Derek Sambrook reflects on the development of two of the region's most business focused centres - Brazil and Panama.
“There never was a democracy yet that did not commit suicide.” President Hugo Chávez’s words? No, they were spoken by one of the first presidents of the US , John Adams. Even so, there are over 120 democracies today. This might not have impressed John Adams, nor the late satirist, curmudgeon and writer, H L Mencken, who dismally thought that democracy was a pathetic belief in the collective wisdom of individual ignorance.
Originally, democracy was created as an expediency, not as a noble cause: Plato was a critic and the Athenian leader, Cleisthenes, applied its principles only “to muster support against aristocratic rivals and Spartan allies”. The outmoded Athenian model permitted choices under a complex system of self-rule which covered war, justice and taxation, whereas today power is placed in the hands of a small group who make decisions on behalf of the people and upon whose judgement we must rely. There’s the rub.
Despite democracy’s global progress, however, in large parts of Latin America we can see moves afoot to bring about even greater control in still fewer hands; we need look no further than the president of Venezuela, Hugo Chávez, whose bid in December 2007, to change the constitution in significant ways, failed. One of the key changes would have allowed the indefinite re-election of the president and an increase in his powers. Perhaps his defeat was the best Christmas gift the Venezuelan people received that year.
Venezuela’s influence has had its greatest impact on the presidents of Bolivia and Ecuador who are both left wing allies of President Chávez. Countering this bloc, however, are countries such as Brazil, Mexico and Chile. On the other hand, according to Latinobarómetro, a non-profit organisation in Chile, at the end of 2007 there were only five countries in the region where there had been an increase in support for democracy, as practised in the developed European economies. One such country was Panama (of which more later).
It has to be remembered that the birth of Latin America’s independence began with the backdrop of Iberian colonial power which, in the case of Spain, hampered the development of democracy because the Spanish, besides imposing a severe form of Catholicism, brought with them a rigid style of militarism.
Last year I wrote about the domination and exploitation of South America by Portuguese and Spanish colonists and how, in the 19th century, the US, the world’s leading, but not largest, democracy, began asserting itself and spreading its influence in the region (although most of it was concentrated in Central America). Today that influence is diminishing as the region flexes its own muscles, mounting the world stage in its own right and engaging more in both international affairs and business.
Nowhere, it can be argued, has the US had a more durable, lengthy presence south of the border than in the Republic of Panama which, because of a canal that splits the country in two, can claim to be part of both Central and (relevant to this article) South America. Equally, nowhere in South America was the influence of a foreign power more strongly felt, in a unique way, than in Brazil where the Portuguese, rather than the Spanish, ruled.
However, compared with Panama, Brazil’s road to independence was a smooth journey.
When Napoleon Bonaparte invaded Iberia it was the British who arranged for the Portuguese king and his entourage to be sent to Rio de Janeiro. This transplant of titular sovereignty meant that Brazil was instantly endowed with an administrative infrastructure that included courts, a national bank and schools of both medicine and law. Once hostilities in Europe were over, King Joâo VI returned to Lisbon, leaving behind his eldest son as regent and when Brazilian independence was declared in 1822, the monarchy remained still intact for some time to come.
Panama has a population of just over three million, whereas Brazil has some 185 million people; not to mention how small in size Panama is next to Brazil, which is as large in area as the continental US. Brazil has enjoyed a boom in the demand for commodities as well as an inflow of foreign direct investment funds. Last year the economic health of the southern giant was such that the Morgan Stanley Capital International Index named Brazil as the world’s biggest emerging market, moving ahead of China. On the other hand, it is a canal, not commodities, that is Panama’s economic force. Despite the stark contrasts and even although one country speaks Portuguese and the other Spanish, they both share a common language: that of business.
It is true that a rising tide lifts all boats but in Panama so do canal locks. The small republic deals with transporting, rather than producing, commodities and moves them swiftly between the Atlantic and Pacific oceans along a water highway that is just 50 miles long. At the end of 1999 when Panama took control of the canal from the US, only 11 per cent of the container traffic between Asia and the US East Coast used it, whereas today that figure has quadrupled. The present expansion of the canal facilities includes the construction of a third set of locks with over $1 billion earmarked for additional improvements. If the expansion project meets all its targets, the canal could just about double its present capacity of 330 million tons a year and every large ship afloat, except, at the time of writing, the Emma Maersk, the largest container ship in service, will be able to pass through it.
If Brazil has concentrated on mineral wealth, then minuscule Panama has concentrated on managing wealth. It is the region’s largest banking centre and privacy-conscious Latins are attracted by Panama’s strict confidentiality laws plus a territorial tax system that does not count income earned beyond its borders. Such tax benefits have classified the country as a paraiso fiscal (tax haven) in some quarters. The briefest of analyses, however, will reveal how history, and not design, brought about Panama’s tax regime and this writer, as a former offshore regulator who has worked internationally for 30 years, would not cast Panama, for example, in the mould of the traditional Caribbean-style tax haven, which has been a feature of international business and investment activity for over 40 years.
