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2017-2021 ARCHIVED CONTENT

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EXECUTIVE SUMMARY

As the home of the Panama Canal, the world’s second largest free trade zone, and sophisticated logistics and finance operations, Panama attracts high levels of foreign direct investment from around the world and has great potential as a foreign direct investment (FDI) magnet and regional hub for a number of sectors.  Panama remains in the first position in attracting FDI in Central America, closing 2019 with $4.835 billion, according to Panama’s National Institute of Statistics and Census (INEC).  Panama, over the last decade, has been one of the Western Hemisphere’s fastest growing economies, benefiting from investment-grade credit, a strategic location, and a stable, democratically elected government.

Prior to the outbreak of the COVID-19 crisis, Panama’s Ministry of Economy and Finance predicted the economy would grow by four percent in 2020, up from three percent in 2019.  However, the crisis will clearly have a significant negative impact on GDP with estimates including negative growth.  The global crisis has hit some of Panama’s key industries, including maritime and the national airline Copa, and the services ancillary to trade.  Panama’s macroeconomic health has been stable, with the inflation rate less than one percent as of the end of 2019.  As of May 2020, six weeks into the COVID-19 crisis, the sovereign debt rating remains investment grade, with ratings of Baa1 (Moody’s), BBB (Fitch), and BBB+ (Standard & Poor’s).  Decreases in government revenue, unexpected expenditures, and additional borrowing resulting from the COVID-19 crisis changed Moody’s outlook from stable to negative.

Apart from those brought by the COVID-19 crisis Panama has other challenges, including corruption, judicial capacity, a poorly educated workforce, and labor issues, which often precludes further investment from foreign companies or complicates existing investments.  With a population of just over four million, Panama’s small market size for many companies is not worth the risk of investment.  The World Bank classified Panama in July 2018 for the first time as a “high-income” jurisdiction in its annual country classifications after its Gross National Income per capita squeaked past the threshold for that classification.

Panama is one of the most unequal countries in the world, with the 14th highest Gini Coefficient and a national poverty rate of 14 percent.  Those numbers will increase due to the COVID-19 crisis.  The Cortizo administration has shown its willingness to address investment challenges by prioritizing key economic reforms required to improve the investment climate and has addressed the precarious situation of the country’s most vulnerable through payment deferral legislation and a robust food aid program.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 101 of 175 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2019 86 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2019 75of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2018 N/A http://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2019 14,370 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Panama depends heavily on foreign investment and has worked to make the investment process attractive and simple.  With few exceptions, the Government of Panama makes no distinction between domestic and foreign companies for investment purposes.  Panama benefits from stable and consistent economic policies, a dollarized economy, and a government that consistently supports trade and open markets.

In 2019, the United States ran a $7.26 billion trade in goods surplus multi-billion dollar trade surplus with Panama.  Both countries signed a Trade Promotion Agreement (TPA) that entered into force in October 2012.  The U.S.-Panama TPA has significantly liberalized trade in goods and services, including financial services.  The TPA also includes sections on customs administration and trade facilitation, sanitary and phyto-sanitary measures, technical barriers to trade, government procurement, investment, telecommunications, electronic commerce, intellectual property rights, and labor and environmental protection.

Panama has one of the few Latin American economies that is predominantly services-based. Services represent nearly 80 percent of Panama’s GDP.  The TPA has improved U.S. firms’ access to Panama’s services sector and gives U.S. investors better access than other WTO members under the General Agreement on Trade in Services.  All services sectors are covered under the TPA, except where Panama has made specific exceptions.  Under the agreement, Panama has provided improved access in sectors like express delivery, and granted new access in certain areas that had previously been reserved for Panamanian nationals.  In addition, Panama is a full participant in the WTO Information Technology Agreement.

The office of Panama’s Vice Minister of International Trade within the Ministry of Foreign Affairs is the principal entity responsible for promoting and facilitating foreign investment and exports.  Through its ProPanama service (http://propanama.mire.gob.pa/sobre-propanama ) the government provides investors with information, expedites specific projects, leads investment-seeking missions abroad, and supports foreign investment missions to Panama.  In some cases, other government offices may work with investors to ensure that regulations and requirements for land use, employment, special investment incentives, business licensing, and other requirements are met.  Panama also has a Minister Counselor for Investment, part of the presidency.  While there is no formal investment screening by Panama, the government monitors large foreign investments, especially in the energy sector.

Panama passed a Private Public Partnership (PPP) law in 2019, as an incentive for private investment, social development, and job creation.  This law was developed as a first-level legal framework that orders and formalizes the formula for the private sector to invest, with the prospect of reasonable profitability, in public initiative projects, expanding the State’s options to meet social needs.

