As part of revisiting and revising my own notes on various Panama-related matters, I have revised the following note which may be of interest or use to others. Any comments, or indeed corrections, would be welcomed.
FATF EVALUATION ASSESSMENT
Panama is a member of GAFILAT, the regional FATF-style regional body (FSRB), which has assessed Panama against the 40 Recommendations issued by FATF. These “set out a comprehensive and consistent framework of measures which countries should implement in order to combat money laundering and terrorist financing, as well as the financing of proliferation of weapons of mass destruction” and thereby establish an international standard against which countries can be measured.
FATF Technical Compliance and Immediate Outcomes
The country’s “technical compliance” with the Recommendations, e.g. by the enactment of the necessary legislation and the introduction of rules, regulations and structures, is assessed separately from the effectiveness of the legislation and systems themselves. The standard of compliance Or, indeed, non-compliance) is illustrated in chart form in the organisations’ reports (see below for December 2017 ratings for Panama). These technical compliance ratings may be adjusted if and when improvement is shown, such as when reassessed during follow-up reports (see below for comments on such follow-up reports).
Since 2013, FATF has also evaluated jurisdictions against 11 “Immediate Outcomes” to assess the effective implementation of the Recommendations and the overall robustness and effectiveness of the control regime in that jurisdiction. These so-called “IO” ratings were introduced as it was found that it was too easy for even a poorly compliant jurisdiction to have all the theoretically available structures in place, without the means or desire to use them.
The 11 Immediate Outcomes are included in the methodology laid down for carrying out of assessments (see Annex C for details of what the FATF Recommendations and Immediate Outcomes are).
Assessments are undertaken by means of mutual evaluation, a type of peer review using experts selected from other member countries of FATF or the FSRB concerned, and the results published in mutual evaluation reports (MER), both by the regional body and (after acceptance by a Plenary) by FATF itself. The experts carry out pre-visit examination of available information, carry out an on-site visit and also call for documents and information from the country being assessed, and subsequently enter into an ongoing dialogue with the country up to the time of the report being finalised.
The results of the assessments undertaken by the regional bodies are moderated and approved by FATF, and the markings published by FATF in a schedule of results for all jurisdictions that have been assessed.
The FATF rating systems
For technical compliance, FATF has 5 levels of grading –
- Compliant – There are no shortcomings;
- Largely Compliant – There are only minor shortcomings;
- Partially Compliant – There are moderate shortcomings;
- Non-Compliant – There are major shortcomings; and
- Not applicable – The requirement does not apply, due to the structural, legal or institutional features of a country.
For effectiveness, FATF has 4 levels of grading –
- High level of effectiveness – The Immediate Outcome is achieved to a very large extent, with only minor improvements needed;
- Substantial level of effectiveness – The Immediate Outcome is achieved to a large extent, with only moderate improvements need;
- Moderate level of effectiveness – The Immediate Outcome is achieved to som extent, but major improvements are needed; and
- Low level of effectiveness – The Immediate Outcome is not achieved or achieved to a negligible extent, and fundamental improvements are needed.
The Immediate Outcomes effectiveness ratings
The FATF 40 Recommendations are listed in Annex C attached to this paper. However, it might be helpful to explain the IO used to determine effectiveness before looing at the ratings obtained by Panama in the 2018 MER.
Policy, coordination and cooperation mitigate the money laundering and financing of terrorism risks.
IO.1 Money laundering and terrorist financing risks are understood and, where appropriate, actions coordinated domestically to combat money laundering and the financing of terrorism and proliferation.
IO.2 International cooperation delivers appropriate information, financial intelligence, and evidence, and facilitates action against criminals and their assets
Proceeds of crime and funds in support of terrorism are prevented from entering the financial and other sectors or are detected and reported by these sectors.
IO.3 Supervisors appropriately supervise, monitor and regulate financial institutions, designated non-financial businesses and professions (DNFBP) and virtual asset service provider (VASP) for compliance with AML/CFT requirements commensurate with their risks.
IO.4 Financial institutions, DNFBP and VASP adequately apply AML/CFT preventive measures commensurate with their risks, and report suspicious transactions.
IO.5 Legal persons and arrangements are prevented from misuse for money laundering or terrorist financing, and information on their beneficial ownership is available to competent authorities without impediments.
