Preventing Money Laundering in the United States vs. Panama: A Case Study of the Regulations

Implemented by the Federal Financial Institutions Examination Council (FFIEC) vs. the

Superintendencia de Bancos de Panama (SBP)Bethany Biruk

0- ABSTRACT

While enjoying the exponential economic growth occurring in Panama, the country is looking for ways to evolve and remain competitive in order to ensure that growth continues. Panama is currently expanding the Panama Canal and is constructing el Metro de Panama, the first metro system in Latin America. As a result of this economic growth, Panama’s laws and regulations are changing to create more stability within the country. Money laundering impedes the progress towards a stable financial system. Money laundering is the act of taking money obtained through criminal activities and introducing it back into circulation without the source of the money being known. This is a criminal activity in Panama and the United States. To gain an understanding of the regulations implemented to prevent money laundering, information was collected in a two step process. The first step was collection of data online and the second step was collecting data through an interview with the regulatory agency in Panama. In the case study, a comparison between the regulatory agencies for banks in Panama and the United States was conducted. This report discusses the laws implemented in an attempt to regulate money laundering in the banking system, as well as compares the regulatory agencies’ roles in preventing money laundering. While many differences exist between Panama and the United States, a consistent framework between the countries for money laundering prevention can be identified. Identifying similarities and differences in the responsibilities of regulators concerning the prevention of money laundering will benefit the accounting industry in Panama. Equipped with this insight, the accounting industry can find direction for potential improvement.

1- INTRODUCTION1.1 Definitions“Fraud is a generic term that embraces all the multifarious means that human ingenuity can devise, which are sorted by one individual to get an advantage over another by false misrepresentation” (Albrecht, Albrecht, Albrecht & Zimbelman, 2009). Fraud includes surprise, trickery, and various other unfair ways that another is cheated and takes many forms. Broad categories of fraud include: employee fraud, vendor fraud, customer fraud, and consumer fraud. This paper focuses on money laundering, which is defined as the “processing of criminal proceeds to disguise their illegal origin or the ownership or control of the assets, or promoting an illegal activity with illicit or legal source funds” ("Money laundering law," n.d.). It is important to understand that obtaining money through illegal activities does not make it laundered money. Money is considered laundered when the source of the money is covered up.

1.2 Overview of the Business Environment in the United States “The US has the largest and most technologically powerful economy in the world, with a per capita GDP of $48,100” ("The world factbook," 2012). In recent years, the United States has experienced a deep recession from which the economy is still recovering. The 2012 World Factbook published by the CIA reports that, 79.6% of the GDP comes from the service sector, with 19.2% contributed from the industrial sector, and the remaining from the agricultural sector. The United States reported a workforce of 153.6 million and an unemployment rate of 9%. As shown in Figure 1.2.1, the economy has stabled since the financial crisis but the unemployment rate is still high, with 6.6 million less jobs. Further, the World Factbook reports that the United States budget includes revenues of $2.303 trillion and expenditures of $3.599 trillion. This indicated what despite being a leading economy; the United States continues to operate under a deficit. The 2011 inflation rate was 3% which was up from 2010 which was reported at 1.6%.

Figure 1.2.1: Real GPD vs. Employment(Perry, 2011)

1.3 Overview of Money Laundering in the United StatesBanks play an important role in the economy of the United States. “Banks act as intermediaries when they mobilize saving from surplus units (savers) to shortage units (borrowers) in order to finance productive activities” (Heffernan, 1996). There are several types of banks. Each type of bank is differentiated based on the types of services they provide and the clientele they serve. In the United States, the banking industry is highly regulated. These regulations include prevention of money laundering since they are the major issuer of money in the economy. The implementation of banking regulations in the United States is to ensure protection of the public and efficient, stable banking operations. Therefore, it can be concluded that to maintain monetary stability, supervision and regulation of the banking system is necessary.

