US embassy cable - 04PANAMA3038

C O N F I D E N T I A L SECTION 01 OF 03 PANAMA 003038 
 
SIPDIS 
 
 
DEPT FOR S/CT, INL/LP, AND WHA/CEN 
 
 
E.O. 12958: DECL: 12/10/2014 
TAGS: EFIN, PTER, SNAR, PM, ECONOMIC AFFAIRS 
SUBJECT: OVERVIEW OF PANAMANIAN EFFORTS TO ADDRESS ILLICIT 
FINANCE 
 
 
REF: PANAMA 2524 
 
 
Classified By: Ambassador Linda E. Watt for reasons 1.4 (b) and (d). 
 
 
1. (SBU) This is the first in a series of reports from 
Embassy Panama's newly formed Illicit Finance Task Force 
(IFTF).  The interagency IFTF was initiated in September 2004 
to monitor terrorist financing and the laundering of 
narcotics and other criminal proceeds.  The task force 
includes members from DHS, DAO, DEA, RSA, NAS, ECON, and POL. 
 
 
-------------------------------- 
Panama: Illicit Finance Overview 
-------------------------------- 
 
 
2. (C) Numerous criminal organizations and drug trafficking 
groups, including the Colombian Revolutionary Armed Forces 
(FARC) and the United Self-Defense Forces (AUC), move 
hundreds of millions of dollars of illicit proceeds through 
Panama each year.  (Comment: Embassy estimates that 70 
percent of the money laundered in Panama is derived from the 
sale of illegal narcotics; the other 30 percent of illicit 
funds come from the proceeds of corruption, arms trafficking, 
human smuggling, intellectual property rights violations and 
other criminal activity.  End comment.) 
 
 
3. (C) Panama has made significant strides in improving its 
anti-money laundering (AML) regime over the past decade, but 
loopholes still exist.  Likewise, under-funded and 
understaffed Panamanian enforcement agencies and poorly 
functioning judiciary allow launderers to operate with little 
fear of arrest or prosecution.  Panama's well-developed 
financial services sector, the Colon Free Zone (CFZ), and 
geographic location at the crossroads of international trade 
and narcotics flows, make it vulnerable to money laundering 
and terrorist financing.  The majority of illicit funds are 
smuggled into Panama via bulk cash couriers, hidden in cargo, 
or transferred via wire to banks or other non-bank financial 
institutions. 
 
 
4. (C) Panama's use of the USD and the existence of the Colon 
Free Zone make it an attractive place for traffickers to 
launder proceeds through the Black Market Peso Exchange 
(BMPE).  Excess USD earned by South American, mainly 
Colombian, drug traffickers and the need to exchange these 
dollars for local currency, create a black market whereby 
brokers purchase excess dollars from drug traffickers (in 
exchange for local currency) to sell to legitimate businesses 
for lower-than-normal market rates.  The USDs purchased in 
this scheme are often used to pay down the trade accounts 
between those businesses and CFZ exporters.  Free Zone goods 
are then shipped from companies in Colon to legitimate 
businesses, normally in Colombia and Venezuela, and the 
exchange is complete.  Efforts by the CFZ Administration to 
monitor BMPE bulk cash and third party payments have been 
weak due to the conflicting goal of promoting commerce. 
 
 
5. (C) The anti-money laundering and compliance efforts of 
Panamanian banks and money remitters have improved in recent 
years.  In 2003, legislation was passed to increase 
regulatory oversight of money remitters and allow the bank 
superintendent (SB) to conduct audits of the industry. 
(Comment: Embassy officials noted that although regulation 
and compliance are generally improving, Panamanian 
institutions tend to give less scrutiny to wire transfers 
from U.S. institutions.  There is a perception among 
Panamanian companies that transactions from the U.S. are 
strictly regulated and therefore safe to accept.  End 
comment.) 
 
 
------------------------------------------- 
Torrijos Administration and Illicit Finance 
------------------------------------------- 
 
 
6. (C) Since taking office in September, the Torrijos 
Administration promised to take a more aggressive approach 
toward money laundering and terrorist finance than did the 
Moscoso Administration.  Panama's Customs Service has long 
suffered from endemic corruption, but, the new director, 
Julio Kennion, has asked the USG to help form an Office of 
Professional Responsibility to address corruption within 
Customs.  (Note: Ironically, unconfirmed rumors of Kennion's 
involvement in corruption have already begun to surface.  End 
note.) 
 
