South Pacific financial centres hit by derisking global banks

Derisking is taking its toll on the financial centres of the South Pacific. In the Cook Islands, private bank Capital Security Bank (CSB) was left without any correspondent relationships for days after international banks cut its lines. “We couldn’t pay any money out for a week,” says CSB managing director David Steens.

In Samoa, the country’s huge remittance flows – amounting to 20% of GDP – have been knocked sideways by Australian and New Zealand banks closing down the accounts of money transfer agents. “It will end up with people carrying cash by hand and so defeat the whole purpose [of derisking],” says Samoa’s central bank governor, Maiava Atalina Ainuu-Enari.

Vanuatu, meanwhile, is on the Asia/Pacific Group on Money Laundering (APG) grey list until legislation is updated. An argument has begun between the business community and government officials about what needs to be done and whether Vanuatu should remain an offshore centre at all.

Risks vs rewards

Given the pressures from organisations such as APG, which is the regional equivalent of the Financial Action Task Force (FATF), the US treasury under the Foreign Account Tax Compliance Act, the European Commission and the Australian Tax Office, there is considerable debate among Pacific Island countries about the risks and rewards of being an international financial centre.

Cook Islands financial secretary Garth Henderson says: “It is a good business to have in terms of creating white-collar jobs, tax revenues and its low impact on the environment, but complying with all the standards on anti-money laundering and terrorist financing makes it a hard business.”

The Cook Islands was on the FATF blacklist for unco-operative countries in the early 2000s and now its supervisor, the Financial Supervisory Commission Cook Islands (FSCCI), is in touch with the APG constantly to ensure the country is on top of all the regulations. FSCCI commissioner Louise Wittwer says that while at first the local industry pushed back against the introduction of new regulations, now everyone is totally on board. “They see the dangers of not being regulated. If there were to be a major incident the jurisdiction could shut down overnight,” she warns.

In Vanuatu, the banking community worries that the required legislation to get the country off the grey list – for countries with inadequate standards – is not moving ahead fast enough. George Andrews, the commissioner of Vanuatu Financial Services Commission, which supervises international business and trust companies, says: “We need to be passing new legislation now before we run out of time. If we get on the black list, we are good as dead.”

Samoa holding on

Ms Enari is adamant that, despite the difficulties, Samoa is staying in the international finance business. “The standard-setters would like to close it down but we are not giving up,” she says. “We don’t have resources like other countries. We don’t have oil and we don’t have gold like Papua New Guinea. The offshore finance centre contributes a lot to the budget of this country.”

Samoan prime minister Tuilaepa Lupesoliai Neioti Aiono Sailele Malielegaoi says: “The financial centre should play a very big role in Samoa’s development. Ever since it was established in 1992 we have continued to grow. What has happened is that because of its belated development, we have tended to take the best experience of the other centres and avoid complex policies and try to maintain the good name of the financial centre.

“Of course, the centre has been facing many problems with the OECD zeroing in on money-laundering control, and we were on the grey list for a short time. But we have been to the international committees for [advice and oversight on] the control of money laundering. The money that the financial centre gets has been very useful to help with the funding of our budget, but mostly it helps in the sponsoring of our sports.”

Samoa found itself in the headlines for the wrong reasons in 2016 following the data leak from offshore law firm Mossack Fonseca, the so-called Panama Papers. Mossack Fonseca is one of 10 licensed trustee companies in Samoa. “We did our due diligence [on the company] and everything is in line with the proper standards and requirements,” says Ms Enari.

The CEO of the Samoa International Finance Authority, Tootooleaava Dr Fanaafi Aiono-Le Tagaloa, says: “With the stigma on international finance centres from events such as the Panama Papers, Samoa continues to develop its laws to ensure that they are updated against modern user trends while at the same time providing strong safeguards for the interests of its clients and maintaining the integrity of the Samoa jurisdiction.”   

Cook Islands prime minister Henry Puna adds: “We were pioneers of the [offshore] industry in the South Pacific and, unfortunately, we had some experiences that didn’t reflect too well on us. We had some issues. But we were able to overcome these and now things are coming along. As we are so small, if there any issues that require legislative intervention, the government is able to move quickly to address them.” International financial services accounts for about 8% of the Cook Islands’ GDP.

Attracting business

Despite bad publicity and the regulatory burden, Pacific financial centres are looking at new ways to attract business. Trusts for asset protection rather than tax avoidance are set to continue as a strong business. This product is aimed mostly at the US market, where entrepreneurs and professionals such as lawyers and doctors seek to protect their assets in case of being sued.

New business is now coming from foundations, which are the equivalent of trusts but designed for civil code legal systems such as that in China rather than for common law systems such as that found in the UK, under which the trust concept first developed. Samoa and the Cook Islands have been actively marketing their foundation services in Asia.

