2010 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
May 2010
Report

Openness to Foreign Investment

The Government of Panama (GOP) promoted economic growth over the last decade through open market policies and by encouraging trade. The GOP maintains a liberal regime for foreign investment and investment in financial instruments. With cooperation from the Panamanian business community, the GOP actively encourages foreign direct investment (FDI ). A new President and a new alliance in control of the National Assembly have maintained this liberal regime.

Laws in general make no distinction between domestic and foreign companies. In 1998, the GOP enacted the Investment Stability Law, which, among other things, guarantees foreign investors, who invest at least two million dollars in Panama, equal treatment under the law to that of their domestic competition. Under Law 41 of 2007, Panama has already encouraged multinational companies to open regional headquarters in Panama by offering various tax incentives and the Ministry of Commerce contains a specific office to assist. While Panamanian courts generally uphold the sanctity of contracts, there have been frequent allegations of corruption within the judicial system and within the executive branch.

The United States and Panama successfully signed a bilateral free trade agreement on June 28th, 2007. The Panamanian National Assembly ratified the TPA on July 11, 2007, and the pact currently awaits Presidential submission to the U.S. Congress for ratification.

This free trade agreement (also known as a Trade Promotion Agreement, or TPA) with Panama would be a natural extension of an already largely open trade and investment relationship. Panama is unique in Latin America in that it is predominantly a services-based economy. Services represent about 80 percent of Panama’s gross domestic product. The agreement will provide new economic opportunities for U.S. exporters, particularly for agricultural products, passenger vehicles and certain machinery which currently face high tariff rates. The TPA would enhance trade remedies, increase transparency in government procurements, strengthen intellectual property rights protection, and provide for commitments to adhere to and to enforce certain protections for workers and the environment.

The Panamanian Vice Ministry of Foreign Trade within the Ministry of Commerce and Industry is the principal entity responsible for promoting foreign investment. It provides investors with information, expedites specific projects, leads investment-seeking missions abroad, and supports foreign investment missions to Panama. However, depending on the character of the planned investment, several different governmental entities may have a passive or active interest in the investment in terms of setting its parameters of operation, particularly within relevant regulations, land use, employment, special investment incentives, business licensing, etc. There is no formal investment screening by the GOP although the government does monitor large foreign investments.

The GOP does impose some limitations on foreign ownership, such as in the retail and media sectors where ownership must be Panamanian. Foreign retailers, however, have been able to work within the confines of Panamanian law primarily through franchise arrangements. Currently approximately 55 professions are reserved for Panamanian nationals only. In particular, medical practitioners, lawyers, accountants, and custom brokers, are currently reserved for Panamanian citizens. The GOP also requires
foreigners in various sectors to obtain explicit permission to work, but the Embassy has not received reports of such restrictions hindering U.S. firms operating in Panama. Once ratified and implemented, the TPA will accord substantial market access to Panama’s retail sector and across its entire services regimes, subject to certain exceptions.

There is no de jure discrimination against U.S. or other foreign investors in most sectors. Panama, however, imposes visa requirements to limit the immigration of citizens from approximately 80 countries. Citizens of the United States may purchase a visa for $30 dollars at a relevant port of entry. A domestic investment protection law between Panama was enacted in 1991 and remains in force; however, it has not yet been invoked or used in contravention of U.S. investment.

The U.S. Embassy in Panama has received numerous property dispute complaints. The complaints include lost property, broken contracts, additional payments, accusations of fraud and corruption, and occasionally threats of violence. There are two root causes for a large proportion of the complaints – title issues and weak judiciary. The majority of land in Panama and almost all land outside of Panama City is not titled. The lack of clear title leads to competing claims to property and frequently to lawsuits. The judicial system’s capacity to resolve contractual and property disputes is weak and open to corruption as illustrated by the World Economic Forum ranking Panama 103 out of 133 in judicial independence. Americans should exercise more due diligence in purchasing real estate than in the United States. Engaging a reputable attorney and licensed real estate broker is strongly recommended. Law 80 of 2009, which regulates coastal property and islands, was recently passed. Precise implementation rules and regulations may be published in 2010.

