I INTRODUCTION

Since the establishment of the Republic of Panama in 1904, the banking sector has played an important role in the commercial activities and economic growth of Panama. In this respect, the International Bank Corporation (now Citigroup) and the National Bank in Panama were the first banks to establish operations in Panama in 1904.

Panama’s strategic geographic position, the free circulation of the US dollar, the country’s political, economic and legal stability, quality of life and a modern banking legislation and regulations, are key elements for international banks to establish a branch or subsidiary in Panama. Some of the international banks with a presence in Panama are Scotiabank, Bank of China Limited, Lafise Bank, GNB Sudameris Bank, PKB Bank, Bancolombia, Banesco, Banco del Pacifico (Panama), SA and Bac International Bank, and Banistmo.

Additionally, JPMorgan Chase Bank, Credit Suisse, Bank Julius Baer & Co Ltd, UBS Switzerland AG and Safra National Bank of New York, inter alia, have obtained a representative banking licence to establish a representation office in Panama. In previous years, other international banks have obtained a banking representation licence before obtaining a banking general licence or a banking international licence.

In Panama, there are three types of banking licences:

    • a General licence: authorises a bank to engage in banking business in or from Panama, and to carry out whatever other activities that the Superintendency of Banks (Superintendency) authorises.
    • b International licence: authorises a bank to engage in, from an office established in Panama, transactions that are perfected, consummated or that have an effect outside of Panama, and to carry out any other activity that the Superintendency authorises.
    • c Representation licence: authorises licensed foreign banks to establish a representation office in Panama and carry out any activities that the Superintendency authorises. Representation offices must always include the expression ‘representative office’ in all of their operations.

Up to November 2016, Panama Banking Centre had the following main features:

  • a total assets: US$119,276,000,000.06;
  • b local deposits: US$49,692,000,000.87;
  • c local credits: US$48,584,000,000.39;
  • d number of banks: 92;
  • e return on assets: 1.35 per cent; and
  • f return on equity: 12.27 per cent.2

Moreover, the five largest banks measured by their total assets as of November 2016 were:3

a General Bank SA (Panama): US$14,996,477,000.49;

b Panama National Bank (Panama): US$10,048,091,000.41;

c Banistmo, SA (Colombia): US$9,098,794,000.67;

d Bac International Bank Inc (United States): US$7,181,872.30; and

e Latin-America Foreign Trade Bank, SA (best known by the Spanish acronym of Bladex) (Multinational): US$7,111.680,000.3

The main banking deals and headlines events that occurred during 2016 were the following:

  • a Through Resolution SPB-0030-2016 of 25 January 2016, the Superintendency authorised the transfer of 70 per cent of the shares of Universal Bank, SA, to Canal Bank, SA.
  • b Through Resolution SPB-0036-2016 of 1 February 2016, the Superintendency authorised Citibank Bank (Panama), SA, to change its business name to Scotiabank (Panama), SA. This change of name is the result of the acquisition of Citibank Bank (Panama), SA by Scotiabank Caribbean Holding Ltd.
  • c In April 2016, France included Panama in a list of jurisdictions that do not comply with international principles of tax transparency.
  • d Through Resolution SBP-0087-2016 of 5 May 2016, the Superintendency took administrative and operative control of Balboa Bank & Trust Corp.
  • e Through Resolution SBP-0115-2016 of 1 July 2016, the Superintendency authorised Promerica Financial Corporation, which is the owner of St George Bank & Company Inc, to acquire 100 per cent of the issued and outstanding shares of Citibank Bank of Guatemala, SA, Citicard of Guatemala Limited, SA, Citibroker Independent Insurance Agent, SA, and Real Estate Centric Group, SA.
  • f Through Resolution SBP-0116-2016 of 1 July 2016, the Superintendency ordered the reorganisation of Balboa Bank & Trust Corp.
  • g Through Resolution SBP-0165-2016 of 26 August 2016, the Superintendency authorised the transfer of all the shares of BSI Holding A G, which represents 100 per cent of the shares of BSI, SA, in favour of EFG International AG, which resulted in the indirect change of control of BSI (Panama), SA and BSI Bank (Panama), SA.
  • h Through Resolution SBP-0166-2016 of 31 August 2016, the Superintendency authorised the merger by absorption between Canal Bank, SA and Universal Bank, SA, whereby Canal Bank, SA, as surviving entity, absorbed Universal Bank, SA, and its following subsidiaries: Universal Real Estates, SA, Universal Reforestation, SA, Universal Factoring, SA, Universal Leasing, SA and Universal Bank Trust Corporation (Montserrat).
  • i The Panama National Assembly enacted Law 48 of 26 October 2016 establishing retaliation measures against countries that implement discriminating measures against Panama.
  • j On 27 October 2016, Panama signed the Convention on Mutual Administrative Assistance in Tax Matters, which was developed by OECD and the Council of Europe and which is considered to be the most comprehensive multilateral instrument for tax cooperation against tax evasion and avoidance.
  • k On 4 November 2016, the Global Forum on Transparency and Exchange of Information for Tax Purposes of the OECD published its review of Phase 2 on Panama, which rated Panama overall as a non-compliant country regarding international principles of tax transparency. The report states that Panama’s deficiencies on tax transparency are the number of inactive companies in Panama; that entities operating outside of Panama are not required to keep accounting records; and that the Panamanian competent authority does not obtain and provide in all cases all of the information requested by a foreign regulator under a tax treaty.

