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Thursday, July 13, 2000

New World Trends to Enforce Access to Banking Information with Tax Purposes



Free access to banking information is a major issue in those countries like Panama, were the legal structure is constructed on the basis of confidentiality

Panama has always developed it legal framework based on the attraction of foreign investments. It “anonymous society” corporation law, it maritime flag registry law, it baking law, it captive insurance law, for example, as well as it concept of territorial source of income for taxation purposes, are characterized by it flexibility, allowing the growing of a Panamanian services and financial industry, which contributes with more than 70% of the total Gross Domestic Product (GDP) of the country.

As countries compete with each other and at the same time become more dependent from each other, total independence result impossible. Domestic problems become international problems and many countries share the same issues. To address those issues, countries enact rules to prevent those practices considered to be dangerous or against the new global world order (e.g. drug traffic, arms traffic, money laundering activities, etc.).

As part of these new rulings, financial institutions has always been on the spot for constant regulation and vigilance, in order to avoid it use to legitimize the money produced by these practices.

Since “off-shore” or “tax heaven jurisdictions” are services oriented, they have enacted and developed their legal frameworks on the base of confidentiality, therefore, are more likely to be used by individuals to legitimize the funds obtained by these practices.

Taking this in mind and due to international pressure, since the mid 80´s and more important in the 90´s, off-shore jurisdictions had implemented strong control measures designed to avoid their use and abuse by criminals who utilize these centers as a refuge to their crimes.

Panama, as well as other “off-shore” centers, had implemented through the years; new rules to avoid being used to money launder the funds obtained by these illegal activities.

In the case of Panama, we had not only enacted legislation, but at the same time: we had created a high level presidential commission against money laundering; we had created the Financial Operations Analysis Unit (UAF), as a branch of the Presidency; we had become a member of the “Edmont Group” with it head office in Canada; we had implemented “Know Your Client” (KYC) policies and rules; and had participated in the regional organization of the Financial Action Task Force, the Caribbean Financial Action Task Force.

In spite of these efforts, a new concern, regarding a related issue has been raised.

The “Improving Access to Bank Information for Tax Purposes” report.

Recently, developed countries (OECD members), disturbed about the off-shore shopping of their citizens and the economic effect of such practices, are starting to consider tax evasion as a money laundering activity, although, as in Panama, tax evasion is not considered to be a crime as in many countries around the world.

This change, is the direct consequence of a March 2000, OECD Committee on Fiscal Affairs report titled “Improving Access to Bank Information for Tax Purposes”.

The report was aimed to explore ways to improve international co-operation with respect to the exchange of information in the possession of banks and other financial institutions for tax purposes in OECD countries. However, it conclusions changed radically the way OECD members are treating and will treat countries that has banking secrecy rules or laws, mostly “tax heavens jurisdictions” as we explained before.

Basically the report states that “banking secrecy” is the biggest problem in combating international financial crimes, mainly tax evasion.

In this regard, the report distinguished between “legitimate banking confidentiality” and “excessive secrecy” that obstructs international investigations, defined to be “secrecy provisions related to financial activities and professions, notably banking secrecy, which can be invoked against, but not lifted by competent authorities in the context of inquiries concerning money laundering”.

The report also pointed out the need of an international agreement for the exchange of information and the need of an harmonization of law structures around the world, were tax evasion becomes an international crime as drug traffic or money laundering itself.

Most important, the report make special mention to “tax heavens” jurisdiction were “...financial institutions do not have to reveal information regarding it clients, based on local secrecy laws”, implying and recommending sanction to those countries.

The Financial Action Task Force on Money Laundering “Black List”.

Due to this report, on June 26, 2000, the Financial Action Task Force on Money Laundering (FATF) of the OECD issued a “Black List” of countries considered non-cooperative jurisdictions.

The list divided three categories of countries, depending on the degree of non-cooperation of each jurisdiction.

The criteria used in the FATF classification is based on the review of the country existence of: (i) secrecy laws; (ii) inadequate rules for licensing and creation of financial institutions; (iii) inadequate customer identification requirements; (iv) anonymous accounts; (v) inadequate commercial law requirements for the registration of business and legal entities; (vi) identification of the beneficial owner of legal and business entities and (vii) the refusal to cooperate in cases involving tax evasion.

Panama has been included in that Black List, as a Class 3 county, it means a country that does not cooperate with tax authorities of OECD countries.

Consequences for Panama.

The effect for Panama of been included in this list, is that the OECD countries may impose sanctions to the listed countries, including the prohibition for their financial institutions to perform any kind of business with any institution located in a listed country.

Panama has been traditionally an off-shore center, who has responded to international movements adopted in the pass for the prevention and use of it financial institutions for money laundering activities linked to drug traffic, as we have seen before.

Panama has never addressed the issue of considering tax evasion as a crime and including it as money laundering activity, however, the new currents seems to take us inevitably to that scenario.

The current government, through the High Level Presidential Commission Against Money Laundering, has the primary responsibility of analyzing the international events that are affecting the condition of Panama as a place for international business, and in particular, the initiatives of the OECD, which can cause a negative impact in our capability of attracting foreign investment.

