Fifty shades of dismay

The FATF's decision to group Panama and Afghanistan in the same banking category is misleading and in need of clarification, says Derek Sambrook

"You have to question the reliability of a list that bands Afghanistan and Panama together. After all, would you rather have $1m deposited in a local bank or in Afghanistan?"

That is the question I posed in a British publication (LatAm Investor) this month, featuring a country report on Panama.

The list I was referring to is the one produced by the Financial Action Task Force (FATF); the inter-governmental body established 25 years ago by the ministers of its member jurisdictions in an effort to clamp down on terrorism financing, money laundering and related threats to the integrity of the international financial system.

High-risk jurisdiction

Countries considered to be high-risk and non-co-operative are placed on a black list. Those where compliance is an on-going process are put on a grey list. That's the one Latin America's Panama, Nicaragua and Argentina find themselves on.

As Panama leads the way in offshore financial services regionally, has a supervisory system especially geared towards the FATF's core areas of concern, perhaps a more accurate analysis would separate the oranges and the apples.

Apples and oranges

The FATF needs a country risk list (oranges) in tandem with one which grades separately those defined as offshore finance centres (apples) for the purposes of its exercise. If not, how do you avoid distortions?

The antithesis of Panama's position is the Special Inspection General for Afghanistan Reconstruction 2014 audit report. The inspector, John F.Sopko wrote about a banking sector in need of robust regulation with, expressing "major concerns" about the central bank being able to regulate the commercial banks.

He also highlighted that systemic weaknesses exist "in many areas of banking governance and operations, including personnel capacity, internal controls, accounting, credit analysis and compliance with regulations". In summary, the banking sector was said to be fragile and unstable.

Sounds like a soft target for terrorism financing and money laundering to me.

Guilty by association

The World Economic Forum report in 2014 addressed the soundness of international banks. Top marks went to Canada and, predictably, Greece (148) came bottom; neither the United States (58) nor Britain (105) were hardly strong performers. Panama took the number 7 slot. But those wishing to open a bank account, and not au fait with the facts, would hesitate to deposit funds in either Panama or Afghanistan if reliance was placed solely on the FATF list.

For the FATF to say that "the situations differ among each jurisdiction" is for me to say that skiing in the Sahara is not popular. Of course Panama has shortcomings, in line with many other off-shore financial centre's which must be addressed, but the perception created by such a listing is fallacious.

A cow has four legs; all animals have four legs, therefore all animals are cows. Aristotle would cringe. Without proper analysis, you might say that you haven't got a leg to stand on.

Perceptions stick and Lyndon Johnson knew all about that. "If one morning", he mused, "I walked on top of the water across the Potomac river, the headline that afternoon would read: 'President can't swim'. And who else is Panama put alongside by the FATF? Zimbabwe and Uganda.

The one thing that is completely transparent to me is the need to accept that, although we don't want fifty shades of grey (apologies to Erika Leonard) there should be at least two for the FATF's list.

As a former regulator, I am sensitive to the need for balancing controls and commercial ambitions, but sometimes there is want of proportion. Members of Britain's House of Lords have fallen foul of the increased due diligence being applied by banks in relation to their customers. Alliterative cries of being treated like "deposed dictators or political pariahs" have echoed in the second chamber of Parliament in the Palace of Westminster.

Treasury Minister, Lord Deighton, has said that when members try to open accounts, the banks, in relation to due diligence, were acting "disproportionately" in their case. Currently, the parliamentarians are not classed as politically dependent persons - although new emerging global standards could change all that.

The taliban in Afghanistan have two legs; all members of the House of Lords have two legs, ergo…

Derek R Sambrook is managing director of Trust Services, SA and has served as both treasurer and chairman of the British Chamber of Commerce in Panama

He writes a regular blog about Latin America for Private Client Adviser

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