Limits on Foreign Control and Right to Private Ownership and Establishment

The Panamanian government imposes some limitations on foreign ownership in the retail and media sectors where, in most cases, ownership must be Panamanian.  However, foreign investors can continue to use franchise arrangements to own retail within the confines of Panamanian law (under the TPA, direct U.S. ownership of consumer retail is allowed in limited circumstances).  There are also limits on the number of foreign workers in some foreign investment structures.

In addition to limitations on ownership, approximately 55 professions are reserved for Panamanian nationals.  Medical practitioners, lawyers, accountants, and customs brokers must be Panamanian citizens.  The Panamanian government also instituted a regulation requiring that ride share platforms use drivers that possess commercial licenses, which are available only to Panamanian nationals.  The Panamanian government also requires foreigners in some sectors to obtain explicit permission to work.

With the exceptions of retail trade, the media, and several professions, foreign and domestic entities have the right to establish, own, and dispose of business interests in virtually all forms of remunerative activity.  Foreigners need not be legally resident or physically present in Panama to establish corporations or to obtain local operating licenses for a foreign corporation.  Business visas (and even citizenship) are readily obtainable for significant investors.

Other Investment Policy Reviews

N/A

Business Facilitation

Procedures regarding how to register foreign and domestic businesses, as well as how to obtain a notice of operation, can be found at the Ministry of Commerce and Industry’s website (https://www.panamaemprende.gob.pa/ ) where one may register a foreign company, create a branch of a registered business, or register as an individual trader from any part of the world.  Corporate applicants must submit notarized documents to the Mercantile Division of the Public Registry, the Ministry of Commerce and Industry and the Social Security Institute.  Panamanian government statistics show that applications for foreign businesses typically take between one to six days to process.

The process for online business registration is clear and available to foreign companies.  Panama is ranked 51 out of 190 countries for starting a business and 88 out of 190 for protecting minority investors, according to the 2019 World Bank’s Doing Business Report (http://www.doingbusiness.org/en/data/exploreeconomies/panama#DB_rp ).

Outward Investment

2. Bilateral Investment Agreements and Taxation Treaties

The U.S.-Panama Bilateral Investment Treaty (BIT) entered into force in 1991 and was amended in 2001.  The BIT ensures that, with some exceptions, U.S. investors receive fair, equitable, and nondiscriminatory treatment, and that both parties abide by international law standards, such as for expropriation and compensation and free transfers.  Following the October 31, 2012, implementation of the TPA, the investor protection provisions in the TPA have supplanted those in the BIT.  However, until October 30, 2022, investors may choose to invoke dispute settlement under the BIT for disputes that arose prior to entry into force of the TPA, or for disputes relating to investment agreements that were completed before the TPA entered into force.  Panama has closely scrutinized, and in some cases disputed, which firms may qualify for preferred treatment under the BIT and TPA.  Panama has a bilateral taxation treaty with the United States.

Panama also has 21 bilateral investment protection agreements with:  Argentina, Canada, Chile, Cuba, the Czech Republic, the Dominican Republic, Finland, France, Germany, Italy, Korea, the Netherlands, Qatar, Spain, Sweden, Switzerland, Ukraine, the United Kingdom, Israel and Uruguay.  Panama signed four BITs that are pending entry into force: Belgium, Luxembourg, Haiti, and United Arab Emirates.

Panama established diplomatic relations with the People’s Republic of China in June 2017.  Under the then-Varela administration, parties were negotiating a free trade agreement, however, there have been no further negotiations since July 2019 when the Cortizo administration took office.

3. Legal Regime

Transparency of the Regulatory System

Panama has five regulators, four that supervise the activities of financial entities (banking, securities,  insurance, and “designated non-financial businesses and professions (DNFBPs)” and a fifth supervisor that oversees credit unions. Each of the regulators regularly publish detailed sector reports, as well as information regarding fines and sanctions on their websites.  Panama’s banking regulator began publishing fines and sanctions in late 2016.  The securities and insurance regulators have published fines and sanctions since 2010.  Law 23 of 2015 created the regulator for DNFBPs, which began publishing fines and sanctions in 2018.  In January 2020, the regulator for DNFBPs was granted independence and Superintendent status similar to that of the banking regulator.

In 2012, Panama modified the securities law to regulate brokers, fund managers, and matters related to the securities industry.  The Securities Superintendent is generally considered a competent and effective regulator.  Panama is a full signatory to the International Organization of Securities Commissions (IOSCO).

Panama is a member of UNCTAD’s international network of transparent investment procedures (http://panama.eregulations.org/ ).  Foreign and national investors can find detailed information on administrative procedures applicable to investment and income generating operations including the number of steps, name and contact details of the entities and persons in charge of procedures, required documents and conditions, costs, processing time and legal bases justifying the procedures.

International Regulatory Considerations

In 2006, at the time of the negotiations of the TPA, the parties also signed an agreement regarding “Sanitary and Phytosanitary Measures and Technical Standards Affecting Trade in Agricultural Products.”  That agreement entered into force on December 20, 2006.

