Executive Summary in two lines: Panama has announced plans to to sign a tax information exchange treaty with the USA next week. Should you be worried? If you’ve followed our advice in the past – no. If you’ve set up a non-compliant Panama offshore structure, then it’s time to review it – start here. But Panama remains an excellent place to incorporate your Foundation or IBC.

Here’s my view of TIEAs. Tax information exchange agreements (TIEAs) are usually printed in black and white, and they nominally promote transparency. However, those are about the only aspects of these treaties that are black and white, or transparent. They are more about show. Politicians want to show they have achieved something. In reality, as I’ve said before,  most exchange of information takes place informally.

With the recent news that Panama has agreed to sign a tax information exchange agreement with the USA, I received, as usual, a flood of e-mails from worried clients asking “what should I do?” or “what do you think of such and such?”

Panamanian President Ricardo Martinelli is a smart guy, and in my opinion he knows what he’s doing. Don’t worry. He is not going to destroy the Panama financial services and banking industry, on which much of the Central American country’s economy is based.

I’ve already written a detailed article on this subject for the next Q Wealth Report that is due out shortly.

Those of us who grew up in major economies like the US or the UK tend to think that everything is black and white. However, most of the world doesn’t think quite like that – and neither do politicians anywhere. Politics is about horse trading. You give up something here, you gain something there. Perception by third parties (like voters) is more highly prized than substance.  And that is exactly what is going on here.

The reason for signing this particular treaty is to appease US left-wingers like Senator Carl Levin, who were threatening to block the US – Panama free trade treaty that was already approved some years back but has never entered into force. Obama can now claim credit for getting Panama to cave in on bank secrecy, even though they are doing nothing of the sort. On their side Panama, to quote verbatim their announcement, get to say:  “Panama has already reached 13 separate taxation accords with other nations. By signing those deals and the one with the US, we’re going to get the certification of the world that Panama’s banks are trustworthy.”

Panama and the US need this free trade agreement. Both governments agree. Panama, whose economy is anchored by the Panama Canal, has a service-based economy and is one of the few nations that run a trade deficit with the US. This in itself demonstrates Panama’s strength. It is very different from the other economies in the region who are dependent on the US. American companies shipped $4.3 billion in goods and agriculture products to Panama last year and imported $302 million.

This Free Trade Agreement is going to make it much easier to operate internationally with Panama companies. Once it is signed, the US can no longer discriminate against transactions with Panama companies. In this regard it is excellent news.

But the most obvious benefit of all: Panama won’t be blacklisted. It will have the full ‘certification of the world’ as they call it. This can only be good for the long term future of the offshore finance industry in Panama.

But what about information exchange on beneficial owners who don’t want to be identified?

First of all, this mainly affects Panama banks. We’ve always been careful to advise clients, especially Americans, against banking in Panama. We always said, take your Panama corporation and foundation and bank elsewhere, like in Europe or Asia. Similarly, Panamanian banks have always been notoriously reluctant to do business with Americans.

Even in light of that, Panamanian corporations with accounts at Panamanian banks are domestic, resident Panama business as far as the law is concerned. Nobody is suggesting revealing this information to the United States or any other country.

Secondly, we’ve always advised readers and clients not to do business directly with law firms in Panama, but rather to buy a Panama company or Foundation through a law office in another jurisdiction. Panama has never required us to pass beneficial owner information, so nobody in Panama knows anything about the beneficial ownership of Panama companies set up through my firm, for example. There is no information to exchange. We particularly like Panama because most offshore jurisdictions do require beneficial ownership information. Panama doesn’t. Panama still allows bearer shares.

Panama is apparently attempting to pass legislation, again to please the gringos, that will require identification of beneficial ownership of corporations. This will be practically impossible.

First of all, Foundations do not have owners according to Panama law. Corporations of course do. However, the companies register in Panama goes back to the 1920s. Unlike other jurisdictions, companies are never struck off the register for non-payment of annual dues. It is a practical impossibility for anyone in Panama to identify beneficial owners of companies that technically exist but might have disappeared or stopped trading decades ago.