The bank’s compliance with the law is ensured by financial examiners. Financial examiners perform audits of the bank’s financial statements and transaction documentation to ensure that they are complying with the laws. According to the 2010 Occupational Outlook Handbook published by the United States Department of Labor, the total number of jobs for financial examiners in 2010 was 29,300 and the financial examiner occupation is growing at an above average rate. It is estimated that it will grow 27% between 2010 and 2020. A bachelor’s degree

is the typical degree held and the average salary for this position is $74,940 per year. “Most financial examiners worked for the finance and insurance industry, the federal government, or state governments” ("Occupational outlook handbook," 2010).

Estimating the amount of money that is laundered in the United States is difficult because, by definition, the act of fraud requires concealment. No direct estimates exist of how much money is laundered in the United States each year. Since, by definition, it is extremely unlikely to be able to determine what percentage of fraud is not caught; conclusions about the impact of money laundering can be determined by evaluating prevention techniques and statistical data. What is known is the amount of laundered money identified through investigations. According to the 2007 National Money Laundering Strategy published by Financial Crimes Enforcement Network, which is the most current report, the majority of money laundering occurred in California with 351,784 filings of suspicious activities. This was followed by New York with 167,635 filings of suspicious activities. Of the total suspicious activities reported, 769,502 were related to money laundering which encompassed 48.22% of all activities. Check fraud followed with only 185,839 filings, a percentage of 11.65% of all suspicious activities. While an amount has not been estimated, it is easy to see that money laundering is a big issue in the United States. This trend is reflected in the table below. As shown in Table 1.3.1 below, the amount of money laundering investigations initiated each year has increased with fewer prosecutions.

Table 1.3.1: Money Laundering Investigations("Money laundering investigations," 2011)

1.4 Overview of the Business Environment in PanamaPanama has one of the fastest growing economies in Central America which is primarily attributable to its strategic geographic location. Panama is in a state of growth and expansion. In addition to being home to the Panama Canal, which generates a considerable amount of revenue, Panama is constructing el Metro de Panama, the first metro system in Latin America. The 2012 World Factbook published by the CIA reports that 64.4% of the GDP comes from the service sector, with 16.7% contributed from the industrial sector, and the remaining from the agricultural sector. Panama has a total reported GDP per capita of $13,600. Panama reported a workforce of 1.57 million and an unemployment rate of 4.5%. An unemployment rate around 4% is considered to be full employment for a country. This means that unemployment is not an issue for Panama. However, there distribution of wealth in Panama is one worst in Latin America. This suggest that while there is high employment that the skills possessed by the labor force varies significantly. Further, the World Factbook reports revenues of $7.762 billion and expenditures of $8.465 billion. Like the United States, Panama operates under a deficit. The 2011 inflation rate was 5.9% which was up from 2010 which was reported at 3.5%.

Figure 1.4.1: GDP Growth("GDP and GDP," n.d.)

1.5 Overview of Money Laundering in PanamaThere are a total of 90 banks in Panama. These banks have a very involved role in money laundering prevention. In addition to requiring bank regulators and employees to actively seek out money laundering, banks are required to provide training about money laundering every year to all employees. Principle 15 of Core Principles for Effective Banking Supervision states that, “Banking supervisors must determine that banks have adequate policies, practices, and procedures in place, including strict “know-your-customer” rules that promote high ethical and professional standards in the financial sector and prevent the bank being used, intentionally or unintentionally, by criminal elements”. This is in accordance with Law 42 of 2000 which requires reporting institutions to “adopt, develop, and establish sound and effective policies, procedures, and practices, including internal control systems to prevent money laundering and the financing of terrorism activities from taking place within the banking system.” Based on the regulations implemented in recent years, Panama ranked #3 in affordability of financial service and in the soundness of its banks.

