Corporations (S.A.) are a legal form of business organization that allows shareholders to limit their liability to the capital contributed. This type of structure offers a number of benefits, such as the ability to raise large amounts of capital, the transfer of ownership through shares, and the perpetuity of the company regardless of changes in ownership. However, despite these legitimate advantages, corporations can also be exploited for less transparent and often illegal purposes. It is necessary to go into the positive potential of corporations to understand how far the legal boundary reaches that marks the difference between what is potentially beneficial to a business, and what is an improper use of the legal figure.
In Panama, corporations are primarily regulated by Law No. 32 of February 26, 1927, "On Corporations". In its first article it establishes that two or more persons may form a corporation for any lawful purpose in accordance with the formalities prescribed in said law. In its article 19, it talks about the broad powers that the legal figure has to carry out transactions, acquire goods and even carry out any type of business, even if it does not specifically appear within the purpose of the corporation, emphasizing again that they must be lawful transactions.
The legislative document regulates the issuance and transfer of shares, the obligation to keep a document called "Share Registry" and the obligation to draw up a "Articles of Incorporation", which the regulation warns must contain the name and domicile of the subscribers; name of the corporation in any language, different from a previously established one that includes a term that identifies it as such, (it can be S. A.); general objectives of the corporation; capital stock and par value of the shares; domicile of the corporation; domicile of the resident agent in Panama; duration of the corporation; minimum of three directors with their names and domicile. Throughout the regulations, the provisions related to the dynamics of the shareholders' meeting, the powers of the Board of Directors, the appointment of officers, the stipulation of the dynamics of sale of assets and rights, and merger with other companies, although regulated, are all subject to the possibilities specified in the Articles of Incorporation, giving the members of the corporation the possibility of deciding how the corporation will be managed.
Article 90 of the above mentioned Law provides that a foreign corporation may do business within the Republic as long as it presents: the deed of protocolization of the Articles of Incorporation, copy of the last balance sheet accompanied by a statement of the part of the capital stock used or proposed to be used in business in the Republic, and certificate of being incorporated and authorized under the laws of the respective country.
These provisions reflect the autonomy that entrepreneurs have in carrying out their business under the figure of corporations, but with this freedom also comes the risk of using the instrument for illicit purposes. Among these practices are common cases of using corporations for tax evasion, hiding income through the legal figure and reducing the tax burden of individuals or companies. When legislation is lax in tax matters, what is known as "tax havens" materializes. A tax haven is a territory or country that offers foreign individuals and companies very favorable tax conditions, such as low tax rates, tax exemptions or total absence of taxes on certain income. In addition, tax havens usually provide a high level of financial confidentiality and minimal cooperation with other jurisdictions in terms of tax information exchange. These characteristics make them attractive destinations for those who wish to reduce their tax burden and hide assets or income. Setting up corporations in tax havens is a common way to avoid tax liabilities, or at least to reduce the tax burden. Corporations are set up in tax havens and, although these companies exist legally, they do not carry out any real business activity. They serve mainly to hide the true source of income and the identity of the beneficial owners. Another form of tax evasion through offshore corporations is false invoicing and over-invoicing. Companies issue invoices for fictitious services or goods or inflate the value of invoices to justify the transfer of funds to offshore corporations. These payments, which are actually forms of profit shifting, are deducted as operating expenses, reducing the tax base in the source country. In addition, individuals and companies can use corporations to hold assets such as real estate, investments and other high-value assets. The income generated by these assets (rents, dividends, etc.) is declared in the tax haven, where tax rates are low or non-existent. There are also cases where the figure of corporations is used in conjunction with others for tax evasion purposes. Trusts and foundations in tax havens can be used in conjunction with corporations to create complex structures that hide the true ownership and control of assets. These structures can make it extremely difficult for tax authorities to trace and attribute income to beneficial owners.
