Panamania

Yesterday, the Panama Papers blew the lid off the planet. The disclosure of many high profile international connections to offshore banking secrecy is creating headaches for leaders like in Argentina‘s Mauricio Macri and the UK’s David Cameron, and has led to government collapse in Iceland.

A few years back, I made a major stink about Panama’s banking practices. I told the  U.S. Congress and Canadian Parliament that U.S. and Canadian trade negotiations with Panama represented a key moment of leverage to clean up bank secrecy.

I highlighted a few problems:

1. Failure to get Panama to sign an agreement to automatically exchange tax information – much as the U.S. and Canada do between themselves. The U.S instead signed a non-automatic tax treaty, which allows Panama ample grounds to refuse to cooperate.
2. No elimination of bearer shares, a key device for laundering money. Instead, Panama passed Know Your Client legislation, which had only limited suspension periods for lawyers that didn’t comply, contained weak identify verification requirements, and penalized lawyers more for identifying clients that it did for not abiding by the disclosure rules.

A few things have happened since then, and a few lessons to be learned:

1. Just having tax treaties does not eliminate all questionable practices. Panama did not used to have any agreements, and now it has them with 25 countries – although none are automatic.
2. Just passing some transparency laws does not fix the whole problem. According to the OECD’s most recent assessment of Panama (para. 21), there are still gaps in requirements to know the beneficial owner of bearer shares. While there have been some improvements, the OECD still finds significant opacity in Panama’s banking practices.
3. Panama has used aggressive and novel tools like previously untested WTO rules to go after countries’ anti-tax haven policies. While winning some arguments, it is now appealing its legal case because it didn’t win all of them.

There’s a lot to follow, and I haven’t followed the story as closely in recent years as I would have liked. Here are some questions I am asking myself (and policymakers should be asking themselves):

1. Panama has made a number of legal changes in recent years. Were they enough? Or were they just the best that the U.S. and other countries could reasonably expect to force a sovereign country to do? We’re still learning how much impropriety was involved in the Panama Papers, so it’s unclear to me whether anything would have been avoided with a different set of policy measures. For example, is it reasonable to expect a better U.S.-Panama deal to hinder Russian oligarchs putting their money in Panamanian banks?
2. Do we have enough tools to systematically assess whether trade deals are living up to their promises, both economically and in terms of regulatory conduct? Are all our policy oars rowing in the same direction? I had warned back in the day that the U.S.’ anti-tax haven policies could be targeted in investor-state dispute settlement under the pact. That has not happened, although it certainly could in the future. Panama is not above encouraging such a move, as the WTO case shows. Moreover, the U.S. now has both an investment treaty and the trade deal (which contains ISDS). Arbitration claims have been brought under both the older (but not the newer) model, even though the newer model arguably has more protections for policymakers. When we say we are upgrading a treaty regime, shouldn’t we actually upgrade it? Finally, should Panama’s pursuit of the WTO case be factored into any assessment of its sincerity on financial transparency?

I’m on some other deadlines, but I’ll try to post more as I learn more.