For the past several months, the Panamanian government has engaged in an extensive period of consultations with local and foreign experts, practitioners, professionals and regulators, in a concerted effort to ensure that the jurisdiction continues to embody the highest international standards in terms of functionality and transparency (while preserving confidentiality). To that effect, the Panamanian legislature enacted Law 47 of 2013 (the “Bearer Shares Law”), which creates a regulatory framework for the continued and lawful use of bearer shares in Panama.
Implications for M&A activity
Today, Panama’s robust regulatory framework provides domestic and international investors alike with unparalleled investment opportunities in the region: a dollarised economy, no exchange controls or restrictions on the movement of capital, readily accessible credit and increasingly sophisticated and liquid capital markets. In order to attract the best and brightest, Panama continues to enact pro-business legislation, based on successful models culled from other parts of the world. Given the country’s diminutive size and limited domestic consumer market, the country has turned to globalisation as a central driver of its long-term economic growth (the Bearer Shares Law being the latest iteration of this commitment).
In the context of M&A and Panamanian companies with bearer shares, the Bearer Shares Law introduces a new party into the mix: the authorized custodian. Prior to the Bearer Shares Law, the parties (i.e., buyer/seller or acquirer/target) could transact privately, with the notable exception that any merger with a Panamanian entity requires the parties to register the merger agreement with the Panamanian Public Registry. As a result of the Bearer Shares Law, the authorized custodian becomes an important component of any M&A transaction involving a Panamanian company with bearer shares, given that the authorized custodian must be notified of the transaction and the new counterparty (i.e., the party that did not have a preexisting relationship with the authorized custodian) may be required to provide the authorized custodian with certain information/documentation as described below. From a best practices standpoint, the parties should coordinate with the authorized custodian(s) beforehand, and include the above referenced requisite information/documentation as part of the closing deliverables within the transaction documents.
Aspects of the Bearer Shares Law
This law has several interesting and innovative features that are worth highlighting:
- Timing: The Bearer Shares Law shall come into effect two (2) years after this law’s enactment (i.e., August 7, 2015 or the “Implementation Date”). As such, the provisions of the Bearer Shares Law shall not become binding and enforceable until such time as this law comes into effect. Furthermore, holders of bearer share certificates validly issued and outstanding prior to the Implementation Date shall have an additional three (3) year period following the Implementation Date to deliver any and all such bearer shares into custody or alternatively, reissue them into registered form. Bearer shares validly issued on or after the Implementation Date may not avail themselves of this additional three (3) year grace period, and must be delivered to an authorized custodian.
- Delivering Bearer Share Certificates into Custody: Holders of bearer share certificates that were validly issued and outstanding prior to the Implementation Date shall be given an additional three (3) year grace period to deliver any and all such bearer shares into the custody of an authorized custodian. Any and all bearer shares that are validly issued on or after the Implementation Date must be delivered into the custody of an authorized custodian within twenty (20) calendar days of the issuance of said bear shares. For the avoidance of doubt, in the event any bearer share certificates that were validly issued and outstanding prior to the Implementation Date were to be redeemed or cancelled after the Implementation Date, any new bearer share certificate(s) that is/are issued representing said redeemed/cancelled shares shall be deemed as having been issued after the Implementation Date, and thus, the three (3) year grace period would not be applicable to said bearer share certificate(s).
For the purposes of the Bearer Shares Law, delivery into the custody of an authorized custodian shall be deemed perfected upon (i) the delivery of the original bearer share certificate to the authorized custodian, and (ii) the delivery of any and all applicable information required under the Bearer Shares Law, which should be sufficient to identify the beneficial owner(s) of the bearer share certificate (ie, affidavit of share ownership). The beneficial owner(s) of any and all bearer shares that fails to comply with his/her duties in a timely manner may definitely lose his/her rights to exercise any and all political and economic rights associated to these bearer shares.
