Offshore financial centres and internal developments in the … · 2019. 10. 8. · Offshore financial centres and internal development in the Pacific islands Anthony van Fossen The

PACIFIC ECONOMIC BULLETIN

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Pacific Economic Bulletin Volume 17 Number 1 May 2002 © Asia Pacific Press

Offshore financial centres andinternal development in the

Pacific islands

Anthony van Fossen

The small size and isolation of Pacific islandstates—factors that usually limit theirdevelopment options—can be advantages foran offshore financial centre (OFC). Theirsmall size provides their promoters withinfluence over the local state for relativelymodest contributions, and isolation furnishesa safe distance from inquisitive metropolitantax and regulatory officials. Some Pacificisland countries’ OFCs play a significant rolein the local economy and governmentrevenues, but they are increasingly leadingthe countries into conflicts with internationalagencies, metropolitan governments, and

even some large international banks. Hostingan OFC increasingly leads to internationalcriticism (from the OECD for abetting taxevasion, the Financial Action Task Force forfacilitating money laundering, and theFinancial Stability Forum for raising systemicrisk in global banking) and this hurts theimage of the Pacific island country. Localoffshore institutions (small in number andlargely run by expatriates) have been facedwith a growing problem of image manage-ment and damage control in internationalrelations and even in their personalised tieswith island political leaders—who have so

This paper provides an overview of how hosting offshorefinancial centres affects the internal development of Pacific islandcountries. While offshore financial centres have been attractivedevelopment options for many regional élites, none has becomefully functional and the returns have often disappointed the islandpoliticians who sponsored them. While there is some synergywith up-market tourism, construction, and telecommunications,financial centre development has also increased island countries’contacts with criminals, increased their conflicts with metropolitanstates and international organisations, and increased theirdependence on unstable financial flows.

Anthony van Fossenis Senior Lecturer inSocial Sciences andConvenor of thePolitics, Economy andSociety Major in theSchool of Humanities,Griffith University.

OFFSHORE FINANCIAL CENTRES AND INTERNAL DEVELOPMENT IN THE PACIFIC ISLANDS

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far emphasised the OFC’s importance tothe local economy, but who may not be ableto resist international moves towardharmonisation of taxation and financialpractices over the longer term.

Norfolk Island

The first Pacific island offshore financialcentre was created in 1966 on Norfolk Island,a unique external territory of Australia witha peculiar form of self-government. Promotersof Norfolk’s tax haven have seen its potentialto become a major global OFC blocked bythe Australian Federal Government. Therehave been enormous opportunities foroffshore centres around the world duringthis period—with bank deposits in offshorecentres rising from US$11 billion in 1968 toUS$2,000 billion in 1996 (Diamond et al.1997; Financial Times, 24 November 1995, 7June 1996; Offshore Investment, October 1999).Advocates of OFC development contrastNorfolk’s frustrations with the success of theBritish-affiliated territories and dependenciessuch as Jersey, Guernsey, the Isle of Man,Bermuda, the Cayman Islands, and the

British Virgin Islands. The OFCs of these UK-affiliated make major contributions to theirislands’ local economic development.

While the British state and the City ofLondon have encouraged the expansion oftax havens in present and past UK colonies,the Australian government has usually beenantagonistic toward this sort of offshoredevelopment in its own external territoriesand within its sphere of influence in thePacific islands region more generally. Thishas meant that Norfolk’s OFC has beenrepeatedly thwarted by the Australian state,although there is still no income tax on theisland and it still provides some offshorepossibilities. The historical trajectory ofNorfolk’s tax haven can be analysed in termsof its dialectical tensions with the Australianstate—tensions between self-determinationand subordination which emerge fromNorfolk’s anomalous status as a self-governing external territory of Australia.

The question of Norfolk Island’s exactstatus (and the closely related issue of thefuture of its tax haven) has been at thecentre of local political controversy sincethe mid 1960s. OFC development is hinderedby the constant perception that Norfolk

1962 71963 101964 261965 361966 1061967 2941968 7741969 9721970 1,3541971 1,5711972 1,4521973 1,3281974 1,294

1975 9981976 1,0251977 1,0081978 1,0561979 1,1071980 9541981 ..1982 6381983 ..1984 ..1985 ..1986 ..1987 ..