The Panamanian Food Safety Authority (AUPSA) was established by Decree Law 11 in 2006 to issue science-based sanitary and phytosanitary (SPS) import policies for agricultural and food products entering Panama.  AUPSA does not have regulatory authority for domestic products.  In the last four years, AUPSA, as well as other parts of the government, have implemented or proposed measures that restrict market access.  These measures have also increased AUPSA’s ability to limit the import of certain agricultural goods, for example as fresh or chilled onions.  In that particular case, AUPSA modified its import requirement adding that imported onions can only be commercialized before 120 days have elapsed since harvest of the onion bulb, and each shipment must be accompanied by a laboratory analysis certifying the shipment to be free of Ditylenchus dipsaci.  In another case, AUPSA certified that a bio-tech agricultural product met international standards and did not pose a threat to human consumption, but the Ministry of Health (MINSA) refused to recognize U.S. and international standards, which resulted in a loss of investment of more than $100 million.

On October 28, 2019, the Government of Panama introduced draft bill 164 which would eliminate AUPSA and create the National Service for Food Import and Export Procedures (SENTA in Spanish).  As of the writing of this report, that draft bill 164 still in the National Assembly.

Legal System and Judicial Independence

In 2016, Panama transitioned from the civil to accusatory justice system with the goal of simplifying and expediting criminal cases.  Fundamental procedural rights in civil cases are broadly similar to those available in U.S. civil courts, although some notice and discovery rights, particularly in administrative matters, may be less extensive than in the United States.  Judicial pleadings are not always a matter of public record, nor are the processes always transparent.

Some U.S. firms have reported inconsistent, unfair, and/or biased treatment from Panamanian courts.  The judicial system’s capacity to resolve contractual and property disputes is often weak, hampered by a lack of technological tools, and susceptible to corruption.  The World Economic Forum’s 2019 Global Competitiveness Report rated Panama’s judicial independence at 129 of 137 countries.

The Panamanian judicial system suffers from significant budget shortfalls that continue to affect all areas of the system.  The transition to the accusatory justice system, with no increased funding, resulted in an insufficient budget (which was insufficient even before the transition) for the personnel, infrastructure, and operating requirements of both a backlogged inquisitorial system and the new accusatory justice system.  The budget shortfall’s continued impact is evident in poorly trained accusatory justice system personnel and often inadequate technological tools, especially in investigations and forensics.. The judiciary’s lack of independence continues as a legacy of a highly politicized system of appointments for judges, prosecutors, and other officials from the most senior positions on down.  Furthermore, under Panamanian law, only the National Assembly may initiate corruption investigations against Supreme Court judges, and only the Supreme Court may initiate investigations against members of the National Assembly, which in turn has led to charges of a de facto “non-aggression pact” between the branches.

Laws and Regulations on Foreign Direct Investment

Panama has different laws governing incentives depending on the activity, including the Multinational Headquarters Law, the Tourism Law, the Investment stability Law, miscellaneous laws associated with certain sectors, including the film industry, call centers, certain industrial activities, and agriculture exports.  In addition, laws may differ depending on the economic zone, including the Colon Free Zone, the Panama Pacifico Special Economic Area, and the City of Knowledge.  Proinvex (http://proinvex.mici.gob.pa/ ), within the Ministry of Commerce and Industry, provides more details on tax and other benefits.

Government policy and law treat Panamanian and foreign investors equally with respect to access to credit.  Panamanian interest rates closely follow international rates (i.e., the U.S. federal funds rate, the London Interbank Offered Rate, etc.), plus a country-risk premium.

The Ministries of Tourism, Public Works, and Commerce and Industry, as well as the Minister Counselor for Investment court foreign investment.  However, once a company invests in Panama, some have reported more difficulty in navigating their new environment, especially in tourism, branding, imports, and infrastructure development.  Although individual ministers have been responsive to U.S. companies, the root issues are more difficult to address.  U.S. companies have complained about non-payment issues from several ministries, which have stalled payments without any official statement as to the merits of the contract terms.

Some private companies, including multinational corporations, have issued bonds in the local securities market.  Companies rarely issue stock on the local market and, when they do, often issue shares without voting rights.  Investor demand is generally limited because of the small pool of qualified investors.  While some Panamanians may hold overlapping interests in various businesses, there is not an established practice of having cross-shareholding or stable shareholder arrangements, designed to restrict foreign investment through mergers and acquisitions.

Competition and Anti-Trust Laws

Panama’s Consumer Protection and Anti-Trust Agency, established by Law 45, October 31, 2007, and modified by Law 29 of June 2008, reviews transactions for competition related concerns and serves as a consumer protection agency.

Expropriation and Compensation

Panamanian law recognizes the concept of eminent domain.  In at least one circumstance, a U.S. company has expressed concern about not being reimbursed at fair market value following the government’s revocation of a concession.

