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Summary of the Banking Act (1998)

The following is a very brief outline of the general provisions of the Banking Act. For more information, please refer directly to the legislation itself (in *.pdf format).

Decree-Law Number 9 of February 26, 1998 (hereinafter referred to as the Banking Act (1998)) establishes the procedures for the establishment, operation and supervision of Banks organised according to Panamanian law carrying out banking business in Panama or abroad, and of banks organised under foreign law and carrying out banking business in Panama.

The Banking Act (1998) was inspired in the Basle accords and has as its main objective the modernisation of the banking system. It aims to create the regulatory and supervisory framework necessary to guarantee the solidity, efficiency and stability of the banking sector.

Some of the main features of the Banking Act (1998) are:

	Three types of banking licenses are available: General License, International License and Representation License, except that in the case of the latter it would now appear that these Banks will be authorized to perform certain local operations.
	The Banks are free to fix active and passive interest rates of any kind and the prohibition against paying interest on current accounts is eliminated.
	Under the previous legislation, a Legal Reserve had to be maintained on local deposits, as well as a Contingency Credit, both of which were eliminated, which should contribute significantly to the reduction in the costs of funds for the banks.
	The minimum paid in or assigned capital was increased to US$10 million for General License Banks and US$ 3 million for International License Banks, of which in the case of the latter US$250,000.00 must be deposited at the National Bank of Panama (Banco Nacional de Panama) or invested in Bank Guarantee Bonds consigned in said institution. Banks which were under-capitalised had a five-year period in which to comply with the new requirements.
	Banks are, however, required to maintain a minimum capital of 8% of the total pro-rated assets by risk. The Superintendence determines, according to a pro rata schedule of the Basel Committee which is used as a reference and adapted to local requirements, the risk rating which should be adopted for the various types of lending and investments. Branches of foreign Banks are governed by the indexes of adaptation of their country of origin.
	The creation of the Superintendence of Banks, as an independent and autonomous governmental entity, headed by a Superintendent, with extensive powers, among which is the granting of Bank licenses. The Superintendence is integrated by a Board of Directors composed of five independent members, who act as a consultancy body and with powers to establish the criteria by which licenses will be granted and the general policies that will govern the Superintendence.
	The budget of the Superintendence is funded by the Banks, by paying a "Banking Regulation Fee", according to the type of license, as follows. General License banks shall pay a fee of US$30,000.00, plus US$35.00 for every million dollar or fraction thereof of their assets, up to a maximum of US$100,000.00; International License banks: US$ 15,000.00; and Representation License banks: US$5,000.00.
	The causes for cancellation of a banking license are extended, including when the Supervisory Entity of a foreign Bank does not carry out an effective supervision, according to the criteria of the Superintendence.
	The official state Banks are subject to inspection by the General Comptroller's office as mandated by the Constitution. However, they are also subject to supervision by the Superintendence and to all the rules, regulations and requirements applicable to Banks in general.

The Banking Act (1998) introduces the concept of "Consolidated Supervision" of foreign Banks with an International License and branches of foreign Banks with a General License. In this regard, the Foreign Regulatory Entity of the country of origin has authority to carry out inspections of the Banks in Panama, pursuant to agreements or understanding approved by the Superintendence. The foreign regulatory entity must maintain strict reservation concerning the information it secures from the Banks so supervised.

The provisions contained in the Banking Act (1998) apply also to the branches and subsidiaries of foreign Banks with General License, subject to supervision by the Superintendence. On the other hand, International License Banks are governed by the legal requirements of their countries of origin, on matters specifically pertaining to liquidity, capital adaptation and loan limits.

Under the terms of the Act, the Superintendence can not request the disclosure of the identity of the depositors of a Bank, except when the deposits guarantee assets that are subject to its review and supervision (for example, where there are related party loans from the bank to shareholders or directors of the bank). On the other hand, the Superintendence may obtain consolidated information from the Banks concerning their liabilities for the purpose of establishing their liquidity and to identity risks.

Under Law 41 of 2001, a Financial Analysis Unit was established which can request information regarding the depositors in banks. This information is used in the analysis of international transfers to ensure strict compliance with anti-money laundering measures. The bank is under the obligation to not inform the account holder of such an investigation.