In Panama, Law No. 57 of September 1978 regulates the profession of certified public accountants in Panama. To obtain a license in Panama, the applicant must be a Panamanian national and be in possession of a university qualification with specialization in accountancy. Prior to the 1978 law, a university degree was not required to practice as an accountant. The 2009 World Bank Report states “As these accountant licenses need not be renewed, and the JTC suffers from severe staffing, the JTC does not know how many licensed accountants are actually practicing”. In addition to not tracking industry specific employment statistics, accountants in Panama are working under an outdated law. “The current law hasn’t kept pace with developments over the last decade in accounting and auditing activities” ("Panama behind in," 2011).

While laws have been implemented to reduce fraud within the country, law creation is not enough to prevent fraudulent behavior. “American law enforcement officials, while giving Panama credit for improving its police forces and cooperation with international agencies, still consider it a major money-laundering haven” (Archibold, 2011). According to the 2008 International Narcotics Control Strategy Report, the most current report, “the Unidad de Análisis

Financiero (UAF) received 1,012 suspicious transaction reports in 2007, of which 170 were sent to the Attorney General’s Office for further action. During all of 2006, the UAF investigated 935 suspicious transaction reports (843 from banks), of which 158 were sent to the Attorney General’s Office. During the second quarter of 2007, the UAF received 63,752 cash transaction reports, a 3.8 percent increase from the same period in 2006. The total amount reported via cash transaction reports during the first six months of 2007 was $2.7 billion, a 46.9 percent increase from the same period in 2006. Approximately 91 percent of the reports came from banks and 4.5 percent from exchange houses. The UAF attributes the increase in cash transaction reports to the growth in the Panamanian economy. As of October, the Drug Prosecutor’s Office reported 43 drug-related money laundering arrests in 2007.”

Figure 1.5.1: Money Laundering in Panama(Schumacher, 2011)

1.6 Focus of this ReportThe focus of this report is Preventing Money Laundering in the United States vs. Panama: A Case Study of the Regulations Implemented by the Federal Financial Institutions Examination Council (FFIEC) vs. the Superintendencia de Bancos de Panama (SBP). More specifically, this report compares the laws implemented to prevent money laundering in the banking industry of Panama vs. the United States.

2- INFORMATION/DATA COLLECTED2.1 Data Collection OverviewInformation was gathered for this report in two ways; internet research and conducting an on-site interview in Panama. The main purpose of the internet research was to obtain the information necessary to conduct professional interviews in Panama and to research the regulatory agencies in the United States.

2.2 Internet SearchThe first part of my data collection process was performing internet searches. The internet searches allowed me to obtain historical information, current trends, and statistical data, as well as gain a strong understanding of the economies, banking system, and money laundering issues in both countries. The databases used in this project are shown in Table 2.2.1. Google was the

primary search engine used to search for information on both countries. Once the preliminary search on Google was complete, government databases and annual reports were used to gain more detail on the topic of money laundering and to obtain statistical data. It should be noted that the accuracy of the statistical data has an inherent limitation based on the ability of firms to detect and prevent fraud. The United States Department of Labor website was used to gain a better understanding of the careers for regulatory personnel in the banking industry.

Table 2.2.1: Databases: Name, URL Location and Information used to Search

The keywords used in this project are presented in Table 2.2.2. These keywords were used in Google. Based on the results produced from these searches, I was able to identify websites of interest as well as gather general information. Each keyword was searched for both countries.

Table 2.2.2: Keywords/Phrases Used for the Search

2.3 Main Goal of Interview in PanamaThe second element of my data collection process was to perform an in-person interview with a representative of the bank regulatory agency in Panama. The main goal of the interview conducted in Panama was to evaluate if a proactive role was being taken by Panamanian banks in combating money laundering. More specifically, the interview was conducted to gain a better understanding of the laws and regulations to which the banks must comply in comparison to the laws and regulations required by banks in the United States to prevent money laundering. “Simply put, money laundering entails taking criminal profits and moving them in a prohibited manner” (Leff, 2012).

Figure 2.3.1: Presentation at the SBP

2.4 Interview InstrumentSince laundered money is real currency obtained in an illegal manner, it can be very difficult to detect. A questionnaire was created to better understand the requirements for complying with regulations and laws regarding money laundering detection, prevention, and education. The questions were designed to better understand the impact of the laws and regulations as they are currently implemented, the role of the employer, and the role and benefit of the employees. The questionnaire is shown in Figure 2.4.1 below.