Dispute Settlement

ICSID Convention and New York Convention

Panama is a Party to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards).

Investor-State Dispute Settlement

Resolving commercial and investment disputes in Panama can be a lengthy and complex process.  Despite protections built into the U.S.-Panamanian trade agreements, investors have  struggled to resolve investment issues in courts and often revert to arbitration.  There are frequent claims of bias and favoritism in the court system and complaints about the lack of adequate titling, inconsistent regulations, and a lack of trained officials outside of the capital.  The World Economic Forum – Global Competitiveness Index 2019 report ranks the independence of Panama’s judicial system 129 out of 137  countries (http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf ).  There have been allegations that politically connected businesses have benefited from court decisions, and that judges have “slow-rolled” dockets for years without taking action.  Panamanian legal firms often suggest writing binding arbitration clauses into all commercial contracts.

International Commercial Arbitration and Foreign Courts

The Panamanian government accepts binding international arbitration of disputes with foreign investors.  Panama is a party to the 1958 New York Convention as well as to the 1975 Panama Convention.  Panama became a member of the International Center for the Settlement of Investment Disputes (ICSID) in 1996.  Panama adopted the UNCITRAL model arbitration law as amended in 2006.  Law 131 of 2013 regulates national and international commercial arbitrations in Panama.

Bankruptcy Regulations

Commercial law is comprehensive and well established.  The World Bank 2020 Doing Business Indicator currently ranks Panama 113 of 190 jurisdictions for resolving insolvency because of slow court systems and complexity of the process.  Panama adopted a new Insolvency law in 2016, but the Doing Business ranking has not yet shown material improvement for this metric.

4. Industrial Policies

Investment Incentives

Panama provides Industrial Promotion Certificates (IPCs) to incentivize industrial development in high value-added sectors.  Targeted sectors include research and development, management and quality assurance systems, environmental management, utilities and human resources.  Approved IPC’s provide up to 35 percent in tax reimbursements, and preferential import tariffs of 3 percent. It is also considering a law to provide incentives for the manufacturing sector.

Law 1 (2017) modifies Law 28 (1995) by exempting exports from income tax and provides a zero percent import duty for machinery for those companies that export 100 percent of their products.  Producers to sell a portion of their products into the domestic market will pay a three percent import tariff for machinery and supplies.

Public-private partnership law incentive includes for private investment, social development, and job creation.  The law will establish a clear institutional framework for developing, improving, operating and/or maintaining public infrastructure for the provision of public services.

Foreign Trade Zones/Free Ports/Trade Facilitation

Panama is home to the Colon Free Trade Zone, the Panama Pacifico Special Economic Zone, and 16 other “free zones” (11 actives zones and five in development).  The Colon Free Trade Zone has more than 2,500 businesses, while the Panama Pacifico Special Economic Zone has more than 340 businesses, and the remaining free zones host 126 companies.  These zones provide special tax and other incentives for manufacturers, back office operations and call centers.  Additionally, the Colon Free Zone offers companies preferential tax and duty rates that are levied in exchange for basic user fees and a five percent dividend tax (or two percent of net profits if there are no dividends).  Banks and individuals in Panama pay no tax on interest or other income earned outside Panama.  No taxes are withheld on savings or fixed time deposits in Panama.  Individual depositors do not pay taxes on time deposits.  Free zones offer tax-free status, special immigration privileges, and license and customs exemptions to manufacturers who locate within them.  Investment incentives offered by the Panamanian government apply equally to Panamanian and foreign investors.

Performance and Data Localization Requirements

There are no legal performance requirements such as minimum export percentages, significant local requirements of local equity interest, or mandatory technology transfers.  There are no established general requirements that foreign investors invest in local companies, purchase goods or services from local vendors, or invest in research and development (R&D) or other facilities. Companies are required to have 90 percent Panamanian employees.  There are exceptions to this policy, but the government must approve these on a case-by-case basis.  Fields dominated by strong unions, such as construction, have opposed issuing work permits to foreign laborers and some investors have struggled to staff large projects fully.  Visas are available and the procedures to obtain work permits are generally not considered onerous.

As part of its effort to become a hub for finance, logistics, and communications, Panama has endeavored to become a data storage center.  According to the Panamanian Authority for Government Innovation (AIG, http://www.innovacion.gob.pa/noticia/2834 ), the majority of these firms offer services to banking and telephone companies in Central America and the Caribbean.  Panama boasts exceptional international connectivity, with seven undersea fiber optic cables.

