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InterviewsJuly 4 2018

Tax and narcotics dominate Panama finance minister's agenda

The finance minister of Panama, Dulcidio De La Guardia, is seeking international co-operation to help the country tackle issues such as tax evasion and drug trafficking. In addition, he tells Silvia Pavoni, he is also looking to the UK to assist in cultivating an environment in which fintechs can thrive.
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Dulcidio De La Guardia

Dulcidio De La Guardia

Panama’s offshore financial centre and canal linking the Pacific with the Atlantic oceans have attracted as much business as they have presented challenges to the country’s international reputation and economy in recent years.

In 2016, leaked documents from Panama City-based law firm Mossack Fonseca, known as the Panama Papers, blew new oxygen onto the already highly flammable debate over tax havens and secrecy. More recently the Panama Canal, a large and reliable source of income for the country, has exposed the need for stronger security and international co-operation on illegal trafficking. Modernising and tightening controls on both Panama’s financial centre and its logistics zone are of paramount importance, says finance minister Dulcidio De La Guardia.

Taxed by tax 

Meeting in London with The Banker during his latest trip to the UK, Mr De La Guardia says some of his top priorities right now centre around taxation – in order to improve the transparency of the offshore centre through the implementation of automated exchange of tax information with international partners, and to support local fiscal revenue. He says that tax evasion accounts for about 10% of revenues in Panama and it is punished only by fines. The government is now proposing to turn the offence into a crime. “Not paying taxes is like stealing from the government. If you steal you go to jail, so why not apply the same [rule] to tax,” says Mr De La Guardia.

But in a congress where the current right-wing administration of president Juan Carlos Varela has a significant minority – only 17 out of the total 71 seats – the law would need the backing of the private sector to be approved, says Mr De La Guardia, especially as political parties are already eyeing 2019 general elections. “We’re one year from elections so the political environment is becoming more complex,” he adds.

The government also has a second, important piece of legislation pending in congress aimed at regulating and supporting the growth of fintechs, which includes the creation of a regulatory sandbox based on the UK experience. Mr De La Guardia hopes this law will be passed by October. Modernising the onshore financial centre is also a key priority.

The UK offers more than a model for fintech innovation, says Mr De La Guardia. Panama's relationship with the country is well established: the UK is currently the fourth largest investor in Panama (it used to be the largest, before London-based HSBC sold off local operations in 2013). And it is likely that trade relations between the two countries will also get a makeover post-Brexit, mirroring the existing deal between the EU and Central America but adapting it to new conditions, says Mr De La Guardia, without specifying if these might translate into a better deal for Panama. “Times have changed somewhat from when Panama and other Central American countries signed the [2012 agreement] with the EU, so there could be some changes to reflect [new] conditions and [new] opportunities,” he adds.

Not paying taxes is like stealing from the government. If you steal you go to jail, so why not apply the same [rule] to tax

Dulcidio De La Guardia

War on drugs 

Maritime connections between Panama and the UK – as well as with other European and US ports – are of even higher importance. These links are currently being tested by the growing trafficking of illegitimate substances, says Mr De La Guardia. This too is a concern for the minister.

“There has been a significant increase in cocaine production from Colombia – it has almost tripled over the past three years – and a lot of that tries to get to international markets through Panama,” he says. The growth in production appears to be a side effect of the peace accord struck between Colombia and former guerrilla group Farc, traditionally heavily involved in narcotics. As part of the deal which ended a 52-year conflict, the Farc was meant to abandon running the illicit business and rural farmers were to be helped to switch to legal crops. But things appear not to be going to plan.

“[Colombian authorities] stopped aerial eradication of cocaine plantations because of the peace agreement. We totally support the peace agreement, but we’re telling the Colombian government that they should tackle [this issue]. Cocaine hectares have grown from 60,000 to 150,000 [since the deal was signed at the end of 2016].”

The increase in trafficking has had a direct effect on Panama too, as it has led to more violence between local gangs. “We had been very successful in reducing the number of homicides in the first years of the Varela administration: when we took office there were 17 homicides per 100,000 people; we reduced that to 10. Now, because of the increase in drug production we haven’t been able to make further reductions – 90% of homicides are drug-related fighting between gangs for the control of [illicit substances seeping into the country].”

The importance of international co-operation – whether on tax or drugs matters – is more important than ever for Panama.

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Silvia Pavoni is editor in chief of The Banker. Silvia also serves as an advisory board member for the Women of the Future Programme and for the European Risk Management Council, and is part of the London council of non-profit WILL, Women in Leadership in Latin America. In 2019, she was awarded an honorary fellowship by City University of London.
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