Bank Finance and Regulation Survey. PANAMA Arias, Fábrega & Fábrega

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1 Bank Finance and Regulation Survey PANAMA Arias, Fábrega & Fábrega CONTACT INFORMATION Cecilio Castillero Arias, Fábrega & Fábrega Plaza 2000, Piso 16, Calle 50 Panama, Republic of Panama I. BANKS AND FINANCIAL INSTITUTIONS SUPERVISION 1) Applicable laws and regulations. Provide a list of the main laws and regulations that refer to the supervision and control of banks and financial institutions. Give a brief summary of the substance of each of them. The primary law referring to the supervision and control of banks in Panama is Decree Law 9 of 1998, as amended to date, which amendments have been consolidated into a reordered and renumbered unified text by Executive Decree 52 of 2008 (the Banking Law ). The Banking Law grants the Superintendence of Banks (see question 2 below) the power to issue regulations, resolutions and letters that expand, explain, and provide instructions as to compliance with, the provisions of the Banking Law. The Banking Law requires that any person who engages in the banking business in or from the Republic of Panama shall obtain a banking license. The banking business is defined as principally, the taking of resources from the public or financial institutions, by means of the acceptance of deposits or money or by any other means specified by the Superintendence of Banks or banking practices, and the use of such resources, at the bank s own risk and for its own account, to grant loans, make investments or any other transactions specified by the Superintendence of Banks. The Banking Law then sets forth provisions relating to the Superintendence of Banks (its creation, objectives, functions, governance, and the career of bank supervisor), the banking

2 system (banking licenses, banking supervision, capital adequacy rules, liquidity requirements, external auditors, reporting requirements, prohibited activities, confidentiality, money laundering and other crimes, and bank reorganization and liquidation), penalties, the banking client and consumer protection. Many of these aspects of the Banking Law have been the subject of regulations, resolutions and letters of the Superintendence of Banks. Other statutes have an impact on the banking industry, but such statutes would fall more within the realm of ancillary regulation. Examples of such statutes are the Negotiable Documents Law (Law 52 of 1917), the And/Or Bank Accounts Law (Law 42 of 1984), the Microfinance Law (Law 10 of 2002), the Electronic Signatures Law (Law 51 of 2008), the Credit Card Law (Law 81 of 2009), and certain consumer protection laws. In addition, certain specific types of loans are regulated under other laws. For example, (i) loans made by finance companies (empresas financieras) are regulated by Law 42 of 2001, (ii) pawn shops are regulated by Law 16 of 2005, and (iii) leasing companies are regulated by Law 7 of Law 42 of 2001 defines finance companies as those natural persons or legal entities who offer to the public loans or financing facilities in money, whether or not the word financiera is contained in the name of the entity, but excludes from that definition pawn shops, furniture stores and any natural person or legal entity who finances its own sales, and also excludes any loans made by any bank supervised by the Superintendence of Banks, or made by insurance and reinsurance companies, cooperatives, mutual funds or savings and loan associations. For purposes of this article we will not examine the details of the laws listed in this paragraph, other than to respond to question 2 below. 2) Entities/Authorities in charge of the control and supervision. Purposes, powers and functions of each of them-their organization and structure (i.e. public or private, independency or body of the Government to which they belong, size, etc.) The Superintendence of Banks is the authority in charge of the control and supervision of banks. The Superintendence of Banks is an autonomous institution of the State, with statutory existence, its own assets, and administrative, budgetary and financial independence. The legal representative of the Superintendence of Banks is the Superintendent of Banks, who is appointed for a period of five years which may be extended for a second period of five years. The Finance Company General Office (Dirección General de Empresas Financieras) is the authority in charge of the control and supervision of finance companies, pawn shops and leasing companies. The Finance Company General Office is a part of the Ministry of Commerce and Industries, and therefore it is not an independent entity. 3) Describe briefly the activities under supervision and give a list of the different types of licenses available. The main activity under supervision of the Superintendence of Banks is the banking business (see the second paragraph of question 1 above). There are three types of banking licenses available under the Banking Law: (i) the general license, (ii) the international license and (iii) the representation license.

