New Internationalist

haven Heaven

Issue 220

new internationalist
issue 220 - June 1991

Tax-haven heaven
Panama is the land of opportunity for tax evaders and drug financiers.
Stan Duncan dissects its shady economics and its impact on
people in the slums of Colon and Panama City.

In 1987 Fred Labutte of the Earth Island Institute signed on with one of a fleet of tuna boats. His clandestine aim was to investigate why it was dolphin kills were on the rise despite protective legislation. To his horror he discovered that the crew regularly killed dolphins caught in tuna nets despite the law.

He also discovered that the fleet was not registered in the US but in tiny Panama thousands of miles to the south. But he didn’t need to bone up on his Spanish to talk to the crew. Neither crew nor captain, nor fleet owner for that matter, were Panamanians. The company had got around the law to protect dolphins by moving the registration of its ship to Panama. Nothing had changed but a little shuffling of papers between countries.

What the Earth Island Institute had stumbled upon was the tip of an iceberg of incredible laws – and lack of regulations – which have made Panama a mecca, allowing people and corporations not only to circumvent laws but also to launder money and avoid taxes. While media images of Panama evoke the Canal, Panama hats, and trouble with General Noriega, a small enclave of elite Panamanian business people have been busy turning their country into an international financial centre, a tax-haven heaven.

But then, Panama was, in a sense, created for the purpose of servicing the world’s financial community. When the US first sent gunboats in 1903 to secure Panama’s independence from Colombia, liberation of the oppressed took a back-seat to the glittering prospect of hard cash to be made on a business deal concerning a canal. In the aftermath Panama became a country without its own currency or its own Central Bank and with the unusually frank motto of Pro Mundo Beneficio – ‘For the World’s Benefit’.

Today, everything in its economy is directed toward serving foreigners and making a thin crust of elites more wealthy. Panama City’s main street, the Via España, boasts night-spots and branch offices of every major bank in the world. Beyond lies some of the worst squalor anywhere in Central America.

The ‘Transnational Services Platform’ – as the Panamanian economic system is sometimes called – towers over all other sectors of the economy to assure its own survival. There are several legs which hold up this Platform.

One leg consists of a set of liberal incorporation laws introduced in 1927. Through them companies can open tax-free, anonymous, unregulated corporate offices in Panama with little more than a rented room. Thousands of companies seeking to avoid taxes in their home country find a home in Panama. Others, whose funds come from such inelegant sources as cocaine marketing or old-fashioned embezzlement, find in Panama’s anonymous corporations exciting investment possibilities.

Not all businesses which register in Panama have something to hide. But the sheer volume of clients suggests that not all investors seek out Panama for its climate. In the mid-1980s Panama was registering new foreign-owned corporations at the astounding rate of 114 per day. By June 1987 Panama had over 100,000 of these so-called ‘paper companies’. They were so popular that Panama became famous for what were known as ‘Off-the-Rack’ corporations. A one-room unstaffed bank could be registered for as little as $5,000 and could be arranged in less than a day.

Peter Appleton, director of Alliance for a Drug-Free Canada, conducted an experiment to see how easy it was. He arrived in Panama in the morning, answered a consultant’s ad in the paper, and ‘by the end of the day I was the proud owner of Banco de Norte’.

Colonel Oliver North was a more celebrated and more earnest user of the system. He set up several dummy corporations like Lake Resources and the Human Development Foundation for the US National Security Council in order to circumvent the US laws preventing aid being given to the Nicaraguan Contras.

Another aspect of this ‘liberalism’ is Panama’s huge ship registry – or ‘Flags of Convenience’— which was such a benefit to members of the tuna industry. Panama registers sea vessels for firms which do not wish to register in their own country or in their own name. In the heady days of the 1980s, Panama’s merchant fleet became the largest in the world with over 12,500 ships flying the Panamanian flag.

One well-known user is Carnival Cruise Lines, Inc., a $1.2 billion US-based company which runs trips to the Bahamas, Alaska and Canada. By registering its ships in Panama it pays no corporate income taxes and its shipmates belong to no costly maritime unions. Tapping both the ship registry system and the lax incorporation laws has enabled Carnival to produce incredibly large profit margins. Even during the recent unpleasantness between the US and General Noriega, Carnival’s stock value doubled from previous years.

A second leg of Panama’s financial Platform is a Duty-Free Zone created in 1948 in Colon, Panama’s second largest city. Companies use the Free Zone to avoid paying high completed-product taxes in their home countries. They ship nearly-finished light industrial goods to Colon, where they are completed tax-free by cheap labour and then re-shipped to their final markets. The ideal location of this Free Zone for international markets has made it the second largest in the world after Hong Kong. Six hundred companies from dozens of countries use the Zone today. Japan is its largest client, accounting for one quarter of the $2 billion in goods which passed through the zone in 1987.