- Authorized Custodian: An authorized custodian is a duly authorized person or entity that may exercise custody over duly issued and outstanding bearer shares. Authorized custodians are divided into two categories: local authorized custodians or foreign authorized custodians. The following persons and/or entities may act as authorized custodians:
- Local Authorized Custodians:
- Duly licensed attorneys and/or resident agents (registered with the Fourth Chamber of the Supreme Court of Panama);
- Banks having a general banking license and trust companies, both of which must be regulated and subject to the supervision of the Panamanian Superintendence of Banks; or
- Brokerage houses (Casas de Valores) and clearing houses (Central de Valores), both of which must be regulated and subject to the supervision of the Panamanian Superintendence of the Securities Markets.
- Foreign Authorized Custodians:
- Banks, trust companies and financial intermediaries that are duly licensed and regulated in member jurisdictions of the Financial Action Task Force on Money Laundering (FATF) or their associated members. In addition to complying with the provisions of the Bearer Shares Law and applicable law, please note that all foreign authorized custodians must be registered with the Panamanian Superintendence of Banks and designate a process/notification agent (agente de notificación). A process/notification agent (agente de notificación) is defined as an attorney, general license bank or trust company based in Panama that is duly authorized by a foreign authorized custodian to receive any and all notices and demands for and on its behalf related to said foreign authorized custodian’s responsibilities as per the Bearer Shares Law and applicable law.
- Responsibilities of an Authorized Custodian: An authorized custodian cannot automatically release a beneficial owner’s confidential information, and thus, fishing expeditions are not being authorized under the Bearer Shares Law. Instead, any request for information must be made in connection to an ongoing investigation by a competent authority into money laundering or in connection to a commitment established in an international agreement and/or convention to which Panama is a signatory.
Any and all foreign authorized custodians are required to deliver sufficient information to identify the beneficial owner(s) of any and all bearer share certificates to the resident agent of the Panamanian corporations that issued these bearer shares. This provision does not require the resident agent to make a specific request in order to be entitled to receive this information (ie, a foreign authorized custodian has the positive obligation of delivering this information to the resident agent upon becoming the custodian of any and all bearer share certificates). The Bearer Shares Law provides a limited carve out for foreign authorized custodians wanting to delay the delivery of such information until such time as the resident agent provides it with notice that a competent authority in Panama has duly requested such information. In order to avail itself of this carve out, a foreign authorized custodian must provide the Panamanian Treasury Department with a US$25,000.00 bond, which must be issued by an insurance company or a bank licensed to operate in Panama.
- Perfecting the Transfer of Bearer Shares that have already been Delivered into Custody: Bearer share certificates that have been delivered into the custody of an authorized custodian shall only be deemed transferred upon the beneficial owner(s) providing the authorized custodian with formal written notice of said transfer, and upon the new beneficial owner(s) providing the authorized custodian with a sworn statement containing specific information about the new beneficial owner(s). The above assumes that the bearer share certificates shall remain in the custody of the same authorized custodian. In the event the new beneficial owner(s) wish(es) to transfer the bearer share certificates to a new authorized custodian, additional steps would be required.
- Inheritance: An interesting new feature of the Bearer Shares Law is that beneficial owners may now engage in estate/succession planning through the authorized custodian of their bearer shares. The beneficial owner(s) of any and all bearer shares held in custody may designate in writing one or more beneficiaries. As such, upon receiving evidence of the beneficial owner(s) death, an authorized custodian may transfer any and all bearer share certificates to the duly designated beneficiaries, without having to wait for probate and/or a court order. The Bearer Shares Law states that the transfer of any and all bearer share certificates to the designated beneficiaries (ie, as designated by the beneficial owner(s) in writing, said written instrument having been delivered to the authorized custodian) shall be valid, irrespective of any other rights that may be asserted (whether these rights be testamentary or intestate).
- Pledging Bearer Shares: A pledgee in possession of bearer shares that were issued and outstanding prior to the Implementation Date and that are subject to a pledge must nevertheless (i) deliver the bearer share certificate into the custody of an authorized custodian, or (ii) if applicable, register as an authorized custodian. The authorized custodian of the pledged bearer shares shall act as a depository (depositario prendario) of such shares.
