Panama and the USA: A Finance Story

BROOKE GLADSTONE:  Amidst all the clamor around the world prompted by the Panama Papers, there was one country that seemed to get fewer mentions than any other.

FEMALE CORRESPONDENT:  Why haven’t we seen any big American names?

FEMALE CORRESPONDENT:  The American people aren’t talking a great deal about the Panama Papers in part because no Americans have been named yet.

MALE CORRESPONDENT:  Any high profile Americans in these documents?

MAN:  Not yet, not yet. That, that has been significant.

BROOKE GLADSTONE:  But there's no denying that the US had a hand in putting Panama on the path to banking infamy.

  [MUSIC UP & UNDER]

You might say that it took an express route through the Panama Canal. The story begins in the 1880s, with a group of French investors who were bent on digging a canal in the then-Colombian province of Panama. It creates a disaster, mainly because it fails to use the nearby railway to remove the dirt, so that when the rain comes the piles host deadly plagues of insects. Hundreds die in mudslides, thousands by disease. Despite 11 miles dug and heavy investment in machinery, the project’s abandoned, the company bankrupt. What’s worse, its contract stipulates that any assets left onsite revert back to Colombia in 1904. Enter Teddy Roosevelt in 1902, mulling the construction of a US canal in either Colombia or Nicaragua. Now those French shareholders with their American partners see a chance to secure a belated payday.

 

I’ll let Noel Maurer, co-author of the book, The Big Ditch:  How America Took, Built, Ran, and Ultimately Gave Away the Panama Canal, pick up the story from there.

NOEL MAURER:  So the first thing they do is they find this guy named William Cromwell, basically a Republican fixer from Brooklyn. They give him the equivalent of $1.3 million, in today's money, to essentially connect them with American politicians to ensure that the congressional vote to build the canal goes through Panama and that they will get paid. The  congressional vote goes through, but the Colombians don't want to make a deal before 1904 because they know that after 1904 that $40 million is going to go to them, instead of these shareholders in this bankrupt company sitting in France and the United States.

BROOKE GLADSTONE:  Mm-hmm.

NOEL MAURER:  So they stonewall. Then a French lawyer cuts $100,000 check to a bunch of Panamanians and tells them to declare independence on a certain date.

  [BROOKE LAUGHS]

He then meets with the Secretary of State of the United States and the President - this is a French lawyer, I want to make this clear, working for a private company - and informs them that the revolution is going to happen on this date, please have warships available.

 [BROOKE LAUGHS]

The warships block the Colombians’ ability to repress the rebellion, the United States recognizes Panama. The French lawyer is appointed the Foreign Minister of Panama to negotiate a treaty with the United States to build a canal, and that treaty has the - about all the advantages to Panama that you would expect from a treaty written under those circumstances.

BROOKE GLADSTONE:  Panama got the profoundly short end of the stick?

NOEL MAURER:  So the treaty cleaves Panama in half. It gives the United States full sovereign control over a 10-mile zone around the canal. When the Panamanians want to reject it, the Secretary of State informs them that is only the Marines and the US Navy protecting them from a Colombian reinvasion and they might want to reconsider.

BROOKE GLADSTONE:  And I know that there is a route from these kinds of treaties to the tax havens that we have today, but it starts with shipping, right?

NOEL MAURER:  Yes, so it starts with a flag of convenience. So this is basically where an American ship will reflag itself as Panamanian, even though it is still owned by Americans. They avoid the unions ‘cause they’re not American. They get out of minimum-wage regulations. They can get hire foreigners. You can pay them in air. You can avoid safety regulations and inspections. It's a great deal. And the United States goes along with this because the US knows Panama is getting no benefit from the canal. And anything that they can do to help prop up the Panamanian government is going to avoid potential problems with the canal, so the US government is perfectly happy to look the other way.

BROOKE GLADSTONE:  So the Panamanian government starts to promote itself as a global tax haven in the 1950s. And, obviously, this is going to help out the US because Panama’s  been a US dollar economy since the construction of the canal. Did American banks and the US government actively create the conditions for Panama to become this tax haven, money-laundering utopia, or did it just turn a blind eye?

NOEL MAURER:  It turned a blind eye. You got to give the credit to a guy named Nicolás Barletta who actually came up with the idea. So he writes the first bank secrecy laws in 1959. He has the idea that we’ve been using the dollar forever, we have an incredibly stable banking system, but anyone can put money in there in absolute secrecy and no one ever will know who they are. The banking sector just explodes.

BROOKE GLADSTONE:  And the US turns a blind eye for the same reason it turned a blind eye to shipping, because it wants to buy off Panamanian public opinion and this is favorable to Panama. And also, the canal itself was a symbol of US power.

NOEL MAURER:  The canal is declining in economic importance and strategic importance after World War II. It's actually becoming a money loser for the American government. Every American government from Harry Truman on actually wants to get rid of the thing but there's this big chunk of American public opinion that views the canal as a symbol of American prestige that we stole fair and square, and I am quoting a US senator on that.

 [BROOKE LAUGHS]

And they don’t want to give it back.

 

In 1964, there are these horrible riots, where a number of people are killed. There's shooting between Panamanian snipers and American soldiers, and it's becoming politically contentious. And at that point, the US government really wants to do everything it can to cool the situation down in Panama because nobody wants an armed confrontation.

BROOKE GLADSTONE:  So let’s jump ahead to 1983. Manuel Noriega, the commander of the Panamanian Defense Forces, takes power and he basically sanctions money laundering. He's even partnering with the [LAUGHS] Medellín drug cartel. The US government is still turning a blind eye to Panamanian banks’ more illicit dealings, and it’s had Noriega on the payroll for years. So what was the CIA's interest in him that they could look past the Medellin?