We consider that some of the immediate actions that our country should undertake are:

1. To disclose to international organisms, such as OECD, FATF, US IRS, and other, all the measures that Panama has putted in execution to avoid that our financial and bank center is used for activities related to drug traffic and money laundry;
2. To identify our weakness and propose the correctives that should be imposed in order to clean our international image;
3. To develop the corresponding legislation, for it wide domestic discussion and consequent approval;
4. To get ready for the discussion of double taxation treaties in which our concept of territorial source of income is respected;
5. To prepare a negotiation team that obtains the widest terms in the negotiations with the industrialized countries that have included Panama in the different “black lists”; and
6. To observe and monitor the position of other countries that are facing the same problem as Panama, in order to, eventually, make international lobby to achieve the relaxation of the position of the international organizations with regard to Panama.

1 Main laws and rulings approved by Panama against money laundering and drug traffic:

Law 64 of February 4, 1963. (1961 Drug Convention).
Cabinet Decree No.54 of March 2, 1972. (1971 Convention on Psychotropic Substances).
Law 20, July 22, 1991. (Bilateral Assistance Treaty between Panama and the United States of America in Criminal Matters.)
Law 20 of December 7, 1993. (United Nations Convention against the Traffic of Drugs and Psychotropic Substances – The Vienna Convention)
Law 11 of July 7, 1994. (Treaty for Bilateral Legal Assistance (TALM) Regarding Drug Traffic between Panama and the United Kingdom of Great Britain and North Ireland)
Law 30 of June 28, 1995. (Article of Agreement of the Permanent Central American Commission against the production, traffic, consumption and illicit use of narcotics and psychotropic substances).
Law 39 of July 13, 1995. (TALM in Penal Themes among Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama).
Law 40 of July 13, 1995. (Agreement between Panama and Colombia to impede the deviation of precursory chemical and essential substances).
Law 42 of July 14, 1995. (Agreement on Legal Attendance and Mutual Judicial Cooperation between Panama and Colombia).
Cabinet Decree No.41 of February 13, 1990. (Prevention and sanction of banking operations with funds coming from illicit activities related with drugs).
- Agreements 4-90 of March 19, 1990 and 1-91 of January 15, 1991 of the National Bank Commission. (They require knowledge of the client (KYC rules) and declaration of operations superior to $US.10, 000 in cash or it equivalent).
- Agreement No. 2-97 of 27 February 1997 of the National Bank Commission modifies Agreements Nos. 5-90 and 1-91. (Declaration of successive operations in cash and it equivalent).
Cabinet Decree No.10 of March 9, 1994. (It requires declaration of travelers who carry money in cash).
- Executive Decree No.16 of March 9, 1994 (fixed in $US.10, 000.00 or more the minimal quantity to declare)
- Resolution No.704-04-624 of November 5, 1997 of the Ministry of Finance and Treasure. (By which a new “Sworn Declaration of Travelers” forms is approved).
Executive Decree No.468 of September 19 of 1994. (Regarding the responsibility of resident agents of anonymous societies “sociedades anĂ³nimas”).
Executive Decree No.125 of March 27 of 1995. Which creates a high-level presidential commission against money laundry from drug traffic as a permanent consultative council).
Executive Decree No.136 of June 9 of 1995. Which creates the Unit of Financial Analysis (UAF) for the prevention of money laundry from drug traffic).
Resolution No.1446 of September 13, 1991 and No.94 of April 12, 1995 of the Ministry of Government and Justice. (Bu which the National Direction for the Execution of the TALM´s is organized).

Resolution J.D. No.2/95 of March 10, 1995 of the Cooperative Autonomous Panamanian Institute. (Requiring declaration of operations superior to US$5,000 for cooperative deposits or transactions.) (Res. J.D. No. 6/95 of July 28, 1995 modifies the Res. J.D. 2/95 by increasing the amount to US$.10,000).
Agreement No.17 of September 11, 1984 of the Panamanian Banking Association, modified in 1985 and 1986. (Code of Conduct for banking operations).
Agreement No.28 of March 10, 1993 of the Panamanian Banking Association. (Rules and procedures for the endorsements of checks).
Agreement No.29 of the Panamanian Banking Association. 1993. (Rules and procedures for the use of foreign negotiable instruments and it transfer).
Code of Conduct (January 1, 1995). Colon Free Zone Users Association (AU).
Agreement No.33 of June 28, 1995 of the Panamanian Banking Association. (Rules and procedures in the handling of transfers of funds, in order to prevent it illegal use).
Agreement No.34 of September 27, 1995 of the Panamanian Banking Association. (Rules to prevent the illegal use of the Panamanian banking services).
Law No.46 of November 17, 1995. (By which the Cabinet Decree No.41 of February 13, of 1990 is modified – Rules for the prevention and sanction of operations performed by banks and other financial institutions, with funds from illicit activities related with drugs - Communication of Suspicious Operations).
2 Organization for Economic Cooperation and Development.