A STRATEGY FOR THE ADOPTION
OF AN ANTI-CORRUPTION
CODE IN PANAMA

BY GISELA VERGARA
M.A. IN COMMERCIAL DIPLOMACY

ADVISOR: GEZA FEKETEKUTY
Spring 1999

MONTEREY INSTITUTE
OF INTERNATIONAL STUDIES

This paper was researched and written to fulfill the M.A. project requirement for the Monterey Institute of International Studies’ Master of Arts in Commercial Diplomacy. For more information about the Commercial Diplomacy program and the M.A. project requirement, please visit www.commercialdiplomacy.org.

Contents  

Scenario

As a consultant retained by Transparency International (TI, Panama Chapter),[1] I have designed a strategy to build consensus for the adoption of an anti-corruption code in Panama. By adopting strong anti-corruption measures, Panama can help ensure a stable and transparent business environment that will help attract investment and enable long-term sustainable economic growth in the 21^st century.

Issue

Corruption is a major impediment to economic development in Panama. Failure to address this issue will threaten the Canal’s economic viability, reduce Panama’s ability to replace income lost from the United States’ withdrawal from Panama (five percent or more of the GDP), and risk further weakening an already sluggish economy.

The United States has identified corruption as a major deterrent to trade and investment in Panama. Indeed, under the U.S. Foreign Corrupt Practices Act,[2] U.S. companies face severe penalties if caught making bribes in foreign countries; they are unlikely to invest in Panama if they think it will require engaging in bribery. The recent entry into force of the OECD Anti-Bribery Agreement further emphasizes the priority the international community has placed on corruption reform.

It is crucial that Panama implement and enforce legal reforms that make corruption a high risk, low return activity and permit full recourse for companies that encounter corruption. This will involve creating strong enforcement and watchdog agencies that can curb bribery and corruption and assure adherence to international conventions that criminalize such practices.

Executive Summary

As Panama moves toward gaining greater control of its own economic destiny, corruption stands as a major obstacle to attracting the level of investment necessary for privatizing state-owned enterprises and developing the Canal areas. Failure to address the corruption issue will threaten the Canal’s economic viability, reduce Panama’s ability to replace income lost from the United States’ withdrawal from Panama (five percent or more of the GDP), and risk further weakening an already sluggish economy.

Panama needs to establish a stable business climate that encourages investment, improves consumer confidence, and provides for long-term sustainable growth. To achieve these goals, Panama must create a transparent and sound business environment for both foreign and domestic corporations.

In light of Panama’s reputation of pervasive corruption, it is crucial that legal reforms be implemented and enforced to make corruption a high risk, low return activity. This involves implementing policies that curb bribery and corruption, adopting international conventions that call for the criminalization of such practices, and creating strong enforcement and watchdog agencies.

Businesses must feel confident that they will be able to function within a fully transparent legal and regulatory framework if they are to invest in Panama. Without such a framework, business costs and overall investment risk are simply too high.

In order to improve Panama’s international image as a good place to invest and convert Panama into a thriving economy, Panama's legal and regulatory framework must be brought into line with international standards. However, such reform will not be easy:

• Corrupt government bureaucracies will counteract all attempts to fight corruption.
• The legislative, judicial and executive branches of government lack transparency and accountability. In fact, Panamanians see the judiciary as the most corrupt branch of government.
• Panama lacks a commitment to implement anti-corruption reforms.
• The public generally tolerates the privileged class that has the political and financial means to buy judges and distort the rule of law.
• Panama lacks solidarity and a common national goal.
• Panamanians generally do not adequately understand the economic effects of corruption on individuals’ and state welfare.
• Because institutional structures and organizations are inefficient, Panamanians believe that bribery is the only way to obtain adequate services; corrupt behavior is seen as justified by circumstances.

Overall Anti-Corruption Strategy for Transparency International (Panama)

The following strategy is designed to build support for reforms through comprehensive domestic and international strategies. The strategy is to be carried out by Transparency International (Panama) in the in the context of the May 1999 presidential elections and to be implemented in the pre- and post-election stages.

Domestic Strategy

• Pre-election Strategy
  Anti-corruption reforms need to be made the central issue of Panama’s political debate, and strong support must be built for the adoption of an anti-corruption code. This involves will involve two strategies:
  • Coalition Building Strategy. In order to build widespread support for and commitment to anti-corruption reform as a common national goal, this effort should include academics, the private sector, civil society, religious groups, NGO's, political parties, the judiciary, legislators, and government workers.
  • Media Strategy. This strategy aims at overcoming opposition and convincing legislators, political candidates, government workers, and national and foreign investors of the need for a world class, transparent, business and legal environment.

