Cablegate: Panama's Off Shore Corporation Industry

VZCZCXYZ0001
RR RUEHWEB

DE RUEHZP #1793/01 2561646
ZNR UUUUU ZZH
R 131646Z SEP 06
FM AMEMBASSY PANAMA
TO RUEHC/SECSTATE WASHDC 8940
INFO RUCNSTF/TERRORISM FINANCE PRE NOTIFICATION COLLECTIVE
RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEAIIA/CIA WASHDC
RHEFDIA/DIA WASHDC
RUEATRS/DEPT OF TREASURY WASH DC

UNCLAS PANAMA 001793

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD KCRM
SUBJECT: PANAMA'S OFF SHORE CORPORATION INDUSTRY

This is Part I of a two part series on Panama's
off-shore corporation regime. Part I describes the
incorporation process, and Part II (septel) will discuss who
benefits and how.

1. (SBU) SUMMARY. Panama is the second most popular
jurisdiction in which to form offshore corporations
(sociedad anonimas or anonymous societies) after Hong
Kong. The advantages to incorporating in Panama include:
the ease and flexibility of forming a corporation,
well-established corporation law, and a tax regime
that taxes only Panamanian derived income.
This incorporation regime ensures secrecy, avoids taxes,
and shields assets from the enforcement of legal
judgments. Along with its sophisticated banking
services, Panama remains an environment conducive to
laundering the proceeds from criminal activity and
creates a vulnerability to terrorist financing.
END SUMMARY

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FORMING A PANAMANIAN COMPANY IS EASY
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2. (U) According to a 2005 World Bank report, Panama
is the easiest and fastest country in Latin America
in which to incorporate. On average it takes seven
procedures and 19 days. Forming a Panamanian
corporation typically costs less than $2,000,
inclusive of legal fees. There is no minimum capital
requirement, and non-resident Panamanian corporations
are not required to have a commercial business
license to operate internationally. Panamanian
corporations are marketed widely on the internet
and in the financial media. Panama's Public Registry
currently lists over 350,000 off-shore corporations
registered in Panama.

3. (U) To establish a Panamanian corporation, two or
more persons of legal age and capacity, of any
nationality or domicile (the subscribers), execute
the articles of incorporation before a notary public
in Panama. The articles of incorporation state the
names and addresses of the directors, officers and
resident agent, but are not required to list the
shareholders. The resident agent must be a Panamanian
lawyer or law firm and usually acts as the subscriber.
The directors and officers of a Panamanian
company need not be shareholders or Panamanian
residents.

4. (U) The subscribers have the right to own one share
of the corporation's capital stock and are typically
the only shareholders that may be listed in the
articles. Once executed the articles are filed with
the Public Registry and the corporation acquires its
legal existence.

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HIDDEN DIRECTORS, OFFICERS AND SHAREHOLDERS
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5. (U) Once a corporation is formed, the initial
shareholders can assign, transfer, or relinquish
their shares to successive individuals and/or other
off-shore corporations without any reporting
requirements. Panamanian law requires the
maintenance of a shareholder registry, but the
physical location can be anywhere. Panama also
allows the issuance of "bearer certificates."
These physical shares in a company entitle
the "bearer" to open a bank account and transact
on behalf of the company.

6. (U) Many Panamanian companies and law firms offer
resident agent services, along with nominee directors
and officers. The advantage to nominee directors and
officers is that they have no connection to, or
knowledge of, the shareholders. These directors
and officers operate pursuant to a power of attorney
granted by the shareholders that is not required to
be filed with the Public Registry.

7. (U) There is no legal requirement for resident agents
to have direct contact with or information concerning
a corporation's directors, officers or shareholders.
While a "know your customer" obligation is imposed
on Panamanian lawyers, the resident agent normally
does not maintain any corporate records. In many
cases, neither the resident agent nor the law firm
know the identity of the shareholders.

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AVOIDING THE TAXMAN
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8. (U) Panama taxes only income derived within
the territory of Panama only. The following
are neither taxed nor required to be reported
to any Panamanian authority:

- Dividends or other distributions by a
Panamanian corporation but sourced from
non-Panamanian income.

- Interest income.

- Salary or other compensation received by
non-Panamanian residents from a Panamanian
corporation.

Accordingly, the function performed by
Form 1099 in the US of linking income to
its recipient does not exist in Panama.

9. (U) Panama's favorable corporate tax
environment is complemented by its sophisticated
banking infrastructure. To bypass the "know your
customer" requirement of Panama's banking laws,
the newly formed Panama corporation opens its bank
accounts outside Panama in any of 100 banks from 30
countries that have branch offices in Panama.

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COMMENT
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10. (SBU) The money laundering process of:
placement (putting money into a legitimate
financial institution), layering
(distancing the money from its origin) and
integration (causing the money to re-enter the
economy in legitimate-looking form) is perfectly
replicated in Panama. Panama's status as a major
commercial and banking center (placement),
corporation law and tax regime (layering) create
an environment conducive to illicit finance.
ARREAGA

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