II THE REGULATORY REGIME APPLICABLE TO BANKS

Decree Law 9 of 26 February 2009, amended by Decree Law 2 of 22 August 2008, (Banking Law), created the new banking regime and established the Superintendency.

Pursuant to the Banking Law, only banks authorised by the Superintendency can carry out banking business in or from Panama. ‘Banking business’ means, principally, taking resources from the public or financial institutions through the acceptance of deposited money or by any other means that the Superintendency or the banking practices have established, and using said resources at the bank’s risk to grant loans or make investments or any other operation defined by the Superintendency for these purposes.

The Superintendency is the agency in charge of supervising banks established in Panama and banking economic groups.

Moreover, banks established in Panama must be incorporated as a corporation or as a limited liability company. Additionally, foreign banks that wish to operate in Panama must establish a subsidiary or a branch in Panama before applying for a banking licence. All banks established in Panama must have a physical presence.

Overseas banks not having a branch in Panama require a banking representation licence to promote their banking business in Panama without engaging in any banking activity in Panama. Consequently, all banking activity (e.g., deposit taking, loans, investment, etc.), must be undertaken outside Panama.

III PRUDENTIAL REGULATION

i Relationship with the prudential regulator

The Superintendency must safeguard the soundness and efficiency of the banking system in Panama through regular off-site or on-site examinations of the banks at least once every two years, or as ordered by the board of directors of the Superintendency or when the Superintendency deems it necessary.

The Superintendency carries out the following types of supervision:4

  • a Macroprudential supervision: the Superintendency carries out macroprudential supervision to mitigate systemic risks that may threaten financial stability and to guarantee the soundness of the financial system.
  • b Microprudential supervision: the Superintendency carries out microprudential supervision through on-site and off-site inspections of banks to examine the soundness of each banking institution and banking group, and examine their financial conditions and compliance with the banking legislation and regulations, and anti-money laundering and counter-terrorism financing legislation.

The Superintendency has prepared a guide for microprudential supervision called the Uniform Risk-Based Supervision Manual.

The principal matters concerning banks’ businesses in which the regulator is or is expected to be closely involved include:

a corporate governance;

b risk management;

c economic and financial evaluation;

d compliance with applicable legislation; and

e compliance with anti-money laundering and counter-terrorism financing regulations.

ii Management of banks

Rule 005-2011 of 20 September 2011 issued by the Superintendency establishes the corporate governance requirements for banks in Panama. In this respect, Rule 005-2011 states that good corporate governance for banks shall establish as minimum:5

a Documents stating clearly the corporate values, strategic objectives, code of conduct and other appropriate behaviour standards.

b Documents stating clearly compliance with the provisions stated in Rule 5-2011 and its due communication to all levels of the organisation.

c A balanced corporate strategy regarding global fulfilment of the bank and measuring the contribution of each level of the corporate governance structure.

d A clear assignment of responsibilities and authorities entitled to decision-making, incorporating the necessary individual qualifications to fulfil those and a hierarchical line of required approvals in all corporate governance structure levels up to the board of directors.