Figure 2.4.1: Interview Questionnaire

2.5 Profile of Interviewee in PanamaThe representative that I interviewed on behalf of the Superintendencia de Bancos de Panama (SBP) was Mr. Chrystian Ramirez, Auditor de Prevencion y Blanqueo de Capitales II. Mr. Ramirez had a Bachelors degree in Finance from the University of Alabama in Huntsville. He has been employed with SBP for 2 years, but was recently promoted to his current position. Mr. Ramirez works in the Department of Prevention & Control of Illicit Operations at the SBP,

which was established approximately 2 years ago. As an auditor for the SBP, Mr. Ramirez performs on-site visits with banks to ensure they are meeting the legal requirements set. During these on-site visits, Mr. Ramirez gains a full understanding of the operations of the bank he is auditing to ensure that, in addition to meeting the regulations and laws of Panama, no illegal activities are taking place.

Figure 2.5.1: Interview with Mr. Ramirez

3- CASE STUDY3.1 Location of the Superintendiencia de Bancos de Panama The Superintendencia de Bancos de Panama is located on Samuel Lewis Ave. in the HSBC Tower in Panama City, Panama. The location of the headquarters is shown in Figures 3.1.1 & 3.1.2 below.

Figures 3.1.1 & 3.1.2: Superintendencia de Bancos de Panama in Panama City, Panama

("Google maps," 2012) (Cruz, 2007)

3.2 General Characteristics of the Superintendiencia de Bancos de Panama On February 26, 1998, Decree Law 9 was established, which recognized that banks needed to be regulated, and the Superintendiencia de Bancos de Panama (SBP) was established as a result.

The SBP is a government funded agency and employs 300 people. The mission of the SBP is “To strengthen and promote the stability, confidence, and competitiveness of the Banking industry, maintaining and fortifying international financial integration as well as the efficiency and security of financial intermediation and the monetary system.”

3.3 Superintendiencia de Bancos de Panama and Money LaunderingThe SBP has a proactive role in the prevention of money laundering. The staff within the Department for the Prevention and Control of Illicit Operations focuses on the prevention of criminal activity in the banking industry. Throughout the year, the staff performs audits which actively seek out potential illegal activity, and then reports any suspicious activity to the Unidad de Analisis Financiero (UAF) in an effort to reduce criminal activity and combat money laundering. An organization chart, including the reporting chain of command, is shown in Figure 3.3.1 below. The services provided by the SBP in regulating the banks of Panama are fundamental. A stable banking sector will instill credibility in the integrity of goods and services offered by this service focused country as it continues its growth.

Figure 3.3.1: Organization Chart of Superintendencia de Bancos de Panama("Organizational chart," 2011)

In recent years, Panama has implemented two laws to fight the impact of fraud in their country. In October 2000, Law 41 expanded the definition of money laundering to include offenses such as: criminal fraud, embezzlement, extortion, corruption of public officials, and similar misdeeds. In June 2003, Law 45 was added to address the issue of financial crimes, and to criminalize the acts of alteration of accounting books and insider training. These crimes included illegal money transfers, concealing, deleting and counterfeiting accounting books and related documents. Further, it included the disclosure of classified information, omitting or denying information, price discrimination, signing of fraudulent agreements, collecting financial means without proper authorization, and other similar types of crimes.

Figure 3.3.2: SBP Auditor on an Audit in Panama

3.4 Location of the Federal Financial Institutions Examination CouncilThe Federal Financial Institutions Examination Council is located in Virginia Square in Arlington, VA. The location of the headquarters is shown in Figures 3.4.1 & 3.4.2 below.

