Exclusive: Panamanian Minister Looks Back On Last Year's 'Panama Papers' Scandal

A year and a half has passed since a certain “John Doe” provided a consortium of journalists across the globe with 11.5 million documents revealing the illegal, unethical and secretive activities of the Panamanian law firm Mossack Fonseca, in what became known as the Panama Papers leak.

The country’s finance minister, Dulcidio De La Guardia, is not a big fan of the name, and has characterized the story as an attack on Panama’s reputation, just as the nation was taken off of the Financial Action Task Force’s “grey list,” which identifies countries with weak money-laundering measures.

In New York as part of the United Nations General Assembly, De La Guardia sat down with International Business Times’ Lydia O’Neal to discuss what his ministry is doing to curb corruption and keep companies like Mossack Fonseca in check, as well as the changing relationship between his country and the U.S. in the Trump era. The following interview has been edited and condensed for clarity and brevity.

Panama has signed on to the Organization for Economic Cooperation and Development’s Common Reporting Standards in 2016 — which, it’s worth noting, the U.S. has snubbed — signed on to the OECD’s Base Erosion and Profit Sharing initiative and ended the use of more secretive bearer shares. What else has the Panamanian government done to combat the behaviors Mossack Fonseca facilitated and improve its standing on the global financial stage?

First, let’s review the Panama Papers — or the Mossack Fonseca leaks. When you look at the numbers, that’s a company that operated in 26 different jurisdictions, out of which less than 20 percent of the companies that they sold were Panamanian… They sold 180,000 companies from all different jurisdictions. [There were 210,000 companies in 21 jurisdictions, according to the International Consortium of Investigative Journalists, which was among the first to publish the leak.] And Panama has taken concrete steps — and we were taking concrete steps before the Panama Papers. In particular, when President [Juan Carlos] Varela took office, in July 2014, at that time Panama was included in the FATF “grey list.” And we worked very closely with the private sector, because we realized that being in the FATF list was the greatest threat to the Panamanian economy.

So, as I said, we worked very closely with the private sector, and we put in place certain new business legislations to bring up the Panamanian standards to the world standards. And we passed completely new legislation, including, for the first time, 25 new industries, non-financial industries, that before were not subject to AML [anti-money-laundering] or KYC [know-your-customer] regulations... Brokers, accountants, public notaries, lawyers — before the law, [they] were not subject to AML regulations. The financial sector was.

So we updated the regulation, we created a new entity to supervise all of these non-financial entities. And we gave not only the new non-financial entities… the resources to supervise these 25 industries, but we also boosted the budget and the human resource, or the headcount, to the financial industry’s regulators and the Panamanian FIU [Financial Intelligence Unit].

And at the same time, we were working with the OECD Global Forum on Financial Transparency and Panama signed the multilateral agreement on tax matters, and we joined the inclusive framework of BEPS, and we are working very closely on that front with the OECD, and we’re also working very closely with the Global Forum on Financial Transparency.

Recently Panama got a largely-compliant rating from the OECD Global Forum on tax matters, and I can announce today we signed an agreement with Norway for automatic exchange of information, so that’s another agreement that we have negotiated successfully with an OECD country.

In Panama, a service Mossack Fonseca often performed for foreign clients was setting up private interest foundations for them, as Law 25 of 1995 has allowed them to operate tax-free and without disclosing the names of their founders or their beneficiaries. How have you changed laws shielding private foundations from taxes or transparency?

The AML regulation in Panama basically covers all types of instruments that are under Panamanian regulation. So, either if you sell a Panamanian corporation, or a Panamanian foundation, basically, the law firm of the resident agent is subject to know who’s the beneficial owner. Secondly, the company must carry on accounting records, and those records must be made available to the tax authority of Panama for inspection. So, basically, the standards that apply to private interest foundations are the same standards that apply to any foundation in any OECD country.

The firm faced accusations of illegal activities or probes from different countries, such as Germany, Brazil and the U.S. Given those red flags, should your office have taken action, perhaps at least auditing the firm, before the papers leaked, and do you regret not doing so soon after entering office in 2014?

As I said before, only 20 percent of the companies sold by Mossack Fonseca were Panamanian.

But it was based in Panama.

Right, but they were operating in 26 jurisdictions. Each jurisdiction is responsible for their own corporations or their own registry. Mossack Fonseca and their partners are indicted in Panama. They are out with bail, and they are awaiting trial for their alleged crimes.

An early criminal investigation of Mossack Fonseca was temporarily suspended in January. When it restarted the next month, it was it was reportedly at the Brazilian government’s request and in connection with another scandal, known as Lava Jato, not what was unearthed by the Panama Papers leak. Should that first probe have been suspended, and is it a problem that it resumed only at the urging of another country?

No. First, the attorney general has been investigating Mossack Fonseca and, as I said before, they are out. They have been indicted and they are out with bail and they are awaiting trial for the indictment that has been put out by the attorney general of Panama. And the attorney general of Panama has basically followed all the leads that they have, and they have carried out their duties correctly.