Table 1 Companies registered on Norfolk Island, 1962–98

Note: Between 1962 and 1975 the year ends on 31 December; after 1975, the year ends on 31 June.Sources: Norfolk Island Report, 1968–98; Treadgold, M.L., 1988. Bounteous Bestowal: the economic history ofNorfolk Island, The Australian National University, Canberra:219.

1988 3501989 3751990 ..1991 ..1992 ..1993 ..1994 ..1995 approximately 2501996 approximately 2501997 approximately 2601998 approximately 260


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Island’s political status may change in someunwelcome way at Australia’s behest andwithout the islanders’ consent.

Nowhere in the Pacific islands regionhas there been such consistent andgenerally successful opposition to OFCdevelopment as from the Australian FederalGovernment in relation to Norfolk Island.Its offshore centre was effectively attacked

from the 1970s and yet at major criticaljunctures the Australian federal campaignsthat threatened Norfolk’s residential taxhaven simply disintegrated in the face ofconcerted and determined local oppositionalthough the danger has never entirelydisappeared.

In the mid 1970s, the hostility of theAustralian state was directed primarily at

Table 2 Company fees on Norfolk Island, 1969–2000 (US$, per cent)

Year Company Company fees/totalfees (US$) government revenue (per cent)

1969 25,150 3.91970 48,609 7.21971 57,571 7.71972 100,521 11.81973 233,107 18.71974 209,653 14.01975 259,329 14.11976 217,944 12.91977 230,164 12.41978 270,802 11.71979 208,643 8.21980 155,831 5.41981 138,775 3.71982 104,426 3.01983 100,823 4.21984 84,793 2.51985 66,043 2.11986 56,663 2.01987 64,854 2.01988 84,741 2.31989 63,304 1.51990 54,295 1.21991 59,708 1.11992 45,606 0.81993 47,380 1.01994 39,698 0.81995 37,751 0.61996 36,608 0.51997 28,273 0.41998 25,000 0.41999 24,198 0.42000 26,470 0.4

Note: Between 1969 and 1975 the year ends on 31 December; after 1975, the year ends on 31 June.Sources: Royal Commission into matters relating to Norfolk Island, 1976. Report, AGPO, Canberra:127,Australian Commonwealth Grants Commission 1997:67; Butland, G.J., 1974. A Long Term PopulationStudy of Norfolk Island (unpublished):19; Norfolk Island Government Gazette, 9 February 1967; Norfolk IslandReport 1968–2000; Norfolk Islander, 2 September 1972, 2 August 1975.


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offshore entities and at the island’s fledglingOFC, particularly after the number ofregistered companies (mostly owned byAustralians) rose from 7 in 1962 to 1571 in1971. The number of companies was approx-imately equal to the total number of Norfolkresidents, and the island had seven residentlegal and accounting firms and bank depositsof A$262.8 million (US$294.4 million) in 1971(Royal Commission into Matters Relating toNorfolk Island 1976).

New Australian amendments to countertax avoidance were applied to Norfolk’sOFC from 19 July 1972 (Royal Commissioninto Matters Relating to Norfolk Island1976), causing company registrations todecline to 998 in 1975 and the volume ofbank transactions to fall by over two-thirds in the three years from 1972. On 30March 1976, the High Court of Australiaunanimously ruled that Australia had fullsovereign (including taxation) powers overNorfolk, although it added that the FederalGovernment might choose not to applythese powers (Australasian Tax Reports,1975–76).

By 1979, the limitations on Norfolk’sability to innovate and promote itself in theface of Australian hostility and increasingcompetition from other offshore centres(which offered up-to-date laws and financialsecrecy) led to the disintegration of its offshorebusiness and a decrease in company feesreceived by the island’s government. Thedecline of the OFC was of little concern tomany (although not all) of the localmillionaires, since it principally affectedoutsiders who were using artificial Norfolkarrangements and attracted unwelcomeattention from the Australian government tothe island’s privileged tax status. Most of thelocal wealthy people were outsiders who hadmade substantial investments in time andmoney to become Norfolk residents, sinceeven millionaires find it difficult to becomepermanent residents on Norfolk (whichcontrols its own immigration). The local

plutocracy, however, remained concernedabout their narrow victory over Australianattempts to destroy their residential tax havenin the mid 1970s.

