United Nations Independent Expert on the effects of foreign debt and other related international financial obligations of States on the full enjoyment of all human rights, particularly economic, social and cultural rights
Mr. Juan Pablo Bohoslavsky
Panama City, 10 May 2017
Today I end my nine-day visit to the Republic of Panama, and would like to share some preliminary findings and recommendations. I start by thanking the Government for its invitation, full cooperation before and during this visit, and for its openness to discuss numerous issues with me. I would also like to thank all my interlocutors for sharing with me information, views and insights.
I will start my remarks by framing the complex issues at stake globally. I will thereafter lay down my preliminary observations with regard to issues discussed during my mission in Panama.
The Human Rights Council in its resolutions 34/11 and 34/3 requested me to study, among other issues, the human rights impact of illicit financial flows. As I have explained in the thematic reports presented in 2015 (A/HRC/28/60) and 2016 (A/HRC/31/61) to the Council, illicit financial flows have multiple, broad and serious negative implications for human rights. Let me reiterate the most obvious one: they drain States of public resources sorely needed to ensure investment in social policies and programmes, in the administration of justice, in schools, hospitals, housing or sanitation; in other words, in all areas related to the realization of human rights, particularly for the most vulnerable, the poor and the disenfranchised. At the same time, illicit financial outflows affect countries´ balance of payments, inhibiting their growth and investment as these require imports; plus they facilitate and exacerbate financial crises which, in turn, badly hit those most vulnerable.
Illicit financial flows are a global challenge, affecting developed and developing countries. They are not accidental or a by-product of the market, rather these flows often appear to be the result of state-sanctioned practices. There is no doubt that these flows can only be effectively addressed and curbed through mechanisms of international cooperation and shared accountability. By the same token, responses by one country alone, isolated from structural changes in other jurisdictions or from international efforts to fight opacity, will seldom produce meaningful results. This is why I commend Member States of the United Nations for committing themselves to reducing such flows substantially as part of target 16.4 of the 2030 Agenda for Sustainable Development. I further welcome that this commitment was reached at the same time as UN Member States agreed to reduce inequality within and among countries in Sustainable Development Goal 10. Curtailing illicit financial flows could make a very substantial contribution to the reduction of national and global inequalities of wealth and income.
Closely linked, the Addis Ababa Action Agenda1 , states that the bulk of the funds needed to reach the Sustainable Development Goal will come from the developing countries themselves through significant gains in domestic resource mobilization. The reduction of illicit financial flows and other tax abuses and the universally understood need to increase domestic resource mobilization are inherently connected to each other and, of course, to human rights.
While there is a large number of phenomena classified as illicit financial flows and other tax abuses, including illegal tax evasion, clandestine tax avoidance by transnational corporations, bribery, corruption and other criminal activities such as money laundering, trafficking of people, drugs, weapons or child pornography, it has been estimated that the majority of all illicit financial flows are related to cross-border tax-related transactions. Indeed, the rationale for international capital movements transferring financial assets or accounting profits to jurisdictions with low (or no) taxation and strong secrecy rules is essentially reducing tax payments. Curbing tax-related illicit financial flows ought to include minimizing tax evasion by high net-worth individuals, commercial tax evasion through trade mis-invoicing and tax avoidance through abusive transfer-pricing by transnational corporations.
Global estimates point to a significant amount of wealth held offshore, benefitting from secrecy and the use of financial instruments that have been set in a number of countries, not declared appropriately. Using 2015 estimates available, there are between $24 trillion to $36 trillion unrecorded private wealth invested offshore. It has been estimated that the relative amount of wealth from developing countries held abroad is much greater than for developed countries, ranging from 20-30 per cent in many African and Latin American countries. Another crucial fact to note is the greatly unequal ownership of offshore wealth. It has been estimated that 85 to 90 per cent of wealth belongs to fewer than 10 million people -just 0.014 per cent of the world’s population.2
How to stop such colossal global fraud and how to address its connections with increasing inequality in the world? I will say it upfront: there are three main measures that can contribute to overcoming the shadow economy: a) abolition of shell companies and anonymous accounts, by imposing a legal requirement for public disclosure of ultimate beneficial ownership information of all business entities, including companies, trusts, charities and foundations; b) automatic exchange of tax-related information worldwide; and c) public country-by-country reporting, mandated by a legal obligation on multinational corporations to submit thorough reports about their assets, profits, revenue, taxes paid and number of employees their profits and losses in every jurisdiction where they operate rather than presenting a consolidated balance3 . Empty and easily manipulated corporate vehicles, hidden funds with unknown owners, and impunity for designing global corporate strategies to pay zero or near-zero taxes do not deliver inclusive growth. It must be noted that from a technical point of view, those three steps are not difficult to undertake; however, they require the political will to be implemented.