The reservation that must be maintained by the Superintendence of information obtained from the Banks is extended to its officers and employees, and in general to all persons that have knowledge of said information by reason of any relation, they might have, with the Bank.

The Banks, can only disclose information about their customers or their operations pursuant to a waiver, or when there exists a formal order by a competent legal authority (such as the Financial Analysis Unit). The banks also have discretion to disclose information about their customers to entities that act as Credit Unions, for example to the Panamanian Credit Association.

The Banks publish their audited financial statements annually, including the respective notes, and must deliver to the Superintendence, quarterly non-audited financial statements, which may order that these be made public.

Loans to non-related parties.

The maximum credit limit a Banks may extend to any single natural or legal person, including those other natural or legal persons that integrate what is mentioned in the Banking Act (1998) as an "Economic Group", is set at 25% of the total holdings of the bank.

Loans to related parties.

The following acts are prohibited for banks:

To grant or obtain, directly or indirectly, loans or credit facilities guaranteed by their own shares;

To grant, directly or indirectly, non-guaranteed loans or credit facilities that exceed 5% of their assets; loans guaranteed by mortgage or pledge, that are not deposits, that exceed 10% of their assets; or loans guaranteed with deposits at the Banks that exceed 50% of their assets, in favour of:

Any natural or legal persons that owns 5% or more of the Bank's capital stock.

Companies that have common directors or officers with the Bank.

Companies in which the Bank owns 20% or more of their capital stock.

The Bank's managers, officers, employees or their spouses, except if dealing with mortgage loans for their principal home.

To grant non-guaranteed loans or credit facilities in favour of their employees that in total exceed their annual salaries.

To grant loans or credit facilities to their managers, officers, employees, natural or legal persons (that hold 5% or more of the shares of the bank), and anyone that belongs to these as an Economic Group, with conditions of cost or for a period period that differs from market practice.

The accumulation of loans, without guarantee or guaranteed by mortgage of pledge that are not deposits, granted by the Banks to related parties cannot exceed 75% of the Bank's assets.

All Banks must maintain assets in Panama equivalent to a percentage of their local deposits. This percentage will be the same for all Banks and will be determined by the Superintendence, which in any case will not exceed 100% of the Head Office capitalisation.

Banks have certain prohibitions and limitations with respect to their investments in other enterprises.

International License Banks are exempt from compliance with the prohibition regarding limits in the consolidation of risks and investments in other enterprises.

The provisions concerning voluntary liquidation, intervention and reorganization of Banks are extended and regulated in detail. The Superintendence has the authority to take charge of the compulsorily liquidation of Banks (this was previously performed by the courts), by the appointing of the liquidators.

The Banking Act (1998) eliminates the order of preference that favoured Panamanian depositors over foreign depositors. However, all natural person depositors with deposits of US$ 5,000.oo or less, are given preference over the other depositors.

Pecuniary sanctions for specific violations are increased to US$100,000.00, and fines are increased up to US$50,000.00. Moreover, new concepts are introduced such as "generic" violations, private warnings and public warning.

The Banking Act (1998) also introduces the concept of "account immunity", whereby funds deposited at Banks in Panama by Central Banks or similar institutions which are depositories of the international reserves of Sovereign Nations, are not subject to precautionary measures, attachments or any other type of retention.

The Banking Act (1998) provides that the money deposited in Banks of International License will be considered as domiciled in Panama, and, therefore, are subject to the jurisdiction of the Panamanian courts. Assets transferred to or deposited in Panamanian Banks, whether as deposits or under the title of mandate, trust, or any other will be subject entirely to the laws and jurisdiction of Panama, unless those instruments, by which the transfer or deposit is made, specifically provide otherwise.

Finally, the Banking Act (1998) incorporates a special title called "Protection to the Users of Bank Services. The provisions contained in the Title are only applicable to General License Banks and to loans that do not exceed US$35,000.00. Any complaints by users must be resolved by the Committee for Free Competition and Consumer Matters (CLICAC), through the process of consumer conciliation.

Note: Although the Cayman Islands has over 500 licensed banks, fewer than 10 of them have a fully-staffed functioning branch in the Cayman's, whereas in Panama (with over 100 operating banks) brass plate banking is not permitted.

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