Panama's privatization framework law does not distinguish between foreign and domestic investor participation in prospective privatizations. The law calls for prescreening of potential investors or bidders in certain cases to establish technical viability, but nationality and Panamanian participation are not criteria. The Government of Panama privatized many entities starting in the mid-1990s, but there has not been a privatization in several years. There have been reports of the water authority, convention center, and some functions of the public health system being privatized, but the current government has not indicated a desire to proceed with these or any other privatizations.

Levels of Foreign Direct Investment (FDI) were over 10% of GDP in years 2006-2008. The data for 2009 are not yet tabulated; however, based upon first quarter data and anecdotal evidence, the world economic and banking crises probably will lower the 2009 level of FDI. FDI levels have been driven by investments in the Colon Free Zone, banking, and development/construction.

The Panama Canal Authority started a seven year, $5.25 billion expansion project of the Panama Canal in September 2007. The project contains a third set of locks, a deepening of Lake Gatun, and newly dredged channels. All major contracts have been awarded, but there will be opportunities to supply goods and services to the contract winners. The Panama Canal Authority also annually procures approximately $250 million in goods and services. Foreign companies are able to bid on such contracts on the same terms and conditions as Panamanian companies.

The Government of Panama has ambitious infrastructure investment plans that could run up to $12 billion in the next five years. As part of this effort, the Government of Panama started the process to construct a $1 billion subway line. The final requirements for the project will be publicized in early 2010 and line is planned to be completed before the May 2014 elections.

In 2006, the GOP announced a $705 million project led by London & Regional to develop a commercial/residential complex on a former air base. Dell, HP, Caterpillar, and 20 other multi-national corporations are located or in the process of locating in the complex.

Progress in the academic and research community (City of Knowledge) continues and prominent NGOs, International Organizations, Universities, and private firms are located there. Pursuant to Law 6 of 1999, the GOP offers a variety of incentives to entities operating within the City of Knowledge.

Panamanian Law 22 of 2006 regulates government procurement and other related issues. Law 22 was intended to streamline and modernize Panama’s contracting system. It establishes, among other things, an Internet-based procurement system
(www.panamacompra.gob.pa) and requires publication of all proposed government purchases, except the Panama Canal Authority and the Social Security System, which have their own Internet based procurement systems. National Security based contracts
can be exempted from the system. The Panamacompra program requires publication of all government purchases on the Internet; evaluation of proposals and monitoring of the procurement process; consultation of public bids, including technical specifications and tender documents; classification of purchases by different government institutions and gathering and analysis of data. The law also created an administrative court to handle all public contracting disputes. The rulings of this administrative court are subject to
review by the Panamanian Supreme Court. The Panamanian government has generally handled bids in a transparent manner although occasionally U.S. companies have complained that certain required procedures have not been followed.

While Panama committed to become a party to the World Trade Organization (WTO) Government Procurement Agreement (GPA) at the time of its WTO accession, it remains an observer and not a signatory. Its efforts to accede to the GPA have stalled. When it enters into force, the TPA will require Panama’s procuring entities to use fair and transparent procurement procedures, including advance notice of purchases and timely and effective bid review procedures, for procurement covered by the TPA. U.S. suppliers will be permitted to bid on procurement above certain thresholds of most Panamanian government entities, including key ministries and state-owned enterprises, on the same basis as Panamanian suppliers. In particular, U.S. suppliers will be permitted to bid on procurement by the Panama Canal Authority, including contracts and subcontract for the $5.25 billion Panama Canal expansion project. The TPA would strengthen rule of law and fight corruption by requiring Panama to ensure under its domestic law that bribery in matters affecting trade and investment, including in government procurement, is treated as a criminal offense or is subject to comparable penalties. Disputes relating to Panama Canal Authority procurement will continue to be addressed through the authority’s existing procedures. Currently, importing entities are required to hold a commercial or industrial license to operate in Panama, which can be obtained through Panama’s online business registration service (www.panamaemprende.gob.pa). Importing entities are not required to have a separate import license, with the exception of certain controlled products such as weapons, medicine, pharmaceutical products and certain chemicals.

Conversion and Transfer Policies

Panama has no legal restrictions on the transfer abroad of funds associated with or capital employed in an investment. There are no restrictions on capital outflows or convertibility. Panama uses the U.S. dollar as legal tender. Currency conversion therefore is not an issue.