Having shared this overview, the question could be: am I visiting the ‘wrong’ country? Some may wonder why I am visiting Panama of all the numerous countries in the world. Others may ask whether I am not singling-out a country for a problem that is truly international.
Illicit financial flows are indeed a global problem and I could visit almost every country that provides financial and legal services or has a significant banking industry, usually highly developed countries, as well as many other countries that suffer or have suffered from significant illicit financial outflows. This year I am in fact visiting three very different countries: Tunisia (February 2017) which continues to struggle to ensure the return of stolen assets from other jurisdictions from the former Ben Ali regime; Panama now; and, later this year, Switzerland, a major international financial market place too. Each of these countries represents a different aspect of the global tax haven value chain, hence they play a role in understanding and fixing the broken international tax system. Moreover, these three visit reports will be simultaneously discussed before the Human Rights Council in March 2018, at its 37th session in Geneva, providing me a unique opportunity to explore common aspects as well as singularities in challenges and responses.
I am convinced that this visit to Panama has been fruitful, helping me to better understand and to make visible how complex regulatory machineries, institutional designs, governance, accountability, international cooperation, financial markets and taxes are all intrinsically interlinked with inequality and human rights.
My first objective for this visit was to learn about the efforts undertaken in Panama to increase financial and fiscal transparency and to curb illicit financial flows and other tax abuses. In accordance with the mandate of the Human Rights Council I was entrusted with, my main objective was to assess
in situ the challenges Panama still encounters in this regard. My mission also aimed at better understanding to what extent Panama’s impressive economic growth has trickled down to ensure the realization of economic, social and cultural rights for all residents and at assessing the role played by authorities and international financial institutions in preventing adverse human rights impacts in the financing and implementation of large-scale infrastructure projects in the country.
Panama has ratified several human rights treaties, notably the International Covenant on Economic, Social and Cultural Rights4, and is therefore legally bound to grapple with these matters. It is obliged to make use of the maximum of available resources to ensure the enjoyment of economic, social and cultural rights under article 2.1 and to do so without discrimination on any ground under article 2.2. Accordingly, Panama has an obligation to ensure that activities carried out within its jurisdiction do not undermine the enjoyment of human rights at home and abroad,5 which means that it has the responsibility to ensure that all businesses enterprises operating in or from its territory – from banks, casinos, law and accounting firms to real estate conglomerates, insurance companies and transportation and other enterprises – respect human rights and, most importantly, that their actions and omissions do not result in negative impacts in other jurisdictions, for example by taking part in the escape of assets and capital that ought to be properly reported on and taxed.6
It is within this context that I would like to discuss the revelations by the International Consortium of Investigative Journalists, in May 2016, based on a leak of documents from a Panama based law firm, Mossack-Fonseca. The so called ‘Panama Papers’ (along with information leaks about similar phenomena)7 drew international attention to the scale and volume of tax abuse and money laundering by business corporations, politically exposed persons and high-net worth individuals from around the world.
Many of my interlocutors during this visit have pointed out that it is unfortunate that the international image of the country was tainted with the name of ‘Panama Papers’, whereas a high number of companies, trusts and transactions, as well as a high volume of money involved in these transactions, have been traced to many jurisdictions all over the world. True, the Papers have demonstrated how international the problem is. Politically exposed persons, high net worth individuals, businesses and financial institutions from all over the world have requested the financial services of a law firm in Panama to deposit financial assets in at least 21 jurisdictions. Yet, the regulatory changes that the scandal triggered and accelerated in the country show that Panama can and must enhance transparency and accountability in its financial service platform.
Whilst the international perception is that this scandal was a turning point in the domestic sphere towards enhanced regulation and more transparency in Panama, I have learned during this visit that there were already a number of discussions and reforms set in place well before the ´Papers´, and that the revelations accelerated their implementation, and gave them a more robust focus. Among these reforms are new obstacles on corporate shares issued to bearer, establishment of an obligation to companies to keep accounting books of offshore transactions, reinforcement of due-diligence requirements on resident agents who are asked to identify the real owners of the corporate vehicles for which they provide services, regulation and supervision of non-financial actors (such as casinos, Free Trade Zone of Colon, accounting and legal firms, and real estate, among others) who are now obliged to report suspicious transactions.
I would also like to mention the recent adoption of the Convention on Mutual Administrative Assistance in Tax Matters. Several tax information exchange treaties have been signed
8, including the Foreign Account Tax Compliance Act with the United States.
