LatamInvestor Panama Report 2020
The recently launched "Latam Investor Panama Report" includes an interview to our founding partner, Ebrahim Asvat, who shares with readers matters in connection to investment opportunities in Panama, how the finance regulator has increased compliance requirements, among other interesting affairs.
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Transcript of the Interview with Ebrahim Asvat, Senior Partner, Patton, Moreno & Asvat
LatAm INVESTOR: How has Patton Moreno & Asvat been active since our readers last heard from you in Q1 2018?
Ebrahim Asvat: In the last two years growth in Panama has decreased. Really the decade from 2004 to 2014 were the boom years in Panama and since then we have seen steady if unspectacular growth. Certain areas of the economy, such as tourism, local commerce and the free zones, have been more affected. So, M&A, which is one of our core areas, has seen a slight reduction in activity owing to the slower growth of the local economy. However, we have also benefited from favourable trends. For example, shipping, which was still suffering in 2017, has recovered over the last two years. That’s one of the main practice areas of Patton, Moreno & Asvat, indeed our London office is focused almost entirely on this, so we have relished the uptick in the industry.
Aviation finance is another important area for us, as we represent banks that finance the purchase of aircraft from Boeing. That’s been hit by the problems with the new 737 Max planes, as airlines have delayed deliveries pending additional inspections. Public procurement has also slowed, as the last two years saw less of the typical Panamanian mega infrastructure projects. However, I expect that to change in 2020, as the new government has just enacted a PPP law, which should increase private-sector investment in Panamanian infrastructure projects. The law is solid so we need to see how it is implemented. Finally, despite all of the reputational challenges, we still see lots of demand for Panama’s capabilities as an offshore jurisdiction, especially from clients around Latin America.
LAI: Panama’s financial regulator has increased compliance requirements; so why is the country back on the FATF Gray List?
EA: The first thing to note is that there are many perfectly reasonable and legal reasons why high-net worth individuals or corporations want to use Panama as an offshore centre. If you look at global finance you see lots of international transactions conducted through vehicles registered in places like Panama, Cayman Islands, the Bahamas or the British Virgin Islands. This has been stigmatised in the general media as an issue of corrupt politicians and tax evasion, but there is a much greater commercial need for offshore jurisdiction. They are useful for tax compliance and asset protection. Many high-net worth individuals want to keep some of their assets outside their home country to diversify the political risk. That’s particularly necessary in Latin America, where you can see radical changes in policy.
Of course, the global financial community is now demanding that offshore centres like Panama, tighten up their legislation. And that’s exactly what the country has been doing. There has been a raft of new financial laws and regulations, which have brought Panama into line with best international practises.
Panama has drafted excellent laws in response to the requirement of the international community but now it has to make sure that it’s fully implementing them. I would hazard that there are still some players in the Panamanian financial system who believe they can operate under the old rules.
That’s not the case in the banking sector, where all of the locally-registered banks have introduced very stringent compliance procedures. Indeed, it is harder to open a bank account in Panama than anywhere else in the Americas. But some of the state institutions themselves still aren’t operating at the levels required by the international finance community They can’t give all the information or pass it on quickly enough to their counterparts around the world. In essence the entities fighting money laundering can’t show enough results. You don’t see cases being prosecuted in court, or compliance failures being sanctioned.
On a company level at PMA we realise that there is a difference between the law and the spirit of the law. It isn’t enough to just have good compliance procedures and to know your clients. You must also be conscious of the clients and transactions that you are getting involved in. It’s not just a box-ticking exercise but a constant and active process of risk management. That’s a big change from how it was ten or 20 years ago.
Of course, a hub like Panama does not want to be on the Gray List but in the short term I don’t think that it damages our status as a financial hub. That’s because the banking sector around the world realises that Panama has come a long way in a short time and has made dramatic improvements to its legislation. Meanwhile our banks are doing their homework and have relevant systems in place to protect themselves. Now the state needs to improve its implementation of the legislation and its ability to gather information about and act on compliance issues.
LAI: Where are the investment opportunities in Panama?
EA: In logistics there are still lots of investment opportunities. But it’s clear that we have to be more creative, as we need to improve the efficiency of our customs service to be able to handle the massive volumes of small items created by e-commerce. Panama’s location and logistics infrastructure, makes it the perfect place for Amazon or Alibaba to use as a regional distribution centre, but our bureaucracy isn’t quite ready.
Also, in the digital arena, Panama has great potential as a hub, as there are seven international fibre optic cables that pass through the country. In tourism we haven’t developed our potential, especially if you compare us to our neighbours Costa Rica. We need to increase our air connections, which will involve having another global air carrier operating a hub in Panama alongside Copa Airlines. Copa’s growth has been great for Panama but we’ve now reached the point where we need another, because ultimately only Copa’s allies feel secure flying to Panama as they know they will be fed passengers. That limits our global connections, while a second airline hub would create more potential for international partnerships, giving us more direct flights to other locations.
LAI: Are you optimistic that the new government can help drive economic growth in Panama?
EA: I am positive about this government as they have the right attitude. I believe we’ll see more results from them than the previous administration. So far, we have seen that they are willing to listen to the private sector and keen to work with us to improve Panama. That’s already evident from the legislation that they’ve passed and there are more exciting laws in the pipeline. The best example of this is the new PPP law, which will investors a far greater role in Panama’s infrastructure projects.
LAI: Should investors be worried about the outbreak of protests in Panama?
EA: These protests will have no impact on your readers. They are related to amendments to the constitution rather than expressions of a deep ideological divide. It’s about the distribution of power between the three branches of the state – executive, legislative and judicial – with other complaints about the local legal setup. There is pressure for a more transparent, effective judicial system as in recent years it’s become apparent that the current one is unable to fairly punish the perpetrators of corruption. The recent scandals demonstrated that Panama’s existing judiciary is too mediocre to handle complex corruption cases, with guilty parties avoiding sanctions. But all of this is completely different to protests elsewhere in the region, say for example Chile, where we see a fundamental clash of ideologies.
Likewise, your readers shouldn’t think that this dispute over the constitutional amendments means that Panama’s new government will be hamstrung by a dysfunctional parliament. There is a lot of noise being created by the media, some local politicians and parts of the public. But it’s a distraction. If you analyse the laws that have been passed by this government in its first months in power you can see that legislators have granted it everything it required. One key example was the dispensation in the 3.5% fiscal deficit restriction, which had the potential to be controversial, but the government was able to get it passed without problem.
LAI: What is PMA’s strategy for future growth?
EA: In today’s world law firms need to be careful how they grow. At PMA we have always been very conservative because we want a sustainable future. My first objective is to keep my partners happy by ensuring that we create a business with solid long-term prospects. That means working with top-tier clients on significant transactions and not taking unnecessary risks. Unlike some other leading Latin American law firms, we are not desperate to become a regional player. We will remain centred in Panama, with our London office, and look to be involved in the international deals that use this country as a hub.
Panama is sometimes called a tax haven. Actually, it’s a safe haven – because in this uncertain world Panama’s growing economy offers exciting opportunities for investors.