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Welcome to the Jungle, Watch Your Back: Fraud, Cons, and Schemes in Latin America

Imagine this. You run a small but successful lending business in a Latin American country. Most of your clients are foreigners who own real property through corporations.

One day, polished attorneys arrive at your door seeking loans on behalf of their overseas clients. Everything seems to check out and all the appropriate documents are notarized. "Our clients," they explain, "are based overseas and too busy to travel here. Since we are already registered agents for their companies and nominee directors, (in some cases nominee shareholders) they have asked us to secure these loans as they are short on liquidity." You inspect and appraise the properties, issue the loans, and secure your collateral.

The lawyers provide solid referrals through their network of existing clients and bring you a number of loan clients over several months. The loan payments come in on time, until they don't, and when you commence foreclosure proceedings the story begins to unravel.

Certain of the key parties who came to you were not lawyers at all. In the case of some loans it would appear the lawyers "hijacked" companies, installing themselves as directors and agents, apparently, with the help of conspiring notaries. In other cases, the beneficial owners of the properties claim that, while the lawyers in question were their company formation agents and nominees, they were not authorized to mortgage the properties. Worse still, there is circumstantial evidence that some of the beneficial owners might have been conspiring with the lawyers to perpetrate the fraud. Criminal complaints are filed against you by the beneficial owners of the properties. Protracted criminal, civil, and arbitral proceedings ensue, costing you thousands of dollars in time, legal and consulting fees, and lost business. It's difficult to describe this as anything other than a "horror story," and, in fact, this story is based on a real case we were hired to consult on.

The fact is, wading into business in Latin America without the proper professional advice is a recipe for disaster. It is a region with legal systems that are, in many ways, radically different from common law systems and plagued by institutional weaknesses.

If one were to imagine a brutally honest sign at the airport in Panama meant for foreign travelers looking to do business here, it might read, "Welcome to the jungle, watch your back." While there are certainly ample and attractive opportunities for investment in both Panama and the broader region, outsiders seeking to do business should be aware of the prevalence and propensity for frauds and scams so as to take preventive measures.

Below we provide a "sampler" of some frauds and scams we have encountered in Panama; variations on the same are often easily copied and propagated across the region so the recommendations are usually translatable across jurisdictions.

Illegal appropriation of properties and corporations: Transactions involving properties and corporations in the region, including in Panama, are normally prepared by attorneys, reviewed by a notary (for compliance with formal requirements), and then forwarded to a public registry where they are officially recorded. There are a number of weaknesses in this system--including issues surrounding control of notarial paper and seals--that create opportunities for fraud.

The frauds that take place within this system are facilitated by the weaknesses inherent in the way public notaries are set up in Panama and most of Latin America. They are appointed by the Executive, (and are technically public officials) but are essentially run as independent businesses and, in some cases, notary offices can be remote or "satellite" offices. Over the past two years, Panamanian press have reported on irregularities involving documents at certain notaries' offices; corruption and improper backdating of notarized documents; and, illegal appropriation of properties belonging to overseas owners via potentially corrupt notaries (often this involves falsifying documents and using a remote notary far from the location of the property). In 2016, authorities in Panama were investigating at least 400 cases of fraud involving notaries. Property owners who are living abroad are often particularly vulnerable and there have been high-profile cases of such persons who found, one day, that their properties had illegally been sold to others; there are even organized criminal groups seeking to illegally appropriate properties in this fashion.

We have seen instances of fraudulent appropriation of properties and corporate boards through abuse of this system both through cooperating notaries and/or submission of falsified documents. The danger is compounded by the fact that acts that are notarized are assumed to be true and formally valid; once they are recorded in the public registry they are given legal weight and validity.

Most of the potential remedies for these weaknesses depend on government reforms of the current system, which have not been forthcoming for many years. In the meantime, we recommend:

  • Regularly monitoring public registry entries relating to your corporation and/or property.

  • Consider a provision in the articles of incorporation restricting or prohibiting the use of ad-hoc representatives for shareholder meetings in your corporate entity.

  • Issue share certificates and record share ownership in stock books early and have these documents notarized.

  • Hire reliable attorneys for corporation formation and real estate transactions.

  • Find a notary you feel is trustworthy and conduct business solely through that notary.

  • Insist that all parties to a transaction be present in order to sign notarized documents.

Loan scams: Through classified ads in newspapers and a number of other media, fraudsters advertise loans with minimal requirements. Typically, the victim will be asked to pay a fee for a requisite "legal procedure" to process the loan or for a life insurance policy meant to secure the purported lender's interest in the event of the borrower's death. The fraudsters then disappear with the funds.

  • Verify licences with the appropriate bodies. For example, the Ministry of Commerce for lender (empresa financiera) licenses for companies and/or individuals in Panama. If anyone you meet in Panama claims to be an attorney that is easy to verify through the Judicial Branch website.

  • Check with the consumer protection agency. For example, in Panama, check with ACODECO, about complaints against the lender.

  • Finally, as always, if the terms of a loan, offer, investment, etc. sound too good to be true, they probably are. Using one's judgment is critical in such situations.

Investment frauds: Whether it's metals, joint ventures, precious stones, real estate, fruit trees, or any number of other schemes, investment frauds in Panama seem to be rather prolific and varied in our experience.