There is no independent monetary policy in Panama as Panama uses the U.S. dollar for its currency and does not have a Central Bank. Inflation has historically been relatively low and predictable, except during the global rise in inflation during 2008.

Expropriation and Compensation

The Embassy is unaware of any current case of direct expropriation of property by the Panamanian government.

Two American investors have informed the Embassy that they are considering filing a lawsuit under the Bilateral Investment Treaty claiming that Law 80 of 2009 on the titling of coastal land and islands constitutes an indirect expropriation of their land because it substantially diminished the value of their property.

Panamanian law recognizes the concept of eminent domain.

Dispute Settlement

Panama has a court and judicial system built around a civil code, rather than the Anglo-American system of reliance upon case law and judicial precedent. Fundamental procedural rights in civil cases are broadly similar to those available in U.S. civil courts although some notice and discovery rights, particularly in administrative matters, may be less extensive than in the U.S. Judicial pleadings are not always a matter of public record, nor are the processes always transparent.

The business community lacks confidence in the Panamanian judicial system as an objective, independent arbiter in legal or commercial disputes, especially when the case involves powerful local figures with political influence. Over the last few years, the majority of investment disputes involving U.S. investors has been related to land purchasing and/or titling issues. Such disputes have been difficult to resolve due to the lack of adequate titling, inconsistent regulations, lack of trained officials outside of
Panama City, and a slow and cumbersome judiciary. Some of these disputes have resulted from U.S. investors being unfamiliar with the Panamanian titling system. The court system is slow and prone to massive case backlogs and corruption.

Panama’s commercial law is comprehensive and well-established. Its bankruptcy law is antiquated and remains under review to be adapted to modern business practices.

The GOP accepts binding international arbitration of disputes with foreign investors. Panama became a member of the International Center for the Settlement of Investment Disputes (ICSID) in 1996. The United States and Panama signed an amendment to the
Bilateral Investment Treaty to incorporate Panama's membership into ICSID on June 1, 2000. This amendment took effect in May 2001. Panama also became a member of the World Bank's Multilateral Investment Guarantee Agency (MIGA) in 1997.
Once ratified and implemented, the TPA will solidify the legal framework for U.S. nvestors operating in Panama. All forms of investment will be protected under the agreement, including enterprises, debt, concessions and similar contracts, and
intellectual property. With very few exceptions, U.S. investors will be treated as well as Panamanian investors (or investors of any other country) in the establishment, acquisition, and operation of investments in Panama. The TPA draws from U.S. legal principles and practices to provide U.S. investors in Panama substantive and procedural protections that foreign investors currently enjoy under the U.S. legal system. The TPA’s investor protections are backed by a transparent, binding international arbitration mechanism, under which investors may, at their own initiative, bring claims against a government for an alleged breach of the TPA’s investment chapter. Submissions to investor-state arbitral tribunals would be made public, and hearings would generally be
open to the public. Tribunals would also be authorized to accept amicus submissions from non-disputing parties.

Performance Requirements and Incentives

There are no legal performance requirements such as minimum export percentages, significant local requirements of local equity interest, or mandatory technology transfer. There are no established general requirements that foreign investors invest in local
companies, purchase goods or services from local vendors or invest in R&D or other facilities. There are special tax and other incentives for manufacturers to locate in an export-processing zone (EPZ), which include call centers.

Official support for investment and business activity is especially strong for the Colon Free Zone (CFZ), the banking sector, the tourism sector, and EPZs. Companies in the CFZ pay basic user fees and a 5% dividend tax (or 2% of net profits if there are no dividends. Banks and individuals in Panama pay no tax on interest or other income earned outside Panama. No taxes are withheld on savings or fixed time deposits in Panama. Individual depositors do not pay taxes on time deposits. EPZs offer tax-free status, special immigration privileges, and license and customs exemptions to manufacturers who locate there. Investment incentives offered by the GOP are available equally to Panamanian and foreign investors. The incentives do not discriminate or distinguish between Panamanians and foreign investors.

