–Sen. Bernie Sanders (D-Vt.), remarks in Philadelphia, April 6, 2016
The recent leak of the Panama Papers — 11.5 million records that revealed offshore accounts held by prominent politicians and international criminals — gave Sanders a chance to do a little victory dance about his opposition to a free-trade agreement with Panama. As he correctly noted, he was opposed to that trade deal in part on grounds that Panama was a tax haven. (In the same speech, he also opposed pending trade deals with Colombia and South Korea, for different reasons).
Interestingly, the United States has a trade surplus with Panama, though it’s a very minor trading partner. But we were curious about a key part of Sanders’s claim — that the free-trade agreement actually fostered the growth of “massive tax-avoidance schemes” in Panama. Does that claim stand up to scrutiny?
To some extent, this is an argument that took place when the free-trade agreement was debated in 2011. Opponents of free trade raised the issue of tax avoidance, while supporters of the deal said it was a non-issue. In fact, they point to a separate deal negotiated at the time with Panama, a Tax Information Exchange Agreement (TIEA), as key to trying to grapple with tax-haven issues.
The Obama administration used the pending free-trade deal as leverage to get Panama to agree to a tax-haven agreement–one that would allow the Internal Revenue Service to demand information from Panama about U.S. taxpayers holding assets or receiving income from business or financial interests there. U.S. officials refused to allow the free-trade deal to be debated until the side deal on taxes was implemented in Panama, along with another side agreement requiring new laws that would stem bearer shares. (Bearer shares are securities owned by whoever owns the physical stock certificate, meaning owner is not registered and transfers are not recorded.)
“The approval in April of a bill authorizing the exchange of information with the US marks the most significant step to date on the road to ending over four decades of virtually water tight banking secrecy laws,” the Economist Intelligence Unit reported in 2011. “The shift in policy stance represents a radical departure from legislation put in place in the 1970s, when Panama used the promise of anonymity to develop its offshore banking center by attracting cash from overseas clients seeking to avoid the attention of the tax authorities.”
A Treasury spokesperson said that such agreements have proven to be effective. “The United States has led the charge in combating tax evasion using offshore financial accounts and is supportive of tax information exchange agreements (TIEAs), which increase transparency between the U.S. and financial centers around the world,” the spokesperson said. “TIEAs are valuable tax enforcement tools for the IRS that discourage bad actors from cheating U.S. tax laws.”
Sanders, in his 2011 floor speech, made no mention of the tax deal at the time. Warren Gunnels, his policy aide, pointed to several provisions in the free-trade deal that he said would encourage tax avoidance, particularly in Chapter 10, which concerned investment. He asserted it “made it safer, and less risky for a U.S firm or individual to use Panama to hide and launder money. It also created incentives for the Panamanian government not to change the laws on which those investor rely.”
Gunnels pointed in particular to sections 10.5, 10.7, and 10.8., which he said helps creates incentives not to reform bank secrecy laws which investors relied on to send their money through Panama, among other things, and which he claimed requires compensation for “indirect expropriation” for a vast array of subject matter not subject to compensation under U.S law including regulatory permits, and an array of financial instruments. He also pointed to the creation of investor-state dispute settlement (ISDS) foreign arbitration tribunals requiring government compensation for changes to law unfavorable to an investor after the investment has been established.
But trade experts say that these sections were included mainly to protect U.S. citizens who invested in Panama from capricious actions by the Panamanian government or regulatory bodies. In fact, this entire section was largely an update of an investment agreement with Panama that include ISDS that went into effect in 1991. This section essentially replaced the 1991 agreement with updated language that improved the investment provisions with safeguards such as more open hearings, a statute of limitations for claims, and provisions to throw out frivolous claims. So it’s odd to claim that an updated investment agreement designed to protect Americans would actually result in more tax avoidance schemes.
Lawmakers who backed the free-trade agreement have noted that it specifically said it did not cover tax issues, which is why a side agreement was negotiated.
“Senator Sanders argument that the Panama FTA would ‘effectively bar the United States from going after tax evaders in Panama’ is wrong,” said a joint statement by Rep. Sander Levin (D-Mich.), the senior Democrat on the Ways and Means Committee and former senator Carl Levin (D-Mich.). Sanders “asserted that combating tax haven abuse in Panama would be a violation of the Panama FTA. There are many flaws in this argument, but one is particularly obvious: the Panama FTA clearly states that ‘nothing in this Agreement shall apply to taxation measures.’”
Few would dispute that Panama is still a tax haven. After the release of the Panama papers, Angel Gurria, the secretary-general of the Organization for Economic Cooperation and Development (OECD), said the country “is the last major holdout that continues to allow funds to be hidden offshore from tax and law enforcement authorities” and warned that it has even been backtracking.
Yet Panama, in response to U.S. and OECD pressure, has continued to tighten its rules on bearer shares, though they have not yet entirely eliminated. Data published on the website of the International Consortium of Investigative Journalists, which published the Panama Papers, show that the number of bearer shares issued in Panama has plunged since the implementation of the tax and bearer-share agreements tied to the U.S.-Panama free-trade deal.
Heather Lowe, legal counsel and director of government affairs at Global Financial Integrity, a Washington research firm that examines illicit flows of money, said the sharp decline in new bearer shares is likely related to the changes in Panama’s laws as a result of the U.S.-Panama agreements. “This is a good sign, that people in the market are taking it seriously,” she said.
The Pinocchio Test
Sanders has not demonstrated that the Panama free-trade agreement encouraged tax avoidance schemes in Panama. The trade deal did not cover tax issues and the section cited by his staff merely updated an existing investment agreement with Panama. The side agreements on taxes and bearer shares actually appear to have had an impact, even if Panama’s overall performance on stemming shady money continues to be poor.
We understand that Sanders is highly critical of free-trade agreements, but in this instance, his claims that provisions in the Panama deal fostered tax avoidance fall short. Perhaps he could make a case that the deal bolstered up an economy built in part on fraud, but that’s not the same thing as saying the deal itself promoted offshore accounts. In fact, U.S. officials tried to use the FTA as leverage to improve access to tax information about U.S. citizens using offshore accounts in Panama.
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