“We are increasingly looking towards Asia and China for business,” says Tamatoa Jonassen, CEO of the Cook Islands Financial Services Development Authority. “Foundations that originate from civil law jurisdictions are now available in addition to trusts under common law.” The Foundations Act was passed in 2012.

Then there is captive insurance and the Cook Islands has attracted captives such as Ovation Risk and Pacific Catastrophe Risk Insurance Company, which is a multilateral entity offering insurance against natural disasters. As well as hosting the facility, the Cook Islands has taken out a policy.

“The old model of setting up an offshore company to hide tax doesn’t work any more,” says Anthony Will, managing director of Cook Islands Trust. “Today it’s about setting up trusts to deal with family issues, succession and asset protection.” But he adds that derisking by international banks is a problem. “To not have banking services for our clients undermines what we are doing.”

CSB experienced the negative side of derisking in May 2016 when its correspondent lines were cut. As the only private bank in the Cook Islands, CSB was originally set up by trust companies to allow trust clients to hold their investment funds in a local bank and across several jurisdictions. 

Director Brian Mason says: “We had to convince our customers it was not a solvency issue. Fortunately most customers took it philosophically.” With international banks such as National Australia Bank and Commerzbank cutting lines, the solution for CSB turned out to be payments provider Western Union Business Solutions.

Negative publicity

Given such difficulties, some Pacific Islands have tried out the offshore business and decided it is not for them. Tongan finance minister ‘Aisake Value Eke says: “We tried before to have offshore banking but it never really worked. We have come to the conclusion that it’s not an advantage to continue such a venture as it attracts negative publicity from OECD countries.”

Fiji has opted for an entirely different business model, under which companies are encouraged to list on the South Pacific Stock Exchange by way of a 10% corporate tax rate as opposed to the standard 20%. Good communications, both internet and flight connections, also make Fiji attractive as a centre for call centres and business process outsourcing. The governor of the Reserve Bank of Fiji, Barry Whiteside, says: “Fiji has established itself as a financial hub for the region in terms of developing capital markets.”

ANZ Bank has centred its back-office operations in Fiji and regards the automation this involves as part of its own derisking drive. In this sense, derisking brings opportunities as well as challenges to South Pacific economies.

"We are centralising more of our regional operations into the Fiji hub, taking advantage of the skills and good communications. A key priority of the bank is derisking, and automation takes out some of the risk of fraud," says Tessa Price, Pacific regional executive for ANZ. 

The operation now employs 350 people in the Suva back office, processing account openings and loan documentation for all the bank’s Pacific locations (Fiji, the Cook Islands, Tonga, Samoa, American Samoa, Vanuatu, Timor, Guam, New Caledonia, Solomon Islands) plus Cambodia, Vietnam, Laos and Papua New Guinea.

Derisking is also a factor when the bank chooses business opportunities. “We want to create a sustainable business for the future, which means taking tough decisions on the areas we want to be in and those we don’t,” says Ms Price. “With tourism projects, for example, we prefer to support ventures where we know the people, their capabilities and their business acumen; we know the brand and the location.”

On the grey list

Vanuatu is the country that is finding the current difficult environment for financial centres particularly challenging. Local businessman Thomas Bayer, whose interests span banking, insurance and shipping, says: “We are having a difficult time in Vanuatu because we slid onto the [FATF] grey list and now every financial transaction is under scrutiny. It took Papua New Guinea two years to get off the grey list. The government has been too slow to respond to the requirements of the APG. We didn't need to be on the grey list in the first place.”

Chief operating officer at Port Vila-based Pacific Private Bank, Audrius Bernotas, says: “Two years ago things were much easier. With all the derisking going on and the grey listing [of Vanuatu] we are more in survival mode than growth mode.”

Some in the offshore finance sector criticise Vanuatu’s Financial Intelligence Unit (FIU) for not being sufficiently proactive in getting the island off the grey list. But FIU director Floyd Ray Mera says the uncertain political environment in Vanuatu previously meant that relevant legislation was not passed. He says that the current government’s commitment is real.

Mr Mera adds that the FIU is often the target of criticism from the private sector because of its probing role in determining beneficial ownership and enforcing the know your customer and anti-money laundering regimes. “Vanuatu only has two options. We either open up the sector [to outside scrutiny] or we close it down,” he says. “The offshore financial sector contributes about 5% to 7% of GDP, which is not huge but the damage it can bring to the country [when things go wrong] is significant.”

Peter Tari, deputy governor of the Reserve Bank of Vanuatu, adds: “We have been on the grey list since October 2015 and we have a plan to rectify all of the deficiencies. We have had technical assistance from the World Bank and there are now about 28 pieces of legislation to go to parliament. The deadline [from the APG] is June.”