Right to Private Ownership and Establishment

With the current exception of retail trade, the media, and several professions, foreign and domestic entities have the right to establish, own, and dispose of business interests in virtually all forms of remunerative enterprise. Foreigners need not be legally resident or physically present in Panama to establish corporations or to obtain local operating licenses for a foreign corporation. Business visas (and even citizenship) are readily obtainable for significant investors. Banking, financial services, and the legal profession are receptive toward attracting foreign business.

Once ratified and implemented, the U.S.-Panama TPA Panama would accord substantial market access across its entire services regimes, subject to very few exceptions, using a "negative list" approach. Under the TPA, Panama agreed to dismantle significant services and investment barriers, such as lifting restrictions on investment in retail trade, and providing new access in professional services that previously had been reserved exclusively for Panamanian nationals. This would allow U.S. firms to take full advantage of the benefits of the TPA across all sectors, including, but not limited to express delivery, logistics, energy, audiovisual, computer, construction, wholesaling, health, education, and environmental services. U.S. financial service suppliers have full rights to establish subsidiaries or branches for banks and insurance companies. Portfolio managers in the U.S. would be able to provide portfolio management services to both mutual funds and pension funds in Panama. Even under the TPA, investment by financial services firms would still be restricted.

Protection of Property Rights

Intellectual property policy and practice in Panama is the responsibility of an Inter-institutional Committee for Intellectual Property (CIPI), which includes representatives from five government agencies - Colon Free Zone, Intellectual Property Registry, Ministry of Education (for copyrights), Customs, and the attorney general - under the leadership of the Ministry of Commerce and Industry. CIPI coordinates enforcement actions and develops strategies to improve compliance with the law. The creation in 2002 of a specialized prosecutor for intellectual property-related cases has strengthened the protection and enforcement of IPR in Panama. However, given Panama’s role as a transshipment point, U.S. industry remains concerned that Panama will become susceptible to trading in pirated and counterfeit goods.

Mortgages, liens, and other security interests are recognized and registered in the public registry. Much of the information contained in the public registry is available on-line. The public property registry has been expanded and modernized. Unique features of Panamanian law and practice in specific areas (including but not limited to banking, accounting requirements, formation and functioning of corporations, and taxation) make retention of local legal counsel highly advisable.

The U.S. Embassy in Panama has received numerous property dispute complaints. The complaints include lost property, broken contracts, additional payments, accusations of fraud and corruption, and occasionally threats of violence. There are two root causes for a large proportion of the complaints – title issues and weak judiciary. The majority of land in Panama and almost all land outside of Panama City is not titled. The lack of clear title leads to competing claims to property and frequently to lawsuits. The judicial system’s capacity to resolve contractual and property disputes is weak and open to corruption. Americans should exercise more due diligence in purchasing real estate than in the United States. Engaging a reputable attorney and licensed real estate broker is strongly recommended. Law 80 of 2009, which regulates coastal property and islands, was recently passed. Precise implementation rules and regulations may be published in 2010.

The legal framework for the protection of intellectual property rights (IPR) in Panama has improved significantly over the past decade. The government passed an Anti-Monopoly Law in 1996 mandating the creation of commercial courts to hear anti-trust, patent, trademark, and copyright cases exclusively. Two district courts and one superior tribunal began to operate in June 1997 and have been adjudicating intellectual property disputes. In January 2003, the GOP designated an IPR-specific prosecutor with national authority, which has consolidated and simplified prosecution of those cases.

IPR policy and practice in Panama is the responsibility of an “Inter-institutional” Committee. This committee consists of representatives from six government agencies and operates under the leadership of the Ministry of Commerce and Industry. It
coordinates enforcement actions and develops strategies to improve compliance with the law including organizing training and public awareness seminars, among other activities. The creation of a specialized prosecutor for intellectual property-related cases
has strengthened the protection and enforcement of IPR in Panama. However, given Panama’s role as a transshipment point, industry is concerned Panama will become susceptible to trading in pirated and counterfeit goods.

The TPA provides for improved standards for the protection and enforcement of a broad range of intellectual property rights, which are consistent with U.S. standards of protection and enforcement and with emerging international standards. Such improvements include state-of-the-art protections for digital products such as U.S. software, music, text and videos; stronger protection for U.S. patents, trademarks and test data, including an electronic system for the registration and maintenance of trademarks; and further deterrence of piracy and counterfeiting.