- Penalties: The failure to adhere to the provisions of the Bearer Shares Law shall be punishable as outlined in this law. The beneficial owner(s) failure to comply with the provisions of this law in a timely manner may result in him/her definitely losing his/her rights to exercise any and all political and economic rights associated to the bearer shares. Any authorized custodian that fails to comply with the provisions of this law in a timely manner may be subject to financial as well as regulatory penalties (eg, temporally lose the right to act as an authorized custodian for a period of three (3) years). Unauthorized breaches of confidentiality by an authorized custodian are stringently penalized pursuant to the Bearer Shares Law.
Executive Summary: From a commercial perspective, spin-offs can represent incredible opportunities for unlocking shareholder value. As with any major undertaking, spin-offs require a tremendous amount of planning, and investors and management alike should rightfully strive to achieve predictable outcomes. Fortunately, the Panamanian legislature has shed some additional light on this subject by recently enacting a long overdue law that specifically regulates corporate spin-offs.
From a commercial perspective, spin-offs can represent incredible opportunities for unlocking shareholder value. Whether it’s by decoupling a high value/growth asset from the trappings of its larger conglomerate or by devising more tax efficient means of distributing value to shareholders, spin-offs offer a whole host of potential benefits. However, spin-offs (as is the case with any major undertaking) may be plagued by certain commercial, administrative and legal challenges, and as such, companies undergoing spin-offs must carefully “manage” the marketplace’s expectations, lest they inadvertently send a mixed or negative message. Some onlookers might interpret a spin-off as tossing out the trash, in order for the winners to keep the cash. Others might view it more favorably if they believe in the operational benefits of having “focused” companies instead of unwieldy conglomerates. In any event, corporate spin-offs require a tremendous amount of planning, and investors and management alike should rightfully strive to achieve a predictable outcome.
In Panama, the law has historically been silent on the issue of corporate spin-offs. The lack of proper regulation has led to corporate spin-offs being perceived as ambiguous and unpredictable affairs in Panama. The unregulated environment and the unpredictability surrounding corporate spin-offs made corporations wary of taking any such actions. Fortunately, the Panamanian legislature recently enacted a long overdue law that specifically regulates corporate spin-offs. Since the enactment of Law 85 of November 22, 2012, Panamanian corporations have finally been able to engage in corporate spin-offs within a regulated and more predictable framework.
Law 85 added several new provisions to the Panamanian Commercial Code, regulating various types/forms of corporate spin-offs. This law starts off by stating that: “A company engaged in commerce of any kind or nature can be split by dividing all or part of its assets and transferring them to one or more new or existing companies, called beneficiaries, which should have the same shareholders or partners as the company being divided or which have said company as their sole partner or shareholder.”
Essentially, the above provision allows for the following types/forms of spin-offs:
1) A complete spin-off, whereby the original company to distribute its assets in full to the beneficiary company or companies and is thereby dissolved in the process; or
2) A partial spin-off, whereby the dividing company remains intact following the split with part of its assets being allotted to one or more beneficiary companies.
It is important to note that in both cases, existing companies or companies to be incorporated pursuant to the spin-off can be used as beneficiary companies for the corporate spin-off process; provided that the beneficiary companies retain the same ownership structure (ie, same partners and shareholders) as the pre-spinoff company, or for the beneficiary companies to be wholly owned subsidiaries of the surviving post-spinoff company.
From a mechanical/procedural perspective, this law clearly lays out the ground rules for completing a spin-off. For example, the members or shareholders of a company are required to approve a spin-off; conversely, the board of directors does not have the authority to unilaterally authorize a spin-off without member/shareholder oversight and approval. Moreover, a company wishing to initiate a spin-off process must provide the Panamanian National Revenue Authority (ANIP) with at least 30-days’ notice prior to registering the spin-off at the Public Registry. After the notification period has expired, the minutes of a meeting of the shareholders/partners adopting the resolution that authorizes a spin-off (or a written certification of the Secretary of said meeting) must be protocolized and registered at the Public Registry for the spin-off to be effective. The law goes on to list a series of other issues that may be dealt with at the above referenced shareholders/partners meeting, which include the following:
a. Total or partial transfer of assets, individually or in block.
b. The limitation of liability regime of the company being divided and of each of the beneficiary companies.
c. Transfer of liabilities of the company being divided.
d. Transfer of shares or related interests to the beneficiary companies.
e. The amount of shares or related interests corresponding to each partner or shareholder of the company being divided, in accordance with the proportion of their stake therein.
f. The approval of the Articles of Incorporation of the beneficiary companies.
