The Panama Papers context

April 7, 2016

The Panama Papers context

by Eric Jackson

Panama is a small and anomalous Latin American country, with some things in common with her sister republics in the region, influences from all over the planet due to its role as a world crossroads, and certain things unique to it. Because it is so small — comparable in population with Jamaica with about four million people, roughly the size of the US state of North Carolina — there are few scholars in the English-speaking world who specialize in it and the large news organizations of the industrialized world don’t tend to treat it as an important outpost to staff and cover. But in shipping, boxing, finance and fraud we are a bigger player than our size would suggest. This is some of the background to the revelations that are rocking the world.

Who are these people?

Panamanian history did not start with the Spanish Conquest. There were people here when the first Europeans came. Archaeology, linguistics, metallurgy, paleobotany and DNA tell us of an ancient cultural and commercial crossroads. Manatees are a Caribbean animal — but their bones have been found in ancient trash heaps on the Pacific side of the isthmus. The cardinals and their distinctive red feathers — prized by many of the first nations of the Americas — have and had a range with its southernmost limits in northern Mexico. Cardinal feathers have been found far to the south, in an ancient rock ledge shelter in Panama. We now know that maize was first domesticated thousands of years ago in a valley in western Mexico — and that not long afterward made its way to the South American continent by way of Panama. We similarly know of hot peppers that the conquistadores found in the Bahamas, which originated in Bolivia and spread to Panama along the way. Panama has gold, generally found along with traces of copper and silver. Our ancient golden artifacts can be found in museums to the north, and mostly they have impurities typical to the isthmus. However, some artifacts have mixes of copper and silver that suggest the metal came from Colombia or other South American lands, and some of the artifacts are unmistakably ancient imports from the south. Most of our seven indigenous nations speak languages of the Chibchan family, with their roots in Colombia’s central plateau. When Spaniards came to Panama looking for gold, the people they encountered told them about and directed them to the golden empire of the Incas. Spain conquered an existing crossroads, and continued to employ it for that purpose.

Our dialects of Spanish may have more anglicisms than those of our neighbors, but for starters we don’t have the Castilian lisp. The Spanish that was established here came from southern Spain, with soldiers and sailors from places relatively recently conquered from the Moors at the time of the conquest of the Americas, places where most young men had no attractive future and every incentive to leave. The soldiers and priests of conquest were by and large led by the younger or out-of-wedlock sons of the nobility — hijos de algo or somebody’s sons, or as it has come down to us, Hidalgos.

Hidalgos didn’t work. They managed property and directed other people to work. If they were lucky or ambitious, they got some sinecure atop a cornered market for some essential or very popular good or service. But Panamanian soil is not so rich and before the world developed a taste for coffee and the technologies to usefully ship bananas and meat overseas being a plantation master was not such a lucrative Hidalgo pursuit. Roles in the shipping of Peru’s looted gold and of European luxury items to the Pacific outposts of the Spanish Empire were more profitable. A commercial culture arose around shipping and the fabulous annual trade fairs at Nombre de Dios and then Portobelo. But the exhaustion of Incan treasures to be easily had, along with the predations of the likes of Sir Francis Drake and Sir Henry Morgan, put an end to the era of trade fair prosperity. Most of those who became rich from that era of Panama’s prosperity left for Ecuador or other parts of the Spanish Empire. Panama still was a good overland shortcut to the Pacific, although the longer Mexican route was less pestilential. After the trade fairs we became a sleepy backwater and today’s rich Panamanians who trace an illustrious and prosperous family tree back to the Hidalgos generally sport a forged lineage.

It wasn’t until the middle of the 19th century, nearly two centuries after the trade fairs, that prosperity began to return to Panama. An American company build the Panama Railroad and Americans streamed across the isthmus going to and coming from the California Gold Rush. The French started, and then the Americans finished — in each case largely on the backs of West Indian labor — the Panama Canal. As Panama became a bit richer, British shipping took notice and established its outposts here. International commerce and financial services came as adjuncts to the canal. A new Panamanian aristocracy arose, generally on the strength of its ties with these international forces. These are the rabiblancos — Panamanian Spanish for the White-tailed hawk, but that origin is obscure to most of the people here. rabiblancos are oligarchs and they are infamous for their fraudulent family histories, academic credentials and representations to gullible foreigners whose fortunes they seek to appropriate.

The Hidalgos and the rabiblancos do, however, share a continuity. They embody a set of values, one that has diffused throughout most of Panamanian society. It’s not what you know, it’s who you know. Family values include theft if it makes the family a bit more comfortable, and mean that if you come into a public office with the power to hire people and you do not put as many relatives as possible on the payroll you have betrayed your family. The use of political or judicial power to promote somebody’s business, or to destroy somebody else’s business so that a favored party can move in and take over, is the essence of government. Panamanians are mostly of mixed race and are an international polyglot, but if there is advantage to invoking racism or xenophobia the general culture won’t take that as overly disgraceful.

