3. Legal Regime
Transparency of the Regulatory System
Panama has five regulators, three that supervise the activities of financial entities (banking, securities, and insurance), and two that supervise the activities of non-financial entities (“designated non-financial businesses and professions (DNFBPs)” and cooperatives). Each of the regulators regularly publish detailed sector reports, 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 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 the 120 days of harvest of the onion bulb, and each shipment must be accompanied by a laboratory analysis certification of 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 over USD 100 million.
On April 10, 2018 the President of Panama vetoed the Draft Bill 577 of October 16, 2017, which would have modified Decree Law 11 of 2006 that created the Panamanian Food Safety Authority (AUPSA). On October 3, 2018 this draft bill 577 was approved again by the National Assembly’s, after the bill was partially vetoed by Panama’s President due to concerns over whether they would unduly restrict trade and market access. The bill is currently pending.
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 and open to corruption. The World Economic Forum’s 2017-2018 Global Competitiveness Report rated Panama’s judicial independence at 120 of 137 countries. The Panamanian judicial system suffers from poorly trained personnel, case backlogs, and a lack of independence. 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/ ) 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 (e.g., the U.S. federal funds rate, the London Interbank Offered Rate – LIBOR, etc…), plus a country-risk premium.
The Ministries of Tourism, Public Works, and Industry and Commerce court foreign investment, but once a company invests in Panama, have been less able to provide assistance to foreign investors to help them navigate 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 frequently complain 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 wealthy 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.
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 repeatedly struggled to resolve investment issues in courts. 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 2017-2018 report ranks the independence of Panama’s judicial system 120 out of 137 countries (http://reports.weforum.org/global-competitiveness-index-2017-2018/countryeconomy-profiles/#economy=PAN ). 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. Many Panamanian legal firms 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.
Commercial law is comprehensive and well established. The World Bank 2019 Doing Business currently ranks Panama 113/190 for resolving insolvency because of slow court systems and complexity of the process. Panama adopted a new bankruptcy law in 2015, but Panama’s Doing Business ranking has not yet shown material improvement for this metric.
Corruption is Panama’s biggest challenge, and Moody’s identified it as one of the risk factors that could affect Panama’s sovereign rating in the medium-term. Panama ranked 93rd out of 180 countries in the 2018 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 in particular 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, Odebrecht, a Brazilian firm, admitted to paying USD 59 million in bribes to win Panamanian contracts of at least USD 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 building the second metro line and the Tocumen airport expansion have continued.
Anti-corruption mechanisms exist, such as asset forfeiture, whistleblower and witness protection, and conflict-of-interest rules. However, the general perception is that anti-corruption laws are 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, admitted to paying USD 59 million in bribes to win government contracts, but is still doing business in Panama and actively applying for government projects.
Panama ratified the United Nations’ 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
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
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 2014, Panama held national elections that international observers agreed were free and fair. The transition to the new government was smooth and uneventful. 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. Elections are held every five years and the next nationwide elections, as of this writing, are scheduled for May 2019.