42 also mandates that casinos, CFZ businesses, the national lottery, real estate agencies and developers, and insurance/reinsurance companies report to the UAF currency or quasi-currency transactions that exceed $10,000. Furthermore, Law 42 requires Panamanian trust companies to identify to the Superintendence of Banks the real and ultimate beneficial owners of trusts.

Executive Order 213 of October 3, 2000, amending Executive Order 16 of 1984 relating to trust operations, provides for the dissemination of information related to trusts to appropriate administrative and judicial authorities. Furthermore, in October 2000, Panama’s Superintendence of Banks issued Agreement No. 9-2000 that defines requirements that banks must follow for identification of customers, exercise of due diligence and retention of transaction records.

In 2002, the Ministry of Commerce and Industry issued a circular to all finance companies reminding them of the transaction-reporting requirement of Law 42, and also began drafting a law to regulate the operations of pawnshops and exchange houses. It also increased the number of inspections of finance companies it conducted. The Autonomous Panamanian Cooperative Institute established a specialized unit for the supervision of loans and credit cooperatives regarding compliance with the requirements of Law 42. The National Securities Commission carried out numerous training sessions and workshops for its personnel and regulated entities. The Colon Free Zone Administration prepared and issued a procedures manual for the users of the CFZ, outlining their responsibilities regarding prevention of money launderiusinesses in the CFZ. In 2004, the Stock Commission announced that it would begin investigating suspicious activity.

With support from the Inter-American Development Bank, the GOP is implementing a Program for the Improvement of the Transparency and Integrity of the Financial System. This Transparency Program is targeted, through enhanced communication and information flow, training programs, and technology, at strengthening the capabilities of those government institutions responsible for preventing and combating financial crimes and terrorist financed activities.

In 2002, the Institute of Autonomous Panamanian Cooperatives, UAF, and the U.S. Embassy Narcotics Assistance Section cosponsored a roundtable on money laundering that offered practical training to financial institutions to assist them in meeting the reporting requirements under Law No. 42. In 2003, Panama launched an education program related to prevention of money laundering and terrorist financing. Panama’s Banking Association, the Inter-American Development Bank, the Panamanian Government, and the Untied States Government financed this campaign. Initiatives under this campaign include a crime analysis seminar, a regional seminar on money laundering for banking regulators, and the detection and reporting of suspicious activities for the banking sector. During 2004, the programs included training for the Gaming Control Commission and a seminar for the Hemispheric Congress on the prevention of money laundering. In 2004, more than 5,000 officials from public and private sector institutions received training through this campaign. Participants included representatives from banks, credit unions, real estate agencies, stockbrokers, insurance companies, Colon Free Trade Zone companies, financial institutions, and money order companies.

To increase GOP interagency coordination, the UAF and Panamanian Customs are developing an office at the Tocumen International Airport to expedite the entry of customs currency declaration information into the UAF’s database. This will enable the UAF to begin more timely investigations. In 2004, Panamanian Customs continued a program at Tocumen International Airport, begun in 2001, to deter currency smuggling by seizing and forfeiting all undeclared funds in excess of $10,000 from arriving passengers. Bulk cash shipments, including through Tocumen Airport, continue to be of great concern, with smugglers often under-declaring the amount of cash being brought into the country.

Executive Order No. 163 of October 3, 2000, which amended the June 1995 decree that created the UAF, also allows the UAF to provide information related to possible money laundering directly to the Office of the Attorney General for investigation. Panama has brought cases for domestic prosecution, and the UAF routinely transfers cases to the Unidad de Inteligencia Financiera (UIF) for investigation. During 2004 the Financial Fraud Prosecutor’s office investigated 2,459 cases related to financial crimes, 86 of which led to a conviction. These included credit card fraud and fraud involving banking institutions.

GOP cooperation in the investigation of the Western Hemisphere’s largest Black Market Peso Exchange money laundering scheme was instrumental in the U.S. conviction in 2002 of Yardena Hebroni, owner of Speed Joyeros, a CFZ enterprise. The GOP also revoked the Panamanian residency of Hebroni, an Israeli national, after she was ordered deported from the United States. In 2004, Panamanian officials charged former Nicaraguan President Arnoldo Aleman with money laundering crimes. The GOP received cooperation in the investigation from the Government of Nicaragua. Also during 2004, there were investigations into possible money laundering crimes of high-level Costa Rican government officials. Finally, GOP investigators are looking into corruption allegations made against former government officials.

The GOP identified the combating of money laundering as one of five goals in its five-year National Drug Control Strategy issued in 2002. The Strategy commits the GOP to devote $2.3 million to anti-money laundering projects, the largest being institutional development of the UAF.

Decree No. 22 of June 2003, gave the Presidential High Level Commission against Narcotics Related Money Laundering responsibility for combating terrorist financing. Law No. 50 of July 2003 criminalizes terrorist financing and gives the UAF responsibility for prevention of this crime. There are no legal impediments to the GOP’s ability to prosecute or extradite suspected terrorists. Panama Public Force (PPF) and the judicial system have limited resources to deter terrorists, due to insufficient personnel and lack of expertise in handling complex international investigations. On January 18, 2003, the GOP entered into a border security cooperation agreement with Colombia, and also increased funds to the PPF to help secure the frontier. In response to United States efforts to identify and block terrorist-related funds, the GOP continues to monitor suspicious financial transactions.

Also, the GOP created the Department of Analysis and Study of Terrorist Activities. This department is tasked with working with the United Nations and the Organization of American States to investigate transnational issues, including money laundering. Panama has an implementation plan for compliance with the Financial Action Task Force (FATF) Forty Recommendations on Money Laundering and its Special Recommendations on Terrorist

Financing.

Panama and the United States have a Mutual Legal Assistance Treaty that entered into force in 1995. The GOP has also assisted numerous countries needing help in strengthening their anti-money laundering programs, including Guatemala, Costa Rica, Russia, Honduras, and Nicaragua. Panama also hosted the Seventh Hemispheric Congress on the Prevention of Money Laundering in August 2003. Executive Decree No. 163 authorizes the UAF to share information with FIUs of other countries, subject to entering into a memoraosta Rica, Russia, Honduras, and Nicaragua. Panama also hosted the Seventh Hemispheric Congress on the Prevention of Money Laundering in August 2003. Executive Decree No. 163 authorizes the UAF to share information with FIUs of other countries, subject to entering into a memorandum of understanding or other information exchange agreement. The UAF has signed more than 27 memoranda of understandings with FIUs, including the U.S. FIU, FinCEN.

The Government of Panama should continue its regional assistance efforts. It should also continue implementing the significant reforms it has undertaken to its anti-money laundering regime, in order to reduce the vulnerability of Panama’s financial sector and to enhance Panama’s ability to investigate and prosecute financial crime, money laundering, and potential terrorist financing. In particular, Panama should institute controls over the transfer of bearer bonds.

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Volume II: Money Laundering and Financial Crimes