NOEL MAURER:  The Sandinistas in Nicaragua were running spy missions illegally at Howard Air Force Base, were funneling huge amounts of money to the Contras through Panama, and Noriega is actually even conducting covert operations inside Nicaragua on behalf of the United States. Panamanian agents actually explode bombs in the Sandinistas military headquarters in 1985. Given that the Reagan administration had this thing about the Sandinistas, it's incredibly useful to have Manuel Noriega onboard helping us out and providing us deniability in the covert war against the Nicaraguan government.

BROOKE GLADSTONE:  So why did the US turn against Noriega in 1989 and invade Panama?

NOEL MAURER:  Because Noriega was an idiot.

BROOKE GLADSTONE:  [LAUGHS] That hardly disqualifies the US from supporting anybody.

NOEL MAURER:  I agree but Noriega almost deliberately goes out of his way to make it impossible for the United States to continue supporting him. So first, he kills a political opponent, a guy named Hugo Spadafora, in 1985 by decapitating him while he’s still alive –

BROOKE GLADSTONE:  Ohh –

NOEL MAURER:  - not realizing that Hugo Spadafora has connections with right-wing American politicians like Jesse Helms who were kind of a little angry that he was decapitated. When you're losing Senator Jesse Helms, you’ve got a political problem. Then when another military leader in his government, a guy named Roberto Diaz, pronounces against him he then immediately arrests Roberto Diaz. And the thing about Roberto Diaz is he has connections with the Sandinistas and the US considers him a Communist sympathizer, but once he's out of the way the US could now take out Noriega without worrying that that is going to put a Sandinista Communist sympathizer in command of Panama.

BROOKE GLADSTONE:  So he cleared away one of the US obstacles. [LAUGHS]

NOEL MAURER:  It's mind-bogglingly moronic. I mean, Noriega in 1990 basically annulled an election. Guillermo Endara won that election. Once Noriega's out of office, the Endara administration comes back and takes over.

 

Noriega did one good thing for Panama. He really destroyed the neo-feudalistic political machines that had controlled the country previously. Afterwards, you do have fairly competitive, if rather corrupt, democratic politics in Panama, and Panama does start to look more like a normal democracy. And offshore banking is - a great thing. It's a major source of employment. It’s a major source of tax revenue. The country does try and move away from the sleazier parts of the business.

 

One of the interesting things about the revelations that are coming out now is, for example, how few connections there are with Mexican drug cartels. And eh, they’ll try but not too hard to make sure that sanctions the US really cares about aren't busted.

BROOKE GLADSTONE:  Why then did they provide a tax haven for North Korean money?

NOEL MAURER:  I doubt that Panamanian officials knew about that directly.

BROOKE GLADSTONE:  Why aren’t there more US names in that damning list in the Panamanian Papers?

NOEL MAURER:  Panama and the United States are joined at the hip. These are two countries that have had a long association with each other. The potential political blowback from aiding or abetting activities by Americans is quite large. At the same time, Panama is not the only country where you can set up an offshore account to launder money.

BROOKE GLADSTONE:  We’ve got the Cayman Islands, the British Virgin Islands, Switzerland - and Delaware.

NOEL MAURER:  If you're an American, you’ve got a lot of options where you’re far less likely to come to the attention of authorities, either in that country or of the United States.

BROOKE GLADSTONE:  But the current Panama banking system exists because of the first Roosevelt administration's involvement and later administrations trying to get out of a Panama political problem by turning a blind eye.

  [MAURER LAUGHS]

So we created Panama in a sleazy deal and thus, Panama’s dealmaking is sleazy?

NOEL MAURER:  The deal we gave the Panamanians gave them no other way to benefit from the fact that they had this great geographical position, other than by engaging in the flag of convenience, bank secrecy and the Colón Free Zone, an area of free imports and exports, because it was not until the 1970s that the country was able to actually benefit directly from the presence of the Panama Canal on its soil.

BROOKE GLADSTONE:  Ah. Why? You just said it’s a big money loser.

NOEL MAURER:  No, not anymore. One of the great miracles has been when the canal was handed over to Panama how much better the Panamanians have run the thing than the Americans did.

BROOKE GLADSTONE:  Ah-ha!

NOEL MAURER:  They start installing high-powered halogen lights at night, having traffic go one way instead of two ways, so ships stop clanking into each other, and firing canal pilots who show up for work drunk.

BROOKE GLADSTONE:  Mm-hmm.

NOEL MAURER:  These are three things that the United States [LAUGHS] did not do when we managed the canal. It has turned into an unbelievably profitable investment. It’s not anywhere near as important as it was back in the 1930s for world trade, but it's a big money maker. It is an island of efficiency and modernity in a country that in many other ways still suffers from very high levels of corruption.

 

I think that the Panamanian government has an interest in cleaning up the banking sector because the sleazy parts of that are no longer as important to Panama as it was in the days before the canal.

BROOKE GLADSTONE:  Thank you very much.

NOAH MAUER:  You're very welcome. It was a pleasure, thank you.

BROOKE GLADSTONE:  Noah Mauer is an associate professor of International Affairs and Business at George Washington University and co-author of the book, The Big Ditch:  How America Took, Built, Ran, and Ultimately Gave Away the Panama Canal.

  [“THE GOLD DIGGERS' SONG” (WE'RE IN THE MONEY) UP & UNDER]

BOB GARFIELD:  Coming up, sometimes the real conspiracy is the one staring you in the face.

BROOKE GLADSTONE:  This is On the Media.

  [“THE GOLD DIGGERS’ SONG”]:

We've got a lot of what it takes to get along!

And so we're in the money,

Look out, the skies are sunny;

Old Man Depression, you are through,

You done us wrong!