Another precedent and positive development towards more transparency and regulation of money laundering transactions came in February 2016, with the end of Panama’s listing in the ‘Grey List’- FATF/GAFI (Financial Action Task Force/ Grupo de Acción Financiera), a multilateral entity in charge of monitoring the effectiveness of strategies, legislation and regulation in the financial domain. Panama’s grading had been lowered in 2014 and, as a consequence, a plan of action with some benchmarks to be achieved had been agreed upon. I commend those efforts and recognize their importance and I would like to encourage the State institutions in Panama to continue making their best efforts towards minimizing financial opacity.
Yet, I am convinced that Panama needs to broaden its understanding of the challenges in terms of financial and fiscal opacity. My reasons are multiple: First, I have learned that tax evasion is not considered a crime under Panama’s criminal law. Those obliged to report suspicious transactions do not have to pay close attention to whether taxes involved have been paid or not. The entire suspicious transaction reporting system does not seem to grasp the fundamental fiscal dimension of the broader illicit financial flows problem. In other words, “know your client” currently excludes assessing compliance with tax obligations and status at home or abroad. In my view, this gap needs to be closed in the Panamanian regulation without delay. Actually, ongoing criminal investigations in the country against those who created, promoted, administrated and benefited from the rigged system have been limited to a few lawyers and not for their role in such system but their participation in money laundering with other crimes perpetrated abroad.
Of course, establishing criminal sanctions for tax evasion should be part of a holistic strategy which considers this crime as a complex phenomenon involving all relevant dimensions of the economy, notably the banking sector, real state, the various financial and non-financial intermediaries, and Free Trade Zones, for both their national and international activities.
Second, I believe that the financial and banking sector still needs to be integrated into the agenda of curbing illicit funds in Panama. The banking sector in the country represents approximately 7 per cent of the GDP, with 90 banks in operation, most of them licensed to carry out general activities domestically and internationally. This begs the question: what role have the banking and financial institutions played in the flows of funds that the corporate vehicles facilitate? While it is true that many financial transactions performed by companies formally created in Panama take place in foreign jurisdictions, given that more than 40 percent of the financial assets in the Panamanian financial sector are sent/lent abroad, I find it absolutely essential that any national strategy towards curbing illicit funds incorporate the banking sector. Even though the 2016 report of the Independent Commission of Experts established by the Government presented essential recommendations, in my view, these recommendations need to be complemented with measures towards ensuring due diligence in the banking sector.
The overall involvement of financial institutions in abusive tax planning strategies for transnational corporations worldwide is confirmed by the number of cases in which individual financial institutions received specific declared penalties and investigations for a host of infractions, the most widespread of which was helping wealthy clients and corporations engage in tax fraud.9
Panama cannot consider itself an exception, particularly given its highly connected financial platform. I therefore encourage the Panamanian banking regulator to broaden the scope and nature of information that is publicly available to offer the complete file: including any investigations of, and sanctions imposed upon, the institutions it supervises as well as the reasons for such investigations and sanctions. This step may also boost confidence in accountability of all actors regardless of their economic standing.
Panama needs to strengthen the fiscal dimension of due diligence in the banking sector: beyond the volume of the tax actually evaded from the Panamanian state (given the territoriality principle upon which its tax system is based), there is an extraterritorial obligation not to facilitate adverse fiscal impacts in other jurisdictions. In addition, the reputational costs of financial and corporate opacity, which clearly has had multiple ramifications in the national economy and society, should also lead to a national debate on the kinds of investments to be attracted to the country, how and what for. The report of the Independent Commission of Experts posed similar questions in the context of erosion of tax base as well as transfer of profits and capital investment. I believe the answers must be adopted based on a wide consensus and they must be human-rights oriented.
Third, in order to effectively implement reforms towards enhanced financial and fiscal transparency in the country, governance must be strengthened. Clear and robust conflict-of-interest legislation must be put in place so that the autonomy and independence of sectorial supervisors and decision-makers are ensured. It is also crucial to guarantee the independence of the judicial branch, including a more participatory and transparent system of appointing judges on the basis of merit and more stability in appointments and staffing to enhance professionalization.
There is no doubt that financial and fiscal transparency has to be tackled by all countries. In the global economy, transparency is only as strong as its weakest link, the least transparent actor.10 Panama can and must do its part, as the rest of the world ought to do. Beyond all the issues already outlined in previous paragraphs, this means that all States of origin ought to apply clear regulations that make it illegal to intentionally, incorrectly or inaccurately state the price, quantity, quality or other aspect of trade in goods and services in order to move capital or profits to another jurisdiction or to manipulate, evade or avoid any form of taxation. It also includes a genuine reciprocity and good faith from all countries in the fulfilment of tax exchange information treaties.