e Establishment of a mechanism for interaction and cooperation between the board of directors, senior management, and internal and external auditors.

f An appropriate control system including risk management duties independent from the business lines, and other balances and counter balances.

g Prior approval, follow up and special supervision of risk exposures, particularly concerning credit facilities granted under best banking practices, where conflicts of interest exist.

h Documents containing approved policies on recruitment, orientation, continuous and up-to-date training of staff, financial and administrative benefits.

i Existence of adequate information flow from within the organisation to the public, ensuring transparency of the corporate governance system, at least in the following areas:

• board of directors structure (size, membership, qualifications and committees) as well as internal rules of the board of directors and their promulgation towards shareholders;

• general administrative structure (responsibilities, hierarchical lines, qualifications and experience);

• basic organisational structure (business line structure, bank’s legal structure, comptroller corporation and banking group); and

• nature and extension of transactions with related parties and members of the banking group.

j A direct supervisory system for each component of hierarchical levels within the organisational structure to the component immediately inferior hierarchically speaking, including the functions that are not involved with the bank’s daily management.

k External audits not involved with the senior management and the board of directors.

l Internal audits not involved with the senior management.

At least seven natural persons with the relevant knowledge or experience regarding the operations and the risks inherent to the banking activities must form the board of directors of a bank. The majority of the board members must be persons who do not participate in the daily administrative management of the bank, or whose director condition does not present any business, professional, ethical or material conflict of interest. The chief executive officer, the operational manager, the chief financial officer or their equivalent cannot preside over the board of directors. At least two members of the board must be independent directors.

Moreover, pursuant to Rule 005-2011, senior management have the following duties to:

  • a implement the strategies and policies that the board of directors has approved;
  • b secure the functioning and efficiency of an effective internal control system;
  • c equip the different management and operation levels of the bank with the necessary resources for the adequate development of the internal control system;
  • d ensure the functioning and efficiency of the process that permit the identification and administration of the risks that the bank assumes in the development of their operations and activities;
  • e maintain an organisational structure that clearly assigns responsibilities, authorities and lines of hierarchy; and
  • f develop processes that identify, measure, verify and control the risks that the bank has engaged in.

Senior management includes general management, the executive vice-president, the executive president or other equivalent titles. The second-ranked executive level include deputy general managers or any other equivalent name, and other managers and executives who carry out key functions and must report directly to their superiors.

There is no distinction between a bank that is a subsidiary and one that is not. However, banks that are branches of a foreign bank and a bank with an international banking licence for which the Superintendency is the host supervisor can evidence compliance with Rule 005-2011 by issuing an annual certification from their head office or their responsible regional office, certifying that the bank has the structure, organisation and controls in place to guarantee good corporate governance in accordance with sound banking practices.

There are no restrictions on bonus payments to management and employees of banking groups, or limitations on the amount of remuneration bank group employees can receive.

iii Regulatory capital and liquidity

Pursuant to the Banking Law, banks with a general banking licence must have a minimum capital of US$10 million, and banks with an international banking licence must have a minimum capital of US$3 million.

The primary, secondary and tertiary capital form a bank’s total capital: primary capital is made up of the paid social capital, declared reserves and retained earnings; secondary capital is composed of the non-declared reserves, revaluation reserves, reserves generated for losses, hybrid debt-capital instruments and subordinated term debt; and tertiary capital is exclusively composed of short-term subordinated risk to address market risk.

The Banking Law establishes that all banks with a general banking licence or an international banking licence must have a capital adequacy of at least 8 per cent risk weighted on the bank’s total assets and off-balance sheet operations.

Notwithstanding the above, in Panama, banks have an average risk weighted capital adequacy of the Banks Index that is much higher that the 8 per cent required.

The Superintendency will have a regulatory capital concern when transactions that could reduce the bank’s capital are below what the law requires. In this respect, a few years ago, the Superintendency had to order the compulsory liquidation of a bank that lost a lot of capital funds by investing in high-tech securities.

Notwithstanding the above, the Superintendency has issued the following rules to implement Basel III: Rule 1-2015 of 3 February 2015, establishing rules that govern the capital adequacy of banks and banking groups; and Rule 3-2016 of 22 March 2016, amended by Rule 8-2016 of 29 November 2016, establishing rules that determine the credit risk and counter-party risk-weighted assets.