Figures 3.4.1 & 3.4.2: Federal Financial Institutions Examination Council in Arlington, Virginia("Google maps," 2012) (Alam, 1998)

3.5 General Characteristics of the Federal Financial Institutions Examination Council

The Federal Financial Institutions Examination Council (FFIEC) “is a formal interagency body empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions and to make recommendations to promote uniformity in the supervision of financial institutions” (FFIEC Mission Statement, n.d). The FFIEC was “established on March 10, 1979, pursuant to title X of the Financial Institutions Regulatory and Interest Rate Control Act of 1978” (FFIEC Mission Statement, n.d.). In 2009, the FFIEC celebrated 30 years since its establishment by Congress. The FFIEC is comprised of comprises the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance

Corporation, the Office of the Comptroller of the Currency, the National Credit Union Administration, and the Office of Thrift Supervision. Even though the regulation of fraud is a highly fragmented affair in the United States, consisting of multiple agencies and a wide coverage area both in geographic size and volume of elements to be monitored, the council has only 6 members and 4 support staff. The FFIEC continues progression towards its overall goal of promoting uniformity in the supervision of financial institutions in the United States.

3.6 The Federal Financial Institutions Examination Council and Money LaunderingThe FFIEC provides guidelines to financial regulators in order to verify compliance with the banking regulations and laws in the United States. The FFIEC places a high importance on prevention of money laundering through education. According to the 2009 Annual Report, the FFIEC trained over 2,700 state and federal employees from various agencies. The FFIEC is also responsible for regulating the Federal Reserve Board (FRB) which focuses on education and training on money laundering. “Regulatory responsibilities of the FRB include monitoring compliance by entities under the Board’s jurisdiction with other statutes (e.g., the money-laundering provisions of the Bank Secrecy Act), monitoring compliance with certain statutes that protect consumers in credit and deposit transactions, regulating margin requirements on securities transactions, and regulating transactions between banking affiliates” (FFIEC Annual Report, 2011). According to the 2011 Annual Report, the FRB held 80 workshops on the prevention of money laundering.

Figure 3.6.1: Educational Kit for Fraud Prevention by the FFIEC ("Complimentary FFIEC information," n.d.)

In the United States, there have been several laws implemented in an effort to prevent money laundering. The Bank Secrecy Act (BSA) in 1970 was a major reform in the US banking Industry. The BSA required banks to keep records of all financial transactions and for all cash transactions in excess of $10,000 to be reported. This allowed the banking industry to be regulated more completely by targeting customers who may have large amounts of cash being deposited from unknown sources. In 1986, the Money Laundering Control Act was passed which established money laundering as a federal crime. In 1990 the Financial Crimes Enforcement Network (FinCEN) was created. This is an organization specifically used to detect financial crimes. Finally, the Annunzio-Wylie Money Laundering Act in 1992 made it illegal for a bank not to report any kind of suspicious banking activity and required financial institutions to conduct internal anti-money laundering programs.

Figure 3.6.2: Partial Checklist used by the FFIEC to ensure Money Laundering Compliance("Bank secrecy act/anti-money," n.d.)

In this case study, I chose the banking industry for conducting my research on the prevention of money laundering. Specifically the regulatory agency for each country was researched to understand the laws and guidelines that were implemented to prevent money laundering. To prevent money laundering, an understanding of how it is accomplished is helpful. There are a multitude of schemes that have been recorded for committing money laundering. Some schemes are more complex than others because it is necessary to disguise the source of their wealth. Perpetrators attempt to disguise the laundered money by moving it further and faster than they anticipate that investigators can track these funds. An example of a money laundering scheme is shown below in Figure 13.

Figure 3.6.3: Money Laundering Scheme("The money-laundering cycle," n.d.)

Since money laundering can adversely impact the global economy, it is important to understand how money laundering is accomplished. Money laundering typically involves a three step process: placement, layering and integration. The first process introduces laundered money into

a legitimate financial system. Next, the money is moved around to create confusion, sometimes by wiring or transferring through numerous accounts. This is done until the money appears to be legitimate, then it is integrated back into circulation.