Well, there will be much more information in my article for members: there are a few other tips and tricks that I don’t want to publish on the public internet for obvious reasons. I’m reminded if the French proverb plus ça change, plus c’est la même chose. The more things change, the more they stay the same. That is the case here. There will be some minor positive changes we as offshore planners can take advantage of. There will be some minor negative changes we can easily get around. Nothing significant is changing, but the politicians on both sides can hail a victory. Perhaps the perfect political deal?

If you wold like to be kept informed of news like this, please remember to sign up for our free weekly e-mail newsletter, Q Bytes.

The following item was published in Saturday’s edition of Q Bytes. We consider The Brussels Agreement (also known as the EU SWIFT Agreement) to be an especially important topic so we are reposting to the blog. To ensure you receive useful information like this in future in a timely manner, simply sign up for your free subscription to Q Bytes. We hate spam as much as you do, and will respect your privacy. Of course, you can unsubscribe at any time.

THE BRUSSELS AGREEMENT MAKES ALL EU BANK ACCOUNTS AN OPEN BOOK TO THE US AUTHORITIES
by Peter Macfarlane, Offshore Banking and Asset Protection Consultant

With remarkably little fanfare, the first of this month saw the entry into force of an important agreement between the USA and the European Union known as the ‘Brussels Agreement.’ This I would regard as the final blow for already weak banking secrecy in European Union countries.

Quite a few astute readers have however noticed this press coverage and e-mailed me questions about it. To answer these questions, I will first reveal below more about the agreement, and then look at its impact on banking privacy. On a positive note, banking secrecy remains alive and well outside the European Union.

The ‘Brussels Agreement’ gives the CIA direct, on-demand access to all bank accounts held in the European Union – period. It also goes under the name ‘SWIFT Agreement’ in European Union papers.

This treaty is an extension and formalization of an existing CIA effort set up shortly after the terrorist attacks in New York in 2001. That program granted the CIA access to data held by SWIFT, the Brussels-based co-operative that processes nearly all international bank transfers. The operation was run covertly until the press found out about it in 2006.

The scope of the Brussels Agreement is, quite frankly, utterly amazing to anyone who cares in the slightest about civil liberties or due process. Far more wide reaching than any Tax Information Exchange Agreements (TIEAs) or Mutual Legal Assistance Treaties (MLATs), and of much greater significance than the recent US attacks on Swiss banking secrecy, the Brussels Agreement simply requires that all 27 EU member states grant requests “as a matter of urgency” for banking information made by the United States under its terrorist finance tracking programme. The records will be kept in a database run by the CIA in Langley, Virginia, for five years before being deleted.

Needless to say, the Brussels Agreement grants US authorities much more scope to consult our bank accounts than that granted to domestic law enforcement agencies in Europe. In the UK and most of Europe a judge must authorise a specific search after receiving a sworn statement from a police officer. In the case of requests from the USA, this due process is completely bypassed.

The USA can also, under the agreement, request so-called “general data sets” perhaps better known as fishing trips, based on broad categories such as “relevant message types, geography and perceived terrorism threats”.

One of the reasons for rushing through this new agreement is that SWIFT at the end of 2009 moved part of its systems architecture to Switzerland, away from its existing computing bases in Brussels and the USA. This would have placed a lot of data outside EU and US jurisdiction, a change apparently demanded of SWIFT by Swiss banks and others concerned about the privacy of their clients’ information. A number of banks had threatened to stop using the SWIFT system altogether if additional privacy protections were not put in place.

We can see that this agreement was rushed through in Europe while attempting to avoid both legal and public scrutiny, because negotiation of the agreement on the EU side was mandated back in July 2009, based on legal provisions in the old Maastricht Treaty that expired at the beginning of December 2009. The agreement was reached just before the deadline, at the end of November. It is limited to nine months duration, but EU documents make clear that this is simply a ‘breathing space’ to keep the program alive while a more permanent bank account information sharing agreement is agreed under the legal auspices of the new Lisbon treaty.