Further challenges to Norfolk’s self-government came in 1990 and 1991, whensome Australian federal politicians againproposed placing Norfolk in the Canberraelectorate, and in 1998 and 1999, when theAustralian government challenged theisland’s immigration controls (HumanRights and Equal Opportunity Commission1999) and proposed changes under whichonly Norfolk Islanders with Australiancitizenship would be allowed to be electedto the island’s Legislative Assembly or enrolto vote. Taxation and representation areclosely related issues and most islandersoppose moving closer to Australia, fearing(among other things) that this will bringincome taxation.

By the 1990s most of the companiesregistered on Norfolk were local (NorfolkIsland Report, 1994–96), even though a fewexotic offshore structures were still on theregister and there were possibilities for more(Offshore Centres Report, April 1991). In 1997,however, there was an unprecedentedrecommendation from an Australiangovernmental organisation that an OFCmight be a valuable vehicle for the island’seconomic diversification and growth—initially through offshore gambling or a flagof convenience and later through offshorebanking (Australian Commonwealth GrantsCommission 1997:31, 45–46).

In 1998, Norfolk implemented offshoregambling legislation as a substantial step torevive the island’s OFC, which continued tobe prominent in the minds of local politicalleaders. The online gambling issue ledNorfolk Island to more intense conflicts withCanberra in 2000 and 2001—with theHoward Federal Government promising tothwart its internet gaming ambitions. Yet,even if Norfolk’s OFC never fully develops,the island’s political economy and external


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Table 3 Companies registered in the Vanuatu offshore financial centre

Year Exempt International Offshore OFC Flag of Trustcompanies companies banks insurance convenience companies

companies registrations(including dualregistrations)

1976 469 - .. .. - ..1977 480 - .. .. - ..1978 480 - .. .. - ..1979 473 - 35 34 - 121980 505 - 41 33 - 121981 555 - 56 34 1 121982 584 - 68 34 4 121983 516 - 72 36 25 161984 600 - 85 37 46 151985 644 - 93 40 65 151986 666 - 93 43 93 101987 711 - 93 42 150 121988 736 - 97 42 198 121989 834 - 103 43 310 121990 932 - 103 43 357 121991 890 - 105 32 401 121992 1,018 . 114 35 381 121993 905 100E 120 35 386 121994 461 700E 122 35 398 121995 430 1,800 64 34 412 121996 175 1,004 74 32 444 121997 232 1,597 77 35 438 121998 235 1,789 66 36 457 121999 195 2,695 65 37 500 122000 184 3,831 56 40 485 13

E Estimate.Sources: Offshore Investment, 1996–2001; Reserve Bank of Vanuatu, 1988–2000, Quarterly Economic Review,Port Vila; Republic of Vanuatu Official Gazette, 20 January 1997.

relations are likely to remain inextricablybound to its tax haven into the foreseeablefuture.

The New Hebrides–Vanuatu

Vanuatu’s OFC started in 1969. In 1970 andearly 1971 a full offshore regime waslegislated and a significant amount of earlybusiness came from clients who wereabandoning Norfolk Island. The NewHebrides quickly attracted support from

major international banks. The early rapidgrowth in the New Hebrides offshore centrebegan to slow by mid 1975, somewhatironically, as its telecommunications (whichhad often been regarded as substandard andhampering the development of its OFC in theearly 1970s) were reaching a more acceptablestandard (Cockett and Fox 1977:153, TaxHaven Review, January, May and June 1975).Over time, most of Vanuatu’s offshorepromoters have gone somewhat down-market, and over the past decade it has beencompeting primarily with mass-market


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offshore centres such as the British VirginIslands in the Caribbean (Offshore Investment,July 1995).

In contrast to Norfolk Island, Vanuatuhas a broad international clientele. Vanuatu’straditional markets of Australia and NewZealand are relatively static and itspromotional efforts have targeted growingmarkets in Hong Kong, China, Taipei,Singapore, Japan, Canada, the United States,South Africa, Russia, and other EasternEuropean countries (PITCO Vanuatu Update,January 1993–December 1999).

The Vanuatu haven often provides morepersonalised services to wealthy, but notmega-rich, clients who might be served in aless considerate manner in larger, older andmore expensive OFCs. Vanuatu’s potentialhas been blunted by considerably higherpolitical instability and lower governmentcommitment than exist in most of its Pacificisland competitors. In 1993, the Vanuatu OFCbegan to register more companies afterparliament enacted new legislation thatcreated the international company—fromwhich little is expected apart from solvencyand the payment of creditors (Ogley 1993).The introduction of international companieswas aimed at satisfying the stated needs ofAsian, particularly ethnic Chinese, clients,who find that even the minimal reportingrequired for the older exempted company istoo onerous. The international companyoffers them a corporate entity that may besomething of a formality covering what isbasically a family enterprise (although thisbusiness may, in some cases, be quite large).The growth in registrations of internationalcompanies has been uneven but it hasexceeded the decline in the number of exemptcompanies.

