Panama’s laundry service

By Adam Green

Two women wash clothes in the Panama Canal, which was still under construction in 1908 when this picture was taken. Over a century later, laundering of a wholly different kind would be making the headlines. But Panama’s dirty dealings as an offshore haven began almost as soon as the canal opened its waterways.

By allowing merchant ships to travel between the Atlantic and Pacific Oceans without having to make the long and perilous journey around the southern tip of South America, the canal transformed Panama into a major hub of international trade. The rules governing shipping back then would look familiar to Mossack Fonseca, the law firm at the centre of the Panama Papers maelstrom. From the outset, the low taxes and minimal regulations of Panama’s shipping registry encouraged foreign owners to transfer the registration of their ships to Panama, in a practice known as flying a “flag of convenience”. In 1919, the Canadian cargo vessel Belen Quezada (which was under partial US ownership) became the first foreign ship to fly Panama’s colours, a tactic which allowed it to smuggle rum to America despite Prohibition.

Many American vessels would follow suit; dry cruise ships were worried about losing out to their European competitors, who could serve alcohol to passengers, and shipping companies wished to evade America’s increasingly strict labour laws. Panama’s shipping registry continued to balloon in the 1930s with an eclectic mix of new entrants: from Danzig oil tankers to Norwegian whalers; from Greek weapons smugglers to a short-lived pirate radio station operating off the coast of Los Angeles.

It wouldn’t be long before the financial services industry took notice of Panama’s laissez-faire regulatory regime. In 1927, Wall Street helped Panama pass a series of laws that allowed anyone to form anonymous tax-free corporations with very few questions asked. Although shipping remained the primary economic activity for many decades, the 1970s saw deposits in Panama’s banking sector swell dramatically, from almost nothing to $50 billion; a who’s who of dictators and malefactors – from Ferdinand Marcos and “Baby Doc” Duvalier to Augusto Pinochet – secreted their money there. After a slight lull in the 1980s due to political instability in Panama and the Latin American debt crises, deposits grew substantially: Panama was firmly established as one of the world’s major offshore havens.

Library of Congress