• Post-election Strategy
• Executive Strategy. This strategy aims at gaining the President’s commitment to address corruption. The President should introduce reform measures to cabinet, legislative and judiciary officials and set reform as a top issue on the government’s agenda.  This strategy also aims at finding reform-minded government officials whose constituencies would support corruption reform as a means to further Panama’s broader interests.
• Legislative Strategy. This effort involves direct lobbying as well as efforts to organize grassroots and other interest groups that can send letters to, call and lobby legislators. To succeed in this strategy, TI will need to identify reform-minded legislators who will support reforms.
• Judiciary Strategy. Implementation and enforcement of effective anti-corruption measures will require support from the judiciary.  Reform-minded judges who will support reforms must be identified.
• Media Strategy. In the post-election phase the initial emphasis should be on ensuring support for the reforms and, once adopted, emphasizing their implementation. A second part of this strategy is a prevention campaign designed to raise awareness within the private sector, government, political class, and general public of the economic effects of corruption.
  

International Strategy

In order to create momentum for the adoption of strong anti-corruption measures in Latin America, the international strategy calls for the formation of coalitions within regional groups. Coalition members should include members from the international business community, NGOs, civil society organizations (CSOs), and other TI national chapters in Latin America. Specific sub-strategies follow:

Ø      Coalition Building Strategy

To build consensus internationally, TI can initiate efforts to create a Global Coalition on Latin America, similar to the corruption fighting campaign former World Bank president Robert McNamara leads in Africa. Members could include TI national chapters in Latin America, the International Chamber of Commerce, CSOs, NGOs, and international industry and trade associations.

Ø      International Organization Strategy

To help focus the government’s attention on corruption, coalition members can initiate a dialogue with donor agencies and international organizations such as the World Bank and the InterAmerican Development Bank (IDB). International institutions should be encouraged to make corruption a top priority when providing assistance to member countries.

Ø      Media Strategy

This strategy is designed to communicate to domestic and international audiences Panama’s efforts to develop its economy and consolidate its democracy through good governance. This strategy will help improve Panama’s business climate, attract investment, and reverse the harmful legacy of Noriega’s dictatorship.

Post-Election Strategy for the Government of Panama:

Domestic Strategy

Ø      Policy Strategy

·        Create a Watchdog and Enforcement Agency. A fully empowered, independent investigative, monitoring and enforcement body should be created to ensure effective compliance with anti-corruption measures. This body can work together with Transparency International to secure its independence from the Panamanian government and be charged with establishing a mechanism to measure corrupt practices in the government (phone calls, e-mails, surveys and polls of the different branches of government). It also can introduce diagnostic surveys (public service delivery surveys, enterprise surveys, and public official survey) with World Bank support.

·        Create a National Advisory Committee. This committee should represent all sectors of society. Its task should be to guide the reform process, as well as to advise on measures that foster public support for reforms. The Committee can also help identify practices and procedures that are conducive to corruption.

·        Introduce Reforms in the Judiciary. The judicial system can play an important role in limiting corruption at all levels of government by monitoring both civil servants and politicians and by holding them accountable in the event of wrong doing.

·        Empower the Ombudsman. The Panamanian Ombudsman needs full authority to operate, including a mandate to investigate the judiciary.

·        Introduce Administrative and Civil Service Reforms. Preventive measures to deter corruption need to be established. These measures include standards of conduct for public officials, mechanisms to enforce these standards, and strengthened government procedures in the areas of hiring, government procurement and tax collection.

·        Government Procurement Reform. Transparency principles must be incorporated into the procedural standards for every privatization and government transaction. This involves the creation of a single agency to monitor best practices in privatization.

·        Introduce Regulatory Reforms. Panama’s regulatory system also needs to be more transparent. Transparency can help ensure that laws and regulations meet the social and economic objectives they are designed to achieve without burdening economic activity more than necessary.

Ø      Media Strategy

The government should also initiate a national media campaign to inform the public sector and general public of the need for support, participation and feedback in denouncing corrupt practices.

International Strategy

Ø      Trade Fora Strategy

Panama can show the world that it is serious about corruption reform by participating in cutting edge discussions on the issue. It should become a full participant in the FTAA working group on investment and take an active role in WTO discussions on government procurement. Panama also should accede to the OECD Anti-Bribery Agreement and negotiate an understanding with the United States in order to address its concerns about the lack of transparency in Panama’s government procurement regime.

Ø      International Organization Strategy

Panama should both request IDB/World Bank technical assistance for implementing anti-corruption reforms and create the necessary regulation for implementation of the OAS anti-corruption principles. These actions would provide a solid beginning for the acceptance and passage of a more comprehensive anti-corruption code.

Ø      Media Strategy

An international media campaign should be initiated to improve Panama's image among investors, international organizations and governments. This campaign should communicate Panama’s commitment to offer a transparent investment climate similar to that of Singapore. The international media strategy will help clear away the mist of corruption associated with Panamanian business practices and bolster Panama’s efforts to integrate into the global economy.

In pursuing these strategies TI should be prepared to counter:

·        A general lack of commitment to the implementation of necessary reforms. An anti-corruption code needs full support and commitment of the executive branch to be passed, implemented and enforced.

