Sunday, April 22, 2012


Reports abound that more than than one thousand real estate frauds have been committed  in the Republic of Panama in the past three years. Most of the victims are from the European Union, the United States and Canada, and they share one thing in common : the fraudsters who exploited them utilised corporations with bearer shares to accomplish their criminal objectives. here's how it works:

(1) A purchaser of real estate is advised, by his broker, attorney or other professional, to take title in the name of a corporation, whether for purposes of secrecy, for tax avoidance, or to avoid disclosure of his or her assets overseas.

(2) A Panamanian corporation is selected by the client's advisor; this company has bearer shares, which possess what I regard as two fatal flaws. The name of the owner of such shares never appears anywhere on the certificate, and they are the property of whomever has physical possession. Furthermore, there is no registry maintained with corporate records identifying shareholders by name.

(3) To obtain the necessary bank loan to purchase the realty, the client executes a security agreement, or escrow agreement, or some other contractual obligation, all of which serve to use the shares as collateral for the loan. Sometimes the documents operate to transfer ownership of the shares to the financial institution that is the lender.

(4) Now its interesting; the fraudster, with the collusion of a corrupt (and well paid) Notary Public, forges the purchaser's signature on a document, which is notarized in the total physical absence of the purported signer (the client) and title is immediately transferred over to the fraudster.

(5) the client closes on the purchase, takes possession, begins to make monthly mortgage payments, only to learn months later that an unknown party has legal and equitable title, and is seeking to take possession; It becomes a nightmare, which only gets worse.

(6) The client retains a Panamanian attorney, who seeks civil, and in some cases, criminal, relief, only to find out that the local judiciary is corrupt, and that a bribe was probably paid to a judge to sit on the case indefinitely. The fraudster may warn the client that he is connected to the President of Panama (which may be true), that the client will never succeed in court, and that he actually may be arrested if he pursues his claim. Reports that business partners of the president are committing these fraudulent acts
have circulated throughout Panama City.

(7) The client is caught between the proverbial rock and a hard place: he is legally obligated on the mortgage, but he is no longer the owner, and he may even been evicted from the premises, by the authorities, acting on behalf of the new "owner," who may try a number of ploys, including forcing his former client to pay "rent" on the real estate, which, in addition to the mortgage payments, may be too  much for client to bear. He returns to his country, and the fraudster then sells the real estate, or looks for another victim, whom he may try to sell the same realty to, and perpetrate his next bearer share fraud.

(8) This type of fraud has exploded in Panama during the past three years, and nobody in government appears to want to stop it.

Conservative estimates of the amount lost to fraud during the past three years exceed US$400m.  The moral of the story:

(A) Never form a corporation whose shares are properly identified as to owner, and are duly registered in the names of its owners in the company's books and records. Know the possible pitfalls of investing in a foreign jurisdiction, especially for residential purposes.

(B) Do not borrow from a financial institution who you have checked out through proper due diligence. It may be a party of organized fraud.

(C) Get the best lawyer that you can afford, and ensure that you can redress grievances adequately in the forum country, should they arise. Be very aware of the level of corruption before you invest.

This is the first installment in a series of articles detailing financial crime in the Republic of Panama. There will be more.

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