 
7. (C) Customs improvement is desperately needed to slow the 
flow of illicit cash movements into the Colon Free Zone and 
the bulk currency that fuels the BMPE.  Undeclared cash 
seizures have dropped from $7.4 million in 2003 to 
approximately $2 million so far in 2004.  In 2003, $470 
million was declared with Panamanian customs officials, up 
from $400 million in 2002.  Total declarations for 2004 are 
not yet known.  (Comment: Embassy officials believe that the 
drop in undeclared seizures, coupled with increasing 
declarations, indicates that couriers have little fear of 
further investigation once cash is declared.  Customs keeps 
records of declared cash, but, follow-up investigations into 
the sources and uses of the cash are rare.  Considering the 
safety, quickness and ease of electronic transfers versus 
cash transactions, $470 million in declared cash is a 
startling amount for a country of Panama's size.  End 
comment.) 
 
 
8. (C) Panama has two main bodies that analyze and 
investigate financial crime: the Financial Analysis Unit 
(UAF), which works under the civilian intelligence service, 
the Council for Public Security and National Defense 
(CSPDN/Consejo), and the Financial Investigative Unit (UIF), 
which operates under the Public Ministry.  The UAF was 
created in 1995 (with USG assistance) and is responsible for 
the analysis of financial intelligence and data.  When 
suspicious activity is identified by the UAF, the cases are 
sent to the Attorney General who decides whether to turn them 
over to the UIF for criminal investigation. 
 
 
9. (C) Orcila Vega de Constable took over as head of UAF 
under the Torrijos administration.  Upon taking office, 
Constable was instructed by members of the Torrijos 
administration to aggressively attack money launderers and to 
improve cooperation with the U.S. Embassy in this effort. 
Currently, the UAF has 12 staff members and, since its 
formation, has sent hundreds of cases to the Attorney General 
and the UIF.  (Note: Constable is an attorney with no 
experience investigating financial crimes.  End note.) 
 
 
10. (C) The UIF continues to face resource and staffing 
shortages, severly limiting its ability to investigate 
financial crimes.  Gustavo Cardenas, the head of the UIF, is 
a hold over from the Moscoso Administration.  The 
understaffed UIF consists of nine investigators who have more 
than 400 open cases.  Though a number of cases are awaiting 
trial, so far in 2004, the UIF has produced no money 
laundering convictions.  With USG assistance, the UIF 
recently updated its facilities with a new computer system 
capable of supporting a staff of 15.  However, due to budget 
constraints, it still lacks basic analytic software programs 
and trained personnel to make full use of the new technology. 
 
 
11. (C) Panama's long-term inability to effectively control 
money laundering is partly due to the lack of internal 
training for financial analysts and investigators.  Neither 
of the two main bodies responsible for financial intelligence 
and investigation, the UAF and the UIF, have formal training 
programs.  Most UAF-UIF financial analysts and investigators 
receive some financial training, but mainly through the 
support of foreign governments or simply on-the-job. 
 
 
12. (C) As is evident by the 400 financial crime cases under 
investigation by the UIF, and the lack of money laundering 
convictions, there are problems at the judicial level. 
Panamanian judges have little familiarity or training in the 
technicalities of money laundering cases.  (Comment: 
Likewise, corruption is more evident among judicial officials 
than among law enforcement, suggesting a need for ethical 
training or oversight.  End comment.) 
 
 
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Comment 
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13. (C) For the reasons previously mentioned, Panama will 
remain a preferred destination for licit and illicit funds 
from around the world.  Panama has improved its AML regime 
and, with continued U.S. support, law enforcement is 
beginning to investigate and bring cases to trial.  The 
challenge for the Panamanians will be to further improve 
customs procedures for monitoring bulk cash movements and to 
sustain and fully utilize the analytic and investigative 
improvements of the UAF and UIF.  More importantly, the 
Panamanians need to address corruption and the inability of 
Panamanian judges to convict money launderers. 
WATT