·        A lack of legislative support for passing necessary reforms.

·        Arguments that reform is not possible because resources are inadequate to create watchdog agencies and auditing mechanisms.

·        The newly elected president’s rejection of pre-election commitments on corruption power once his/her party is in power.

The government should be prepared to respond to and overcome:[3]

·        An absence of commitment by high level officials. Without such a commitment, the government will lack the moral authority to enforce laws and punish the corrupt.

·        A lack of confidence among enforcement officials that their actions against powerful people will be supported by top leaders.

·        Overly ambitious promises that might lead to unrealistic expectations and a loss of public confidence.

·        Reforms that are piece-meal and uncoordinated.  Reforms will not be successful if no one is committed to seeing that they are implemented. Likewise, reforms that rely too much upon the law or enforcement may lead to repression, abuses of enforcement power and the emergence of further corruption.

·        Reforms that "overlook" those in leadership roles and focus only on the “small fry." If the law is applied unfairly, it soon ceases to have any legitimacy or deterrent effect.

·        Government failure to attract and retain the most capable officials from civil society and the private sector.

Background Paper

According to the 8^th International Anti-Corruption Conference held in Lima, Peru in 1997, Panama has one of the highest levels of corruption in Latin America.  Government regulation and intervention in the economy have tended to reduce transparency, hinder competition and hamper the efficient allocation of investment. Bid procedures for certain privatizations and government-financed projects have been questioned with respect to transparency, and there have been seemingly unjustified re-submissions of bids.  Panama’s judicial system continues to be too susceptible to political influence and apparent corruption.

Important bidders have complained about the Panamanian government procurement regime because, as currently implemented, it falls short of best practices and, in some cases, may not even follow the few relevant laws and procedures already in place.  In 1996, for example, bidders in the privatization of two important Canal terminals denounced the bid process for its lack of transparency. These cases and several other instances of questionable practices have soured some large international firms on doing business in Panama.

Currently, the government is actively looking for investment in the fields of tourism, maritime services, and in-bond assembly and manufacturing in the Canal areas. The government’s passage of important economic reforms has not improved the international perception of Panama as corrupt and lacking adherence to the rule of law.

At the same time, the international community is making a concerted effort to treat corruption as a global problem and bring it under control. International lending organizations have increased their efforts to curb corruption by leveraging their lending power for change. In 1994, for example, aid to Tanzania and Kenya was suspended because of corrupt practices in those countries. The OECD Anti-Bribery Agreement, which entered into force in February 1999, is developed countries’ attempts to attack the supply side of corruption by criminalizing bribery of foreign officials.

In Latin America, anti-corruption initiatives have been made a top priority via the Organization of American State’s (OAS’s) Convention Against Corruption, which requires governments to criminalize bribery, transnational bribery, and illicit enrichment. Panama ratified this Convention in 1997, but it has not yet enacted legislation necessary for its implementation.

Previous Attempts to Curb Corruption in Panama

Article 299 of the Constitution is one of Panama’s few legal provisions against corruption. It obligates every high government official to present an affidavit of his/her estate upon taking office. However, Article 299 has had almost no effect because regulations have not been established to govern the content of the affidavit, its public nature, and the penalties for non-fulfillment of this obligation.

In September 1997, a bill was introduced in the Assembly that would have put some regulatory teeth into Article 299, requiring the president, vice-presidents, Supreme Court judges, ministers, vice-ministers and the different directors of government autonomous entities to make affidavits of their financial estate upon taking office. The bill, however, was not even addressed by the Government Commission or introduced for debate in the legislative period.

In 1997, Panama’s Attorney General introduced a bill to curb corruption with the participation of TI and the United Nations Development Program. The bill addressed some of the above-mentioned issues by proposing reforms to the judicial and penal codes, criminalizing bribery, and making provisions for combating different forms of corruption. In the end, however, TI and other civil organizations opposed some sections of its content due to its lack of strong language and failure to make public officials accountable. The General Assembly did not even discuss the legislation arguing that there were more important bills awaiting debate.

On a number of occasions, Transparency International (Panama) has denounced the investment climate in Panama; investors often feel forced to offer bribes to officials during government procurement processes because they know other investors engage in such activities. Since 1997, TI has tried to get the government to implement the Pacts of Integrity, which include signed commitments by participants in government procurement to respect the laws prohibiting payment of bribes to government officials. This principle was successfully applied during the privatization of the national telephone company. In general, however, government officials have done little to denounce corrupt behavior.

Legal Framework for Government Procurement

Panama’s Constitution gives the executive and legislative branches of government the fundamental power and authority to award administrative contracts and lease or sell state property. It also acknowledges the use of concessions by the government and requires such awards to be based on considerations of social well-being and the public interest.

