Panama was considered the most important international banking center in Latin America in the late 1980s. In 1970 only 28 banks operated in Panama's international banking center by 1987 there were 120, with assets of nearly US$39 billion. The growth in Panama's Eurocurrency (see Glossary), or offshore banking, has contributed to the country's relative prosperity and accentuated the importance of the service sector in the economy. As an example of offshore banking, the Central Bank of India established an office in Panama in the late 1970s to finance its trade with Brazil.

The idea of opening Panama up to international banking was the brainchild of Ardito Barletta, who, as Torrijos's minister of planning in 1969, sought to diversify Panama's economy away from the canal and the CFZ. His timing could not have been better Panama benefited greatly from the recycling of petrodollars after the 1973 and 1979 oil price hikes. Panama also became a center for flight capital from Latin America and tax evasion dollars from the United States and other countries.

Panama's success in attracting offshore banking has been attributed to the political stability of the Torrijos years, the dollar-based economy, the country's tradition as a trade and business center, and a policy of low taxes on deposits and income. Most importantly, however, Panama's success has been a result of its stringent secrecy laws. In 1970 banking laws were liberalized, secrecy was guaranteed, currency controls were abolished, and few restrictions were imposed on bank transactions. Panama's banking commission had the sole right to conduct general inspections of bank records, and banks were not allowed to disclose information concerning their customers. Ardito Barletta once claimed that Panama's secrecy laws were stricter than those of Switzerland.

Observers disagreed on the benefits derived from offshore banking. Banks were required to maintain offices in Panama, where they generated employment for 10,000 Panamanians, slightly more than the number of jobs associated with the canal. Approximately US$200 million has been injected into the domestic economy each year through loans. Some critics have charged, however, that the offshore banking has "denationalized" Panama's economy. According to this line of thought, offshore banking limits a nation's political and economic autonomy because the government must maintain a favorable investment climate. International capital is highly fungible and is subject to flight in the event of major political or economic disturbances, as occurred in the latter part of 1987.

Total deposits in the offshore banks peaked at US$47 billion at the end of 1982 and then fell, primarily as a reflection of Latin America's financial crisis. In 1984 numerous United States banks reduced their Panamanian assets, such as Citibank (by 70 percent) and Bank of America (50 percent). Some banks (Chase Manhattan and Citibank) also reduced their operations within Panama, while others (Security Pacific and Libra Bank International, a London-based consorti 1000 ium) actually left Panama. This drain, however, was partially offset by the increased exposure of other United States banks, such as First National Bank of Chicago, and by the influx of Japanese banks, many of which have made Panama their Latin American banking headquarters. Also, "narcodollars" (income derived from the sale of illegal drugs) reportedly were transferred to Panama from Caribbean havens that were placed under closer scrutiny.

In 1985 the largest banks in Panama's International Financial Center were First National Bank of Chicago (assets worth US$3.6 billion) Banco de la Nación Argentina (US$2.8 billion) American Express Bank (US$2.4 billion) BNP, (US$1.4 billion) Deutsche Sudamerikanische Bank (US$1.3 billion) Crédit Lyonnais, Sanwa Bank, Bank of Tokyo, and Sumimoto Bank (US$1.2 billion) and Banco do Brasil (US$1.1 billion).

The foreign share of total deposits in the International Financial Center declined from 94 percent in 1979 to 85 percent in 1985. The assets of 14 Panamanian banks remained virtually constant, at US$5.5 billion from 1982 through 1984 their relative share of total deposits increased from 10 percent in 1982 to 15 percent in 1985 as a result of the reduction of foreign deposits. Founded in 1904, the BNP was the country's most important bank. It served as the government's depository and fiscal agent in addition to being the largest commercial bank with forty-seven branches throughout the country and an agency in New York. The other major state-owned financial institutions were a savings bank (established 1934), a mortgage bank (1973), an agricultural development bank (1973), and a development finance company (1975). The latter two institutions were founded to provide longer-term credit for agricultural and industrial development than was generally available from the commercial banks.

Panama's offshore banking confronted severe challenges in the late 1980s. Firstly, it faced charges that it had become the center for laundering drug money. Given the secretive nature of Panama's banking legislation, substantiating such charges was difficult. According to the United States Department of the Treasury, an estimated US$600 million in drug-related money is laundered through Panama's offshore banking system annually. Since 1985, the United States has pressured Panama to sign the Mutual Legal Assistance Treaty (MLAT), which lifts banking confidentiality. A similar treaty has been signed by the Cayman Islands, the Netherlands Antilles, the Turks and Caicos Islands, Switzerland, Turkey, and Italy. Although Panama has resisted any changes in its banking secrecy regulations, fearing negative repercussions on its International Financial Center, it did make major concessions in a law passed on December 26, 1986. The new law had three basic provisions: penalties for drug trafficking were made more severe extradition procedures were established and money-laundering was made a crime. The measures fell short of those established in the MLAT, but they were expected to deflect United States criticism, at least in the short term (see Other Aspects of Panamanian-United States Relations , ch. 4 Involvement in Political and Economic Affairs , ch. 5).

A second major challenge to offshore banking in Panama was that of political instability. The political turmoil of mid-1987 damaged Panama's reputation as a safe haven. International banks were a major target for attacks by progovernment groups seeking to blame foreign elements for the political disturbances. In June the government further shattered investor confidence when it suspended interest payments on its debt to foreign governments, a de facto default. One international bank lowered Panama's rating on the political risk scale, and First National Bank of Chicago closed its Panama branch. Perhaps one-tenth of the estimated US$40 million in deposits left the country as capital flight, creating a liquidity crisis 391for the e country.

Data as of December 1987