Panama’s data protection law (Law 81, March 26, 2019) establishes the principles, rights, obligations, and procedures that regulate the protection of personal data.  The National Authority for Transparency and Access to Information will oversee enforcement of the law that will go into effect in March 2021.  The National Authority for Government Innovation is working closely with large private sector companies to draft specific data protection regulations.  The concept of the personal privacy of communications and documents is provided for in the Panamanian Constitution as a fundamental right (Political Constitution, article 29).  The Constitution also provides for a right to keep personal data confidential (article 44).  The Criminal Code imposes an obligation on businesses to maintain the confidentiality of information stored in databases or elsewhere, and establishes several crimes for the misuse of such information (Criminal Code, articles 164, 283, 284, 285, 286).  Panama’s electronic commerce legislation also states that providers of electronic document storage must guarantee the protection, reliability, and proper use of information and data stored on behalf of their customers (Law 51, July 22, 2008, article 55).

5. Protection of Property Rights

Real Property

The majority of land in Panama, and almost all land outside of Panama City, is not titled; a system of rights of possession exists, but there are multiple instances where such rights have been successfully challenged.  The World Bank’s Doing Business 2020 report (http://www.doingbusiness.org/data/exploreeconomies/panama  ) notes that Panama has risen to 87 out of 190 countries on the Registering Property indicator, though it still ranks 141st in Enforcing Contracts.  Panama enacted Law 80 (2009) to address the lack of titled land in certain parts of the country; however, it does not address deficiencies in government administration or the judicial system.  In 2010, the National Assembly approved the creation of the National Authority of Land Management (ANATI) to administer land titling; however, investors complain about ANATI’s capabilities and lengthy adjudication timelines.

The judicial system’s capacity to resolve contractual and property disputes is generally considered weak and susceptible to corruption, as illustrated by the most recent World Economic Forum’s Global Competitiveness Report 2017-2018 (https://www.weforum.org/reports/the-global-competitiveness-report-2017-2018 ), which rates Panama’s judicial independence as 120 out of 137 countries.  Americans should exercise greater due diligence in purchasing Panamanian real estate than they would in purchasing real estate in the United States.  Engaging a reputable attorney and licensed real estate broker is strongly recommended.

Intellectual Property Rights

Panama has an adequate and effective domestic legal framework to protect and enforce intellectual property rights (IPR).  The U.S.-Panama TPA improved standards for the protection and enforcement of a broad range of IPR, including for patents; trademarks; undisclosed tests and data required to obtain marketing approval for pharmaceutical and agricultural chemical products; and digital copyright products such as software, music, books, and videos.  In order to implement the requirements of the TPA, Panama passed Law 62 of 2012 (industrial property) and Law 64 of 2012 (copyrights).  Law 64 also extended copyright protection to the life of the author plus 70 years, mandates the use of legal software in government agencies, and protects against the theft of encrypted satellite signals and the manufacturing or sale of tools to steal signals.

Panama is a member of the Paris Convention for the Protection of Industrial Property.  Panama’s Industrial Property Law (Law 35 of 1996) provides a term of 20 years of patent protection from the date of filing, or 15 years for pharmaceutical patents.  Panama has expressed interest in participating in the Patent Protection Highway with the U.S. Patent and Trademark Office (USPTO).  Law 35, amended by Law 61 of 2012, also provides trademark protection, simplifies the registration of trademarks, and allows for renewals for 10-year periods.  The law grants ex-officio authority to government agencies to conduct investigations and seize suspected counterfeited materials.  Decree 123 of 1996 and Decree 79 of 1997 specify the procedures that National Customs Authority (ANA) and Colon Free Zone officials must follow to investigate and confiscate merchandise.  In 1997, ANA created a special office for IPR enforcement; in 1998, the Colon Free Zone followed suit.

The Government of Panama is making efforts to strengthen the enforcement of IPR.  A Committee for Intellectual Property (CIPI), comprising representatives from five government agencies (the Colon Free Zone, the Offices of Industrial Property and Copyright under the

Ministry of Commerce and Industry (MICI), the Customs Administration (ANA), and the Attorney General), under the leadership of the MICI, is responsible for the development of intellectual property policy. Since 1997, two district courts and one superior tribunal have exclusively adjudicated antitrust, patent, trademark, and copyright cases.  Since January 2003, a specific prosecutor with national authority over IPR cases has consolidated and simplified the prosecution of such cases.  Law 1 of 2004 added crimes against IPR as a predicate offense for money laundering, and Law 14 establishes a 5 to 12-year prison term, plus possible fines.

Panama is not included in the United States Trade Representative (USTR) Special 301 Report or the Notorious Markets List.

For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .

Resources for Rights Holders

Embassy point of contact:

Colombia Primola
Economic Specialist
PrimolaCE@state.gov

Local lawyers list:  https://pa.usembassy.gov/u-s-citizen-services/attorneys/

6. Financial Sector

Capital Markets and Portfolio Investment

Government policy and law with respect to access to credit treat Panamanian and foreign investors equally.  Panamanian interest rates closely follow international rates (i.e., the U.S. federal funds rate, the London Interbank Offered Rate, etc), plus a country-risk premium.