Money laundering is another crime associated with corporations. Criminals can use these entities to launder money obtained from illegal activities, such as drug trafficking or corruption. The structure of corporations is attractive for this criminal purpose because it is useful at all stages. The dynamics of money laundering involves placing the money in the financial system, which can be done through a deposit to a bank account in the name of a corporation, separating the illicit funds from the offender and entering them as assets of the corporation. Subsequently, in a structuring stage, the money is divided into small amounts and multiple deposits and transfers are made to avoid detection by the authorities. Transfers are even made between corporations in different countries using the aforementioned false invoices and front companies. In addition to these possibilities, laundered funds can be invested in real estate, stocks or legitimate businesses through anonymous companies, obtaining profits that will appear to be legal.
Corporations can also be used to commit corporate fraud. Executives and other employees may manipulate financial statements to inflate the value of shares, mislead investors or hide financial problems. This can lead to significant losses for shareholders and other stakeholders.
Another illicit possibility is to take advantage of corporate anonymity to hide assets. This is a challenge in corruption cases, where public officials may use corporations to hide illegally acquired property and other assets. The complexity of the ownership structure can make it difficult to identify the true owner of the assets. However, this practice is not limited to public officials. Cases are common where assets are sought to be concealed by using corporations in civil or family disputes. The main objective is to protect the individual's assets from lawsuits, garnishments and legal claims. This objective is achieved in several ways. In principle, transferring assets to a corporation separates them from the individual's assets. A network of interconnected corporations in different jurisdictions can also be created to make it even more difficult to trace an individual's assets. There is a very blurry margin between the intentions of protecting assets and acting in bad faith in a civil or family dispute by trying to hide assets, and using a corporation to do so.
To face all these criminal possibilities in the panorama of corporations, Panama has made legislative and institutional efforts to combat the use of this legal figure for improper purposes.
Anonymity control in Panamanian corporations
The main regulatory body that addresses the need for oversight of the dynamics of corporations is Law 23 of April 27, 2015 which was created with the objective of strengthening the mechanisms of supervision, control and international cooperation for the purposes of prevention of money laundering, financing of terrorism and proliferation of weapons of mass destruction. The law applies to institutions that carry out this supervisory objective such as: The National Commission against Money Laundering, Financing of Terrorism and Financing of the Proliferation of Weapons of Mass Destruction; The Financial Analysis Unit for the Prevention of Money Laundering and Financing of Terrorism (UAF); The Superintendence of Banks of Panama; The Superintendence of Insurance and Reinsurance of Panama; The Superintendence of the Securities Market; The Panamanian Autonomous Cooperative Institute, The Superintendence of Non-Financial Subjects and any other public institution determined by law or its regulation. This regulatory body is also applicable to non-financial regulated entities, to activities carried out by professionals subject to supervision, and to financial regulated entities, their branches, subsidiaries and majority owned affiliates of the financial group. It is a legal instrument that seeks to be the regulatory framework for the prevention and supervision measures that must be taken to prevent the business practice from becoming a criminal practice.
The National Commission against Money Laundering, Financing of Terrorism and Financing of the Proliferation of Weapons of Mass Destruction is created, formed by: The Minister of Economy and Finance, the Minister of Foreign Affairs, the Minister of the Presidency, the Superintendent of Banks of Panama, the Attorney General of the Nation representing the Public Ministry, the Director of the Financial Analysis Unit for the Prevention of the Crime of Money Laundering and Financing of Terrorism and the President of the Economy and Finance Commission of the National Assembly. This commission was legislatively designed to be the main actors in the national strategy for the prevention of these crimes, and its functions include a risk assessment, the establishment of policies for the prevention of crimes, reporting to the Cabinet Council on the measures and actions that are implemented based on the risk assessment, submitting an annual summary to the Executive Branch of the sanctions and actions taken and preparing an annual report listing the States, countries or jurisdictions that present a high risk to the Republic of Panama of money laundering, financing of terrorism and financing of the proliferation of weapons of mass destruction. It is a joint effort of multiple institutions that guarantees the supervision of business activities that could be suspicious as a result of these three criminal figures, placing necessary limits on activities such as the incorporation of corporations, which is exercised by lawyers, qualified in the law as non-financial regulated entities.