Panama, together with places such as Jersey in the Channel Islands, had its tax system in place long before ‘offshore centre’ was part of everyone’s vocabulary. This is certainly not the case in many of today’s island offshore centres; some, such as the Cayman Islands, have never even introduced income taxes. In the island paraisos fiscales it was often this complete absence of taxes plus user-friendly corporate laws and banking that started the ball rolling; as business grew, so did diversification, such that these centres began offering additional sophisticated financial services. All these endeavours generated healthy government revenues and this presented the UK in particular (many of these islands are UK dependencies) with an opportunity to make some of its overseas possessions financially self-sufficient rather than a burden on the British Treasury; filing cabinets would substitute for scant natural resources.
The circumstances in Panama’s case could not be more different. Like its tax system, its Delaware-based company law was also introduced in the early part of the last century and remains, fundamentally, unchanged. As for banking, besides an early strong American presence and the present-day demands of a population in the millions (the population in the largest British crown dependency finance centre – the Isle of Man – is 80,000), it is a regional business centre, fuelled in part by its canal-related activities, which includes having the largest free trade zone in the western hemisphere. And, unlike some of those Caribbean jurisdictions, brass plate banks were never allowed; every one of the 80-odd banks in Panama, in other words, has staff and a brick and mortar presence.
Panama has never focused on traditional offshore financial services for revenue any more than it has, until recent times, on tourism; more than half the banking business today is domestic and although traditional offshore banking and related services make their contribution, they are not the economy’s driving force.
But if Panama is South America’s closest comparison with an international financial centre, its success with banking has not been repeated with trusts, another field that is one of the pillars of offshore business. In fact, the trust is regarded more as a guest in South America and one that is not always welcome. Why is that? Like democracy’s presence in the region, one needs to look at Latin American history.
Any slight foothold which the trust has owes much to force of competition, rather than coercion, because trade and investment have been the spur. At the beginning of the last century, in an effort to lure capital, principally from the US, it was considered necessary to offer investment vehicles, such as trusts, that Americans frequently used back home. The first trust law was passed in Colombia in 1923 with Panama quickly following suit in 1925 and undoubtedly, as with banking, Panama would have been influenced by the early American presence following independence in 1903. Despite this, the family trust remains unpopular and it is, therefore, perhaps ironic that the largest foreign investor in Panama today is the UK from where the English trust derived.
Further study of the commercial motive behind the fideicomiso (the closest equivalent of the noun ‘trust’ in Spanish) reveals how in Latin America it has continued to be used more for business than family purposes with banks or financial institutions often managing commercial investment funds. In Mexico, for instance, only banks can act as trustees and the law prohibits the trustee from being a beneficiary of the trust. The trust, in other words, is seen as a practical, financial investment vehicle.
The trust as a means of managing individual wealth will, however, doubtless gain ground as South America continues to open itself up to the world, despite some stumbling along the way. We should, in this context, remember the words of Juan Bautista Alberdi, a 19th century Argentine constitutionalist: “Nations, like men, do not have wings; they make their journeys on foot, step by step”. Like the Emma Maersk that cannot use Panama’s canal, there will always be room for improvement in our imperfect world. A canal can always be a little wider, and so can the minds of some critics commenting on the pitfalls and problems that face South America.
Derek Sambrook is a member of the Society of Trust and Estate Practitioners in the United Kingdom and obtained the Trustee Diploma of the Institute of Bankers in South Africa in 1973, becoming a Fellow of the institute in 1996. He emigrated in 1977 from Rhodesia (now Zimbabwe) where he was branch manager of a trust company and continued his profession in North America (Miami), Europe (including London and the Channel Islands), and the Caribbean (including the Cayman Islands). He has lived in Panama since 1996 where he is the Managing Director of Topaz Services, S.A. (www.trustservices.net), a Panamanian financial services company. He was Treasurer of the British Chamber of Commerce Panama for several years. Mr Sambrook‘s regulatory experience began in the corporate division of the Rhodesian (now Zimbabwe) Ministry of Justice (1965-1970) and subsequently he was appointed by the British government (1989-1992) as the first Bank, Trust Company and Insurance Regulator in the Turks & Caicos Islands, British West Indies; he established a regulatory body and drafted trust and insurance laws, banking and other regulations including licensing guidelines. As a direct result of his innovative captive insurance law, the Turks & Caicos Islands at the end of his contract had more than 5,000 producer-owned reinsurance companies and was the leading domicile in the world for this service. During his tenure he was also an affiliated member of the Latin American and Caribbean Banking Commission and Chairman of the government’s Offshore Financial Services Committee. He was a columnist for a leading United Kingdom offshore financial journal for over 15 years. His newsletter, Offshore Pilot Quarterly, has been published since 1997. In 2021 he celebrated 50 years in the trustee profession.