Circular 10-2018 Clarification on Point V of Circular No. SMV-9-2018

SMV
Superintendency of the Securities Market
Panama, August 14, 2018.
Circular No. SMV-10-2018

To:
Compliance Officers and
Senior Executives.
City.

Respected Sirs:

Re: Clarification on Point V of Circular No. SMV-9-2018.

Following consultations with this Superintendency regarding Circular No. SMV-9-2018 issued on June 15, 2018, we deem it appropriate to clarify Point V regarding the risk classification of Private Interest Foundations. The objective of this Circular was to inform obligated subjects about the findings commonly encountered during inspections of obligated subjects, which must be corrected, serving as recommendations.

Firstly, it is important to note that Interpretive Note 15 on Higher Risks of Recommendation 10 "Customer Due Diligence" of the FATF explicitly indicates that legal structures that are vehicles for holding personal assets present a higher risk and require intensified due diligence measures.

"Higher Risks
15. There are circumstances where the risk of money laundering or terrorist financing is higher and intensified CDD measures must be taken. When assessing money laundering and terrorist financing risks related to customer types, countries or geographic areas, and products in particular, services, transactions, or delivery channels, among the examples of potentially high-risk situations (in addition to those set forth in Recommendations 12 to 16) are the following:
(a) Risk factors regarding the customer:

• Legal persons or legal structures that are vehicles for holding personal assets.
  . . . " [underline is ours]

Additionally, the Evaluation of COMMERCIAL LEGAL ENTITIES indicated that they have higher risks for money laundering:

Circular No. SMV-10-2018

for money laundering, or even for terrorist financing, due to their wide use, are bearer share companies and private interest foundations." [underline is ours]

On the other hand, Article 28 of Law 23 of 2015 specifically mentions the case of Private Interest Foundations and indicates that measures must be taken to mitigate the risks inherent to this type of legal structure:

"Article 28. Basic customer due diligence measures in the case of a legal person.
Financial obligated subjects must take measures to prevent the improper use of other legal structures, including private interest foundations, ensuring that adequate, precise, and timely information exists, including information on the beneficial owner, the founding council, and the founder." [underline is ours]

Finally, Agreement 6-2015 authorizes this Superintendency to determine persons to whom enhanced due diligence must be performed.

"Article 16. (Enhanced or reinforced due diligence).
Among the types of cases, customers, or activities that may lead to performing enhanced or reinforced due diligence are the following, without limitation:
8. Any other persons or activities that the Superintendency of the Securities Market determines must undergo enhanced or reinforced due diligence." [underline is ours]

The inspections carried out by this Superintendency unfortunately frequently reveal structures of this type with poorly substantiated due diligence measures, insufficient information, and, in some cases, irregular handling. It is vital that obligated subjects take the necessary measures to prevent the improper use of Private Interest Foundations and perform due diligence that includes, at a minimum, the founding deed, the regulations, the persons forming the founding council, the founder, and the beneficial owners; as well as the other requirements set forth in Agreement 6-2015 applicable to them.

SMV
Superintendency of the Securities Market
Circular No. SMV-10-2018

Since Private Interest Foundations are legal structures for holding personal assets, they fall within the higher risks referred to in Recommendation 10 "Customer Due Diligence" of the FATF transcribed above; and, therefore, have a potentially high risk. In order to mitigate the high risk to which this type of structure may be exposed, the obligated subject must perform their respective risk analyses and, depending on the result and in accordance with their methodology for customer risk classification and due diligence, must categorize a specific Private Interest Foundation at the corresponding level; a classification that must be properly substantiated.

Sincerely,

[Signature]
Superintendent
Compliance Officer
Senior Desk

Calle 50, P.H. Global Plaza Building, Floor 8. Tel.: (507) 501-1700 Fax: (507) 501-1709 www.supervalores.gob.pa Apartado 0832-2281 WTC Panama, Republic of Panama