The regulation names the set of institutions as supervisory bodies in order to implement a strategy that involves regulation, supervision and application of sanctions for non-compliance, creating a structure that works dynamically to prevent the previously mentioned crimes. As an essential prevention mechanism, the law defines Due Diligence. According to it, it is the set of rules, policies, procedures, processes and management that allow a reasonable knowledge of the qualitative and quantitative aspects of the client and the final beneficiary, with special attention to the financial and transactional profile of the client, the origin of his assets and the continuous monitoring of his transactions or operations, when applicable according to the regulation of the law, by each supervisory body. Article 28 of the law proposes that non-financial regulated entities take the following basic customer due diligence measures in the case of legal entities such as corporations:
- Request the corresponding certifications evidencing the incorporation and validity of legal entities, as well as the identification of officers, directors, attorneys-in-fact, signatories and legal representatives of such legal entities, as well as their identification, verification and domicile.
- Identify and take reasonable measures to verify the beneficial owner using relevant information obtained from reliable sources.
- When the beneficial owner is a legal person, due diligence shall extend to knowing the natural person who is the owner or controller.
- Understand the nature of the client's business and its shareholding and control structure.
- The financial regulated entities, in general, must take measures to prevent the misuse of the products and services they offer by legal entities for money laundering, financing of terrorism, money laundering and, financing of terrorism or financing of the proliferation of weapons of mass destruction.
- Regulated entities that have clients that are legal persons with bearer share registration or bearer share certificates shall take effective measures to ensure that they identified the beneficial owner or who is the beneficial owner and apply transactional due diligence so that these legal persons are not misused for money laundering, financing of terrorism or financing the proliferation of weapons of mass destruction.
- When the financial regulated entity has not been able to identify the beneficial owner, it shall refrain from initiating or continuing the business relationship or carrying out the transaction in case of persistent doubt as to the identity of the customer or the beneficial owner.
- Conduct the appropriate due diligence for natural persons acting as administrators, representatives, attorneys-in-fact, beneficiaries and signatories of the legal person.
In the case of non-financial regulated entities and activities performed by professionals subject to supervision, the basic measures of due diligence of the client, legal person shall be limited to numerals 1, 2, 3 and 8 according to the relative importance, the identified risk and especially when they are involved in any cash transaction with a client for an amount equal or greater than the amount established by the supervisory body...
This measure, together with the obligation to store all customer information records, is a way to ensure that the operations being carried out are legitimate. Failure to comply with this prevention provision or the negative results of its exercise, oblige the non-financial subject to refrain from starting a business relationship or carrying out any type of transaction, and may in this case, make a suspicious transaction report to the Financial Analysis Unit for the Prevention of Money Laundering and Terrorism Financing. Any failure to comply with the provisions of the law will be sanctioned by the supervisory bodies taking into consideration the seriousness, recidivism and the magnitude of the damage and harm caused to third parties. The regulation establishes as a generic sanction fines from five thousand balboas to one million balboas, depending on the seriousness of the matter; and establishes that the supervisory agencies must regulate the scale of specific sanctions.
Another regulatory body that supervises the dynamics of corporations in Law 129 of March 17, 2020: Which creates the Private and Unique System of Registration of Beneficial Owners of Legal Entities. It is created with the purpose of facilitating access to information on the beneficial owners of legal persons to the competent authorities in the prevention of crimes of money laundering, financing of terrorism, and financing of the proliferation of weapons of mass destruction. The law creates a Registry of Resident Agents, which are all lawyers or law firms that provide their services to one or more legal persons in the Republic of Panama, and will be held at the Superintendence of Non-Financial Subjects. This same institution also administers the Private and Unique System of Registration of Beneficial Owners of legal entities incorporated in the Republic of Panama. The law guarantees that it is free, private and of limited access, with the proper security controls and technological protection. It ensures the integrity, confidentiality, traceability and computer security of the data under custody, under international standards of data management and protection. Access to the system is limited to the resident agent of the legal entity and two officials designated by the Superintendency of Non-Financial Entities, who based on a risk analysis will be assigned the type of access and their respective roles, which will be limited to making available the information required by a competent authority in its supervisory role for the prevention of crime.