Panama is a member of the World Intellectual Property Organization (WIPO), the Geneva Phonograms Convention, the Brussels Satellite Convention, the Universal Copyright Convention, the Bern Convention for the Protection of Literary and Artistic Works, the Paris Convention for the Protection of Industrial Property, and the International Convention for the Protection of Plant Varieties. In addition, Panama was one of the first countries to ratify the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty although the GOP has yet to introduce implementing legislation to put these treaties fully into force in Panama and to establish new offenses, such as those needed for internet-based copyright violations and to enhance border measures. Under the TPA, Panama would be obligated to ratify or accede to the Patent Cooperation Treaty, the Convention Relating to the Distribution of
Programme-Carrying Signals Transmitted by Satellite, and the Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure by the date the TPA enters into force. Panama would also be obligated to
ratify or accede to the International Convention for the Protection of New Varieties of Plants by 2010 and the Trademark Law Treaty by 2011.

Copyrights

The National Assembly in 1994 passed a comprehensive copyright bill (Law 15), based on a World Intellectual Property Organization model. Law 15 provides copyright protection based on the life of the author plus 50 years. If there are co-authors, the
protection is until the death of the last author plus 50 years. Collective works, software and audiovisual works are also covered for 50 years since the date of publication or after the work is finished (with no publication). The law modernizes copyright protection in
Panama, provides for payment of royalties, facilitates the prosecution of copyright violators, protects computer software, and makes copyright infringement a felony. Though Panama’s 1994 copyright law modernized copyright protection and amendments
to the law in 2004 provided for a special Copyright Office with anti-piracy enforcement powers, piracy remains a problem. Films in theatrical release are often downloaded to DVDs and videos, reproduced on optical discs, and then distributed by street vendors.
The TPA would require implementation of the WIPO Treaties in a manner consistent with the U.S. digital Millennium Copyright Act. The TPA would also extend copyright protection to life of the author plus 70 years; would require both governments to mandate the use of legal software in government agencies; and would include provisions to protect against the theft of encrypted satellite signals and the manufacturing or sale of tools to steal such signals.

Patents

Panama is a member of the Paris Convention for the Protection of Industrial Property. Panama’s Industrial Property Law (Law 35 of 1996) provides a term of 20 years of patent protection from the date of filing. Law 35 provides specific protection for trade secrets.

Under the TPA, Panama must adjust the patent term for products (other than pharmaceutical products) to compensate for unreasonable delays that occur while granting a patent. For pharmaceutical products, Panama may, but is not required to, adjust the patent term if there is an unreasonable delay in granting a patent or providing marketing approval for a product.

Trademarks

Panama’s legal system provides for a trademark protection regime, which includes a simplified process of trademark registration, and the ability to renew a trademark for 10-year periods. However, U.S. companies report judicial irregularities and corruption once the cases reach the courts. Panama ranks 103 out of 133 by the World Economic Forum in judicial independence. Law 35 provides trademark protection, simplifies the process of registering trademarks and allows for renewal of a trademark for 10-year periods. An important feature of the law is the granting of ex-officio authority to government agencies to conduct investigations and to seize materials suspected of being counterfeited. Decrees 123 of November 1996 and 79 of August 1997 specify the procedures to be followed by Customs and Colon Free Zone (CFZ) officials in conducting investigations and confiscating merchandise. In 1997, the Customs Directorate created a special office for IPR enforcement, followed by a similar office created by the CFZ in 1998. The
Trademark Registration Office has undertaken significant modernization with a searchable computerized database of registered trademarks that is open to the public as well as online registration.

The Trademark Registration Office’s website allows applicants to track the status of their Trademark and Patent applications and the creation of a Customer Service Center. The Trademark Registration Office claims to be the most advanced in the region with 90 percent automation. This office reports that it has reduced trademark registration processing time in half, down from one year to six months. This office also reports that it has conducted classes on the importance of IPR protection at the Technical University of Panama and recently sponsored a National Inventor's Competition that brought inventors together with prospective investors and customers. Under the TPA, Panama must protect trademarks and geographical indications, including by refusing protection or recognition of a geographical indication that is likely to be confusingly similar to a preexisting trademark. Panama must also have a system of registration that provides efficient and transparent procedures governing applications to protect trademarks and geographical indications.