3 4) Describe briefly non-regulated financial and banking activities. There are no non-regulated financial or banking activities in Panama. 5) Describe briefly non-permitted financial and banking activities and/or government monopolies. The Banking Law prohibits carrying on the business of banking in or from Panama without having previously obtained an appropriate banking license or otherwise being appropriately authorized by law. Once in possession of the appropriate license, the holder thereof is limited in its banking activities to those that the relevant license entitles its holder to and, within those limits, further limited by the regulatory requirements of the Banking Law and the regulations thereunder. The Panamanian government does not have any monopolies in the banking industry (and there is no central bank in Panama), but it does own a 100% interest in certain official banks, such as the Banco Nacional de Panamá and the Caja de Ahorros. II. BANKING ACTIVITIES 6) Different types of banking licenses. Activities permitted under each of them. Activities prohibited. As indicated in question 3 above, there are three types of banking licenses under the Banking Law. Below is a brief description of the activities permitted under each license type. (i) General license: The holder of a general license may carry on the business of banking anywhere in Panama, as well as transactions that are consummated or have their effects outside of Panama, and any other activities authorized by the Superintendence of Banks. (ii) International license: The holder of an international license may direct, from an office in Panama, transactions that are consummated or have their effects outside of Panama, and carry on any other activities authorized by the Superintendence of Banks. (iii) Representation license: The holder of a representation license may establish in Panama a representation or liaison office for client relations and marketing purposes, and carry on any other activities authorized by the Superintendence of Banks. 7) Procedures to be followed and requirements to be met to obtain each of the different licenses. Formalities to be fulfilled, documentation to be submitted, guaranties requested, time estimation, etc. Applications for a banking license to the Superintendent of Banks must be made in writing through an attorney-in-fact, who shall be an attorney admitted to practice in Panama. The Superintendent of Banks will have up to ninety days (or such longer period as the Superintendent of Banks deems necessary for a better evaluation of any particular application) to grant or deny such application. In determining whether or not to grant such application, the Superintendent of

4 Banks will consider (in addition to any other criteria that the Superintendent of Banks deems appropriate) the following criteria: 1. the identity of the principal shareholders and the professional competence of the administrative staff; 2. the ability of the shareholders to contribute the required minimum capital; 3. whether the business plan clearly demonstrates the viability of the bank and its contribution to the Panamanian economy; and 4. the corporate governance policies of the bank. The applicant will prove compliance with the above criteria by including with the application specific and extensive information required by the regulations. Once a complete application has been submitted, the Superintendent of Banks will grant a temporary permit for ninety days, for the sole purpose of allowing the applicant to file with the Public Registry of Panama the applicant s articles of incorporation using the word Bank or any of its derivatives, in any language. After such filing has been made, and within the ninety-day period of the temporary permit, the applicant is required to file a new application, in this case for the definitive license. Such application will include evidence of (i) the filing by the applicant of its articles of incorporation, (ii) compliance by the applicant with the minimum capitalization requirements ($10,000,000 for general license banks, $3,000,000 for international license banks), and (iii) if the applicant is applying for an international license, the making by the applicant of a guaranty deposit in the amount of $250,000 with the Banco Nacional de Panamá. The Superintendence of Banks will publish in a national newspaper, for three business days, the following information: 1. the name of the applicant for the license; 2. the name of the directors and officers of the applicant; 3. the operative background of the applicant; 4. the names and identifications or passports of the directors, officers and executives of the bank, indicating their respective positions. Third parties will have fifteen days after the last publication to oppose the granting of the license applied for on grounds of the moral or economic capacity of the persons described in the publication. Such third parties will be required to submit in writing any alleged evidence, and the applicant will have fifteen days after being notified of such opposition to refute any such allegations. However, the Superintendence of Banks does not have any obligation to respond to any allegations on the part of third parties, or any refutation on the part of any applicant.

