INTERNATIONAL BANKING IN PANAMA by Fernando Cardoze, B.A. (Duke),J.D. (Harvard) and G.A. Galindo, B.A., L.L.B. (Cantab), of the firm of Arias, Fabrega & Fabrega, lawyers ¡n the Republic of Panama .22 9 Panama, April 1981 This Article was prepared for publication ¡n "Euromoney INTERNATIONAL BANKING IN PANAMA by Fernando Cardoze, B.A. (Duke), J.D. (Harvard) and G.A. Galindo, B.A., L.L.B. (Cantab), of the firm of Arias, Fabrega & Fabrega, lawyers in the Republic of Panama Panama, April 1981 e c * TABLE OF CONTENTS I. REASONSFORTHEDEVELOPMENTOFTHE BANKING SYSTEM............................................................... 5 M II. GROWTH OF THE BANKING CENTRE............................ 6 III. PROCEDURES FOR THE ESTABLISHMENT OF BANKS............................................................................... 8 IV. BANKING REGULATIONS.................................................. 9 1. Office Premises................................................................ 10 2. Staff................................................................................. 10 3. Capital Requirements..................................................... 10 4. Capital Reserves............................................................. 11 5. Assets in Panama............................................................. 11 6. Contingency Credit......................................................... 11 7. Legal Reserves.................................................................. 12 8. Liquidity........................................................................... 12 9. Legal Interest.................................................................. 13 10. Reporting Requirements................................................ 14 11. Restrictions...................................................................... 14 V. TAXATION............................................................................. 16 VI. BOOKS, CORRESPONDENCE AND BANKING SECRECY............... 17 VIL SPECIAL FEATURES .... 20 VIII. BANKS IN PANAMA......... 21 1. General License........... 21 2. International License. 22 3. Representation License 23 3 r & s. r * • » •• ' ' i'' !■ 7 .7 ' \ . \ ■ •• -r? ’• ; ' ■ ■ ' r- ; ; • í-’ . 7;; ti ‘ ‘ ; '; ■ ' ' i • > i • ' " , - '■ ' ’jr.j íül >• : í'if • ■ ' ' r , 7 ■ - .,7.- 7 H'íj ' . ■ ■ i¡ u • - i,' < - if. ‘ ">' ■ 7 '» 7777' . 77 ■ Panama has developed into an important banking centre during the last fifteen years. The purpose of the present article is to examine briefly the causes for such development, the growth of the banking system as a whole, the regulations which affect banking business, as well as certain special characteristics of the system. I. REASONS FOR THE DEVELOPMENT OF THE BANKING SYSTEM The continuous development of Panama since about fifteen years ago as a centre for International banking activity is the result of con- ditions external to Panama on the one hand, and, on the other, of a propitious financial and legal framework within which Panama had traditionally operated. For instance, the amounts of U.S. dollars circulating outside of the United States during the Sixties as well as developing uncertainties in various other traditional off-shore banking centres directed bankers to the posibilities of other countries as suitable places from which to conduct international banking business and thereby diminish the risks of doing such business. Attention was then focused on Panama for a number of reasons peculiar to Panama. Panama had a strong mercantile tradition which dated bak to Spanish colonial days and which developed into an independent and viable economic system after Panama had achieved political independence in 1903. Another very important factor was its geographical location, the existence of the Panama Canal with its great incidence of inter­ national shipping and air Communications with other parts of the world, as well as the immediate availability of the standard interna­ tional telex and telephone communiations. In the cities of Panama and Colon, there was already a large bilingual (Spanish and English) business community. Traditionally, the fiscal system of Panama was such that only income actually produced within Panama was subject to income tax, regardless of whether the transactions in question were conducted in Panama or outside. Another major factor was also the complete absence of monetary or exchange Controls of any kind and the fact that, by law, the U.S. dollar was, as is now, legal tender. In addition, the activities generated by the Panama Canal, the presence in the city of Colon of the Free Zone for bonded warehous- ing and manufacture, as well as favourable corporate and maritime legislation which had fostered the large development of Panama as a place for off-shore