Substantial growth has occurred duringthree principal periods: 1988–90, whenPanama faced a crisis (culminating in the USinvasion); in 1995, when the Cook Islandswere under particular pressure from the ‘winebox’ inquiry in New Zealand; and in

1999–2000, when the country intensifiedpromotional efforts and the pressure broughtby international organisations (ironically)gave it greater public recognition. TheVanuatu Letters of Guarantee fiasco andwidely reported political instability (forexample, the strike of the Vanuatu MobileDefence Force, the arrest of strike leaders, andfalse newspaper stories that they hadattempted to take over the government;Offshore Investment, December 1996) appearto be reasons for the decline in 1996. The 1994report of William Penman-Brown, formerFinancial Services Commissioner inGibraltar ’s OFC, which recommendedraising the quality of banks registered inVanuatu through more supervision andhigher reporting requirements, resulted in adecrease in the number of registered offshorebanks (PITCO Vanuatu Update, July 1994).

The rate of internal development ofVanuatu’s offshore centre is indicated bystatistics concerning the gross income ofprofessional services firms, the net earningsof commercial banks, the OFC’s localexpenditure, employment, total foreignexchange earnings, and value added. Allstatistics about the OFC should be treatedwith caution, as they have in many casesbeen substantially revised and some doubtshave been expressed about their mode ofcollection. Nevertheless, while perhaps notbeing conclusive, the figures in the followingtables are of value in providing a rare viewof the continuous internal development of aPacific islands OFC.

Particularly notable is the exceptionalgrowth in the gross incomes of legal firms incomparison with the less impressive growthof accountancy firms and the erratictrajectories of trustee companies. The unevenearnings of commercial banks’ offshorebusiness are also significant, but somecomments should be made in relation to thesebanking statistics. In 1995, the worst yearreported for commercial banks from theirOFC operations, the overall profits of most


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Table 4 Gross income of OFC trust company, accounting, and legal firms and net earnings ofbanks, 1984–99 (US$ million)

Year Trust Accounting Legal Total Bankscompanies firms firms professional net

1984 3.34 1.93 0.68 5.95 ..1985 3.14 2.10 0.51 5.75 ..1986 2.55 2.47 0.63 5.65 ..1987 2.49 2.62 0.69 5.80 3.091988 2.57 2.66 0.66 5.89 3.501989 2.95 2.40 0.68 6.03 5.651990 2.78 2.83 1.17 6.78 3.431991 6.22 3.58 1.02 10.82 14.111992 3.59 3.48 1.23 8.30 6.061993 2.67 3.20 1.25 7.12 12.731994 3.46 3.20 1.37 7.93 6.431995 3.25 3.07 1.50 7.82 2.401996 3.70 4.01 2.20 9.91 7.261997 2.99 4.32 2.23 9.54 6.781998 3.20 3.93 1.98 9.11 8.221999 6.16 6.50* n.a. 12.66 17.612000 6.43 7.04* n.a. 13.47 ..

Note: *Accounting and legal firms combined.Source: Reserve Bank of Vanuatu, Quarterly Economic Review, 1988–2000.

(or perhaps all) of them were still very high.While Westpac does not reveal its incomefrom its Vanuatu activities, two other full-service banks in Vanuatu (the Bank of Hawaiiand ANZ) reported operating net profits of48 per cent and 36 per cent on shareholders’equity. The overall reported profits of banksinclude onshore as well as offshore incomeand are therefore not directly comparable tothe Reserve Bank’s calculations of their OFCprofits. Even if the profits of the offshorecentre are lagging, extraordinarily highprofits can be made by being in an OFC freeof corporate income tax.