Transparency of Regulatory System

U.S. businesses are concerned about the responsiveness and transparency of most regulating agencies. In the last half of 2009, several U.S. companies believed regulatory agencies were seeking additional fees/taxes that were not contained in original contracts/concessions or were seeking to impose new taxes retroactively. For one American company, Standard and Poor’s lowered the corporate credit and senior unsecured debt ratings, and also lowered the rating on $300 million senior notes to 'BB+' from 'BBB-'. S&P stated the downgrade was due to Panamanian government changes in the regulatory framework.

The frequency of unexpected or retroactive changes in the regulatory framework that have been reported to the Embassy increased in the second half of 2009. The Eurasia Group reports that “sectors that have a direct impact on consumers or are high on the list of voters' priorities may also be a target.”

In the banking and finance sector, private entities generally give good marks to the Panamanian entities that regulate them, such as the Superintendent of Banks.

On July 12, 2006, Panama enacted Law 27 which allows the GOP to create enterprises to conduct oil and gas exploration, distribution, production, storing, industrialization, commercialization, importation, exportation and refining activities. This gave rise to concerns that Law 27 is ambiguous and may result in greater government intervention and restrictions on the energy sector.

In late 2008 and early 2009 the GOP started to change the rules governing the import and sale of refined petroleum products. Fuel importers frequently did not consider the process to be fair and transparent.

Efficient Capital Markets and Portfolio Investment

Panama's 1998 Banking Law with amendments from the 2008 Banking Law regulates the country's financial sector. The law, which concentrates regulatory authority in the hands of a powerful and well-financed Superintendent (http://www.superbancos.gob.pa), transformed the previously inadequate regime into one that approaches international standards.

Traditional bank lending from the well-developed banking sector is relatively efficient and is the most common source of financing for both domestic and foreign investors, offering the private sector a variety of credit instruments. The free flow of capital is actively supported by the GOP and is viewed as essential to Panama’s large banking sector.

Panamanian and foreign investors are treated equally vis-à-vis government policy and law with respect to access to credit. Panamanian interest rates closely follow international rates (i.e., the London Interbank Offered Rate - LIBOR), plus a country-risk
premium. However, the global financial crisis has affected rates and curtailed the availability of funds from correspondent banks abroad.

Panama passed a securities law that established a National Securities Commission to regulate brokers, fund managers, and all matters related to the securities industry in 1999. The Commission began to function in early 2000. Some private companies, including multinational corporations, have issued bonds in the local securities market. Companies rarely issue stock on the local market and, when they do, they often try to issue shares with no voting rights. As a result, these stocks are less attractive than those with voting rights. Moreover, investor demand is generally limited because of the small pool of persons, companies, and investors with the resources to invest. Interest from time deposits and certain bonds are tax-exempt. There is a 10 percent
withholding tax on dividends although capital gains from the sale of equities listed on the Panamanian exchange is tax exempt. While wealthy Panamanians may hold overlapping interests in various businesses, post is unaware of any established practice
of having cross-shareholding or stable shareholder arrangements, designed to restrict foreign investment through mergers and acquisitions.

There are no restrictions on, nor practical measures to prevent, hostile foreign investor takeovers, nor are there regulatory provisions authorizing limitations on foreign participation or control or other practices to restrict foreign participation. There are no government or private sector rules to prevent foreign participation in industry standards setting consortia.

Financing for consumers is also relatively open, as mortgages, credit cards and personal loans, even to those earning modest incomes, are widely available on terms similar to those in the U.S.

Political Violence

Panama's Constitution provides for the right of peaceful assembly, and the Government generally respects this right. No authorization is needed for outdoor assembly although prior notification for administrative purposes is required.

Unions, student groups, employee associations and unaffiliated groups frequently attempt to impede traffic and commerce to force the government or business to agree to demands.

Corruption

The Transparency International Corruption Index ranks Panama 84th out of 180 countries world in 2009. There is evidence of corruption in all levels of the judicial system. Weak administration and accountability among the branches of government and in rural areas facilitated corruption.