This law takes a strong stance towards protecting minority interests and creditors’ rights (viz-a-viz the controlling stakeholders of a company contemplating a spin-off). For example, by requiring a shareholders/members meeting, minority stakeholders are given the tools to overturn any corporate action taken that falls short of strict compliance with the law (e.g., meetings held without providing all shareholders/partners with due notice). Furthermore, by requiring the same ownership structure amongst the various beneficiary companies, minority stakeholders are protected from potentially unscrupulous controlling shareholders/partners attempting to syphon off quality assets, while leaving minority stakeholders holding the proverbial bag. In addition to building in fundamentally sound corporate governance protections, this law introduces an element of paternalism by requiring companies to provide the Panamanian National Revenue Authority (ANIP) with prior notice of forthcoming spin-offs.
With respect to the protection of creditors, this law specifies that any and all liabilities associated with a given asset shall flow directly into the recipient beneficiary company (e.g., mortgaged property). However, creditors are afforded additional protections in the event they oppose the spin-off. For example, a certification issued by the Public Registry in connection with the spin-offs is required to be published (ie, made available to the public) for three days. Any creditor may challenge a spin-off within thirty (30) days of the final publication of the above referenced certification. Furthermore, creditors that either were unable to avail themselves of this thirty (30) day window or opted not to use it may still sue the other beneficiary companies involved in the spin-off. Such beneficiary companies would be treated as jointly and severally liable in the event the spin-off was found to be prejudicial to the suing creditor.
From a tax perspective, this law creates a conundrum that in many instances might make spin-offs an unattractive alternative for certain corporations. On its face, spin-offs are treated as tax neutral events (ie, not treated as transfers for tax purposes); provided that, assets are transferred at book value. However, this law imposes joint and several liability on the beneficiary companies for any and all of the dividing company’s tax liabilities at the time of the spin-off and into the future. If the courts opt to interpret this new provision literally, spun-off companies may need to account for this contingent liability in their books, subject to applicable statutes of limitation. Since this law does not clarify whether this joint and several liability applies for spin-offs where the dividing company does not survive (ie, joint and several liability as between the beneficiary companies), practitioners may opt to advise their clients to pursue this type/form of spin-off until the courts and/or the legislature clarifies this issue.
The views expressed herein are solely those of the author and have not been endorsed, confirmed or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.
PANAMA UPDATE – Legislation Creates Incentives for Multinationals to Establish Headquarters in Panama
The MHQ laws create a comprehensive scheme for multinational corporations seeking to establish a global or regional headquarter in Panama. Multinational corporations are now opting to setup operations in Panama as a staging point for pursuing their pan-LatAm strategies (Panama playing a similar role to Singapore and Hong Kong in the Asian market).
In a concerted effort to promote the country’s long-term growth prospects, the Panamanian legislature enacted Law No. 41 of 2007, as amended by Law No. 45 of 2012 (the “MHQ laws”), which created a comprehensive scheme for multinational corporations (including its subsidiaries and/or affiliates, a “Multinational”) seeking to establish a regional headquarter in Panama (“Multinational Headquarters” or “MHQs”). The MHQ laws seek to promote the establishment of MHQs by (i) providing MHQs and employees with considerable regulatory, labor, fiscal and tax benefits (vis-à-vis other foreign entities operating in Panama under different regulatory schemes) and (ii) streamlining the application process by centralizing and standardizing the various procedures (e.g., immigration, work permits, etc.) within a single department at the Ministry of Commerce and Industry. Since its enactment, more than sixty Multinationals have set up an MHQ in Panama, including (but not limited to) Procter & Gamble, Dell, Caterpillar, Nestle, VF Corporation and Maersk.