While the contribution of the OFC’s localexpenditure (Table 5) has been as high as12.8 per cent of GDP, a fairly high proportionof local expenditures may leak out of Vanuatuto purchase imports such as computers,financial technology, or goods and servicesfor expatriates. Expatriates, while decreasingin number, continue to have high and

presumably tax-free annual incomes ofUS$59,900 per expatriate in 2000. Indigenousni-Vanuatu employees’ yearly incomes areUS$7,400 on average, which, while beinghigh by national standards, is less than 15per cent of the expatriate salaries (Table 6).Although the OFC employs only a very smallproportion of the country’s labour force, thetax haven provides a high percentage of jobsin the private sector that are locally consideredto be well-paid.

The offshore centre has had a decisiveeffect on the history of the New Hebrides–Vanuatu. From 1970, it greatly boosted therevenues of the pro-independence Britishadministration and reduced the relativeimportance of the French, with whom theBritish shared rule in a condominiumarrangement. The OFC brought lawyers,trustees, and bankers, particularly fromAustralia and New Zealand, who were morefavourably disposed toward independence


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Table 5 Vanuatu offshore financial centre local expenditure and GDP, 1981–99

Year Total local expenditure Total expenditure(US$ million) (per cent of GDP)

1981 12.69 12.81982 .. ..1983 .. ..1984 10.45 8.71985 10.31 8.41986 10.59 8.81987 12.47 10.91988 15.27 10.91989 18.66 12.81990 17.56 10.71991 19.67 11.61992 27.38 16.01993 20.25 11.71994 20.36 10.81995 17.67 8.11996 18.82 8.21997 17.42 7.41998 16.60 7.81999 17.88 7.42000 20.96 8.7

Sources: Asian Development Bank, various issues. Key Indicators of Developing Countries, AsianDevelopment Bank, Manila; Reserve Bank of Vanuatu, various issues, Quarterly Economic Review, ReserveBank of Vanuatu, Port Vila; World Bank, various issues. World Tables, World Bank, Washington, DC.

and Melanesian aspirations than the Frenchsettlers, who were predominantly planterson the large proportion of the country thathad been alienated from the indigenousinhabitants. Thus, the offshore centre greatlyincreased the powers of the British admini-stration. By 1976, British revenues hadreached twice those of the French, who werein favour of maintaining the New Hebridesas a settler bailiwick. The OFC helped totransform Port Vila from a sleepy Frenchcolonial village into an active town with afew French people in it. More importantly,it contributed to the independencemovement by providing resources for theBritish administration and anglophoneindigenous politicians (Treadwell 1989,personal communication).

After the indigenous anglophonepoliticians—led by the country’s first Prime

Minister Father Walter Lini—won theindependence battles in 1979 and 1980, theyjettisoned their ‘socialist’ reservations aboutthe offshore centre. All prominent Vanuatupoliticians express support for the OFC andeven francophone politicians now seek togain benefits for their constituents fromoffshore development. Independent Vanuatu’srelatively high level of sovereignty and itspolicy of non-alignment during the Cold Warcontributed to the country’s image of resistingpressures placed upon it by metropolitangovernments and taxation officials.

Clearly, Vanuatu has come to depend onits offshore centre. This dependence can beseen very clearly when we consider the OFC’sforeign exchange earnings, which actuallyexceeded the total value of all the country’smerchandise exports in two years (1990 and1991) and made substantial contributions to


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reducing Vanuatu’s balance of paymentsdeficits in all the other years listed. Whilethe use of vatu (rather than the more commonUS dollar) as the currency unit for many ofVanuatu’s offshore activities may have putoff some potential clients, it has assistedVanuatu in solidifying its national currencyand foreign reserves.

New offshore gambling operationspromise even greater foreign exchangeearnings as they are subject to a 2.5 per centrevenue tax and reportedly draw up to A$600million (US$360 million) a year out of theAustralian racing industry alone (TheAustralian, 21 February 2000), but questionshave been raised about whether all keyoffshore promoters are making their contri-butions to foreign exchange and paying their

local taxes. One scheme to avoid the turnovertax (and to escape converting fees into vatu)led to a split among Vanuatu’s tax havenpromoters in 1998 and 1999—one accountingfirm resigned from the Finance CentreAssociation over its claims that the Associationhad failed to act against a rival accountingfirm for using a Vanuatu offshore companyto avoid paying the 4 per cent tax on its fees.It is not known how commonly tax havenpromoters in Port Vila use offshore structuresto avoid paying revenue to the Vanuatugovernment. Likewise, considerable numbersof passports of convenience have been soldillegally to ethnic Chinese, but the proceedsdo not appear in government accounts.Finally, Vanuatu is struggling to refuteaccusations that it is a centre for money