Rumors abound that bribes have played a large role in these Cabinet awards, which is not surprising given how the government procurement regime’s multiple layers allow for inconsistency and lack of transparency. The Constitution, Law 5 of 1988, Law 56 of 1995, and individual sectoral laws all provide their own rules and regulations for privatizations. The recently modified public contracts law (Law 56) introduced transparency principles in bidding processes, but no agency oversees best practices in government procurement.

International Efforts to Curb Corruption

World Trade Organization

In 1996, the WTO launched a new attempt to develop an agreement to ensure transparency in government procurement. The working group on transparency in government procurement is currently discussing how to structure a multilateral agreement, which could become part of the Millennium negotiating round. The WTO secretariat is currently considering a Japanese proposal for a procurement agreement. At present, WTO members agree that such an agreement would require:

·                    publication of national legislation and procurement procedures,

·                    information on procurement opportunities,

·                    transparency of decisions on qualified bidders, and

·                    transparency of decisions on contract awards.

The voluntary WTO Government Procurement Agreement (GPA) is one of the models being examined by the working group. Its 26 signatories are predominantly industrialized countries.

OAS Inter-American Convention Against Corruption

The OAS Convention Against Corruption was signed by most Latin American governments in 1996. However, its signatories have not enacted legislation and regulations to implement it. The Convention requires governments to cooperate in investigating and prosecuting corrupt acts, including facilitating extradition and providing assistance in recovering illicitly acquired property or wealth. It also requires governments to criminalize bribery, transnational bribery, and illicit enrichment, and it discourages the use of bank secrecy laws as the basis for withholding cooperation from investigations of corruption.

Last March, the OAS and the InterAmerican Development Bank signed an agreement to promote the prompt ratification and implementation of the OAS Convention Against Corruption. The two organizations are co-financing the project with contributions of $105,000 each. The program will include a series of workshops in several countries to raise awareness of the importance of ratifying and implementing the Convention.

OECD Anti-Bribery/Anti-Corruption Agreement

The OECD Agreement represents a major step in the fight against corruption because it requires countries to help each other prosecute cases. The Agreement is based on the idea that, since each country has an interest in preventing others from gaining an advantage through bribery, each will want to monitor others' adherence to the new convention. Because OECD countries are promising to punish cheaters, the hope is that more companies will choose honesty.

As of January 1999, 11 countries—including five of the 10 largest—had ratified the Agreement: the United States, Germany, the United Kingdom, Canada, Norway, Japan, Finland, Hungary, Korea, Bulgaria, and Iceland. They represent almost 60 percent of OECD exports.

The Agreement went into force in these 11 countries on February 15, 1999.  Other big exporters such as France, Belgium, the Netherlands, and Italy, which represent almost one-quarter of all OECD exports, have not signed.

While corruption is worst in developing regions, many bribes come from companies headquartered in highly developed countries. Accordingly, the OECD Convention on Combating Bribery of Foreign Officials in International Business Transactions attacks “the supply side of corruption.” It asks the world's major industrialized democracies to enact laws that end tax deductibility of foreign bribes and prohibit local companies from paying bribes to foreign governments.  

The Agreement calls for the application of effective measures to deter, prevent and combat corruption and bribery of foreign public officials in connection with international business transactions and, in particular, the prompt criminalization of such practices.  The OECD Agreement prohibits bribery of foreign legislative, administrative, and judicial officials, whether appointed or elected. Bribery is prohibited not only in procuring orders but also in all regulatory affairs concerning, for example, environmental permits, taxation, and customs and judicial proceedings.  The Agreement requires strong penalties, including extradition. It also requires mutual legal assistance and the establishment of accounting and auditing rules to prevent off-the-books accounts. The Agreement, however, does not prohibit improper payments to political parties, party officials, and candidates. In 1999, the OECD Anti-Bribery Working Group is reexamining this issue for further action.
 

The U.S. Foreign Corrupt Practices Act

The United States made bribery of foreign officials a crime in 1977, when it adopted the Foreign Corrupt Practices Act (FCPA). To help in enforcing the FCPA, businesses are required to keep accurate books and records of their transactions.

The United Nations

In December 1996, the UN General Assembly adopted a Declaration against Corruption and Bribery in International Commercial Transactions, as recommended by the UN Economic and Social Council. Although not legally binding, the declaration’s wording on criminalizing foreign bribery and ending bribery’s tax deductibility signifies broad political agreement in the international community on this matter.

The European Union  

On May 21, 1997, the European Commission (EC) adopted a Communication to the Council and the European Parliament on a policy against corruption. The Communication sets out the EC’s comprehensive policy on corruption inside the EU, as well as in its relations with non-member countries. The Communication deals with a wide range of actions, including the ratification of conventions that criminalize corrupt acts of EC and member country officials, eliminate the tax deductibility of bribes, and reform public procurement, accounting, and auditing systems. The Communication proposes to establish a “coherent anti-corruption strategy in the area of its cooperation with third countries which benefit from EC assistance.”