The general perception is that anti-corruption laws are not applied rigorously and that the government enforcement bodies and courts have lacked effectiveness in pursuing and prosecuting those accused of corruption, particularly in high-profile cases.
Panamanian law provides that only the National Assembly may initiate corruption investigations against Supreme Court judges and that only the Supreme Court could initiate investigations against members of the National Assembly, thereby encouraging, in effect, a “non-aggression pact” between these two branches of government. Supreme Court judges are typically nominated to their 10-year terms on the basis of political and personal considerations.

The GOP has not acted to dismantle Panama's dictatorship-era libel and contempt laws, which often are used to punish whistleblowers while those accused of acts of corruption are seldom prosecuted and almost never jailed. Panama's government lacks strong systemic checks and balances that incentivize accountability. The lack of a strong professionalized career civil service work force in Panama's public sector also hinders systemic change.

Complaints by American investors about allegedly corrupt judicial and governmental decisions prejudicial to their interests remain common and problematic. Nevertheless, other than cases involving drug trafficking, GOP officials, judges, and legislators are seldom investigated, much less convicted on corruption charges.

While corruption is present in many areas, Panama's Supreme Court has been a particular concern. In March 2005, four Court magistrates hurled accusations of corruption against each other, provoking wide-spread public demands for the dismissal
of all nine justices. In response, President Torrijos created a State Justice Commission to recommend improvements to the administration of justice, mainly in the areas of transparency, efficiency, and public accessibility. The Commission released its report in October 2005, but thus far no long term substantial changes have been made. In November 2005, the National Assembly's Judicial Affairs Committee dismissed a complaint filed by NGO Citizens’ Alliance for Justice against eight of the nine
magistrates for questionable rulings. Coincidentally, a day later the U.S. government revoked the visa of Supreme Court magistrate Winston Spadafora under section 212(f) of the Immigration and Nationality Act (regarding public corruption).

To increase transparency and reduce corruption, the government transferred certain functions to computer-based processes over the past several years ago. The government’s internet-based procurement system (PanamaCompra) requires publication of all proposed government purchases on the internet, the evaluation of proposals and monitoring of the procurement process, and advance public notice of intended procurement, including technical specifications and tender documents. An administrative court handles all public contracting disputes. The rulings of this administrative court are subject to review by the Panamanian Supreme Court.

Additionally, commercial or industrial licenses may be obtained through Panama’s online business registration service, PanamaEmprende. This innovation, in which a prospective business owner may register his or her business in 15 minutes, has reduced dramatically the number of opportunities for corruption from the former process which took 60 days and involved numerous interactions with local officials.

Bilateral Investment Agreements

Panama has bilateral investment agreements with the United States, the United
Kingdom, France, Switzerland, Germany, Taiwan, Canada, Argentina, Spain, Chile,
Uruguay, the Czech Republic, Netherlands, Cuba, Mexico, Dominican Republic, Korea
and Ukraine. Commerce Ministry officials have said that there have been some
exploratory talks toward investment agreements with other countries, but they
acknowledge that these discussions have a lower priority than ongoing free trade
negotiations. The U.S.-Panama Bilateral Investment Treaty (BIT) entered into force in
1991 with additional amendments in 2001 to reflect Panama's joining the International
Center for the Settlement of Investment Disputes (ICSID).

If the TPA is implemented, it would supersede the BIT. With some exceptions, the BIT
ensures that U.S. investors receive fair, equitable and non-discriminatory treatment and
that both parties abide by international law standards such as for expropriation and
compensation and free transfers. Under the TPA, the BIT would be suspended after a
period of 10 years. Investors will continue to have important investment rights and
protections under the investment provisions of the TPA. The TPA would establish a
more secure and predictable legal framework for U.S. investors operating in Panama.
Under the bilateral TPA, all forms of investment would be protected, including
enterprises, debt, concessions, contract and intellectual property. U.S. investors would
enjoy, in almost all circumstances, the right to establish, acquire and operate
investments in Panama on an equal footing with local investors. Among the rights
afforded to U.S. investors are due process protections and the right to receive a fair
market value for property in the event of an expropriation. Investor rights would be
protected under the bilateral TPA by an effective, impartial procedure for dispute
settlement that is fully transparent and open to the public. Submissions to dispute panels
and dispute panel hearings would be open to the public, and interested parties would
have the opportunity to submit their views.