Another final aspect on this issue from a global perspective is the important role that journalists and whistle-blowers play in investigating corruption and drawing attention to the negative impact of illicit financial flows on the rule of law, the effectiveness of institutions, and ultimately the realization of human rights for everyone. Special attention must be paid to protecting journalists and their sources and to ensuring the essential independence journalists need for their work. In these cases, journalists act as human rights defenders, shedding light on critical issues of our times; and as such they require guarantees of protection against threats and reprisals.11
Let me now turn to addressing another dimension of my preliminary assessment in Panama. Economic growth in a country with a world class financial sector should bring substantial reductions in economic, social and political inequalities of its population and massive improvements in the enjoyment of economic, social and cultural rights for the poor and marginalized.
Panama takes pride in the strength of its economic model geared towards services12 and in the impressive 7.2 percent average annual growth it has achieved during the last decade – more than double the regional average and among the world’s highest. It must be noted that this growth is linked to the period since the administration of the Canal was given to the Panamanians. It profits from its geographic advantage as a hub for banking and financial services, logistics, transportation, and communications. Around 5.5percent growth per year is estimated for the years to come.
In absolute terms, growth has led to a clear reduction of poverty, especially since 2004. Between 2008 and 2014 figures indicate a reduction from 26.2 to 18.7 per cent of poverty, and from 14.5 to 10.2 per cent of extreme poverty.13. While this has meant that more people are now considered ‘middle-income’ in the country, I have repeatedly heard of the ‘four Panamas’: wealth and income continue to be sharply stratified and indicate pervasive inequality and exclusion. There is a small wealthy urban group, an urban-poor group, a poorer rural Panama, and a worst-off indigenous peoples in the comarcas, indigenous territories where the eight indigenous peoples live. Urban extreme poverty represents about 4 per cent, while rural extreme poverty represents 27 per cent, six times higher. In the
comarcas, poverty is above 70 percent and extreme poverty as high as 40 per cent, 4 times the national average. In this context, the National Plan for Development of Indigenous Peoples should be implemented from a human-rights based approach and in keeping with international human rights standards and principles on the rights of indigenous peoples.
Panama's Gini coefficient is higher than many countries in the region, at 50.7 (2014).14. One could fall into the trap of considering that this is a simple paradox that will correct itself over time, if it was not for the analysis of the economic political choices that seem to continue favoring wealth consolidation and growth in the hands of a few. It is worth pointing out that Panama has one of the lowest tax/GDP ratio in the Latin American region (16,2 percent vs regional average 22,5 percent in 2015). While all the countries in the region have increased this ratio from 1990 to 2015, in Panama it remains practically the same.15
The Government’s Strategic Plan 2015-201916 acknowledges that development in recent years has been based on a social, economic and institutional structure with multiple imbalances and gaps. It also explicitly aims at enhancing social inclusion. I concur with this diagnosis and aim. In my view, lack of balances and loopholes in taxation impede keeping wealth widely distributed and systemic changes are needed to create a more inclusive, fair and productive society.
Tax policy is a powerful tool that Governments can use to address exclusion and inequality, and to ensure that no group hoards the benefits of economic growth for itself. More importantly, taxation must also be understood as an essential element in the implementation of international human rights obligations, notably in balancing disparities. To exemplify, in the flourishing area of high-end real estate and horizontal properties in Panama, especially in Panama City, a current legislative debate is related to lowering the tax on properties. While some developers have argued that the current tax is too high and the valuation too ‘subjective’, the Government rightly considers that a discontinuation of this tax would be detrimental to the overall tax base. In addition, I would highlight that property and land taxes in a rapidly urbanizing country like Panama, with ´financialization´ of housing as a phenomenon, could be an essential element in the fight against poverty and inequality and would also address possible illicit flows via real estate transactions.
The National Budget should be rationalized, with better planned and regulated public investment in the social areas, which are sorely needed especially in the poor and marginalized areas. Panama’s economic advantages ought to be garnered to benefit its people. Budget planning and programming may consider multi-year needs, accountability mechanisms and updated checks-and-balances for the types of investments that can ensure the elimination of inequity and inequality as top priority.
Another critical dimension of the disproportionate attention given to economic growth in detriment of human development and inclusion can be perceived in the implementation of vast investments in infrastructure, agro-industry and hydroelectric power plants. Panama’s economic capacity, easy access to credit, and its priority geared towards providing services to international markets have captured an uneven emphasis in a series of projects, without a robust consideration for human rights and environmental impact assessment prior to carrying them out. For illustration, the consequences of hydroelectric power plants in the Province of Chiriquí were brought to my attention, in particular those known as “La Cuchilla”, “Chuspa” and “Chan 75”.