Money laundering threats are detected and disrupted, and criminals are sanctioned and deprived of illicit proceeds. Terrorist financing threats are detected and disrupted, terrorists are deprived of resources, and those who finance terrorism are sanctioned, thereby contributing to the prevention of terrorist acts.
IO.6 Financial intelligence and all other relevant information are appropriately used by competent authorities for money laundering and terrorist financing investigations
IO.7 Money laundering offences and activities are investigated and offenders are prosecuted and subject to effective, proportionate and dissuasive sanctions.
IO.8 Proceeds and instrumentalities of crime are confiscated.
IO.9 Terrorist financing offences and activities are investigated and persons who finance terrorism are prosecuted and subject to effective, proportionate and dissuasive sanctions.
IO.10 Terrorists, terrorist organisations and terrorist financiers are prevented from raising, moving and using funds, and from abusing the non-profit organisation (NPO) sector.
IO.11 Persons and entities involved in the proliferation of weapons of mass destruction (WMD) are prevented from raising, moving and using funds, consistent with the relevant UN Security Council Resolution.
The 2014 MER
After the previous MER in 2014, the International Cooperation Review Group (ICRG) of FATF placed Panama in its enhanced follow-up process, and GAFILAT also placed the country under an enhanced follow-up process (which had ended by the time of the next on-site visit in 2017). The role of the ICRG is to monitor and report on “high risk” jurisdictions. Referral to the ICRG is normally based primarily on the results of the jurisdiction’s MER, and jurisdictions whose MER reveals a significant number of key deficiencies are referred to the ICRG. Jurisdictions considered to be falling short may be given a short window (usually 12 months) to demonstrate improvements, and may be required to prepare and submit an action plan and to engage in meetings with FATF representatives, as well providing high-level political commitment to remedying any identified shortcomings.
The 2018 MER
The latest MER for Panama was published in 2018, this having followed an on-site visit by a team of evaluators from GAFILAT in May 2017. According to that MER, Panama was deemed “Compliant” for 10 and “Largely Compliant” for 22 of the FATF 40 Recommendations.
However, Panama only scored “Substantially Effective” for 2 of the 11 Immediate Outcomes, and failed to score “Highly Effective” for any.
One of the main risks facing Panama in terms of income from criminal activities was said to be the receipt of funds or other financial assets resulting from tax crimes committed abroad. This risk had not been considered in the NRA and in the MER GAFILAT said it was important to point out that tax crimes are not criminalised as a predicate offence for the purposes of money laundering in Panama, which (naturally enough) significantly affects the possibilities for prevention and investigation. The National Strategy Plan of 2017 (see Section 6 below) included criminalising tax crimes as one of its most important action points, and the MER identified this step as a priority action.
Illicit drug trafficking was seen as the illicit activity committed in the Panamanian territory which was most related to money laundering in the country, with the country being seen as primarily a transit point – not a production base – for drugs heading chiefly to North America.
The MER said a priority was for Panama to pay special attention to the free zones sector to prevent measures of improper invoicing of goods or other illegal foreign trade operations. It also said that measures must be taken to control the use of cash in free zones, as well as in the real estate and construction sectors.
The MER called for greater attention to be paid to the risks of terrorism financing and proliferation/proliferation financing, and for more effort on raising the awareness of the risks.
However, as was the case with the NRA, the MER noted that tax crime not being a predicate offence for money laundering enhanced the risks in some vulnerable sectors, such as the financial sector, the corporate sector and the free zones. In addition, the MER said that the current control mechanisms of operation of the corporate service sector were not considered enough to mitigate the risks associated to the operation of Panamanian corporations and private interest foundations, especially in the offshore sector (something that I think was underlined by the revelations of the Panama Papers).
January 2019 – first follow-up report
In January 2019, GAFILAT published the First Enhanced Follow-up Report on Panama. This
reviewed Panamá’s progress in addressing the deficiencies of technical compliance identified in the MER. This report also analyses Panama’s progress in implementing new requirements relating to FATF Recommendations which have changed since the onsite visit made to Panama in 2017.
New technical compliance ratings are granted when enough progress is observed, and, in general, countries are expected to have addressed most of the technical compliance deficiencies, if not all, before the end of the third year as from the adoption of their MER.
In summary, the new report concluded that Panama was making progress in addressing the technical compliance deficiencies identified in its MER.