incorporation and ship registration, had already conditioned the financial community to the principies and mechanics of large scale financial transactions and placed it in cióse working 5 contact with the major financial and industrial centres of the world, to a point beyond which its rather small population and territorial extensión would perhaps otherwise not have justified. All of the above factors were reflected in the general as well as in the special legislation of the country, such as, for instance, that dealing with corporations, shipping, taxation, the Colon Free Zone, the re- insurance business and, of course, banking. There was also the mani- fest desire of successive governments, as well as of the population, to maintain and develop such characteristics. Whereas prior to the middle Sixties a small number of (oreign banks had already been established in Panama to conduct both local and international business, the late Sixties saw a marked increase in the registration of foreign banks. Panama, which hitherto had had rather simple statutory banking regulations, then reacted with the enactement in 1970 of certain banking legislation (the Banking Law) with the specific object of encouraging foreign banks while at the same time regulating their activities in a manner which would ensure the orderly conduct of the business without unduly restricting their operations. It sought also to give substance to the banking system in Panama by ensuring that only banks of recognised internatinal stand- ing could be licensed to conduct banking business in Panama, and by requiring banks to have actual premises and staff, thereby avoiding “paper banks” and banking Service companies. II. GROWTH OF THE BANKING CENTRE As a direct result of the above, at 31 December 1980, there were 103 banks registered to do business and with offices in Panama (a list of which is given at the end of the article), from the following coun- tries of origin: U.S.A. 15 Argentina 3 Switzerland 7 Ecuador 3 Panama 10 England 2 Colombia 8 Brazil 2 Japan 7 Luxembourg 2 Germany 5 Arabia 1 France 5 Holland 1 Venezuela 5 Korea 1 Multinational 5 China (Taiwan) 1 Spain 4 Bolivia 1 Cañada 4 Israel 1 Bahamas 3 Uruguay 1 6 Costa Rica 1 Chile 1 Finland 1 India 1 Cuba 1 Perú 1 (Source: National Banking Commissions) The growth of the banking system in the last decade (1970 to 1980) may be appreaciated from the following tables: Total Assets of the Banking System (in millions of U.S.$) 1970 856.6 1975 10,257.5 1980 (Sept.) 36,547.3 (Source: National Banking Commission) Total Deposits in the Banking System (in millions of U.S.$) Internal External Total 1970 341.2 410.9 752.1 1975 849.6 8,494.8 9,344.4 1980 (Sept.) 2,195.5 29,799.8 31,995.3 (Source: National Banking Commission) Total Loans by the Banking System (in millions of U.S$) Internal External Total 1970 * 419.8 245.4 665.2 1975 1,525.3 5,302.5 6,827.8 1980 (Sept.) 2,355.5 19,496.0 21,851.5 (Source: National Banking Commission) From the foregoing it is interesting to note that the total assets of the Banking System have increased in the last ten years from 853.6 million to upwars of 36 billion dollars (U.S.$36,547,300,000), that is to say, an increase of over forty-two times. The external deposits in 7 the last five years have gone from slightly over 8 billion to almost 30 billion dollars. The loans placed by the Banking System during the same period increased from slightly over 6 billion to almost 22 billion dollars, a greater than threefold increase in both instances. III. PROCEDURES FOR THE ESTABLISHMENT OF BANKS The Banking Law provides that banks wishing to conduct banking business in or from Panama would need to apply and obtain one of three types of banking licenses, which vary depending on the ^cope of the business which a particular bank wishes to conduct. The three types of licenses are General License, International License, and Re- presentation License. The General License authorises a bank to conduct banking business from an office in Panama with respect to both the domestic market and the international markets. Such banks may therefore obtain funds from local and overseas depositors, lend within and outside Pa­ nama, and generally carry on banking business from therir offices in Panama without limitation as to any area or field of activity. The International License, on the other hand, authorises a bank to conduct banking business from their offices in Panama, but only in respect of transactions which are consummated outside of Panama. Such banks may receive deposits originating only from outside of Pa­ nama and may not lend to companies or individuáis carrying on busi­ ness in Panama. Finally, the Representation License merly authorises a bank to establish offices in Panama for the exclusive