Letter from Panama

Making History

Ricardo Martinelli, candidate of the Democratic Change party, had a convincing win in Panama’s presidential elections and took office on 1st July. He won 60% of the vote in May compared with just 5% at the last elections in 2004 and he is the first presidential candidate in the country’s modern history to have won an absolute majority. Not only that, he and his allies enjoy a comfortable majority in the National Assembly which will doubtless be the envy of some presidents in other countries in the region. His closest rival, Balbina Herrera, the candidate who represented the previous president’s centre-left Revolutionary Democratic Party, was only able to get 37% of the vote. So it’s all change at the Palacio de las Garzas (Heron’s Palace), the formal residence of Panamanian presidents.

A Martinelli victory will not be celebrated in Caracas. The new president is a businessman who ran as a centrist independent and financed his own election campaign. The 57-year old self-made multimillionaire, who owns the largest supermarket chain in Panama, is a family man with three children. And his background is not restricted to the commercial field: back in the 1990s he served the government of the defeated Revolutionary Democratic Party as Director of Panama’s social security service. In addition to this, he has been chairman of the board of directors of the Panama Canal Authority as well as Minister of Canal Affairs at the time that the decision was made to approve the US$5.25 billion canal expansion presently underway. Considering the current economic slowdown in the region, this background will give President Martinelli an acute awareness of the challenges facing both social security funding and the canal’s profits; the waterway has represented 19% of Panama’s Gross Domestic Product and produced 28% of the government’s tax revenue.

Although the global economic woes have affected Panama, the Economic Commission for Latin America and the Caribbean thinks that the region’s GDP growth as a whole will be just under 2% with the highest increase expected in Peru (5%) followed by Panama (4.5%) and Uruguay (4%). If Panama’s economy grows as expected, then this will be good news for Panamanians.

One of the first issues President Martinelli will have to address is the 2006 bilateral free-trade agreement with the United States of America which was signed by Panama but which has still to be ratified by the US Congress. But since Panama signed the agreement a further hurdle has appeared. The US now wants Panama to dilute its strict bank secrecy rules in the wake of a world-wide drive for more transparency as countries search for tax revenues to bolster their feeble finances. The behaviour (not just in lending practices) of Switzerland’s UBS bank, as reported in newspapers and on television screens, has, unfortunately, added fuel to the fire and given traction to the argument for an all-out assault on financial services centres with bank secrecy, such as Panama.

Ruffled Feathers

Secrecy has meant protection for many Latin Americans in the past in order to protect their assets from unstable governments; although in the 21st century those threats have diminished, the region’s culture of privacy has not. Most businessmen in the region are cautious and try to keep their business affairs as private as possible. It is an attribute shared by the Swiss, even if the motives are not identical. Sensitive information is given only to relatives (family is the cornerstone of the culture) or to trusted third parties; this is in stark contrast, for example, with the US culture where people normally will freely give information (solicited or not) about themselves – as any frequent flyer will attest to. Trust is at the root of all business relations and a guarantee of privacy in the conduct of banking affairs is highly prized. I learned this first hand when I managed an office in Miami that catered for South Americans who were sheltering assets offshore from political instability in their own countries where, in certain cases, the pervading climate of uncertainty was palpable. Having lived through turbulent (and violent) political times myself in Africa, where exchange controls saw people smuggling cash in their shoes when they travelled abroad, I have some empathy for them.

So Panamanians, by their very nature, will be hesitant to relinquish bank secrecy as a sine qua non to having the 3-year old free-trade agreement ratified by the US. Senator John F. Kerry, chairman of the US Senate Foreign Relations Committee, is hammering home the point that although Panama has made progress (the senator, incidentally, will still find it easier to open a bank account in Miami than Panama) much has still to be done. In wishing to see an agreement in place he nonetheless says that the issue has to be “weighed against the necessity of persuading countries that cater to tax evaders, terrorists and drug lords to change the way they do business”. As far as facilitating such activity goes, the US does not have clean hands (read the September, 2008, Offshore Pilot Quarterly to understand the degree of hypocrisy at play).

Furthermore, the facts supporting the US case are suspect. John Kerry has argued that offshore tax abuses cost the US every year US$100 billion in lost taxes; even the US Internal Revenue Service Commissioner, Doug Schulman, has testified before the US House of Representatives Appropriations sub-committee that this calculation was based on “wild estimates”, adding that “pretty broad numbers” are used. With this background all one can expect the US to do is to ruffle feathers in the Heron’s Palace.

(An extended version of this article appears in the July/August issue of Offshore Investment.com).

Letter from Panama is published by Trust Services, S. A. which is a British- managed trust company licensed under the fiduciary laws of Panama. It is written by Derek Sambrook, our Managing Director, who is a former member of the Latin America and Caribbean Banking Commission as well as a former offshore banking, trust company and insurance regulator. He has over 40 years private and public sector experience in the financial services industry. Our website provides a broad range of related essays.