Some private companies, including multinational corporations, have issued bonds in the local securities market.  Companies rarely issue stock on the local market and, when they do, often issue shares without voting rights.  Investor demand is generally limited because of the small pool of qualified investors.  While some Panamanians may hold overlapping interests in various businesses, there is not an established practice of having cross-shareholding or stable shareholder arrangements, designed to restrict foreign investment through mergers and acquisitions.

Money and Banking System

Panama’s 2008 Banking Law regulates the country’s financial sector.  The law concentrates regulatory authority in the hands of a well-financed Banking Superintendent (https://www.superbancos.gob.pa/ ).

Panama’s banking sector is developed and highly regulated.  However, some U.S. citizens and entities have had difficulty meeting the high documentary threshold for establishing legitimacy of their activities both inside and outside of Panama.  Banking officials counter these complaints by citing the need to comply with international financial transparency standards.  Several of Panama’s largest banks have gone so far as to refuse to establish banking relationships with whole sectors of the economy, such as e-commerce, in order to avoid all possible associated risks.  Private U.S. citizens have also faced difficulty opening bank accounts in Panama, due to regulatory issues.  This results in a large number of legitimate businesses excluded from banking services in Panama.

Traditional bank lending from the well-developed banking sector is relatively efficient and is the most common source of financing for both domestic and foreign investors, offering the private sector a variety of credit instruments.  The free flow of capital is actively supported by the government and is viewed as essential to Panama’s 70 banks (2 official banks, 40 domestic, 18 international plus 10 representational offices).

There are no restrictions on, nor practical measures to prevent hostile foreign investor takeovers, nor are there regulatory provisions authorizing limitations on foreign participation or control or other practices to restrict foreign participation.  There are no government or private sector rules to prevent foreign participation in industry standards setting consortia.  Financing for consumers is relatively open for mortgages, credit cards, and personal loans, even to those earning modest incomes.

Panama’s strategic geographic location, dollarized economy, status as a regional financial, trade, and logistics center, and favorable corporate and tax laws make it an attractive target for money launderers.  Money laundered in Panama is believed to come in large part from the proceeds of drug trafficking.  Tax evasion, bank fraud, and corruption are also believed to be major sources of illicit funds.  Criminals have been accused of laundering money via bulk cash smuggling and trade at airports, seaports, through shell companies, and the active free trade zones.

In 2015, Panama strengthened its legal framework, amended its criminal code, harmonized legislation with international standards, and passed an anti-money laundering/combating the financing of terrorism (AML/CFT) reform law.  Panama passed Law 18 (2015) that severely restricts the use of bearer shares; companies still using these types of shares must appoint a custodian and maintain strict controls over their use. Panama passed Law 70 (2019) that criminalizes tax evasion and defines tax evasion as a money laundering predicate offense.

The Financial Action Task Force (FATF) added Panama to its grey list of jurisdictions subject to ongoing monitoring due to strategic AML/CFT deficiencies in June 2019.  FATF cited Panama’s lack of “positive, tangible progress” in measures of effectiveness, but commended Panama’s ongoing progress, particularly in increasing effectiveness of the Financial Analysis Unit, responses and international cooperation on law enforcement requests, and strength in seizures and confiscation of assets involved in financial crimes.  Key deficiencies identified by FATF include a lack of effectiveness of the Attorney General’s office in investigating, prosecuting, and convicting money launderers; ineffective supervision of lawyers, corporate services, and offshore activities, including identification of beneficial owners; lack of effectiveness of Panama’s tax evasion law; a lack of proactive inter-institutional coordination; and ineffective penalties.  Panama agreed to an Action Plan with concrete measures to be completed in stages by May 2020 and September 2020.  Due to the COVID-19 pandemic, FATF announced in April 2020 that Panama would receive a four-month extension on its Action Plan, pushing the deadlines to September 2020 and January 2021.

Panama is only beginning to accurately track criminal prosecutions and convictions related to money laundering.  Law enforcement needs more tools and training to conduct long-term, complex financial investigations, including undercover operations.  The criminal justice system remains at risk for corruption.

Foreign Exchange and Remittances

Foreign Exchange

Panama’s official currency is the U.S. Dollar.

Remittance Policies

Panama has customer due diligence, bulk cash, and suspicious transaction reporting requirements for money service providers (MSB) including 19 remittance companies.  In 2017, the Bank Superintendent assumed oversight of AML/CFT compliance for MSBs.  The Ministry of Commerce and Industry (MICI) grants operating licenses for remittance companies under Law 48 (2003).

Sovereign Wealth Funds

Panama started a sovereign wealth fund, called the Panama Savings Fund (FAP), in 2012 with an initial capitalization of $1.3 billion.  From 2015 onwards, the law mandates contributions to the National Treasury from the Panama Canal Authority in excess of 3.5 percent of GDP must be deposited into the Fund.  In October 2018, the accumulation rule of the savings was modified, determining that when the contributions of the Canal exceeded 2.5 percent of the GDP, half of the surplus would be destined to national savings.  President Cortizo, signed Law 139 on April 2 that allows the use of the $1.3 billion FAP assets to confront the COVID-19 health crisis.