The Superintendency has the legal authority to carry out the consolidated supervision of the banking group of which the banks are members. This supervision is carried out by on-site and off-site examinations. For the Superintendency to supervise banks and banking groups outside of Panama, the Superintendency must sign a memorandum of understanding (MOU) with the banking regulator of the country of origin of the bank.

To date, the Superintendency has signed MOUs with the following authorities: the Cayman Islands Monetary Authority; the Central Bank of Bahamas; the Central Bank of Brazil; Bank of Russia; the Financial Services Centre of Montserrat, British West Indies; the British Virgin Islands Financial Service Commission; the National Banking and Securities Commission of Mexico; the National Banking and Insurance Commission of Honduras; the Financial Service Regulatory Commission of Antigua; the Office of the Comptroller of the Currency (US); the Board of the Governors of the Federal Reserve System (US); the Federal Deposit Insurance Corporation (US); the Office of the Thrift Supervision (US); the Turks and Caicos Islands Financial Services; the Office of the Superintendency of Financial Institutions (Canada); the Superintendency of Banks and Insurance of Peru; the Superintendency of Banks of Guatemala; the Superintendency of Banks of the Dominican Republic; the Superintendency of Banks and Other Financial Institutions of Guatemala; the Superintendency of the Financial System of El Salvador; the Superintendency of Banks and Other Financial Institutions of Chile; and the Central-America Council of Superintendency of Banks and Insurances and Other Financial Institutions.6

On liquidity regulations, pursuant to the Banking Law, banks with a general banking licence and banks with an international banking licence where the Superintendency is the supervisor of origin must maintain at all times minimum liquid assets of 30 per cent of their total deposits.

Notwithstanding the above, it is worth noting that the average liquidity index for banks established in Panama during 2016 were between 58.25 and 62.84 per cent, which was much more higher than the legal amount required.

iv Recovery and resolution

Under the Banking Law, the Superintendency can take administrative and operative control of a bank under the following circumstances:

a as requested by the bank itself with a supporting cause;

b if the bank cannot continue its operations without endangering the interests of the depositors;

c as a consequence of an evaluation rendered by an adviser appointed by the Superintendency;

d for not complying with a corrective measure required by the Superintendency;

e if the bank carries out its operations illegally, negligently or fraudulently;

f if the bank cannot pay its obligations; or

g if the Superintendency confirms that the bank’s capital adequacy, solvency or liquidity has impaired its operations and requires the involvement of the Superintendency.

The Superintendency may also order the reorganisation of banks, requesting a bank to take certain measures and adopt the changes necessary to protect the interests of the depositors and creditors of the bank.

The Superintendency also has the authority to order the compulsory liquidation of a bank over which it has previously taken adminstrative and operative control.

In Panama, there is no possibility to wind down a bank that has failed (or is considered by the relevant regulator to be reasonably likely to fail) in an orderly manner while preserving its critical functions (e.g., deposit taking and payment services) and minimising the need for any taxpayer ‘bailout’ and serious market disruption.

Moreover, in Panama, ‘bail in’ powers do not exist; that is to say, the powers of a regulator or government authority to require the mandatory write-down or conversion to equity, or both, of such debt upon the occurrence of certain triggers associated with bank’s failure or reasonable expectations as to a bank’s failure, whatever the terms of such debt.

IV CONDUCT OF BUSINESS

Rule 005-2011 of 20 September 2011, whereby good corporate governance provisions applicable to banks are updated, governs banks’ conduct of business. Additionally, banks must comply with the Banking Law, anti-money laundering and counter-terrorism financing laws and other applicable laws while conducting their business.

Moreover, the Superintendency may impose the following sanctions on a bank:

  • a up to US$1 million for violating money laundering and financing of terrorism provisions contained in the Banking Law, and for related crimes;
  • b up to US$500,000 for violating the following provisions contained in the Banking Law and regulations:

• the obligation to submit to inspection;

• the capital requirements;

• the liquidity requirements;

• the submission of documents and reports;

• prohibitions and limitations; and

• the obligation of confidentiality; and

  • c with a private reprimand, public reprimand or a fine of up to US$50,000 for a violation of the Banking Law that does not have a specific sanction.