In some of these cases, the volume of water used, the type of concession contracts with the companies, and the impact in the water courses of the rivers in the areas suggest not only a direct impact on the lack of access to water for domestic and personal use, but also a longer-term impact in the waterways, ecosystems and the living conditions of entire communities. I have also received information about displacement caused by land conflicts and illicit sales in the case of Kusapín, and the situation of people of African descent in relation to displacement due to a touristic project in Pedro González. I also express concerns about the situation of these communities.
I also wish to refer to the complex situation of the Barro Blanco Hydro Electric Plant that has been considered by a number of domestic instances, as well as by the Inter-American Commission for Human Rights, and that was also the topic of an urgent appeal by some of my colleagues, the Special Rapporteurs on environment and human rights, and on the rights of indigenous peoples, in June 201617. The Government responded pointing out the importance it gives to dialogue and the peaceful resolution of the concerns as well as its proactive engagement in ensuring that a recent agreement with the communities be reached in a participatory way, and that it should be implemented. It has been noted that this project is already close to its finalization, in which case there is an essential aspect of reparation and compensation. In other cases, the human rights standard of free, prior and informed consent should be ensured before any project can be developed, and it must be respected by the Governments as well as by public and private lenders.
In this realm, the State is bound by international human rights law (which prominently protects the most vulnerable groups) and pertinent bilateral investment treaties (sheltering investor’s’ rights). I would like to recall that the Inter American Court of Human Rights has addressed this same kind of conflict in favour of an indigenous community18 and its human rights which should not go unnoticed by international arbitrators and treaty negotiators.
During my visit, many Panamanian authorities and stakeholders have mentioned the importance given to international perceptions and assessments. Clearly, there is a particular interest in complying with international regulations and mechanisms on transparency, most notably GAFI/FATF. It is important for me to highlight that Panama ought to be equally mindful of the importance of complying with its international human rights obligations. In this respect, I would like to commend the country for having taken clear steps in preparing some pending reports to the UN treaty monitoring mechanisms, for example for the Committee on the Rights of the Child, and more recently the Common Core Document. It has also been brought to my attention that the Government is currently preparing its report under the International Covenant on Economic, Social and Cultural Rights, pending since 2004, and that the aim is to present it in the coming months.
In closing, I commend the Government of Panama for its openness to address all issues with me and for its willingness to engage in a constructive discussion on how to minimize financial, fiscal and corporate opacity and to guarantee well-rooted conditions for sustainable development. I do believe the United Nations in Panama has a role to play in supporting the country in implementing a
transparency agenda anchored in international human rights law. This has to be the framework for finance in all countries.
Information about the visit
The United Nations Independent Expert on the effects of foreign debt and other related international financial obligations of States on the full enjoyment of all human rights, particularly economic, social and cultural rights, Mr. Juan Pablo Bohoslavsky, visited Panama from 2 to 10 May 2017.
He met with a wide range of stakeholders, including high ranking Government authorities and representatives. Mr Bohoslavksy met with the Ministers of Foreign Affairs, Economy and Finance, Social Development and Health, as well as with the Vice Minister for Employment; and for Environment, and with authorities in these various ministries as well as in the Ministry of Public Works. He had the opportunity to meet with the National Authority for Administration of Lands (ANATI). He also met with representatives of CANDSIF, the National Authority for Transparency (ANTAI), the Financial Analysis Unit (UAF), several members of the Independent Committee of Experts, the Banking Association of Panama and several regulators (Superintendencia de Bancos, de Mercado de Valores y de Seguros y Reaseguros). The Independent Expert also met with the National Authority for the Panama Canal.
The Independent Expert had the opportunity to meet and confer with the President of the Supreme Court and some Judges, as well as with the Attorney General (Procuradora General) and members of her team, the Ombudsperson; the Lawyers Association and law firms. In terms of multilateral lending, he met with the Inter-American Development Bank, the World Bank and the International Financial Corporation and the Development Bank of Latin America (CAF).
Mr. Boholavsky’s programme also included meetings with representatives of indigenous peoples, trade unions, civil society and community organizations, as well as with academics and experts. He had the opportunity to meet the UN Resident Coordinator and members of the UN Country Team.
The Independent Expert would like to thank all his interlocutors for their time and for the opportunity for frank discussion and sharing of information and views. He conveys special gratitude to the Regional Office of the High Commissioner for Human Rights for Central America for its work and assistance in preparing and carrying out this visit.