7. State-Owned Enterprises

State-owned enterprises (SOEs) are required to send a report to the Ministry of Economy and Finance, the Comptroller’s Office and the Budget Committee of the National Assembly within the first ten days of each month showing their budget implementation.  The reports detail income, expenses, investments, public debt, cash flow, administrative management, management indicators, programmatic achievements, and workload.  SOEs are also required to submit quarterly financial statements.  SOEs are audited by the Comptroller’s Office.

The National Electricity Transmission Company (ETESA) is an example of an SOE in the energy sector, and Tocumen Airport and the National Highway Company (ENA) are SOEs in the transportation sector. Financial allocations and earnings from SOEs are publicly available at the Official Digital Gazette (http://www.gacetaoficial.gob.pa/ ).

Privatization Program

Panama’s privatization framework law does not distinguish between foreign and domestic investor participation in prospective privatizations.  The law calls for pre-screening of potential investors or bidders in certain cases to establish technical viability, but nationality and Panamanian participation are not criteria.  The Government of Panama undertook a series of privatizations the mid-1990s including most of the electricity generation, distribution, ports and telecommunications sectors.  There are presently no privatization plans for any major state-owned enterprise.

8. Responsible Business Conduct

Panama maintains strict domestic laws relating to labor and employment rights and environmental protection.  While enforcement of these laws is not always stringent, major construction projects are required to complete environmental assessments, guarantee worker protections, and comply with government standards for environmental stewardship.

In May 2012, Panama adopted ISO 26000 to guide businesses in the development of corporate social responsibility (CSR) platforms.  In addition, business groups including the Association of Panamanian Business Executives (APEDE) and the American Chamber of Commerce (AmCham) are active in encouraging and rewarding good CSR practices.  Since 2009, the AmCham has given an annual award to recognize member companies for their positive impact on the local community and environment.

9. Corruption

Corruption is Panama’s biggest challenge.  Panama ranked 101 out of 180 countries in the 2019 Transparency International Corruption Perceptions Index.  U.S. investors allege corruption is rampant in the private sector and all levels of the Panamanian government; purchase managers and import/export businesses have been known to overbill or take percentages off purchase orders while judges, mayors, members of the National Assembly, and local representatives have reportedly accepted payments for facilitating land titling and court rulings.  The Foreign Corrupt Practice Act (FCPA) precludes U.S. companies from engaging in bribery and other activities, and U.S. companies look carefully at levels of corruption before investing or bidding on government contracts.

The process to apply for permits and titles can be opaque, and civil servants have been known to ask for payments at each step of the approval process.  The land titling process has been very troublesome for multiple U.S. companies, which have waited in some cases decades for cases to be resolved.

Panama’s government lacks strong systemic checks and balances that would serve to incentivize accountability.  Under Panamanian law, only the National Assembly may initiate corruption investigations against Supreme Court judges, and only the Supreme Court may initiate investigations against members of the National Assembly, which in turn has led to charges of a de facto “non-aggression pact” between the branches.

In late 2016, Brazilian construction firm Odebrecht admitted to paying $59 million in bribes to win Panamanian contracts of at least $175 million between 2010 and 2014.  Odebrecht’s admission was confined to bribes paid during the previous administration.  The scandal’s reach has yet to be fully determined and Odebrecht’s activities including construction on the second metro line and the expansion of Tocumen airport have continued.

Anti-corruption mechanisms exist, such as whistleblower and witness protection and conflict-of-interest rules.  However, the general perception is that anti-corruption laws are weak, not applied rigorously, that government enforcement bodies and the courts are not effective in pursuing and prosecuting those accused of corruption, and the lack of a strong professionalized career civil service in Panama’s public sector has hindered systemic change.  The fight against corruption is also hampered by the government’s refusal to dismantle Panama’s dictatorship-era libel and contempt laws, which can be used to punish whistleblowers, while those accused of acts of corruption are seldom prosecuted and almost never jailed.

U.S. investors in Panama complain about a lack of transparency in government procurement.  The parameters of government tenders often change during the bidding process, creating confusion and the perception the government tailor-makes tenders for specific companies.  For example, the Panama NG Power project has been stalled due to legal challenges alleging the government created the terms of the tender specifically for the Chinese-led consortium.  Odebrecht, furthermore, is still doing business in Panama and actively applying for government projects

Under President Cortizo, Panama has taken some measures to improve the business climate and urge transparency.  These include a new public-private partnership (APP) law that covers construction, maintenance, and operations projects valued at more than $10 million. The law is designed to implement checks and balances and eliminate discretion in contracting, a positive step that will increase transparency and create a level playing field for investors. In addition, the public procurement law was reintroduced in the National Assembly for discussion to improve the bidding processes so that no tenders could be “made to order”. This law is currently under review in the National Assembly as of May 2020.