Table 6 Vanuatu: wages and employment, 1979–99

Year Wages Vanuatu Total OFC Expatriate ni-Vanuatu and salaries citizens’ employment employment employment(US$ million) wages and

salaries(US$ million)

1979 .. .. 311 249 621981 .. .. 322 210 1121984 3.97 1.45 380 123 2571985 3.90 1.48 365 104 2611986 3.92 1.65 370 98 2721987 5.13 1.81 366 89 2771988 5.83 2.36 389 82 3071989 4.80 1.90 389 76 3131990 5.00 1.86 393 80 3131991 5.79 2.63 397 86 3111992 7.98 2.73 432 70 3621993 7.35 1.96 374 59 3151994 7.15 2.10 386 62 3241995 5.55 2.55 386 61 3251996 6.04 2.79 424 64 3601997 6.66 2.99 409 61 3481998 6.13 2.78 393 56 3371999 6.66 2.61 409 61 3482000 6.79 3.26 506 68 438

Sources: Asian Development Bank, Key Indicators of Developing Countries, Asian Development Bank, Manila,various issues; Reserve Bank of Vanuatu, various issues, Quarterly Economic Review, Reserve Bank ofVanuatu, Port Vila; World Bank, World Tables, World Bank, Washington, DC, various issues.


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laundering and tax evasion and to ward offpossible sanctions from the OECD and otherorganisations (including four large inter-national banks that suspended US dollartransactions with Vanuatu, Nauru, andPalau in November 1999—contending thatthe three countries were not vigilant againstmoney laundering). However, the FinancialAction Task Force regarded Vanuatu asmaking substantial progress against moneylaundering and removed it from its blacklistin November 2000.

Nauru

Nauru began to provide offshore services in1972. Like Vanuatu, Nauru promotes itselfas one of the world’s few ‘pure’ tax havens,with no internal or external personal orcorporate income taxation. Nauru’s policy

toward offshore development has beenparadoxical. On one hand, the OFC wasinitiated to provide an industry that wouldcompensate somewhat for the ultimatedisappearance of the phosphate that hadmade the country one of the richest in theworld on a per capita basis. On the otherhand, Nauru has been extremely reluctantto issue work permits to foreigners who couldpromote the industry. The government hasoften been suspicious of attempts to open theisland to tourism, which usually hassynergies with the offshore sector. The airportis small, the hotel facilities are mediocre, andbusiness travellers require a visa to visit thecountry. The Nauru Agency Corporation hasa monopoly on all offshore trustee businessbut has only six employees. Furthermore,almost no legal, accounting, or bankingservices are available on Nauru for offshorebusiness, which means that clients must

Table 7 Vanuatu OFC foreign exchange earnings, 1982–99

Year OFC/foreign exchange Per cent of total earnings (US$ million) merchandise exports

1982 9.002 39.31983 9.924 33.51984 12.698 28.71985 15.109 49.31986 16.131 92.91987 13.028 73.61988 16.242 83.41989 22.182 99.81990 25.901 137.61991 20.999 114.81992 17.039 72.21993 14.106 62.21994 11.168 44.71995 13.148 46.51996 14.511 48.11997 13.524 38.31998 12.995 38.71999 12.085 48.72000 11.247 44.0

Sources: Asian Development Bank, Key Indicators of Developing Countries, Asian Development Bank, Manila,various issues; Reserve Bank of Vanuatu, Quarterly Economic Review, Reserve Bank of Vanuatu, Port Vila,various issues; World Bank, World Tables, World Bank, Washington, DC, various issues.


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organise all of these by themselves. Thisproduces very weak regulation of Nauru’soffshore entities. Fraudsters have used somany Nauru offshore banks that the country’sOFC has a credibility problem in manyquarters. Its reputation has not been enhancedby the country’s government-ownedphosphate trust (a capital exporter on its ownaccount) having been defrauded of millionsof dollars in a prime bank instrument schemeoriented around Vanuatu and other OFCs.