As already pointed out, such a follow-up report does not deal with progress aimed at improving effectiveness. A subsequent follow-up assessment (evaluation) will analyse the progress on the improvement of effectiveness which may eventually result in the new rating of the Immediate Outcomes.
Improvements noted meant that Panamá received a new, improved rating in the following Recommendations –
- 14 (Money or value transfer services);
- 19 (Higher-risk countries);
- 32 (Cash couriers);
- 33 (Statistics).
Acknowledging progress, GAFILAT considered it did not justify rerating of the following Recommendations –
- 1 (Assessing risks and applying a risk-based approach);
- 3 (Criminalising of money laundering offences);
- 16 (Wire transfers information);
- 17 (Reliance of financial institutions on third parties);
- 20 (Reporting of suspicious transaction);
- 27 (Powers of supervisors); and
- 35 (Civil and criminal sanctions for non-compliance).
Since the adoption of Panama`s MER in 2018, FATF had amended Recommendations –
- 7 (Targeted financial sanctions related to proliferation) – changes in the requirements of Recommendation 7 were covered, so the rating remains unchanged as Largely Compliant;
- 18 (Internal controls and foreign branches and subsidiaries) – the rating remained as Compliant); and
- 21 (Tipping-off and confidentiality) – changes were said to be covered sufficiently to justify maintaining a rating of Compliant.
As a result, the revised set of Recommendation results were as follows –
August 2019 – second follow-up report
On 22 August 2019, GAFILAT published a second follow-up report. As with the first follow-up report, this examined only the progress, if any, on technical compliance, and not effectiveness (which, as said, has to await a further evaluation).
The new report said that Panama had made progress in addressing its technical compliance deficiencies identified in the MER in relation to the following Recommendations:
- Recommendation 24 (Transparency and beneficial ownership of legal persons), originally rated Non-Compliant;
- Recommendations 3 (Money laundering offences), 20 (Reporting of suspicious transactions), 25 (Transparency and beneficial ownership of legal arrangements) and 30 (Responsibilities of law enforcement and investigative authorities), all of which had originally been rated Partially Compliant.
As a result, GAFILAT had re-rated for all these Recommendations, except Recommendation 25 (Transparency and beneficial ownership of legal arrangements), where it was felt that progress did not justify a new rating.
For Recommendation 3 (Money laundering offences), GAFILAT noted that tax crimes had been criminalised and made predicate crimes for money laundering, though some doubts over the proportionality and effectiveness, and other minor deficiencies, meant that the Recommendation was re-rated to Largely Compliant from Partially Compliant (and not to a full C for Compliant).
On Recommendation 20 (Reporting of suspicious transactions), progress was sufficient to mark Panama as now being Compliant.
For Recommendation 24 (Transparency and beneficial ownership of legal persons), this was re-rated from Non-Compliant to Partially Compliant, with some “moderate” deficiencies that still need to be addressed, such as those relating to the information in corporations, and that some mechanisms mentioned in FATF guidance are not specified to ensure that information referred to in the guidance is accurate and kept updated in a timely manner.
For Recommendation 30 (Responsibilities of law enforcement and investigative authorities), Panama was re-rated to Compliant, it now being possible to initiate parallel financial investigations alongside investigation of a predicate offence.
One other Recommendation remained with its original rating. Recommendation 2 (National co-operation and coordination) remains rated Largely Compliant.
With these various adjustments taken into account, the revised Technical Compliance ratings were now as follows –
FATF places on “grey list” June 2019
Notwithstanding the foregoing, in June 2019, FATF placed Panama on the list of countries with strategic deficiencies on its AML framework.
In a note on a Staff Visit to Panama, on 23 July 2019, the IMF said that despite recent progress on financial integrity, including the recognition of tax evasion as a predicate offense to money laundering, the legal framework needed to be further strengthened and its effectiveness to be demonstrated. It further said that the authorities were fully committed to implementing the recommendations of the action plan agreed with the FATF and aim to be removed from the list as soon as it is possible. It commented that sustained efforts to enhance the AML framework and tax transparency will be crucial to strengthen Panama’s position as a regional financial centre.
Panama had made a high-level political commitment in June 2019 to work with the FATF and GAFILAT to strengthen the effectiveness of its AML/CFT regime – with some of the issues raised by FATF being addressed in the second follow-up report above.