Benefitting from LatAm’s most interconnected air and maritime hubs, Multinationals have successfully leveraged Panama’s infrastructure to improve upon the execution of their LatAm strategies. From an M&A perspective, LatAm offers very attractive opportunities for both developed and emerging markets alike looking to engage in strategic acquisitions (e.g., with a view to secure key natural resources and/or to open new markets). For example, in 2010, Chinese foreign investment in LatAm surged to approximately US$11 billion (a 44% year-over-year increase). Beyond just focusing on mining and resources, Chinese companies are looking to increase their investments in LatAm in a broad swath of industries, including infrastructure, manufacturing, agribusiness and forestry. In addition to Chinese companies, Multinationals from around the world are opting to setup operations in Panama as a staging point for pursuing their pan-LatAm strategies (Panama playing a similar role to Singapore and Hong Kong in the Asian market).
The MHQ laws provide considerable fiscal and tax benefits for MHQs and their personnel. At the MHQ level, any income generated from its international operations (i.e., ex-Panama) is tax exempt. Panama has a territorial tax system, and as such, MHQs are permitted to breakout their IBT (i.e., into Panama and Global ex-Panama) and pay local income taxes only on their locally generated portion of IBT, if any. Furthermore, the most recent amendments to the MHQ laws have further strengthened this “ecosystem” by allowing MHQs to provide services to any entity, whether foreign or domestic, that does not generate Panama sourced income without forgoing the income tax exemption for revenues generated from said activities.
The MHQ laws also provide MHQs with a value added tax exemption (Impuesto de Transferencia de Bienes Corporales Muebles y la Prestación de Servicios or ITBMS) for services rendered abroad. For example, services rendered by an MHQ to any of the Multinational’s subsidiaries and/or affiliates operating abroad are exempt from the 7% value-added tax. Services rendered by an MHQ locally however, continue to be subject to the 7% value-added tax. Furthermore, MHQs may transact amongst themselves within Panama without forgoing the value added tax exemption for revenues generated from said activities. Lastly, MHQs are also exempt from paying dividend tax.
In terms of human resources benefits, another very important advantage for MHQs (vis-à-vis other foreign entities operating in Panama under a different regulatory scheme) is that they are exempt from the Panamanian legislation that imposes strict local-to-foreign personnel ratios. By law, unless there is specific legislation to the contrary, any and all entities operating in Panama may only have up to 10% of their work force consist of foreign personnel. Duly licensed MHQs however, have considerable flexibility when it comes to hiring foreigners.
The MHQ laws also provide foreign executives and middle management working in Panama (“Foreign Executives”) with several benefits as well. For example, salaries paid to Foreign Executives from any of the Multinational’s offices abroad are exempt from income tax. Furthermore, Foreign Executives may import certain household items into Panama without having to pay any import taxes. Also, any and all foreign personnel working for an MHQ in Panama are exempt from paying social security contributions in Panama.
Regarding immigration issues, MHQs can now conduct immigration procedures directly through the Ministry of Commerce and Industry (eliminating the need to transact these procedures separately at the Immigration Bureau). Pursuant to the MHQ laws, the following new visa categories were created for MHQ personnel: (i) visas for permanent MHQ personnel;(ii) visas for temporary MHQ personnel;(iii) visas for dependents of permanent MHQ personnel;and (iv) visas for MHQ personnel attending to a special event. MHQ personnel may also opt for permanent residency after having had a valid MHQ visa for a period of five consecutive years.
In order for an operation/office to qualify as an MHQ under the MHQ laws, an MHQ is required to provide “services” to its global or regional headquarters, subsidiaries and/or affiliates from its operation/office in Panama. For the purposes of the MHQ laws, the term “services” includes (but is not limited to) the following: (i) administration and/or management of a Multinational’s operations; (ii) management of a Multinational’s logistics and/or warehousing; (iii) provision of technical assistance to a Multinational and/or its customers; and (iv) providing financial management, accounting, consulting, and/or such other analogous service to a Multinational.