Ramon Fonseca was Varela’s former adviser, and his founding partner at the firm, Jurgen Mossack, served on the nation’s foreign relations council between 2009 and 2014. Varela’s chief of staff, Álvaro Alemán, worked at a law firm that was caught up in a money-laundering investigation by Argentinian authorities. Luis Miguel Hincapié, Panama’s deputy foreign minister, worked at two Panama-based companies that were part of a ponzi scheme investigated by U.S. authorities. The list goes on. All four were members of Panama’s Association of International Lawyers, which, the Panama Papers revealed, was dedicated to working around tax evasion laws, and Alemán was once its president. Does Panama’s government have a bit of a pipeline problem, or a revolving-door problem, and what can you do to fix that?

Let me tell you the following: President Varela has been the one to fight against corruption, and no other government in Panama has done that before. We have put in place the most dramatic changes to the Panamanian regulations and to the Panamanian economy to bring back the money that was stolen by the previous government, from the Panamanian people — the money that, today, is in OECD countries, that is in Europe. And we are trying to get that money back. So, the president has been very clear that he is in the process of making sure that justice is done, but without hurting the innocent people which is basically the Panamanian people, and we are very clear that we want to get the money back that was stolen from the Panamanian people.

Joseph Stiglitz, an economist on a panel to examine the country’s finance system, resigned soon after his appointment, saying the panel would have “no credibility.” He and another resigned panel member, Swiss anti-corruption specialist Mark Pieth, produced their own damning report. Has the latter report been useful to you in crafting economic reforms, and would it have been more useful had Stiglitz and Pieth stayed on and contributed?

I think that — the commission came out with their recommendations. The government was already working on most of them. Some of them were already implemented by the time the commission [report] came out. I think it was unfortunate that Joseph Stiglitz left. He left saying that the government was not willing to make public the report, and we did.

There are some recommendations still pending for implementation. One is, for instance, we created an entity called the [Intendence] to Supervise Non-Financial Entities, like lawyers, accountants, casinos and so-forth. That entity is part of the Ministry of Finance and they recommend to be an independent agency from the ministry. We’re working on that, hopefully to submit to Congress a bill to make that independent in the next year. We are in the final phases of negotiating with the private sector the final wording on the law.

Stiglitz and others have advocated for a mandatory international open, public registry of companies incorporated within their borders. Are you supportive of this proposal?

That initiative has not been adopted by any OECD country and it generates a violation of the rights of the people — the privacy rights of the people. When I see an OECD country adopting that standard, we will look at it.

You don’t think Panama could be a leader in financial transparency on the world stage for being at the forefront of advocating for such a policy? It would probably do a lot for Panama’s damaged image.

Again, Panama will meet, will make sure we comply with the highest international standards. If the international standards change, we will look at it. We will make sure that we comply.

Let’s turn to U.S.-Panama relations. How do you think U.S.-Panama relations have changed since Donald Trump became president, if they have changed?

I think the relationship between the U.S. and Panama is very good. President Varela and President Trump, they have met twice — or more than twice, once at the White House and once this week. I think the relationship in particular between the Panamanian agencies and the U.S. agencies responsible for law enforcements and security are extremely good. We share information between both countries on a daily basis on security threats. We’re fighting narcotics trafficking together, and also dealing with illegal immigration to avoid security threats to Panama and to the U.S., so in that sense, I believe that the relationship between both countries is very good. We also have a very good dialogue between the Ministry of Finance and the Treasury Department...

Do you have any worries, as a U.S. trading partner, related to Trump’s plans to impose stricter barriers to free trade and his embrace of protectionism?

First, in the case of Panama, we have a free trade agreement with the U.S., and Panama runs a deficit.

With the U.S.

With the U.S., yes. So, we believe that free trade is good for the world. Panama is a small economy even though we… run a deficit with the U.S., we export a lot of services related to logistic platform[s] in Panama. So the higher the world trade, [the] more services Panama will be able to export, by the usage of the Panama Canal, or the logistic platform around the country. So, anything that hurts world trade endangers Panama, so we do worry about any movements that will generate a protectionist movement in the U.S. So, anything around that, I think, Panama will see it very carefully, because it will hurt world trade, [but] not directly the deficit that we will run with the U.S.

How do you think the proposed renegotiations of the North American Free Trade Agreement, which includes Panama’s larger-economy neighbors, stands to affect the Panamanian economy?

Trade between the U.S. and Mexico is very focused on different industries. Much of that trade doesn’t come through Panama — it’s directly between the U.S. and Mexico. So, I think — this is my opinion — it’s going to be very difficult to separate the value change of the industries that are embedded in that trade, like the auto industry, with the parts built in the U.S., then sent to Mexico for assembly and then sent back into the U.S. So that value change is very difficult to separate. At the end, I think there will be a new free trade agreement, but I do not think it is going to be dramatically different from what it is today, because there is interest in both sides of the border that the value change adds value to both countries significantly.