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Panamanian business leaders say it is highly discriminating to dub the Mossack Fonseca matter the ‘Panama Papers,’ damaging a nation’s reputation in the name of international integrity. Here Panama City. (Photo: Panama Economy Ministry)
Thursday, April 5, 2018

Panama Papers: What Changed?

What has changed since the ‘Panama Papers’ leak?

Inter-American Dialogue 

Mossack Fonseca, the Panama-based law firm that suffered a data breach two years ago of 11 million leaked documents that shed light on how the world’s wealthy exploit financial secrecy laws to hide assets, announced in March that it was closing. The so-called Panama Papers scandal brought down government officials and embarrassed public figures around the world. How has the fallout from the Panama Papers over the past two years changed the financial services industry in Latin America and the Caribbean? What reforms have been most meaningful to date, and what sorts of changes are needed in order to improve moving ahead? What unintended consequences might emerge as a result of reactions to the Panama Papers data breach?

Thomas Morante, member of the Financial Services Advisor board and partner at Holland and Knight in Miami, and Barbara Efraim, associate at Holland & Knight in Los Angeles: Data privacy laws in Latin America predate the Panama Papers breach. In the aftermath, some countries in Latin America enacted comprehensive privacy laws and data breach reporting requirements.

Additionally, Latin American countries are amending their laws and enforcing compliance in response to the European Union’s implementation of the General Data Protection Regulation, or GDPR, a system of data privacy laws standardized across Europe with extraterritorial reach, and the OECD’s Common Reporting Standard. Argentina and Chile modified their privacy laws to comply with the GDPR. Argentine law restricts cross-border transfers to countries without adequate protection. Chile’s privacy law differs from other Latin American countries in that it lacks a data protection authority to oversee data breaches; although its sector-specific laws (such as, the Law on Banks and the Criminal Law) provide additional privacy protections to individuals.

Brazil does not have a comprehensive data protection law, although it protects privacy rights through lawsuits and government enforcement actions. Several bills have been introduced, and new privacy legislation is anticipated later this year. Colombia’s data protection law regulates the processing, transmission, and transfer of personal data by public and private institutions. Mexico’s privacy laws regulate public-sector use of information, holding government agencies to the same standards as private parties. Both Colombia and Mexico require that cyber-attacks be reported to the owner of the data, although neither country requires that the breach be reported to the government. The Panama Papers and similar scandals have triggered amnesty programs throughout Latin America, enabling individuals to declare their offshore currencies and facilitate repatriation.

Developing strong privacy laws in the region that require immediate reporting of data breaches would likely create greater transparency. Financial companies will need to be aware of this expanding regulatory environment.

Jaime Jácome, partner at Diaz Reus-Panama: Since 1977, Mossack Fonseca had been a major player in the market of international legal and financial services. An illicit intervention in its archives by unknown actors, disclosed by a journalistic organization and with evidence that no judicial system in the democratic world has accepted as valid, the scandal caused international commotion that conflated some cases of political corruption, organized crime and tax fraud with hundreds of thousands of licit mercantile operations. However, the scandal has not had a major negative impact in Panama.

The rate of incorporation of Panamanian companies has declined over the last five years—not only because of new laws that oblige law firms to know their customers and keep compliance information available, but also because of the conservative and cautious policies of Panamanian banks, which have imposed severe controls on customers.

Jurisdictions ‘protected’ by the OECD remain as opaque as ever, competing unfairly, while others have begun to reduce taxes to recover capital. The lessons learned are clear. First, justice through courts is not the only way that these actions are condemned; there is also media condemnation created by perceptions—not by evidence—and without the right of defense. Second, states that insist on low taxation will be commercial enemies of the nations for which tax evasion has ceased to be just an ethical and moral problem and has become an eminently economic one that threatens their survival. Third, everything comes to light. The Panama Papers, WikiLeaks and other leaks have nullified commercial secrecy. Opening a world of information, though by means that may be considered illegal, in practice creates a more open and controlled society.

Jaime Figueroa Navarro, secretary of internal affairs and a member of the board of directors of the Panama Business Executives Association: Mossack Fonseca at one point was the world’s fourth-largest largest provider of offshore financial services, with 45 offices around the globe offering ample financial advice in many areas. It seems to be highly discriminating to dub the Mossack Fonseca matter the ‘Panama Papers,’ damaging a nation’s reputation in the name of international integrity.

The movement seems to be now focused on opening a Pandora’s box of corrupt practices around the world. Reforms and changes should focus, for example, on the New York and Miami financial districts that seem to be far more involved in illicit activities than Panama’s.

For one, U.S. authorities should focus their attention on how the illegal drug trade, which has its largest global share within its borders, launders obscene amounts of cash daily within the U.S. banking system.

Marco A. Gandásegui, Jr., professor of sociology at the University of Panama and research associate at the Center of Latin American Studies (CELA): The fallout of the so-called Panama Papers has had one major breakthrough: it forced Mossack Fonseca’s operation to shut down. Other firms offering similar services in the Caribbean Basin ran for cover and are still doing business, though maybe on a smaller scale.

The probable winners are law firms in the United States, mainly in open-for-business  jurisdictions such as Delaware and Nevada. No major reforms have been pushed in any of the jurisdictions that are known to operate with the world’s wealthy. If the international financial community is interested in fighting the tax-evasion racket, it must take action in the U.S. Congress. Legislation at this level has been stalled for decades. In recent years, more and more U.S. states have been taking advantage of the lack of regulation on financial transactions, especially from foreign countries into the United States.

Panamanian and other law firms around the world have a long history of serving all kinds of entrepreneurs in setting up shell companies in the Caribbean, Europe, and the United States. This will not end until the U.S. Congress cracks down and creates new legislation in order to stop such activities.

Republished with permission from the Inter-American Dialogue's biweekly Financial Services Advisor


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