MHQs can be established through any of the following bodies corporate: (i) a foreign body corporate (i.e., the holding company and/or a subsidiary of a Multinational) duly registered with the Public Registry of Panama, and/or (ii) a Panamanian body corporate owned by a Multinational.
To obtain an MHQ license from the Ministry of Commerce and Industry, a Multinational must submit an application to the License Commission of Multinational Headquarters (the “Licensing Commission”). The list of documents requested by the Licensing Commission as part of the application includes (but is not limited to) the following: (i) the incorporation documents of the applicant; (ii) the audited, consolidated financial statements of the Multinational, which must evidence assets equal to or in excess of US$200 million; (iii) a reference letter from a reputable bank; (iv) an estimate of the initial investment to be made by a Multinational to start-up the MHQ; and (v) a list of such Foreign Executives that will occupy executive and/or middle management positions at the MHQ. All documentation filed with the Licensing Commission must be translated into Spanish by a certified public translator and legalized and/or apostilled by the competent authorities. The application process generally takes approximately thirty working days (i.e., calculated as the date the completed application is filed with the Licensing Commission).
Income before taxes
Foreign executives may only avail themselves of this exemption for goods imported in connection to their initial relocation to Panama. Nevertheless, foreign executives are allowed to import one car into Panama tax free every two years.
This exemption is contingent on said employees (i) refraining from applying for permanent residency in Panama, and (ii) maintaining medical insurance throughout their entire stay in Panama.
These visas are issued for a period of five years to Foreign Executives. These visas can be renewed multiple times for an additional five year period. Holders of this visa category are not required to obtain a separate labor permit in order to lawfully work in Panama.
These visas are issued for a period of three months to any MHQ personnel. Holders of this visa category are not required to obtain a separate labor permit in order to lawfully work in Panama.
Their spouse and/or partner of over five years, underage children, dependent children under the age of twenty five studying in Panama, and their parents are eligible for this visa category. These visas may be issued for a period of up to five years, and may be renewable depending on the duration of the applicable Foreign Executive’s visa.
These visas are issued to MHQ personnel travelling to Panama on a temporary basis to attend a specific event (e.g., meeting, technical training program, etc.). The length of these visas is determined on a case by case basis.
LATIN AMERICAN UPDATE – Outbound Investments Into Latin America – A pan-American overview for Chinese investors
This contribution is based on the Guide first published by China Law & Practice, in association with International Financial Law Review, Hong Kong, 2011.
- Latin American markets have put in a stellar performance in recent years and present ever-growing business opportunities to Chinese investors, as China becomes increasingly active and influential in the region.
- Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay and Venezuela , as with all the other Latin American jurisdictions and mainland China, have a continental legal system. Furthermore, if their legal systems are taken at face value, it becomes apparent that laws seem to be virtually copied from one country to another, a feature that probably stems from their common Spanish legal heritage.
- Nevertheless, the way of applying and enforcing these regulations in the different Latam Countries varies greatly.
- This guide provides a bird’s-eye view of the legal framework for investment in Latin America, as well as a comparison among the opportunities and pitfalls arising from the legal systems of the main economies of the region that become relevant when considering a transaction from China.
The product of an extensive canvasing of sovereign wealth funds from around the world and a review of their respective best practices, Panama’s new National Savings Fund provides the government with a sophisticated and transparent investment vehicle to manage the country’s surpluses.
Riding off of an unprecedented period of prosperity and growth, the Panamanian government recently created a National Savings Fund (the “Fund”) as a forward-looking initiative aimed at safeguarding the country against future negative shocks (e.g., natural disasters, tail risk events, economic recessions, etc.). The product of an extensive canvasing of sovereign wealth funds from around the world and a review of their respective best practices, the Fund Law seeks to provide the Panamanian government with a sophisticated and transparent investment vehicle to manage the country’s surpluses.