The World Bank

In 1996, World Bank (WB) president James Wolfensohn made combating corruption a top priority. In 1997, the Bank adopted a comprehensive program that included assistance for corruption reform and strong controls to prevent bribery in connection with WB financed projects. The Bank’s efforts to fight international corruption focus on economic and policy reform and institution strengthening.

In June 1998, the Bank created the Anti-Corruption Knowledge Center to help task managers and interested Bank staff understand corruption and to devise strategies that help client governments reduce corrupt practices. These goals are consistent with the Bank's strategy to mainstream anti-corruption work in country operations. The Bank's work focuses on the following:

·        Preventing corruption in Bank projects.

·        Helping countries reduce corruption upon governments' requests.

·        Mainstreaming anti-corruption efforts by integrating the topic in country assistance strategies, economic sector work, and other Bank operations.

The Bank's international efforts to reduce corruption focus on:

·        Cooperating with other multilateral development banks and with bilateral donor agencies; informing them of how it plans to help member countries in this area; and undertaking joint or coordinated activities as appropriate.

·        Contributing to the work of regional organizations engaged in the fight against corruption (including the OECD, the Council of Europe, and the OAS) and participating in technical assistance and other activities as appropriate.

·        Consulting with the business community to better understand its perspectives on corruption.

·        Consulting with NGOs to gain their insights and exchange views on the Bank’s approach.

·        Supporting domestic programs aimed at controlling transnational bribery and money laundering.

·        Explaining how international efforts complement domestic action. The WB supports domestic efforts to control transnational bribery and money laundering.

International Business Initiative

In March 1996, the International Chamber of Commerce (ICC) issued revised rules of conduct to combat extortion and bribery in international business transactions. The rules prohibit extortion and bribery for any purpose. The rules are not binding on ICC members but corporations may voluntarily endorse them. To promote the new rules, the ICC has set up a standing committee of business executives, lawyers, and academics. ICC national committees mobilize support for the rules in their countries.

Transparency International

NGOs around the world are participating in the efforts of local governments and other entities to curb corruption. Among the international NGOs, Berlin-based Transparency International (TI) works to curb corruption through international and national coalitions that 1) encourage governments to establish and implement effective laws, policies and anti-corruption programs, and 2) build public support for anti-corruption programs and public transparency and accountability in international business transactions and public procurement. TI has established chapters in more than 70 countries.

Analytical Overview

Panama’s economic future depends upon its ability to attract investment. It will need large investment infusions to both develop the Canal areas and offset income lost from the United States’ withdrawal from Panama (approximately US$385 million annually or five percent of the GDP).

To date, however, Noriega’s legacy of corruption, along with Panama’s failure to develop clear anti-corruption laws and enforcement mechanisms, has undermined investor confidence. By refusing to tackle corruption, the government has created an environment that encourages corrupt practices in both the public and private sectors. Panama’s corrupt reputation in the international community could well limit its future ability to achieve long-term sustainable development.

Panama can address the above-mentioned issues by adopting an anti-corruption code. This will require the implementation of domestic policies that severely punish bribery and corruption and the creation of enforcement and watchdog agencies. Panama should sign and come into compliance with international conventions that criminalize bribery. Immediate actions involving the establishment and enforcement of transparent standards in areas such as government procurement and bidding would be a good first step toward establishing Panama’s commitment to adequately address this issue.

Commercial Issues

Panama needs large inflows of foreign investment to stimulate its sluggish economy and make up for the United States’ withdrawal from the country. Its current growth rates are too weak to support job production or reduce its high, 14 percent unemployment rate. In the last four years, Panama’s GDP averaged two percent growth, far below what is needed to sustain development and increase employment.

With an estimated value of US $5 billion, the former Canal Zone will be critical in shaping the growth of the economy in the next 10 years. The complex shipping and cargo-processing activities related to the Canal are the crown jewel of the government’s economic plans to attract foreign investment.

The transfer of the Canal to Panamanian control at the end of 1999 offers an opportunity for Panama to mold its political and economic future to become a model of sustainable development in Latin America. This transition presents a unique opportunity to fully develop the Canal areas into commercial enterprises that create jobs, raise national income and foster economic growth.

Nonetheless, major uncertainties cloud the realization of this goal. Serving as instruments of corruption during Noriega’s rule, the government’s executive, legislative, and judicial branches still act as deterrents to investment attraction. Costly public relations’ campaigns in The Financial Times and other well-known newspapers have helped Panama’s international image. However, the investment climate continues to be undermined by the lack of transparency in government transactions and public bids. 

If Panama is to become integrated into the global economy, with higher living standards driven by sustainable private sector growth, it needs to establish a transparent business environment recognized as such by the world's most important trading and investment partners. Only large inflows of investment will reverse Panama’s declining economy.

Vision for Panama’s economic development

Panama’s economic success in the new millennium will depend on its ability to exploit its real and comparative advantages: its strategic position, the Canal, and the Canal area assets.