As a result, Nauru’s OFC has sometimesformed alliances with questionable operators.For many years in the 1980s and 1990s itsOFC strongly resisted pressures from US andother investigators and it justified thisrefusal to cooperate in terms of its sovereignindependence (Shockey 1992, personalcommunication). In 1999, according to theUS Treasury, Nauru had registered at least400 offshore banks (about half of them ownedby Russians) and the Russian Central Bankcontended that US$70 billion had beentransferred from Russia to Nauru’s OFC asof 1998. The association of Nauru’s offshorebanks with crime is so strong that the OECDthreatened to terminate Nauru’s links withthe international financial system in 1999and further pressure came from the G-7, theUS government and some internationalbanks. The image of the country was notimproved when President BernardDowiyogo reportedly wrote to the USTreasury Department (in what one officialdescribed as an attempt at extortion)demanding a minimum of US$10 millionfrom the United States before Nauru couldbegin reforming its OFC. Nauru has cometo be regarded as a prime target for globalfinancial regulators. The OFC contributedapproximately US$500,000 (or 2 per cent)of government revenues in 1999 (Diamondand Diamond 1997; Diamond, Diamondand Kaplan 1997; Global InformationNetwork, IFS Newsfeed, 25 May 1999; NewYork Times Magazine, 10 December 2000;Pacific Islands Monthly, April 1999).

Tonga

Tonga’s ventures in offshore banking andpassports of convenience have a chequeredhistory. In 1978–79, the Bank of the SouthPacific, which was given a monopoly overOFC activities, rose and fell amidstallegations that its principal, John Meier, aformer executive in the Howard Hughesorganisation, had been involved in anassortment of felonies. New offshore bankinglegislation introduced in 1984 led to thelicensing of a number of banks that defraudeddepositors. Almost all were deregistered, butin 1999 three new offshore banks wereincorporated in Tonga.

Passports of convenience have been soldto wealthy foreigners seeking freedom ofmovement and tax minimisation. Despite legalchallenges from some commoner members ofTonga’s parliament, all Tongan offshoreprojects have been initiated by the King, whois a nearly absolute monarch. The highlysecretive registration of offshore banks andthe surreptitious issuance of passports byTonga delayed the construction of a morecomprehensive and transparent OFC thatcould offer a broader, less lopsided range ofoffshore entities and better prospects fordurable and continuous future development.Despite Tonga’s problems, its experiment inoffshore banking has apparently producedrevenue of at least US$100,000 in 1986, judgingby the vague replies of the Minister of Financeto parliamentary questioning. Tens of millionsof US dollars of profit have been derived frompassport sales and deposited in the TongaTrust Fund. Only small proportions of theselarge amounts (most of which are held in SanFrancisco bank accounts) have gone to thekingdom’s internal development, and mostof the funds that have been forthcoming arein the form of loans, not grants—so that in1999 US$10.7 million of advances to theTongan government were held as assets of theTonga Trust Fund (Tonga Government Gazette,29 September 2000). There has been little


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domestic legislative control over theseventures.

The assets and contributions togovernment revenue of the Tonga Trust Fundare detailed in Table 8.

Most people in Nuku'alofa politicalcircles believe that the Tonga Trust Fund isultimately controlled by and for the benefitof the royal family. A scandal emerged in 2001when more that US$20 million of the Trust’sfunds were alleged to have been lost in thepurchase of life insurance policies thatgambled on the early deaths of prominentAmericans.

Guam

The US territory of Guam has remaineddependent on the decisions or indecisionsof Washington, DC, and the island has had

little ability to determine its own course foroffshore development. Guam became anofficial offshore banking centre in 1979 underfairly strict US supervision, but it had beendoing less formal offshore banking since about1975. The approval of international bankingfacilities in the continental United States inthe 1980s diminished Guam’s relativeattractiveness as an offshore banking site witha US connection. OFC promoters have beencontinually frustrated by what they felt to belost opportunities, comparatively low returnsfrom offshore operations for the local economyand the island’s extreme dependency on thepriorities and legislative predilections of theUS Congress for whatever offshore develop-ment Guam might be permitted to enjoy. Itsoffshore deposit and lending facilities haverisen and fallen and its ambitions to become atax treaty shopping centre (Anonymous 1984)have been scuttled as a result of US legislative

Table 8 Tonga trust fund: assets and contributions, 1988–99 (US$ million)

Year (as of Tonga trust TTF’s budgeted TTF’s actual Total actual Total recurrent31 March fund’s reported contributions to contributions to development revenueunless other- assets development development budgetwise noted) budget budget

1988–99 8.1* - - 8.4 29.01989–90 19.4 1.6 1.7 8.0 32.31990–91 24.7 6.2 1.6 9.6 36.61991–92 27.6 5.6 0.2 5.6 34.81992–93 26.5 10.8 1.8 7.2 37.61993–94 27.8 8.4 0.0 8.5 40.21994–95 28.1 2.5 1.6 16.2 45.61995–96 30.1 6.4 1.1 13.8 50.91996–97 32.3 6.5 0.9 12.8 49.21997–98 32.3 4.0 3.6 12.6 41.71998–99 42.0 2.3 1.1 .. ..1999–2000 43.1 .. .. .. ..