The Fund Law establishes the Fund’s overarching mandate, which is divided into four central directives. The first directive requires the Fund to provide the country with a mechanism to accumulate and preserve its long-term savings. Second, in addition to being a savings fund, the Fund is required to function as a stabilization fund, capable of deploying capital to mitigate any major negative shocks. The third directive requires the Fund to serve as a “lender of last resort” during times of crisis and/or economic recession. The final directive requires the Fund to assist in the management of budgetary deficits.
Assets under Management (“AUM”)
The Fund will receive its initial AUM from the government’s existing “Development Fund,” which is a trust fund that was created pursuant to Law 20 of 1995. Subsequently, the AUM would increase from contributions received from the following sources of capital: (i) any funds which by law are assigned to the Fund; (ii) any private/public donations, grants and/or bequests; and (iii) the Rule of Accumulation (as defined herein).
The “Rule of Accumulation” requires that any and all monies received by Panama’s National Treasury – from distributions from the Panama Canal Authority (“ACP”) – in excess of the equivalent of 3.5% of the country’s nominal GDP must be deposited into the Fund. By way of background, the ACP contributes to the National Treasury a sizable percentage of its profits (i.e., pursuant to a disbursement that is analogous to a yearly dividend payment). In the event the ACP’s yearly contribution to the National Treasury is larger than 3.5% of nominal GDP, the excess would be diverted to the Fund.
The Rule of Accumulation will come into force in 2015. The hurdle will initially be set at 3.5% of nominal GDP for any given year. It may be revised once every five years beginning in 2020. However, in order for it to be effective, the revised Rule of Accumulation must be approved at the Cabinet level as well as by the plenary session of the National Assembly.
Investment Guidelines/Investment Policy
The Fund Law establishes strict investment parameters that must be complied with during the preparation of the investment guidelines and subsequently the investment policy. The central tenet is that the Fund may only invest in foreign issuers and/or securities. A very limited carve-out was created for public debt instruments issued by the Panamanian government (i.e., government bonds). This limited carve-out comes into force beginning in 2015. However, aside from this exception, the Fund must pursue a global (ex-Panama) investment strategy.
The Ministry of Economy and Finance (“MEF”) is charged with the responsibility of preparing the Fund’s investment guidelines. These guidelines flesh out the government’s investment objectives and provide the Fund’s Board of Directors (the “BoD”) with a clear set of parameters for developing the more comprehensive investment policy. The investment guidelines will define, among other things, specific performance benchmarks, minimum credit rating requirements for investments, asset allocation requirements, and other such investment parameters.
The BoD is charged with the responsibility of preparing the Fund’s investment policy. This comprehensive policy sets out detailed instructions regarding the investment of the AUM. Throughout this process, the BoD is assisted by an in-house financial advisory team known as the Technical Secretariat. Once the investment policy has been finalized, the BoD remits it to the National Bank of Panama (“BNP”), which is responsible for executing the investment policy and managing the AUM.
In response to a common critique of other sovereign wealth funds, the Fund Law incorporates very stringent transparency requirements to ensure that the Fund’s year over year performance is a matter of public record. Accountability would be achieved through a combination of periodic public disclosures and robust internal controls.
The BoD is required to prepare an annual report of the Fund’s performance and operations by no later than March 31st of each year. The BoD must present this annual report to MEF and to an independent supervisory committee consisting of members of civil society. A copy of the BoD’s annual report must also be presented to the Economy and Finance Commission of the National Assembly.
After this annual report has been vetted, MEF and the BoD must in turn prepare a detailed presentation of the Fund’s performance and operations, which must include the Fund’s audited consolidated annual financial statements (including the external auditor’s opinion letter). The Minister of MEF and the President of the BoD must appear before the plenary session of the National Assembly to give said presentation by no later than June 30th of each year.
Additional public disclosures are required to be made by the BNP and the Technical Secretariat. The BNP will publish the Fund’s audited consolidated annual financial statements, which must be audited by an external auditor. In turn, the Technical Secretariat will divulge information through the Fund’s website regarding the performance of the Fund’s portfolio, the Fund’s annual budget, as well as on material decisions taken by the BoD.