Following a Plenary in October 2019, FATF announced that Panama remained on its “grey list”, saying that whilst the country had taken steps since June 2019 to improve its co-operation in the fight against money laundering, it had to “continue working on the implementation of its action plan to address its strategic deficiencies”.
Following the Plenary, FATF issued short statement on developments in Panama. It said that since June 2019, when Panama made its high-level political commitment to work with the FATF and GAFILAT to strengthen the effectiveness of its AML/CFT regime, it had taken initial steps towards improving its AML/CFT regime. This included drafting sectoral risk assessments for the corporate and DNFBP sectors and free trade zones.
However, FATF said that Panama should continue to work on implementing its action plan to address its strategic deficiencies, including by strengthening its understanding of the national and sectoral money laundering and terrorism financing risk and using the findings to bolster its national policies to mitigate identified risks. It was also said that it should proactively take action to identify unlicensed money remitters, applying a risk-based approach to supervision of the DNFBP sector and ensuring effective, proportionate, and dissuasive sanctions again AML/CFT violations.
Another thing mentioned by FATF was the need to ensure adequate verification and update of beneficial ownership information by obliged entities, establishing an effective mechanisms to monitor the activities of offshore entities, assessing the existing risks of misuse of legal persons and arrangements to define and implement specific measures to prevent the misuse of nominee shareholders and directors, and ensuring timely access to adequate and accurate beneficial ownership information.
Panama was also told to ensure effective use of FIU products for money laundering investigations, to demonstrate its ability to investigate and prosecute money laundering involving foreign tax crimes and to provide constructive and timely international co-operation with such offence, and continuing to focus on investigations in relation to high-risk areas identified in the NRA and MER.
In June 2020, FATF confirmed that Panama remained on its “grey list” of Jurisdictions under Increased Monitoring, adopted in February 2020.
30 August 2020
 Under the FATF framework, jurisdictions having deficiencies are placed in a follow-up process, with regular reporting back to FATF or its FSRB and reassessments from time to time. In cases of serious deficiencies, an “enhanced” follow-up process is instigated, with shortened timescales and increased pressure on the jurisdiction concerned. This happened to Panama following the 2014 MER.
 http://www.fatf-gafi.org/media/fatf/documents/reports/mer-fsrb/MER-GAFILAT-Panama-Jan-2018.pdf For details of previous FATF assessments and reports, see http://www.fatf-gafi.org/countries/#Panama
 This was nevertheless an improvement over the previous MER of 2014, in which it was reported that Panama fully complied with only 1 Recommendation; mostly complied with 3 Recommendations; partially complied with 26 Recommendations; and did not comply with 19 Recommendations. It did not receive a compliant or largely compliant rating in any of the 16 Principal and Fundamental Recommendations: https://www.imf.org/external/pubs/ft/scr/2014/cr1454.pdf
 This conclusion being underlined by the Odebrecht affair (see above)
 However, in 2016, of 6.2 million TEU containers entering/leaving the country, only 56 were seized for containing counterfeit goods (and this was down from 233 the previous year), with 61% of the goods said to be in transit (i.e. not destined for the Panamanian domestic market). INTA, the International Trademark Association, identified the CFZ as “a sensitive hub of counterfeit goods”: https://www.inta.org/INTABulletin/Pages/Anticounterfeiting_Update_7214.aspx
 Involved in trade-based money laundering and other trade-based financial crime: https://www.gov.im/media/1348726/notice-1000-man-trade-based-money-laundering-july-18.pdf
 Which might include proliferation, sanctions-busting etc. In 2018, Panama adopted new export controls for dual-use goods, and also adopted the EU list of dual-use items (see below).
 See MER paragraph TC31.
 See Annex C for details of what FATF Recommendations and Immediate Outcomes cover.
 There should be designated law enforcement authorities that have responsibility for ensuring that money laundering, predicate offences and terrorist financing are properly investigated through the conduct of a financial investigation. Countries should also designate one or more competent authorities to identify, trace and initiate freezing and seizing of property that is, or may become, subject to confiscation.
 Such as trusts, foundations etc.
 This was, of course, prior to the introduction of the new beneficial ownership legislation in 2020 (see Section 8A below).
 This was that it was not expressly stated that the information should be available in the country, nor is the information that resident agents must keep on all shareholders or members of a company clearly established.
 Once again, it might be noted that this was prior to the introduction of the new beneficial ownership provisions in 2020 (see Section 8A below).