(Economist) EVER since Panama founded its offshore banking centre in the 1970s, its governments have vowed to resist international demands for information about assets held by foreign citizens in the country. Until the global financial crisis struck in 2008, Panama faced little pressure to cough up such data, because other jurisdictions like the Cayman Islands were more popular with tax cheats. Once the OECD began cracking down on offshore tax evasion, however, and convinced many of the biggest havens to clean up their acts, Panama began to stand out for its intransigence.
The country has claimed that it has been in compliance with international standards since signing a rash of treaties to prevent double taxation, which include information-exchange provisions. But the OECD has insisted that such clauses were not sufficiently comprehensive, and kept the country on its “grey list” of financial miscreants. This year, two French banks left Panama after Nicolas Sarkozy, France’s president, encouraged his country’s financial institutions to close their operations in tax havens. The United States has turned up the heat even further: a jobs bill passed in March established a new 30% tax on income from American assets held by foreign banks that kept their books sealed. Moreover, Democratic lawmakers have delayed ratification of a free-trade agreement with Panama for three years, in part because of concerns about bank secrecy.
Such pressure proved to be too much for Ricardo Martinelli, a conservative supermarket magnate who was elected as Panama’s president last year. On November 30th, he agreed to the country’s first-ever tax-information exchange treaty. The pact, signed with the United States, tightens Panamanian restrictions on the creation of anonymous “shell” companies, and allows each country to request and receive a full report on the holdings in the other country of any citizen suspected of tax evasion. Since Panama only taxes economic activity within its territory, meaning that no American assets are subject to its levies, the deal represents a clear surrender to American demands. Not only are many Americans, who are thought to make up 25-40% of all foreign bank account holders in Panama, expected to close their accounts in the country, but the precedent set by the agreement will probably encourage capital flight from other foreign investors as well.
Mr Martinelli has clearly calculated that Panama will gain more from cleaning up its financial reputation and securing free trade with the United States than it will lose in dodgy deposits. It is now up to America’s Congress, which still must approve the free-trade deal, to prove him right.