In a Panama that doesn’t produce very much, much of the upward mobility is by way of a grasping political caste under rabiblanco or foreign sponsorship. At the top of this? General Noriega was a US-trained CIA asset on his way to power. After him? President Endara, an NYU-educated corporate lawyer. Then President Pérez Balladares, Notre Dame and Wharton and then CitiBank. Then President Moscoso, the poorly educated at a Miami community college widow of an old caudillo with powerful backers in the south Florida Cuban exile community. Then President Torrijos, the son of a military dictator and Texas A&M man. Then President Martinelli, a University of Arkansas grad and Wal-Mart intern, also by way of CitiBank. Now President Varela, scion of a liquor distilling family and Georgia Tech graduate. Did some of them acquire this or that along the way, so as to present themselves as “self-made?” Panamanian corporate and banking secrecy, and our historic and current criminal defamation laws, are well designed to limit any inquiries about the legitimacy of such claims.

What is Panama’s offshore industry?

Banking secrecy, providing refuge for criminals from around the world and the celebration of defrauding the tax man go way back in Panamanian culture and law. But the institutions from whence arose the Mossack Fonseca law firm — and a number of others in the “offshore asset protection” sector — mostly go back to the establishment of the international banking sector and the rise of the duty-free import/export industry.

International banks first came here so that ship owners could pay their crews. The large payrolls of the French and American canal construction efforts were largely handled and guarded in-house, without the need for a major banking presence. Once the canal was open the needs of shipping and commerce increased the demand for banking services.

Before that robbers created a huge problem, a public order dysfunction with which the authorities in Bogota — the seat of the the Spanish Empire’s Viceroyalty of New Granada of which Panama was a part, and then the capital of the greater Colombia, of which Panama was also a part until its November 1903 separation — could scarcely be bothered. Starting in the days of the Panama Railroad construction, Bogota authorized the Panama Railroad Company to create a private army, which in its heyday was famously under the direction of Ran Runnels, a former Texas Ranger. Through the French Canal construction days the New York corporation that owned the railroad was the main force for enforcing some sort of order in the transit zone between Colon on the Atlantic Side and Panama City on the Pacific, which was later to become the canal area.

As an independent republic under US tutelage, the need for private armies in Panama all but went away. There are still bank robbers to this day, but mostly they don’t get away with it. The ones who do tend to be those who run the banks, and some of these go on to become major actors on Panama’s political and financial scenes.

(Does anyone remember the acquisition of Banco del Istmo by HSBC? The big fuss here was how about a half-dozen men, including then Vice President Samuel Lewis Navarro, prevailed on the government to write a special capital gains tax exemption worth some $400 million for themselves just for that transaction. The heads of the HSBC branch in Panama and at the home office back in England were rewarded with large bonuses and took their retirement. Then HSBC’s office in London complained that they had not bought so much as had been represented and it wasn’t such a good deal after all. Panama, you see, has its own form of accounting. The Panamanian supreme court even ruled that Generally Accepted Accounting Principles that prevail in the rest of the world are unconstitutional here. Does HSBC allege that their man in Panama at the time didn’t know that?)

The surge in the import/export industry came with the duty-free Colon Free Zone, the businesses of which pay no taxes on the goods that they import and then export. (The business owners do pay income taxes on what they declare as their personal income, and if things imported into the free zone are bought there and taken out into Panama duty must be paid.) This walled part of the city of Colon had its humble beginnings in the late 1940s and its first superstars were the Motta family, Sephardic Jews who came to Panama via the Caribbean and soon had the world’s largest liquor distributorship based in the Colon Free Zone. They branched into different products, split the free zone business between alcohol and everything else, then went into other sectors such as Panama’s Copa Airlines, the TVN television network, a major behind-the-scenes presence in Panama’s boxing scene, a big share of Banco General and more. They are Panama’s richest family and quite influential in the nation’s politics, even if not as politicians themselves.

Panama’s rabiblanco elite was centered in Panama City and could not be bothered with hardscrabble, mostly black Colon. Was their old game to see businesses that others, often foreigners, develop, then use their political influence and maybe a bit of old fashioned bribery to shut those companies down so that they could take over? By the time that the Mottas got big enough for them to look up from Panama City and notice, the Motta family was too rich to be very vulnerable to those sorts of power plays.