5 Once all the documentation for a definitive license has been submitted, the Superintendent of Banks will have 120 days (or such longer period as the Superintendent of Banks deems necessary for a better evaluation of any particular application) to grant or deny such application. 8) Legal structure admitted/requested for each of the different licenses. There are no specific legal structures required for each of the different licenses, except that a representation license is granted solely to the foreign bank that requests it and, once granted, such bank may carry on its activities in Panama either through a branch or through a wholly owned subsidiary with independent legal existence. a) Different types of legal structures that may be used, i.e. corporations, limited liability partnership, branches, subsidiaries, etc. Any type of corporate structure may be used for a bank in Panama, as long as the entity has independent legal existence. b) Capital requirements and own fund rules. Banks must have capital of at least eight percent of their risk-weighted assets and contingent off-balance-sheet operations, and Tier 1 capital (capital primario) of at least four percent of their risk-weighted assets and contingent off-balance-sheet operations, with a minimum of US$10,000,000 in paid-in capital for general-license banks and US$3,000,000 in paid-in capital for international-license banks. c) Transfer of control and ownership regime. Is it regulated? The prior approval of the Superintendent of Banks is required for any transfer of the shares of a bank or bank holding company, to the extent that any such transfer results in a change of control or in a substantial influence on the applicable bank. A change of control is defined as the acquisition of all or a majority of the share capital of a bank, whether by one person or by a group of persons acting in concert, or the acquisition of the control of the administration of such bank, i.e., the ability to appoint a majority of the board of directors, the president and the legal representative of the bank, or the chief executive officer (gerente general) or the highest-level officers. A substantial influence on a bank is defined as the acquisition, whether by one person or by a group of persons acting in concert, in one or more transactions, of 25% or more of the share capital of such bank. The concept of acting in concert does not require an express agreement. In considering whether to approve any change of control or acquisition of substantial influence, the Superintendent of Banks will take into consideration, among other factors, (i) whether the transaction will have an adverse effect on competition in the banking sector in Panama that outweighs any favorable effect on the public interest, (ii) any impossibility to verify and confirm the information about, or any doubts that may exist with respect to, the reputation, integrity or experience of the petitioners, (iii) any doubts that may exist about the source of the funds to be used in the transaction, (iv) whether the money-laundering or terrorism-financing prevention programs of the banks have noticeable weaknesses, and (v) whether the transaction is advisable for the banking center

6 or the entities participating in the transaction, including in respect of the financial strength of the purchaser and the surviving entity. In addition, any change in the corporate structure of the economic group to which a bank belongs must be previously notified to the Superintendence of Banks, which notification must include, in the case of foreign economic groups, a certificate of no objection from the home country supervisor of the relevant bank. d) Personal requirement and restrictions that may apply in each case for officers, directors, shareholders, etc. One of the criteria used by the Superintendence of Banks in order to determine whether or not to grant a license to a bank is the identity of that bank s shareholders. In respect of shareholders who are entities, there is no additional specificity as to how their identity will influence the decision to grant or deny such license, for which reason it is fair to say that there are no limitations regarding the types of entities that may own an interest in a bank. There are, however, limitations regarding the individuals who may own an interest in a bank. Such individual shareholders (and also the promoters, directors and officers of the bank) have to be of well-known moral and economic solvency, for which reason banking licenses will be denied when any such individual shareholder (or promoter, director or officer) (i) has been convicted of certain crimes (including money laundering, drug trafficking, corruption of public servants, terrorism and any other crimes against property or public faith (fe pública)), (ii) is subject to a prohibition against the exercise of commerce, either in Panama or in any other country, (iii) has been declared bankrupt or (iv) has been responsible (as determined by the Superintendence of Banks) of acts that resulted in the compulsory liquidation of a bank. Because the identity of the shareholders is one of the criteria to be considered by the Superintendence of Banks when determining whether or not to grant a banking license, licenses are not issued to any bank if its capital stock, or the capital stock of the entity that would control such bank, is represented in whole or in part by bearer shares. e) Special requirements/restrictions for foreigners either individual or legal entities (including short description of WTO/GATS commitments and exemptions). There are no special requirements or restrictions for foreigners, whether individuals or legal entities, who own an interest in a bank. However, entities that control banks are subject to inspection by the Superintendence of Banks. 9) Is there a Deposits Insurance? Is it mandatory or based on self-regulations? Provide a brief explanation of how it operates. There is no governmental deposit insurance in Panama. However, some depositors are granted priority by the Banking Law in the case of a liquidation of the bank, and the Panamanian government did put in place a financial stimulus program in 2009, funded (because there is no central bank in Panama) through loans from a multilateral organization and Banco Nacional de Panamá, which funds are then loaned to the banks of the Panamanian banking system who so request. However, such financial stimulus program has not been used by the banks of the Panamanian banking system.