OPIC and Other Investment Insurance Programs

The United States and Panama signed a comprehensive Overseas Private Investment
Corporation (OPIC) agreement in April 2000. OPIC offers both financing and insurance
coverage against expropriation, war, revolution, insurrection, and inconvertibility for
eligible U.S. investors in Panama. OPIC can insure up to USD $200 million per project for U.S. investors, contractors, exporters, and financial institutions. Financing is available for overseas investments that are wholly owned by U.S. companies or that are joint ventures in which the U.S. firm is a participant. Panama is a member of the Multilateral Investment Guarantee Agency (MIGA).

Labor

The most common concern among American businesses in Panama is the labor code, specifically the cost and time of laying off or firing an employee. According the World Bank’s Doing Business 2010 Report, Panama’s “Employing Workers” rank was 177 out of 183 based on difficulties in hiring and firing workers.

Panama's non-agriculture labor force is approximately 1.2 million with 6.6 percent unemployment. Approximately 43 percent are employed in the informal sector, with a lower rate of informal employment in Panama capital area (37 percent) compared to indigenous areas (80 percent). Panamanian labor law, in requiring the Labor Ministry's permission to dismiss employees for "economic reasons," may act as a legal barrier to a firm wishing to reduce its workforce or repatriate its capital. If a firm is insolvent, the law also gives workers priority over all other non-secured creditors.

The monthly minimum wage varies between the region of Panama and the industry; the range is between $220.48 and $416.00.

Despite spending approximately 13 percent of the central government budget and 5 percent of GDP on education, approximately half of the students fail their university entrance exam. The lack of skilled labor is of serious concern to both Panamanian and foreign investors. The problem with the lack of skilled Panamanian labor is compounded by the Panamanian law that mandates 90 percent of an employer’s staff must be Panamanian.

While the GOP has periodically revised its labor code, including a modest revision in
1995, it remains highly restrictive. Several sectors, including the Panama Canal
Authority, the Colon Free Zone, and export processing zones/call centers are covered by
their own labor regimes. Employers outside of these areas such as tourism have
called for greater flexibility, easier termination of workers, and the elimination of many
constraints on productivity-based pay. Employers frequently cite the lack of skilled labor
as a constraint to growth.

Foreign-Trade Zones/Free Ports

Law 25 of 1996 provides for the development of "export processing zones" (EPZ's) as
part of an effort to broaden the Panamanian manufacturing sector while promoting
investment in former U.S. military bases transferred to Panama. The law also includes
specific labor and immigration provisions that are more favorable than the current
Panamanian labor code. The government also provides numerous tax incentives to
companies that operate in EPZs. Companies, whether Panamanian or foreign, operating
in these zones may import inputs duty- free if products assembled in the zones are to be
exported. Of the 17 registered EPZs, most remain small and underdeveloped with
only a few tenants. They face difficulties combating Panama's high relative wages, low
industrial base, and weak infrastructure, particularly outside the Panama-Colon Corridor.

Law 25 of 2006 also provides for the development of call centers. Fifty-four companies are licensed to operate call centers, and they employ 8,829 workers.

Law 41 of 2004 provides for the development of "Panama Pacific Special Economic Area" in the former Howard Air Base to encourage investment, specifically regarding logistics, in the area. Dell, HP, Proctor & Gamble, Singapore Technologies Aerospace, Caterpillar, and others are located there. London & Regional, the overall developer, will invest a minimum of USD $705 million for the development.

Index/Rankings

Transparency International Corruption Index (2009) 3.4, ranked 84th in the world
Heritage Economic Freedom (2009) 64.7, ranked 55th in the world
World Bank Doing Business (2010) ranked 77th in the world

Foreign Direct Investment Statistics

Foreign Direct Investment (FDI) in Panama
1998-2009
(In nominal US$ millions)

1998 1,219
1999 517
2000 624
2001 467
2002 98
2003 818
2004 1,019
2005 962
2006 2,498
2007 1,907
2008 2,402
2009 (1) (2) 387

Source: GOP Comptroller General’s Office
(1) Preliminary figures.
(2) January 1, 2009 through March 31, 2009.

Web Resources
Contraloria General de la Republica http://www.contraloria.gob.pa/

[This is a mobile copy of Panama]