The Superintendency may levy the sanctions imposed on the bank on the bank’s directors, officers, managers, employees and any other personnel involved in the violation of the provisions of the Banking Law. In the case of employees and directors, the bank will be jointly and severally liable for the fines imposed on their personnel.

The fines and sanctions imposed by the Superintendency are without prejudice to any criminal and civil liability against the bank, their directors, officers or employees by applicable law.

Under the Banking Law, banks can only disclose information about their clients and their operations with the clients’ consent. However, the bank does not require the client’s consent in the following situations:

  • a when the information is required by a competent authority;
  • b when the bank must disclose the information to comply with anti-money laundering, terrorism financing and related crimes provisions;
  • c when the information is provided to credit agencies that analyse risks; and
  • d when the information is provided to processing data agencies or offices for accounting and operative purposes.

V FUNDING

Banks typically fund their activities with capital that the bank assigns for operations, the deposit taken from their customer, and with loans obtained from other banks. In Panama, there is no central bank.

VI CONTROL OF BANKS AND TRANSFERS OF BANKING BUSINESS

i Control regime

The Superintendency supervises the persons controlling or otherwise having a significant stake in banks, and any change of controlling persons of a bank requires prior authorisation by the Superintendency.

Pursuant to Rule 001-2014 of 29 December 2004 issued by the Superintendency, transfers of shares of banks or of economic groups of which banks are a member, as well as any modification in the shareholder composition of a bank, requires prior authorisation from the Superintendency, provided that said transfer involves a change of control or there exists a concerted action causing a change in control, or there is a significant interference.

There is a change of control when the acquisition or transfer of the capital stocks of a bank or economic groups of which the bank is a member whereby the buyer or any other natural or juridical person acting individually or in concerted action becomes the whole or majority owner, or obtains directly or indirectly control of the bank’s administration.

There is a significant interference when the transfer of the stock capital of a bank or the economic groups of which the bank is a member involves 25 per cent or more of the stock capital.

There is a concerted action when natural or juridical persons act jointly in concert to achieve a common goal to acquire control of a bank independently, whether or not there is an agreement between the parties. It can also mean combined and other interest votes for a common goal by a contract, understanding, relation or agreement in writing or otherwise.

A detailed business plan containing the preliminaries plan that the proposed buyer plans to develop once the Superintendency authorises the transfer of stock shares must be filed with the application for regulatory approval of an acquisition stake in a bank. However, this is not the case for a significant stake in a holding company of a bank.

A banking acquisition can be structured as follows:

  • a Stock purchase agreement of the capital stocks of the bank: the buyer buys all or the majority of the issued capital stocks of the bank representing a change of control. This is the most common type of bank merger or acquisition transaction. In many cases, a local bank will buy the stocks capital or another local bank, and later merge with the subsidiary bank. In this respect, in 2011, Balboa Bank & Trust Bank merged with Transatlantic Bank, SA using this structure.
  • b Merger by absorption: the surviving entity will absorb all of the assets and liabilities of the merged entity. Merger by absorption is the second most common type of bank merger or acquisition transaction.
  • c Merger by consolidation: both entities will disappear, and a new integrated entity will emerge. Merger by consolidation is the third most common type of bank merger or acquisition transaction.
  • d Public stock offering: an entity makes a public offering for the traded shares of a bank. Although short in numbers, the cases of public stock offering have been an important element in the composition of the International Banking Centre. These cases are the acquisition by a public stock offering of National First Group, SA by the Isthmus Bank, SA (2000), Wall Street Securities by Continental Bank, SA (2004), Banistmo Group, SA by HSBC Asia Holdings BV (2006) and Banaagricola, SA by Bancolobia (Panama), SA (2007).
ii Transfers of banking business

Transfers of deposits from one bank to another requires the prior consent of the client. Loan arrangements can be transferred by the bank without the prior consent of the client, unless the parties have established in the arrangement that the client must give his or her consent.