Panama's current situation is similar to that of Singapore’s in 1964. Both countries are strategically located in their respective regions, and both have similar population sizes—Singapore has 3.4 million people, and Panama has almost 3 million. When the British withdrew from its Singapore military bases, Singapore lost US$ 70 million in annual income—a figure not too different, adjusting for inflation, to what Panama will lose from the United States departure today.

But, like Panama, Singapore gained port infrastructure as well as airports, housing and roads. And with these assets in hand, it made a crucial decision to pursue outward development. It began training its workers and promoting savings, investment, social development and exports. Its goal was foreign investment in a free market context, and it succeeded. Singapore remains the best example of sustainable development in the last 30 years. It has achieved an annual per capita income of US$ 13,000, almost 4 times that of Panama's. Today, Singapore exports approximately US$ 40 billion, almost seven times more than Panama's GDP.

By December 1999, the United States will have gradually transferred to Panamanian control 94,000 hectares along the Canal, including 7,000 buildings and installations such as airports, hospitals, schools, and ports. By following a development approach similar to Singapore’s, Panama could rapidly become a model of Latin American development. But this requires recognizing the linkage between good governance and sustainable growth and following a well-defined economic strategy that focuses on services exports and increasing inward foreign direct investment (FDI).

Panama has a relatively small domestic market. With only 2.8 million people, it is the equivalent of only 15 percent of Mexico City's market or a small portion of Buenos Aires' or Sao Paulo's markets. If Panama is to achieve sustainable economic growth, it needs to become a net exporter. By increasing and diversifying its exports, Panama can substitute and surpass the loss of income resulting from U.S. withdrawal from the Canal areas.   Panama has successfully exported services through the Colon Free Zone (the largest in the Western Hemisphere), as well as the Canal and the Banking Center (the largest in Latin America). It is also evident that Panama can increase exports of goods and services by fully developing the Canal areas.

Through the development of the Canal areas Panama can increase its exports to US$ one billion annually and generate approximately 150,000 jobs. But to realize this potential, Panama requires large amounts of investment, and in order to attract investment, Panama needs to eliminate or reduce corruption. Substantive and procedural policy changes must be implemented to make corruption a high-risk, low return activity. The adoption of transparent and strong anti-corruption measures would signal that Panama is serious about attracting investment to reach its development potential.

Analysis of the Substantive Policy Issues

The adoption of an anti-corruption code will only be a first step toward curbing corruption in Panama. The adoption of the regulatory framework set forth in the OAS Inter-American Convention Against Corruption can create momentum for the passage and implementation of a more complete anti-corruption code. To further improve Panama’s anti-corruption measures and signal that Panama is serious about combating corruption, it can adopt provisions from the OECD Anti-Bribery Agreement and Transparency International’s standards—both of which reflect developed-world standards recognized by the largest sources of investment.

OAS Inter-American Convention Against Corruption

Last year, Panama ratified the OAS Inter-American Convention Against Corruption, but it has not yet adopted regulatory measures to enforce it. The OAS Convention could be used as a model for addressing the following issues in Panama.

Illicit enrichment. Under the OAS Convention, it is an offense for a public official to inexplicably gain significant increases in personal assets relative to lawful earnings. Panama needs to implement legislation to this effect.

Government procurement policies. Multiple and sometimes contradictory laws (the Constitution, Law 56, and individual laws for specific sectors) govern the Panamanian government procurement regime; no agency monitors best practices in government procurement; and multiple agencies handle major privatizations. Only the recently modified public contracts law (Law 56) introduced transparency principles in bidding processes. To streamline and strengthen its government procurement regime Panama should:

·        Make the transparency principles of Law 56 the procedural standard for every privatization and government transaction.

·                 Expand the purview of ProPrivat to be the only agency in charge of overseeing privatizations and commercial transactions, including those in the Canal areas. 

·        Adopt and apply the Transparency International Pacts of Integrity, which involve a signed commitment by participants in government procurement to respect the laws prohibiting payment of bribes to government officials.

Civil service personnel reforms. To improve the quality of the civil service, Administrative Career legislation will need to be updated to ensure objective criteria are used in recruiting staff and reviewing personnel performance. Panama cannot afford to have an inefficient civil service in the 21^st century. Government downsizing will meet with resistance if it is tied to the introduction of an anti-corruption code. However, public sector salaries are inadequate because, in part, the government is too large, and the inadequacy of public sector salaries encourages "petty corruption." By downsizing, remuneration can improve and efficiency should increase, resulting in increased business activities and investment. This in turn should open new job opportunities. Singapore has been successful in this endeavor. Gradual pay raises, fair salary structures, and strict penalties for corrupt acts by civil servants all help ensure quality public services. To address corruption at the highest levels, where officials are already well paid, stricter penalties, monitoring and surveillance systems must be put in place. The OAS Convention can serve as a model for these systems. The Convention establishes the need for ethical codes concerning the prevention of conflicts of interest, oversight of state resource and asset allocation, and reporting systems for identifying corrupt acts when they occur.