Panama ratified the UN’s Anti-Corruption Convention in 2005 and the Organization of American States’ Inter-American Convention Against Corruption in 1998.  However, there is a perception that Panama should more effectively implement the conventions.

Resources to Report Corruption

ELSA FERNÁNDEZ AGUILAR
Directora Nacional de Transparencia y Acceso a la Informacion (ANTAI)
Autoridad Nacional de Transparencia y Acceso a la Informacion
Ave. del Prado, Edificio 713, Balboa, Ancon, Panama, República de Panama
(507) 527-9270 / 71/72/73/74
www.antai.gob.pa 

10. Political and Security Environment

Panama is a peaceful and stable democracy.  On rare occasions, large-scale protests can turn violent and disrupt commercial activity in affected areas.  Mining and energy projects have been sensitive, especially those that involve development in the designated indigenous areas called Comarcas.

In May 2019, Panama held national elections that international observers agreed were free and fair.  The transition to the new government was smooth.  Panama’s Constitution provides for the right of peaceful assembly, and the government respects this right.  No authorization is needed for outdoor assembly, although prior notification for administrative purposes is required.  Unions, student groups, employee associations, elected officials, and unaffiliated groups frequently attempt to impede traffic and commerce in order to force the government or business to agree to demands.

11. Labor Policies and Practices

Panama had a seven percent 2019 unemployment rate.  Unemployment is estimated to rise to 14-20 percent as a result of the 2020 COVID-19 economic crisis.  There is a shortage of skilled workers in accounting, IT, customer service, and specialized construction and also a dearth of English speaking workers.  Panama’s non-agriculture labor force is nearly 1.6 million people and around forty-four percent of workers are employed in the informal sector.  The majority of informal labor occurs in indigenous communities including the Comarca Kuna Yala, Comarca Embera, and Comarca Ngabe Bugle.  Panama spends approximately 13 percent of its budget, or 3 percent of GDP, on education.  While Panama has one of the highest minimum wages in the hemisphere, the 2018-2019 World Economic Forum Global Competitiveness Report ranked Panama 89 out of 141 countries for its low skillset of university graduates

The government’s labor code remains highly restrictive.  Several sectors, including the Panama Canal Authority, the Colon Free Zone, and export processing zones/call centers are covered by their own labor regimes.  Employers outside of these areas, such as the tourism sector, have called for greater flexibility, easier termination of workers, and the elimination of many constraints on productivity-based pay.  The Panamanian government has issued waivers to the regulations on an ad hoc basis in order to address employers’ needs, but there is no consistent standard for obtaining such a waiver.  While the majority of public-sector employees can strike and organize professional associations, they cannot organize unions.  Private sector unions are required to register with the Ministry of Labor.  If the ministry does not respond to a private-sector union registration application within 15 calendar days, the union automatically gains legal recognition, provided the request is submitted directly with supported documentation established by law.

12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs

The United States and Panama signed a comprehensive agreement with the Overseas Private Investment Corporation (OPIC, now DFC) in April 2000.  However, the World Bank classified Panama as a high-income country in July 2018, and as such Panama no longer qualifies for support under DFC.  Panama has ten active projects under DFC that were initiated prior to 2018. The projects are valued at $220.85 million in the financial sector, $45.5 million in the energy sector, and $7.5 million in the real estate sector.  Panama has been a member of the Multilateral Investment Guarantee Agency (MIGA) since 1996.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) N/A N/A 2018 $65B www.worldbank.org/en/country 
Foreign Direct Investment Host Country Statistical source USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2018 N/A 2018 $5,050 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data 
Host country’s FDI in the United States ($M USD, stock positions) 2018 N/A 2018 $2,793 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data 
Total inbound stock of FDI as % host GDP 2018 $54,675 2018 8.2% UNCTAD data available at
https://unctad.org/en/Pages/DIAE/
World%20Investment%20Report/
Country-Fact-Sheets.aspx
 
Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $49,127 100% Total Outward $6,174,234 100%
United States $10,0916 22% United States $917,646 15%
Colombia $8,066 16% United Kingdom $652,297 11%
Canada $5,575 11% Switzerland $492,344 8%
Switzerland $3,211 7% Luxembourg $487,384 8%
Singapore $2,305 5% Germany $358,086 6%
“0” reflects amounts rounded to +/- USD 500,000.

Table 4: Sources of Portfolio Investment
Data not available.

14. Contact for More Information

Commercial Section
Luis.Saldana@trade.gov
Building 783, Basilio Lakas Street, Clayton
www.trade.gov

2020 Investment Climate Statements: Panama
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