Certain elected representatives in Europe are none too happy about the way the agreement was bulldozed through by Brussels bureaucrats, directly attempting to circumvent normal mandates and procedures. A Bloomberg article just published on BusinessWeek entitled U.S., EU Terror-Finance Data Deal Should Be Vetoed, Panel Says has more information.

Of course, certain safeguards are put in place – the most important of which is that the information is for counter-terrorism use only. If the CIA wishes to reveal information to other US agencies such as the Treasury Department, IRS etc, a European judge must rubber stamp this first. Frankly, however, if it were my information being passed around – which it isn’t because I don’t bank in the EU – this safeguard would give me little confidence. Who is realistically going to trust the CIA?

The actual agreement, a classified document obtained from the EU, is here

An ‘Information Note’ on the subject released by the European Union, is here

IMPACT OF THE BRUSSELS AGREEMENT ON OFFSHORE BANKING AND ASSET PROTECTION

From a banking secrecy point of view, perhaps the most concerning thing is that this agreement has a higher legal force even than national constitutions such as Austria, which protect confidentiality. The CIA can look straight into bank accounts in some of the best offshore banking countries like Austria, Luxembourg, Latvia and Estonia, as well as other EU member states where banking confidentiality has traditionally been less of an issue.

The enormous scope of this agreement also makes minor tax information exchange agreements and the like look insignificant. We would not only not trust the CIA to refrain from sharing this information with other US government agencies. They are likely also to share it informally with their colleagues overseas. The precedent for this would be the UKUSA agreement, for example, where the UK routinely spied upon US citizens at the request of the US, because the CIA was technically prohibited from spying on Americans.

However, let’s not panic either. In fact, this process has been in place since 2001, so it’s nothing new. It’s only new that we are learning about it and it’s being subjected to the democratic process.

The other thing to note is that the EU is the only area where the USA has been able to obtain such ridiculously wide-ranging access. Traditional offshore best banking countries like Switzerland, Singapore and Panama are not covered by this agreement, though you should be aware of transactions that might pass through USA or EU correspondent banks. Switzerland in particular has an excellent clearing system of its own which bypasses SWIFT on Swiss Franc transfers.

The usual message, worth repeating in this case, is that by following the offshore banking advice in Q Wealth you can sleep soundly at night. To recap in a nutshell:

• You should make sure all your structures are legally compliant. Just because I say that banking privacy is NOT dead, and I believe privacy in financial affairs is a basic human right, doesn’t mean you should use banking privacy to hide money. You either get this distinction – or you don’t. Secret bank accounts as a tax evasion tool will not work long term. If you conduct your offshore business in a proper manner following guidelines in my articles, your account will not appear on the radar and your assets will be protected.

• Compliance with your home country’s rules is still easy and possible. Plan your second passport (citizenship) and residence with a professional… considering basing yourself, not just your business, offshore. For Americans this is unfortunately more difficult, since the USA is the only country in the world that taxes its citizens on worldwide income. Americans should therefore consider acquiring a second passport and renouncing their first.

It is perfectly possible and legitimate to protect your assets against the inevitable coming devaluation of fiat currencies, by using offshore multi-currency bank accounts. We have talked recently for example about Norwegian Kroner and Swiss Francs being good investment-grade currencies. Both of these currencies are strong, and they clear outside the EU so they are not affected by the Brussels Agreement.

If you would like to learn more about this, and are not yet a member of Q Wealth, subscribe today to gain access to the wealth of resources in our Members Area.

Better still, come to Cancun next month. We still have a few slots available on our ‘Strategies for Success’ event in Cancun and a few spaces available for one-on-one personal consultations. If you have bank accounts in European Union countries like Austria or Luxembourg and would like them to remain private, this should be a wake-up call. If you haven’t yet moved assets offshore but are considering doing so, also contact Frederick in the Q Wealth Office to set up a personal meeting with Peter Macfarlane in Cancun next month.