Accounting and auditing reforms. Reforms in these areas will improve transparency in public spending.

Disclosure requirements. The Panamanian Constitution requires public servants in managerial or top positions (ranging from the president to directors of public entities) to make disclosure statements.  Nonetheless, this has not served as an effective deterrent to corruption because the pertinent regulation has not been adopted in the legislature, and disclosures are kept in the Controller's Office where they are not subject to evaluation. Appropriate regulation needs to be enacted. The issue of making affidavits public is very controversial and needs to be subject to public debate. (Legislative opposition to the disclosure requirement was due to legislators’ reluctance to make disclosures public.) Annual disclosure of the financial affairs of key players and reviews of disclosure statements by independent enforcement institutions can go a long way toward discouraging corrupt practices.

Establishement of an independent commission against corruption. Corruption monitoring cannot be left only to public prosecutors and other law enforcement bodies. Panama needs to create a new agency or regulatory body to monitor compliance with the anti-corruption code and to offer legal assistance relating to investigations and proceedings within the scope of best practices. To avoid political manipulation, Transparency International (Panama Chapter) can be involved in this monitoring and surveillance task. In cases where complaints are found to be valid, reviewing authorities may have powers to grant relief to complainants.

The OECD Anti-Bribery and Anti-Corruption Agreement

The OECD Agreement helps assure transparency in bidding processes by attacking the supply side of bribery and corruption in international business transactions, including trade and investment.

Eliminating tax deductibility of bribes to foreign public officials. Signatories to the OECD Agreement are required to make bribes of foreign public officials, as well as the proceeds thereof, subject either to seizure and confiscation or to sanctions of comparable effect. Companies are required to issue financial statements disclosing their material contingent liabilities.  Although Panamanian laws do not allow tax deductions for bribes, companies are not required to issue financial statement disclosures. By adopting this OECD provision, Panama will send a signal to domestic and foreign companies that it is building a system based on integrity and transparency.

Criminalizing transnational bribery and corruption. Panama’s penal code should prohibit transnational bribery and provide for the punishment of such practices. To establish the Panamanian government’s serious intent to improve credibility and transparency in business transactions, this issue needs to be attacked on all fronts. It is not enough to simply criminalize the act of making a bribe. Strict legislation should also criminalize the demand side—public officials’ misuse of power for private gain. Current Panamanian laws criminalize bribery and corruption but the penal code needs to be revised and updated to tackle new forms of corruption that are not covered by the law. Penalties might need to be increased to deter corrupt practices. Additionally, Panama has no mechanisms in place to make holders of public office accountable for their decisions and actions. There needs to be a system of checks and balances within the legal framework.

Prohibiting improper payments to political parties. Panama prohibits improper payments to political candidates but has no mechanism for monitoring compliance with this prohibition, and political parties have been accused of receiving bribes in exchange for contract concessions. No international agreement or convention addresses contributions to political parties, but the OECD is studying the issue.

Other Anti-Corruption Issues that Panama Should Consider

Right to petition. Access to information is a critical aspect of anti-corruption programs. Recently approved legislation establishes the right to petition and the right to public information. However, public officials do not comply with this legal provision. 

Ethics. The ethical environment must be owned, policed, adapted and updated across the public sector. If the ethical environment has potential weak points, new means of accountability must be introduced or existing means upgraded and reinforced.

Application of the Code. Aside from writing and enacting an anti-corruption code, the government needs to determine whether the code should be retroactive. In the past, there have been accusations that governments have mishandled important contracts and privatization projects. The companies involved are already established under legal terms and employ hundreds of Panamanians. In light of the controversial nature of retroactive application, an anti-corruption code should not be retroactive.[4] Hong Kong, deemed as one of the world’s most corruption-free societies, successfully followed this approach.

Political Issues

The adoption of anti-corruption and anti-bribery regulations is a politically sensitive issue for most countries. In many cases, politicians see anti-corruption reforms as political suicide.

Government officials are likely to resist implementation of anti-corruption codes that require higher levels of government accountability and transparency, and accordingly, political interference aimed at watering down proposed anti-corruption legislation should be expected. While the political elite may agree to cosmetic reforms to satisfy TI and international lending organizations, actual enforcement will be weak without civil society’s active participation.

Due to the limited scope of international lending institutions’ work on governance and participation, it might be difficult to obtain immediate support from them for stronger anti-corruption measures. However, international institutions are paying more and more attention to the negative effects of corruption in development. Efforts to address corruption in the OECD, and soon in the WTO, will keep a spotlight on the negative impacts of corruption in international trade and economic development.

Political issues that need to be addressed in bringing Panama's legal and regulatory framework into line with international standards include:

·        A lack of support for institutional changes from the executive, legislative, and judicial branches of government.