It is not only the administrative route that provides a framework for the supervision of the legality of the activities of corporations. Law 70 of January 31, 2019 amends the Criminal Code to add the Chapter on Crimes against the National Treasury. It is a regulation that develops different scenarios of tax fraud, punishing with imprisonment natural persons who incur in these acts. Due to the nature of the legal entity, the penalties are limited to fines not less than the amount of the defrauded tax nor more than double the amount of the defrauded tax. In matters of tax evasion, it is also essential to evaluate the possibility that the final beneficiaries are of other nationalities with a tax regime that is not limited to their territory, forcing them to declare in their country of origin, otherwise they could be violating the law of said country of origin, translating this practice into asset laundering for tax evasion purposes.
Hiding assets versus protecting them
Corporations are an effective tool to protect assets and separate them from the main patrimony. However, one must question when it is protection and when it is an unethical practice of hiding assets for personal interests that harm third parties or have a criminal purpose such as evading tax liabilities. Asset hiding involves intentionally concealing property or funds from tax authorities, creditors, spouses in divorce proceedings or any other interested party. Protecting assets entails using legitimate legal structures and strategies to safeguard assets and funds from future claims, litigation, or business risks. The latter is a legal and ethical practice as long as it is done in accordance with applicable laws and regulations.
Previously developed methods such as fraudulent transfers, networks of interconnected companies, false invoicing or registering anonymous companies in tax havens to benefit from their confidentiality and low cooperation with other jurisdictions are used to hide assets.
On the other hand, when it comes to asset protection, practices are summarized in methods with a more ethical connotation, such as using corporations as part of an estate planning strategy to protect family assets and inheritances, buying insurance to protect assets against lawsuits, creating corporate structures to separate personal and business assets to reduce risk exposure, or registering companies in jurisdictions with favorable asset protection laws, of course, complying with international and local regulations.
Although both practices appear to involve similar actions, it is the intent that makes the difference, and therefore it is the evidentiary skill that must be brought to bear to determine which scenario we are dealing with. Both may involve the use of corporations to achieve their purpose, but the difference lies in the transparency, intent and analysis of the methodologies used to achieve the purpose.
Why create corporations in Panama?
The advantage of the legal structure is evident. Business can be conducted abroad with corporations registered in Panama, shares of one or more classes can be issued, and it can be established in the Articles of Incorporation of the corporation that these shares are convertible to a different class, which evidences the ease with which the capital of the corporation can be administratively managed. Other important advantages that emerge from the creation of a corporation are:
- Simplicity in its incorporation: The incorporation process is relatively simple.
- Its perpetuity: Its existence does not depend on the life of its owners. This allows the continuity of the business even if the original shareholders decide to sell their shares or die.
- Tax incentives: Competitive tax rates.
- Transfer of ownership: The ease of buying and selling shares benefits both owners who wish to liquidate their investment and new investors interested in acquiring a stake in the company.
- Successful management: A corporation is usually managed by a Board of Directors and a professional management team, which can lead to more efficient and effective management of the company compared to owner-managed entities.
- Protection of shareholders' rights: Detailed legislation on the confidentiality of information of each incorporated corporation.
Along with these business advantages, Panama has become a propitious scenario for the creation of corporations because it has reached a balance between facilities for the incorporation of these and the robust legal framework that guarantees the security that they are figures with legitimate purposes. It is an optimal center for national and foreign investment that facilitates projects of organization of assets, heritage protection, while guaranteeing the protection of the identity of the owners to protect the life and property of the beneficiaries. In conclusion, the panorama that has been built in the last decade, in legislative and institutional terms, places us as an attractive country to develop prosperous businesses.
Opting to run a business through a corporation is a shrewd decision. It involves optimally managing capital through shareholding, having greater control over the assets you seek to separate from your personal assets, and in general it gives it that professional connotation that makes a project be seen as a potential business, which makes it easier to attract investors and expand operations in a structured way.
The fact that there is a risk of using the figure for illicit purposes is not comparable to the benefits it offers according to Panamanian legislation; and it is that same legislation that is constantly updated to deal with the improper use of corporations. We are a country with a structure enriched by resources such as the Panama Canal, the Free Trade Zones, tax incentives for businessmen and entrepreneurs, and all the logistics development that has been strengthened over the years. On a balance, the benefits and possibilities of public limited companies outweigh the risks when there is a solid legal framework and competent supervisory bodies such as ours. Don't miss the opportunity to invest through a corporation in Panama, it's a promising bet in a country ready to see your business thrive.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.