4- RESULTS AND RESULTS IMPACT4.1 Comparison of the SBP and the FFIECIn evaluating the results of the case study, there were similarities and differences between the banking industries in Panama and the United States. The similarities and differences were evaluated by comparing the requirements of the laws and regulations implemented in each country specifically related to money laundering, as well as the role and operations of the regulating agency for each country.

4.2 Similarities of the SBP and the FFIECSimilarities between Panama and the United States include: existence of banking regulation agencies, existing laws and regulations for the prevention of money laundering, prison sentences for perpetrators, and mandatory employee awareness programs on preventing money laundering. These similarities are shown in Table 4.2.1 below.

Table 4.2.1: Similarities in Panama vs. the United States

These results are important because while the details of these items may vary, there is consistency in the framework. Consistency indicates, by definition, an “agreement or logical coherence among things or parts” ("The free dictionary," n.d.). If consistency can be established across country borders, the ability to effectively overcome criminal activity, such as money laundering is increased. The framework shown above indicates that bank regulation, prevention laws, penalties for violating those laws, and education are all important elements in the prevention of money laundering.

4.3 Differences of the SBP and the FFIECDifferences between Panama and the United States include: the responsibilities to detect fraud, salaries, structure of bank regulators, government intervention, reporting methods available to

employees, and financial statement preparation. The specific differences are shown in Table 4.3.1 below.

Table 4.3.1: Differences in Panama vs. the United States

These results are important because it shows that the countries may have different needs and/or indicate that improvement could be made in one of the countries. An example of a difference that is based on different needs is the dissimilarities in the structures of the banking regulators. Panama is a smaller country which allows one agency to handle most of the regulatory needs for the companies located there with ease. This would not be so easily accomplished in the United States where the companies are spread throughout a large geographical location. Regarding differences based on strengths, Panama requires auditors to actively seek fraud during the course of an audit. The United States does not require auditors to actively seek fraud. Fraud is reported only if it is found during the course of the audit. This could be an area of growth for the United States. Areas where Panama could improve include: better salaries for regulators, more detailed financial statements, anonymous fraud reporting for employees, and insurance for banks.

5- SUMMARY

While various forms of fraud continue to plague all economies, money laundering is considered to be more apparent in developing countries. With the proper policies and procedures, it is believed that money laundering can be contained. While it is impossible to know exactly how

much fraud goes undetected, Panama and the United States regulate the banking industries in an effort to prevent money laundering.

Information was collected in a two step process. The first step was research preformed via the internet. Next, data was collected by an in-person interview with the Superintendencia de Bancos de Panama conducted in Panama. Based on the data collected online and in the interview, Panama’s proactive approach to preventing money laundering was evident. In the case study, the role of the SBP was compared to the role of the FFIEC. While the overall role of both agencies was the same, the responsibilities of these agencies varied. Panama’s size allows one regulatory agency to exist for the entire country, which is not feasible for the United States. Further, the case study showed that even though the laws and regulations of Panama have been implemented more recently than those adopted by the United States, they are very comparable in detail.

Once the case study was completed, the information collected was compared for similarities and differences. The similarities and differences were compared based on the laws and regulations implemented and the role of the regulatory agencies. Even though there were several differences in the comparison of regulations regarding money laundering detection and prevention between Panama and the United States, there was a consistent framework which indicated overall that there was a similar approach. Several benefits can be derived from this case study. First, it is a reflection of the improving economy in Panama. The new implementation of laws to prevent and detect fraud suggests that the economy is experiencing growth. Secondly, the case study identified areas of potential weaknesses in both countries. This could lead to additional research and future improvements. Finally, while this case study identified areas where improvement could be made, it also identified areas of strength which could allow the accounting industry to replicate these strengths in other countries around the world.

Some additional work that could be done include: the progression of money laundering prevention as the laws and economy evolves in Panama and its effects on the banking industry, the accounting industry and its role and ability to detect money laundering, and research could be preformed to evaluate the need for accountants in Panama. Currently Panama is unaware of the number of accountants performing accounting work in the country.

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