7 10) Interest rate. Is it regulated? Should the answer be affirmative, explain briefly its regulatory framework. Banks in Panama may freely determine the interest rate that they will charge for their operations, for which reason any other Panamanian laws that would limit interest rates do not apply to banks in Panama. However, banks must clearly and unequivocally indicate the effective interest rate, both relating to their loans as to their deposits. 11) Sanctions (civil, administrative, or criminal) for violations of the legal and regulatory dispositions. In the event of a violation of the Banking Law and the regulations thereunder, the Superintendence of Banks may initially take certain measures in order to stop such violation. Such measures may include (i) the separation from the applicable bank of a director, officer, manager or employee, (ii) the Superintendence of Banks taking the operating and administrative control of the bank (see question 15 below) or even ordering the reorganization of the bank (see question 16 below) if it is in the best interests of the depositors and creditors of the bank, or (iii) the cancellation of the bank s license. In addition, the Superintendence of Banks may impose fines of up to US$1,000,000, which may be increased from time to time if the applicable violation continues without remedy. These fines may be imposed to the bank itself or to its directors, officers, management and employees who took part in the violation. The Superintendent of Banks may also impose administrative sanctions for those violations, taking into account the gravity of the violation, whether or not there is recidivism, and the amount of damages caused to third parties. There are also criminal penalties for certain financial crimes, but those are governed by the Penal Code, not by the Banking Law. However, the fines imposed by the Superintendence of Banks or the sanctions imposed by the Superintendent of Banks are cumulative with any applicable penalties imposed by the Penal Code. III. BANK SECRECY LAWS 12) Is clients information protected? Are there any restrictions for its use? Clients information is protected, and its use is restricted. 13) Should answer to number 12) be affirmative, please describe the legal framework, i.e. scope, limitation, exceptions. Clients information is protected at three levels: (i) within the bank itself, (ii) when the bank has provided the information to the Superintendence of Banks and (iii) when a foreign regulator requests the information from the bank.

8 Within the bank itself, the information is protected under the Banking Law. Banks are not permitted to disclose information about their clients or their clients operations unless the relevant client consents. However, banks may disclose such information without the relevant client s consent in any of the following four cases: (a) if the bank is requested to do so by a competent Panamanian authority in accordance with the law; (b) in compliance with anti-money-laundering or anti-terrorism-financing laws; (c) to rating agencies for risk analysis purposes; or (d) to data processing agencies for operative or accounting purposes. The information is also protected under the Banking Law when the bank has provided the information to the Superintendence of Banks. In that situation, the Superintendence of Banks must strictly maintain the confidentiality of the information, and may reveal such information solely (a) pursuant to a request from a competent authority in connection with criminal proceedings; (b) if the information is already public; or (c) in compliance with anti-moneylaundering or anti-terrorism-financing laws. Finally, the information is also protected when a foreign regulator requests the information from the bank. Under those circumstances, the Panamanian Commercial Code prohibits the bank from providing such information. The appropriate channel, as provided for in the Panamanian Commercial Code, would be for the foreign regulator to make the request to the Superintendence of Banks, which would then determine whether or not the information is to be provided. If the Superintendence of Banks determines that the information is to be provided, then the Superintendence of Banks would instruct the relevant bank to provide the information to the foreign regulator. If, on the other hand, the Superintendence of Banks determines that the information is not to be provided, then the relevant bank has no further obligations under Panamanian law in respect of the request made by the foreign regulator. However, if the foreign regulator is the home country supervisor of a foreign bank doing business in Panama, such home country supervisor may request information and perform inspections of the bank. In that case, such home country supervisor may not use any information obtained by it for any purposes other than such supervision without the prior authorization of the Superintendence of Banks, and the home country supervisor will have an obligation to provide to the Superintendence of Banks with a copy of all reports and other documents prepared in connection with that supervision. 14) Sanctions (civil, administrative, or criminal) for violations. Please see the response to question 11 above.