Then came the coup in 1968 and many old power equations broke down with it. General Torrijos allowed the Free Zone to prosper. One of its early big customers was Cuba, which under the US embargo laws needed a place to shop for certain things. The duty free zone became the most important regional wholesaling and warehousing center as US exports were replaced by the products of Asian industry. Jews, Hindus, Arabs, Chinese and Colombians, ethnicities that had been disdained by the rabiblancos, went into business in the Colon Free Zone and prospered in a big way. With that commerce came the need for banking and insurance services. The highway robbery of buyers carrying large amounts of cash for Free Zone transactions still happens, but it would be a lot more common had the banks not set up outposts within the Free Zone walls or in any case not on the other side of the isthmus in Panama City’s banking district.

Under the 21-year dictatorship the banking system also prospered from the rise of the drug economy, and the world’s tax cheats and kleptocratic heads of state also took notice of what the drug lords were doing and began to park their ill-gotten fortunes in numbered Panamanian bank accounts as well. Panamanian corporate secrecy added extra layers of protection, the opportunity to play shell games with investigators from elsewhere. There arose an entire “offshore asset protection” industry, mostly centered in law firms but also including brokerages, banks, real estate, investment counselors and CPA firms. The Mossack Fonseca law firm, a merger of two small firms, traces its roots back to 1977, a time when General Omar Torrijos ran Panama.

So is Mossack Fonseca the center of world attention at the moment? With branches in nearly four dozen countries they may be the most widespread Panamanian “offshore asset protection” firm, but there are others and some of these may have more clients, or richer clients. You may have heard this European adage: “There is multilingual, trilingual, bilingual and American.” So many US citizens, including some very rich and supposedly sophisticated ones, only speak English and look for Anglo surnames when searching out a Panamanian law firm with which to do business. Do conspiracy theorists of the weird left and of the online paranoia profession make a big point of of the relatively few Americans mentioned in the Panama Papers? There are Americans named and their relative unimportance in this huge leak may be mostly a matter of US citizens with money to launder or big tax bills to evade prefer the services of other firms.

(One variant of the conspiracy theories about the Panama Papers is that Israel is shielded and thus the revelations must be some variety of Jewish plot. See the coverage of Israelis mentioned in the documents published in Ha’aretz to give the lie to that in the first instance. Then consider that Israelis argue among themselves about who is Jewish, and then in the Spanish Americas — most famously in Albuquerque, New Mexico, USA — there is the legacy of Crypto-Jews, those who hid their prohibited Jewish identity in the times of the Spanish Inquisition. Don’t the theoreticians of The International Jewish Conspiracy have a book burning to attend somewhere? They don’t belong in any serious discussion of the Panama Papers.)

When and where did this story arise?

As the 11.5 million documents in the Panama Papers are more fully published, we shall see the window in time from which they come. Figure that they may not go back to the firm’s foundation in the 20th century, but just to the time when Mossack Fonseca went online. If they do get into the firm’s founding documents, that will be a sign of either an inside job, a product of a law enforcement investigation such as the one in Brazil that led to raids, seizures of documents and hard drives and criminal charges against two Mossack Fonseca lawyers, or of a profound hack that got way beyond the website and email accounts.

What we are told is that about a year ago a source came to a Munich newspaper and began sending them documents. The first of the documents sent, if they are ever identified, ought to indicate much about the source’s thinking, or possibly what she or he expected of the journalists’ thinking.

What was happening in the world of “offshore asset protection” a year ago? Panama was making some token concessions to avoid sanctions by various countries and international organizations. Were those European powers, the Americans and groups like the Organization for Economic Development and Cooperation so gullible as to believe that the problems with Panama were over, or on the road to being resolved? Or were cynical politicians, in the fashion of Iceland’s now former prime minister, David Gunnlaugsson, putting on insincere shows for public consumption? Probably more of the latter than the former, but in any case the Panama Papers are disrupting those shows.

The leaks went to a newspaper in Germany, where Transparency International began, where bankers and politicians have been taking stern postures against corruption and waste in southern Europe. The leaks came at a time when the United States, the European Union, China, Russia and Brazil are all suffering from serious economic problems. Markets may say one thing, but governments in these places are bleeding and massive tax evasion — let alone large-scale embezzlement and corrupt sales of important national assets — are not so easily afforded.

The source of the Panama Papers leak will have a particular world view and set of motives. So will the journalists and editors who report and publish the stories arising from them. But well beyond what anybody ever intended to affect, these revelations are bound to affect business and political reputations. Was it the NSA? Was it a rogue Brazilian prosecutor? Was it a hacker of the Anonymous genre? Was it someone at Mossack Fonseca who didn’t get the raise or promotion that he or she thought should be coming? That’s all beside the point and if Panamanian President Juan Carlos Varela, his cabinet minister and party comrade Ramón Fonseca Mora or persons whose bread and butter come from “offshore asset protection” complain that it’s unfair to call them “the Panama Papers,” pay them no heed. This is about Panama. About crooks in richer countries, too, but it’s about Panama and Panamanians would be well advised to deal with it.