While they come in a variety of forms, investment schemes often involve a few key features. The investment opportunities are often promoted as, "special, exclusive, and rare." The promoter of the investment, where a company or individual, has some sort of "secret knowledge" or "expertise" and has discovered a purportedly unique opportunity they want to share with others.

There is often some sort of pressure exerted on potential investors as well. A "limited time" or "limited supply," or both is often at play. The investment is often promoted as a "sure thing" and a sensible way to diversify ones portfolio while securing the value of one's money.

The fraudulent investment may be promoted on professional-looking websites, through sleek brochures, and at ostensibly legitimate conferences. They may be promoted through organizations and publications aimed at those seeking to invest internationally, perhaps to avoid "confiscatory" taxes or purportedly unstable currencies.

  • Just because the website or promotional material looks good, doesn't mean it's a good idea. Just because the investment is being promoted in an apparently reputable publication or at a conference doesn't mean it has been vetted in the least, especially not by the promoters.

  • Verify as much as possible about the person(s) involved in the investment or company. If it involves real property/farm land, or storage of some commodity, visit the locations involved or, if you cannot afford to travel there, hire an investigator to look into it for you.

  • Study the details of the transaction. Where will the funds be held? How easy is it to get money out? Are the person(s) or company involved licensed/regulated to promote that particular type of investment in the relevant jurisdiction? Should they be? What is the rate of return on offer and does it seem reasonable? As always, if it sounds too good to be true, it probably is.

Fraudulent conveyance or other real property frauds: These schemes come in many different forms. A common thread in these frauds is that they tend to exploit inherent weaknesses in the process of certifying and recording documents related to the underlying transactions.

In most Latin American countries, a property purchase involves preparation of the underlying documents by attorneys who then provide the documents to notaries. As described above, notaries function very independently. After they review documents for formal validity, these are taken to the Public Registry where the "act" (a property sale, for instance,) is officially recorded.

Fraudsters may try to sell properties with false title documents or properties that otherwise do not have "clean" titles. They may also try to sell a property several times to various buyers. The possibilities for fraud are limited only by the creativity of the perpetrators. In a case reported on just last month, a buyer paid a $495,000 for what he believed was a penthouse condo in Panama only to find that his brokers had sold him a "penthouse" that was in the building's common area and that he had purchased at least 11 parking spaces that were already in use.

  • Check the history of the property in the public registry extensively, from the first recorded acts to the present.

  • Verify, verify, verify. If you are shown statements of good standing from the water company and the tax authorities, verify independently with those agencies that these are legitimate. If necessary, obtain independent property appraisals, particularly for rural or remote properties.

  • If you sense something is "off" about anyone you are dealing with, (the seller, a real estate agent, an attorney, etc.) and even if you don't, you should look into them.

General judicial insecurity: Panama and the broader region are generally plagued by institutional weaknesses in the judiciary and other agencies that translate into serious judicial insecurity. This is not a type of fraud in itself, but the weaknesses in the system are exploited by fraudsters to their benefit and to the detriment of victims.

In Panama, we have seen everything from bribery of officials to sentences that "disappear" from court files and lawyers who continue to practice freely despite being convicted of serious criminal offenses and investigated for violent crimes. It's an open secret that there are public officials who help obtain bail or other probationary measures for criminal defendants in exchange for money. In fact, a recent exposé on an organized ring of corrupt officials at the Second Superior Court revealed a practice of taking bribes in exchange for manipulating juries or issuing certain sentences or orders in murder trials. Between January and November 2015, homicide prosecutors tried 101 cases at the Second Superior Court; 133 defendants were acquited and only 3 were convicted.

Another recent article in the Panamanian press detailed the lucrative enterprise of using remote real property, often "overvalued" through the use of faslified documents, as collateral for criminal defendants seeking bail. Between 2016 and the start of this year, a sampling of 100 court cases found properties owned by a small group of connected corporate entities and individuals had been used to secure the release of public figures named in corruption cases as well as alleged murderers, drug traffickers, and money launderers. The article also reported that it is common for the criminal defendants to pay "fees" to the property owners for the right to use their properties as collateral.

A system with these sorts of institutional weaknesses can lead to "nightmare" scenarios for the unfamiliar. There are a few points to keep in mind.

  • As we discussed previously on this blog, it's not uncommon for parties to try to resolve commercial or civil disputes through the criminal system, which tends to move more quickly and is seen as a more effective means of pressure. One should be aware of this and deal cautiously with other parties. A good attorney will be prepared to respond defensively when necessary and will also review transactions to spot problems before they arise.

  • Contracts can also be a source of problems as they can be used as a basis for executive civil suits. These types of matters move more quickly than "ordinary" civil processes. We have seen matters where contract counterparties falsely assert that the other party has not paid a debt simply for the nuisance value of getting a court to freeze bank accounts. In other words, planning for these sorts of operational business risks is paramount.

Ultimately, there are too many potential variations of issues to cover in this section. The key points to remember when engaging in a commercial transaction in Panama are that you should retain proper counsel and always conduct due diligence.

Engaging in business, commercial, or other transactions in Latin America can present great opportunities, but for outsiders unaware of the differences in the cultural, legal, and regulatory environment, these opportunities can come with significant pitfalls. Rampant corruption, institutional weaknesses, and bureaucratic obstacles pose a problem, even for natives; an outsider who is ignorant of and unprepared for these challenges will be at even greater risk.

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