Action plan: A broad range of initiatives aim to improve sector regulation and enable it to comply with international requirements

A number of initiatives currently under way in Panama are expected to strengthen what is already a strong banking sector. Although the World Economic Forum’s Global Competitiveness ranking indicates that Panama’s financial system is at or near the top decile globally in most respects (see overview), the sector is hampered by its continued inclusion –as of early June 2015 – on the grey list of the Financial Action Task Force (FATF).

Along with countries such as Afghanistan, Angola, Indonesia, Iraq, Lao PDR, Sudan, Syria and Yemen, Panama is undertaking an “ongoing process” of ensuring its compliance with global anti-monetary laundering/ counter financing of terrorism (AML CFT) norms.

A Key Priority

Georges Hatcherian, an analyst at Moody’s Investor Services, told OBG that Panama’s continued inclusion in the grey list could complicate local banks’ access to funding from the global banking system. This is especially important because Panamanian banks derive a sizeable portion of their funds from outside Panama. According to the regulator, the Superintendency of Banks of Panama ( Superintendencia de Bancos Panamá, SBP), the “other borrowings” (i.e., those from the rest of the world) of the banking system comprises close to 17% of the total, or some $16.4bn out of $97.3bn as at the end of 2014.

Thus, institutional changes that will enable Panama to fully comply with the FATF’s requirements, and be removed from the grey list, constitute a major priority for the SBP and other actors in the banking sector. In a presentation in early March 2015, Gustavo Adolfo Villa, the secretary-general of the SBP, identified a number of major priorities for the calendar year. The first involves legal changes that will criminalise money laundering and the financing of terrorism in line with international norms. The second is to establish a legal framework which will enable the government to freeze terrorist assets in accordance with UN resolutions 1267 and 1363.

Third, institutional changes will be implemented to make it easier for the authorities to conduct due diligence in relation to non-financial businesses and professions (e.g., casinos). In particular, this will include a strengthening of the Unidad de Análisis Financiero (UAF), the country’s financial intelligence unit, which reports to the office of the president.

Another priority will be a broadening of the scope of Suspicious Activity Reports financial sector institutions and designated non-financial businesses will be required to submit. Finally, international cooperation between the UAF and its peers in other countries will be increased. This will involve the signing of new memoranda of understanding (MoUs) with these bodies as well as changes to legal mechanisms and procedures of the domestic agency.

Necessary Actions

In his presentation, Villa highlighted three main actions that are necessary for Panama to be removed from the FATF’s grey list. One is the passage of bills that will outlaw piracy, forgery/counterfeiting and smuggling, as well as formalise international cooperation procedures for the UAF. The second is the passage of the bill for the Prevention of Money Laundering, the Financing of Terrorism and the Financing of Weapons of Mass Destruction. This will expand the powers of the UAF, broaden its reach (in terms of entities required to report to it) and enable the government to freeze terrorists’ assets. The third is to boost the financial, technical and human resources of the UAF: the body will also benefit from new guidelines related to the Suspicious Activity Reports it receives from financial institutions and the MoUs it develops.

Formal Review

A formal and external review of the government’s actions was due to begin in May 2015 under the aegis of the Grupo de Acción Financiera de Latinoamérica (GAFILAT), the regional intergovernmental AML CFT taskforce. As part of this process, formal approval for a visit to Panama by representatives of the FATF was expected to be on the agenda of the FATF plenary session in early June 2015. Once approved, the visit could take place in August or September 2015. Should all go to plan, and the FATF’s assessors be satisfied at their visit, Panama’s removal from the FATF grey list could be announced as early as the FATF plenary session scheduled for mid-October 2015.

Wider Change

This complex process of change can be seen as part of a broader range of initiatives by the regulator to strengthen the international banking centre (IBC), which includes both the national banking system of institutions active in the country and the international banks that operate offshore. The SBP was established under Law 9 of 1998, as an independent regulator funded by fees received from the organisations it oversees. In this respect, it was markedly different to its predecessor, the National Banking Commission, which had been funded directly out of the budget of the central government. Since its creation, the SBP has sought to strengthen and promote the image of the IBC both at home and abroad, in part by staying one step ahead of the banks in terms of new business development and by monitoring of sophisticated products.

Coordination Committee

A key development in recent years was the establishment of the Financial Coordination Committee (Consejo de Coordinación Financiera, CCF) in accordance with Law 67 of 2011. Recognising that the IBC does not operate in isolation from the other parts of Panama’s broadly defined financial services sector, the CCF seeks to promote collaboration between the relevant agencies and exchange of information to ensure the efficient regulation of the entire financial sector.

Members of the committee include the chief executives of the SBP, which was a key actor in the establishment of the CCF; the Superintendency of the Securities Market, the financial markets and private sector pensions regulator; the Superintendency of Insurance and Reinsurance of Panama, the insurance sector regulator; the Panamanian Autonomous Cooperative Institute, which oversees cooperatives; the Savings and Retirement Account System for Public Servants, the organisation that administers the pensions system that Panama’s public servants are required to join; and the relevant department of the Ministry of Commerce and Industry.

In addition to these members, the heads of the UAF and the Technical Board of Accountancy, the element of the ministry that oversees accountants and auditors, attend the CCF as observers.

Risk Management

A year after the CCF was established, the sector undertook another key regulatory development with the introduction of the Uniform Risk-Based Supervision Manual (Manual Único de Supervisión Basada en Riesgos, MUSBER) in 2012. MUSBER includes a rating system that measures corporate governance, risk, economic and financial assessment, and regulation of each institution obliged to adhere to it, known by its Spanish acronym, GREN (gobierno corporativo, riesgos, evaluación económico-financiera, y normatividad).

Risk management has been further improved through Accord 004-2013 of May 28, 2013. This provides a clearer delineation of responsibilities for risk management among the senior officers of the country’s banks. The accord also provides for more detailed provisioning by sector institutions. Previously, loans had been classified in terms of days of delinquency, but the accord specifies that they be grouped both in terms of days of delinquency and type of client. The accord also introduces dynamic provisioning, which recognises previous growth in credits extended. Once provisioning has been increased by the dynamic process, it cannot be reduced except following an exhaustive examination by the SBP.

Strengthening of the system continues. The IBS conforms to the Basel I capital requirements, and is moving towards the Basel III standards. Although there is no deadline as to when it will achieve these, Agreement 001-2015 dictates that banks and banking groups gradually increase their capital between January 2016 and December 2019, in line with Principle III of the Basel III Committee. Furthermore, over the course of 2015, the regulator will introduce a new index to assess banks’ short-term liquidity.

In its assessment of the sector, the IMF notes that the SBP’s capabilities have been further enhanced by a new law that improves governance of conglomerates. Additionally, efforts to take a big-picture view towards managing the stability of the financial system have seen the SBP focus attention on housing prices and household indebtedness. To further its aim of increasing transparency, the regulator plans to publish an enhanced financial stability report on a semi-annual basis starting in mid-2015.

The IMF’s overall assessment is that the reforms in the financial sector are “on a positive trajectory”. Nevertheless, the IMF considers that more could still be done by the regulator, through, for instance, the creation of a facility that can provide temporary liquidity to banks as well as the introduction of a deposit insurance scheme for small depositors.