But the third and most important leg of Panama’s Transnational Services Platform is its banks. Panama launched anonymous accounts in 1959 but it did not integrate them into the rest of the system until a decade later. Ironically, it was the 1970s Panamanian leader General Omar Torrijos who did more than any ruler before or since to open up the Government to poor sectors. But to do so he needed the tacit support of members of the banking oligarchy. He got their co-operation by giving them ‘carte blanche’ to remodel the banking system to their liking. In addition to bringing together existing services, they added such provisions as low minimum reserves on accounts, no taxes on deposits, and no tax on income from local accounts.

There are other advantages. Because of its special relationship with its patron, the United States, Panama has historically received fresh brand-new dollars each year just like an American state. Panama’s ‘local’ currency therefore is seldom devalued, it can be used internationally and its inflation rate is tied to that of the United States. This is an unbelievable combination for international financiers.

All of this would be of only passing interest if it did not also have its dark side. One problem is that tax-avoidance schemes rob local governments and put a disproportionate tax burden on the middle and lower income groups. Because of Panama’s financial wizards, investors in Carnival Cruise Lines can rest assured that not one dime of their money will help contribute to the roads, schools, nutrition or social security of either the US or Panama. In reality the Transnational Services Platform has never been able to survive and operate on its own without the constant infusion of funds from either international loans or by bleeding other sectors of the economy.

A tragic illustration of this is the city of Colon, home to the immensely prosperous Free Zone. The US Ambassador to Panama, Deane Hinton, told a Newsweek reporter recently that when he first visited Colon in 1938 it was ‘a beautiful city’. But after the development of the Financial Center in Panama City both investment and Government services were cut to help feed the ravenous appetite of the Transnational Services Platform. Today the Zone is still doing booming business. But in the city of Colon unemployment is over 25 per cent and drug use, violent crime, malnutrition and prostitution characterize the area. In Hinton’s words, it has become a ‘disaster area’.

Meanwhile a country which ties itself to the US dollar, produces little and bases its economy on shuffling money, puts itself in a precarious position in case there is a collapse, loss or decline of dollars. That, in fact, happened with the US economic embargo of 1988. The US froze Panamanian accounts in the US banks, cut off all military and economic aid and trade, and blocked all future IMF and World Bank loans. It directed all US businesses in Panama to cease paying Panamanian taxes and it refused entry to all ships bearing Panama’s flag.

Panama’s economy was in shambles within months. It was so dependent on laundering and hoarding US dollars that it could not survive the loss of its life blood. With so little industry and agriculture, people in the rural areas strained to find food and people in urban areas nearly starved.

Another result of the sanctions was that after the events of 1987, the drug cartels quietly took their business to other banks, primarily in the Bahamas and the Grand Cayman Islands. Dirty money does not enjoy headlines. By the time that the US troops landed in December 1989, there were few drugs, drug money, or drug financiers left to capture.

Panama today is governed almost entirely by members of the old banking and finance oligarchy. Even the new President, Guillermo Endara, sits unrepentantly on the board of one of the myriad of banks accused of laundering drug money. Unsurprisingly, his Government plans further increases in banking secrecy and off-shore tax-haven services, further cuts in social spending and more cuts to the labour code – thus continuing the philosophy that when times get hard the poor at the bottom must pay to support the Platform at the top.

In 1990 the US pledged $1 billion of the estimated $4 billion needed to correct the damage caused by its sanctions. Half of that disappeared into interest on previous unrepayable loans. Because it is still desperately trying to close the underground drug money railroad the US is aggressively working for more openness in bank secrecy. The Bush Administration had announced to the world that its 1989 invasion was to stem the tide of drug shipments and drug-money. It has been, therefore, a source of some embarrassment that the new Government is working just as hard to leave the system in place and announce that they are back to ‘business as usual’.

Stan Duncan writes on Central American affairs from St Louis, Missouri.

[image, unknown]

Illustration: Alan Hughes
THE BUREAUCRAT

PER JOHANSSEN. A bitter man. A suit with a burning conscience. Johanssen had worked all his life to ensure the integrity and fairness of Sweden’s tax system. He had been a veritable bloodhound in tracking down wealthy Swedes who would go to great lengths to avoid paying their share for the world’s most developed welfare state. In recent years Johanssen had seen one of the world’s most equitable systems of income tax systematically dismantled in favour of what he regarded as a hare-brained system of indirect taxes that would hit those on fixed incomes and hit them hard.

For him Rakowski represented the tax establishment. In his paper to the Conference Johanssen took great pains to point out that job-based income is going to shrink over the next decades and if those who drew their income from stocks, interest and property escaped paying their proper share there would be little money left to support the poor and the unemployed. Blinded by his obsessions, he seemed unaware that Rakowski himself was beginning to have doubts about letting capital off the tax hook. Could the angry Swede have done in a potential ally who was just beginning to see the light?

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