Pursuant to Rule 2-2004 of 29 December 2004 issued by the Superintendency, ‘banks engaged in the Business of Banking in or from Panama, that intend to sale-purchase portfolios and/or transfers of deposits, where there exists a Significant Impact (as defined hereinafter) in the volume or nature of banking business, shall require prior authorisation by the Superintendent, pursuant to provisions set forth in this Agreement’.7

Article 3 of Rule 2-2004 states that: ‘For the effects of this Agreement, Significant Impact shall be understood to exist in the volume or nature of the Banking business, whenever the sale-purchase of portfolios and/or transfer of deposits involve 25 per cent or more of the assets and/or liabilities of the seller or buyer individually.’

VII THE YEAR IN REVIEW

The most important developments regarding banking and banking regulations in 2016 were the enactment of a series of laws by the Panama National Assembly to comply with international standards on tax transparency and OECD requirements.

In this respect, the Panama National Assembly enacted the following laws:

  • a Law 47 of 24 October 2016, whereby the Panama National Assembly ratified the agreement between the Republic of Panama and the United States of America to comply with FATCA regulations;
  • b Law 51 of 27 October 2016, which establishes the legal framework for the automatic exchange of information for tax purposes;
  • c Law 52 of 27 October 2017, which establishes the obligation for every Panamanian entity that does not engage in commercial or industrial activities in Panama to keep accounting registries together with supporting documents, and establishes a strike-off method for inactive companies at the Panama Public Registry; and
  • d Executive Decree 408 of 18 December 2016, which establishes guidelines for the exchange of information between the Superintendency of Banks and the Superintendency of the Securities Market.

Moreover, the Superintendency of Bank issued the following rules regarding prevention of anti-money laundering, terrorist financing and weapons of mass destructions financing, and on the implementation of Basel III:

  • a Rule No.6-20016 of 27 September of 2016, which establishes guidelines for managing risks related to the prevention of money laundering, the financing of terrorism, and the financing of the proliferation of weapons of mass destructions that may arise due to new products and technologies.
  • b Rule No.7-20016 of 4 October of 2016, which establishes guidelines for managing risks related to the prevention of money laundering, the financing of terrorism, and the financing of the proliferation of weapons of mass destructions that may arise from cross-border correspondent banking relationships provided by correspondent banks in the Panamanian banking system.
  • c Rule 3-2016 of 22 March 2016, amended by Rule 8 of 29 November 2016, which establishes rules for determining credit and counterparty risk-weighted assets.

VIII OUTLOOK AND CONCLUSIONS

The implementation of Basel III by the Superintendency is still pending. Nevertheless, Panama continues working with the OECD to comply with international principles on tax transparency.

It is highly likely that Panama’s banking sector, economy and foreign direct investment could be affected if the OECD does not favourably change its no-complaint evaluation of Panama, as foreign banks that are established may decide to abandon the market and other foreign banks may decide not to establish operations in Panama.

Moreover, other countries such as France and Ecuador may decide to include Panama on a list of tax haven jurisdictions, forbidding their citizens and companies from investing in Panama or maintaining banking operations in Panama.

Based upon the above scenario, the government has to direct all possible efforts and resources to resolve these problems and obtain a complaint evaluation within the shortest period of time.

Notwithstanding the above, it is important to point out that since the OECD report was issued, Panama has taken important measures to address these deficiencies. In this respect, the Panama National Assembly enacted Law 52 of 2016 establishing a strike-off method for inactive companies at the Public Registry, and establishing that companies that do not operate locally need to have accounting registries and supporting documentation.

Additionally, DGI, Panama’s tax collection authority, has been amending its procedures to make the obtaining and exchange of information with foreign tax regulators more effective. As already pointed out, Panama signed the Convention on Mutual Administrative Assistance in Tax Matters, which is pending ratification by the National Assembly and which will allow the DGI to exchange automatic information for tax purposes with foreign authorities.

To conclude, the government must continue working to strengthen laws on tax transparency to maintain a sound and efficient banking centre. In the short term, the Panama National Assembly must ratify the Convention on Mutual Administrative Assistance in Tax Matters, and at the same time the Executive Branch must begin implementing the relevant executive agreements with other countries to establish the procedures for the exchange of tax information.

1 Mario Adolfo Rognoni is an associate at Arosemena Noriega & Contreras.

4 www.superbancos.gob.pa/en/supervisory-framework.

7 www.superbancos.gob.pa/en/laws-and-reg/memorandum-understanding.