Non-compliant offshore financial centre puts other Vanuatu businesses at risk – but costs of compliance are high

Money laundering Vanuatu

Between Vt1.8B—Vt4.5B in proceeds of foreign crimes are laundered through Vanuatu’s offshore financial system every year, it is estimated. The non-implementation of checks against money laundering by Vanuatu’s offshore financial centre may prevent other Vanuatu small businesses from accessing foreign currency transactions – but Vanuatu lacks the resources to put the checks in place.

Vanuatu, accused of inaction over money laundering, is facing international sanctions as its politicians debate whether to spend government funds to fix the country’s financial services or to deal with disaster reconstruction.

Vanuatu, home to 270,000 people, has a 25-year-old offshore financial centre offering banking and company-creation services that provide well-paid employment in its capital, Port Vila. For the disaster-prone nation, the financial sector is a crucial part of its economy, contributing between two and three percentage points to gross domestic product.

In September the Financial Action Task Force, an inter-governmental group that combats money laundering and terrorist financing, warned of “strategic deficiencies in Vanuatu’s anti-money laundering and combating the financing of terrorism system.”

The group called for an action plan including criminalizing money laundering and terrorist financing, along with other measures such as the confiscation of assets and supervisory and oversight programs.

However, Vanuatu has shown few signs of full compliance, and now faces “further action and scrutiny.” Sanctions in the region typically involve isolating a country’s banking system by disallowing the use of credit cards and stopping financial transfers. For example, Germany’s Commerzbank cancelled the National Bank of Vanuatu’s correspondent bank account in March.

Nauru, another Pacific Island nation, suffered similar sanctions for four years from 1999. Businesses were hit because all transactions had to be conducted in cash, which resulted in shortages of foreign currency. In Vanuatu, such sanctions could severely damage the tourism industry.

Jason Sharman, a political science professor at Australia’s Griffith University who researches money laundering, said it seemed that Vanuatu is expected to “waste significant sums of money and effort responding to problems they do not have at the expense of dealing with the manifold problems that they do have.”

Sharman said there was no “credible estimate” of the cost to Vanuatu. His book “Considering the Consequences” — which studies the cost of implementing regulatory financial standards in Barbados, Mauritius and Vanuatu — concluded that anti-money laundering policies are expensive but do not work. “Asking how much these things cost is regarded as a sign of insufficient devotion to the cause,” he said.

Prime Minister Charlot Salwai, who took power in February, has acknowledged that no progress had been made for years in dealing with the financial regulations issue because of Vanuatu’s “volatile political environment and unavailability of resources.” Few governments last their full four-year terms, and 14 members of the 52-seat parliament were jailed for corruption in October 2015. Salwai’s government is to face no confidence vote on Nov. 30.

The country’s Vt 91.7 billion (US$850 million) economy remains in turmoil after a cyclone in March 2015 killed 16 people and left more than 75,000 homeless. The disaster also severely damaged Vanuatu’s key subsistence and tourism sectors. The financial toll of the cyclone is estimated at roughly Vt 63.7 billion (US$590 million).

Salwai’s government has begun drafting legislation to address the FATF’s concerns, including a bill establishing a police anti-money laundering and terrorist financing unit that will come into effect next year. The government is also seeking international funds for expert advisers to help with other steps that need to be taken.

In addition, Salwai is creating a taskforce of officials, private sector representatives and politicians to deal with the FATF recommendations. However, attempts to push through new legislation have been hampered by political opposition. The government is under pressure from a coalition of MPs ejected from the previous administration.

Opposition leader Ishmael Kalsakau has questioned the new measures, saying that the FATF “may remove the secrecy of our nation, secrecy protected under our laws which gives confidence to investors to come and invest in Vanuatu.”

Ripe for crime

An FATF report last year said Vanuatu’s financial regulation problems arise from the laundering of foreign proceeds of crime, especially related to tax evasion. It said that between Vt 1.8 billion and Vt 4.5 billion (USD$16.6M–$41.7 million) is laundered in Vanuatu each year, adding that organized criminal groups had used Vanuatu for weapons smuggling and the shipment of illicit drugs and chemicals.

The report also said that the country operates a largely unregulated flag-of-convenience shipping register that could be used to facilitate illegal foreign fishing and the movement of prohibited goods across borders. There was “little understanding amongst the Vanuatu authorities of the … high risk and vulnerabilities relating to the international financial (offshore) sector,” the report said.

Information about the beneficial ownership of international companies in Vanuatu was also “extremely difficult to obtain” making the country “particularly attractive to criminals” wanting to launder money, the report said. Law firms often tout Vanuatu as an attractive place to base shell companies, citing low costs and fast registration.

Vanuatu offshore international companies that can be cross-registered in Australia and New Zealand are routinely used by individuals and companies that want to hide their wealth. The companies usually have Vanuatu “directors” who may not exist but figure on company registers around the world.

Nearby Papua New Guinea has also flouted terrorist financing rules in the past, but was removed from the FATF’s non-compliance list after the government announced a legal shake-up. The Cook Islands, Nauru and Samoa have also been listed and then removed, for various reasons.

Experts say that although these small countries do not fund terrorism, they are nevertheless required to implement FATF rules and regulations, which can be expensive. “The cost to government to deal with the FATF regime is significant,” said Tess Newton Cain, the Vanuatu-based principal of TNC Pacific Consulting and a visiting fellow at the Development Policy Centre of Australian National University.

Newton Cain said that if the FATF imposed sanctions Vanuatu would have to call on the International Monetary Fund and other international organizations for help.

The government does not want to dismantle the financial centre, which employs about 500 people, but sees the “need for stability and compliance with international regulations,” Newton Cain said. She said complying with international demands “isn’t an issue that is high on the ‘to do’ list until such time as it becomes critical.”

Vanuatu is the smallest nation and the last Pacific country on the FATF’s list of “high-risk and non-cooperative jurisdictions,” which also includes Afghanistan, Bosnia, North Korea, Iran, Iraq, Laos, Syria and Uganda.

Article by Michael Field. Republished with permission from Nikkei Asian Review.