·        The unjustifiable benefits and prerogatives that legislators and other high-level government officials now enjoy.

·        A widespread tolerance of a privileged class that has access to power and can buy judges.

·        A non-transparent judicial system that is seen as the most corrupt branch of the Panamanian government.

·        Apathy within the general public toward active participation in the democratic process.

These obstacles will make an anti-corruption campaign both difficult and lengthy. Especially difficult to overcome will be strong opposition from within the government. Opposition to reforms will likely come from the following areas:

Legislators. Members of the Legislative Assembly enjoy unjustifiable privileges and prerogatives that would disappear with a more stringent anti-corruption code. Past attempts to pass anti-corruption reforms encountered legislators' opposition, and reform bills were not even debated. Legislators generally do not consider corruption an important issue (partially because they do not understand its impact on the economy), and they will oppose reforms that will limit their earning potential. Another issue to consider is the partisan nature of the legislature, particularly with respect to bill sponsorship. If introduced by the majority party, anti-corruption measures might get majority support. If introduced by the minority, however, passage is unlikely. As Panama consolidates its democracy, legislators will come under increased scrutiny during election campaigns. Accordingly, anti-corruption reforms should be addressed in the context of these campaigns.

The Executive. Successful anti-corruption reforms will require strong support and leadership from the president. The stakes are so high that powerful high-level officials may try to obstruct reforms and even use violence in order to avoid passage. In the past, Panamanian government officials have given little support to stronger anti-corruption measures and have failed to denounce corrupt behavior. Indeed, after initiating a UNDP-financed corruption control program, the Office of the General Controller decided to transfer it to Transparency International because of its own lack of success in obtaining results.

The Judiciary. Under the current administration, the judiciary has been highly criticized; it is perceived as the least transparent branch of government. Its weak and uneven application of the rule of law reflects a fundamental problem. In the last three years, 15 judges have been fired, and some have resigned alluding to pressure for specific rulings. Because of the judiciary’s critical role in the implementation of an anti-corruption code, it will need to undergo important reforms. Judicial reform involves strengthening objective criteria for selecting and retaining judges and other personnel.

Political party leaders. Three presidential candidates have included TI’s proposals in their government plans, but once in power, each has caved on anti-corruption; the political costs involved are extremely high and other pressing issues such as poverty, unemployment, health, and education are easy to put at the top of the agenda. Political party agendas reflect the lack of knowledge and awareness of the real impact of corruption in economic development. Additionally, political leaders concerned with election might view reforms as an obstacle to their ability to receive campaign financing and public sector support. Because politicians tend not to fulfill their promises, civil society’s scrutiny will play an important role in ensuring compliance.

Private Sector Opposition. Locked in a prisoner’s dilemma in which the dominant strategy is bribery, international and local business people have been reluctant to support reforms. Businesses that have close ties with high-level corrupt officials and have been involved in prior misconduct might lose out, at least in the short run, by such reforms. Recently, however, Panama’s lack of transparency has been identified as a barrier to private sector development and to increased local and international investment. Further, corruption scandals involving U.S. firms and Panamanian government officials have been exposed in the media—exposure that has negatively impacted the image of those businesses. The entry into force of the OECD Anti-Bribery Agreement, which criminalizes bribery of foreign officials, will help build private sector support for anti-corruption reforms.

Building Consensus for the Adoption
of an Anti-Corruption Code

Overall Strategy

In order to succeed, an anti-corruption reform strategy must have the support of all segments of society: governmental, legislative, business and public. Despite the political elite’s vested interest in maintaining the status quo, building such support is plausible. Just as national leaders, despite their self-interest in maintaining the status quo, undertook free-market reforms, privatizations, and related policies, these leaders also can be persuaded to support enactment and enforcement of an anti-corruption code.

Broadcasting two messages will be key to the consensus building strategy:

·        In the coming years, governments will be increasingly pressured to take action against corruption. Just as global forces pushed for economic reforms, privatization and openness, they are now pushing for better governance and greater transparency in commercial transactions.

·        Reforms are necessary if Panama is to successfully attract FDI and international portfolio investment. Competition for foreign investment is keen, and foreign investors value stability, predictability, transparency, and honesty in government decisions. For Panama to become a model of sustainable development in Latin America, it must reduce corruption.

The May 1999 elections offer a window of opportunity to introduce reforms, especially if the elections result in a change in regime or individual leadership. Polls indicate that a majority of Panamanians are discontent with the government’s performance and will support a reform effort

Domestic Strategy

The objective of this strategy is to overcome domestic opposition to reform and build support for the adoption and enforcement of anti-corruption reforms in both pre- and post-election stages.

Pre-Election Strategy

Consensus Building Strategy. In order to create national support for the adoption and enforcement of anti-corruption reform, all sectors of society should be pulled into the campaign as early as possible. TI can pursue the following two-tier strategy:

1.