Note: * 1 July 1989Sources: Kingdom of Tonga, Budget Statement for the Year by the Minister of Finance, Kingdom of Tonga,Nuku’alofa, various issues (1989–96); National Reserve Bank of Tonga, Quarterly Bulletin, National ReserveBank of Tonga, Nuku’alofa, various issues (1993–98); Kingdom of Tonga, 1997. Report of the Minister ofFinance 1997, Kingdom of Tonga, Nuku’alofa; Kingdom of Tonga, 1998. Report of the Minister of Finance 1998,Kingdom of Tonga, Nuku’alofa; Tonga Chronicle, 3 June 1999; Tonga Government Gazette, 28 October 1992, 26May 1993, 31 January 1996, 29 February 1996, 30 June 1997, 26 February 1998, 31 July 1998, 10 August1999, 29 September 2000, 18 September 2001, 21 September 2001.


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changes. The uncertainty about Guam’sexact relationship to the US tax system hasstifled its captive insurance initiatives in thelate 1990s. Guam’s recent attempts to offertax minimising offshore trusts wereeffectively thwarted by the US Treasury inNovember 2000.

Guam’s most successful OFC operation—the licensing of foreign sales corporations(FSCs)—was completely dependent on theinitiatives of the US Congress. The FSCregime was destroyed by the World TradeOrganization, which ruled in 1999 that theFSC regime was an illegal export subsidy toUS businesses and proclaimed that it wouldhave to be eliminated by October 2000. In1994, Guam derived only 0.2 per cent ofgovernment revenue (or approximatelyUS$150,000) from all offshore activities, thevast majority being from the registration of215 active and 131 relatively inactive largeand small FSCs (Government of Guam 1997).These revenues were minuscule comparedto the advantages that Guam’s FSCsconferred on their owners. In 1992, the mostrecent year for which figures are available, 7per cent of all FSCs were in Guam, and allFSCs were providing additional net profitsto US businesses of between US$1.4–2.5billion a year (Quest Economics Database,21 October 1999).

The general situation has producedfrustration and a sense of futility among localoffshore promoters. Many indigenousChamorro politicians see a considerablyhigher level of sovereignty as being necessaryfor the creation of a larger and moresuccessful offshore centre, a goal that is oftenmentioned by indigenous nationalists, evento casual visitors (see also Malcomson1990:57). Many local offshore promotersacknowledge that proper OFC developmentcannot come without Guam moving from itscurrent status as an unincorporated territory.Becoming a commonwealth similar to theNorthern Marianas or Puerto Rico might beenough to propel some offshore development,but even this would give Washington

considerable power to over-rule tax haveninitiatives. Many local offshore supportershave long doubted that the US will everpermit the creation of a proper OFC in Guam(South Sea Digest, 8 May 1992) and it seemslikely that their desire to create an offshorecentre along the lines of Bermuda (GuamBusiness, September 1997) will not succeedwithin the foreseeable future.

Cook Islands

Cook Islands emerged as an OFC in 1981 and1982. The advent of a modern satellite linkin 1980 increased the feasibility of a projectthat had first been proposed some time earlier.Cook Islands (like Niue more recently)emphasised that it combined the sovereigntyto write its own laws (without any higherauthority needed to ratify them) and thestability provided by its relationship of freeassociation with New Zealand.

The Cook Islands offshore centre wasseen as taking advantage of the politicalinstability in Vanuatu after it becamepolitically independent in 1980. Vanuatu’srhetoric of ‘Melanesian Socialism’, itsLibyan connections, and its volatilecoalition governments contrasted with theconservatism and continuity of the CookIslands polity. Vanuatu’s principal rival asa Pacific islands tax haven has been theCook Islands. The Cook Islands OFC hasdeveloped in a steadier manner. A roughidea of the comparative positions of theOFCs is provided by the ratio of theircontributions to their respectivegovernments’ receipts (Table 9).

The Cook Islands’ figures do not includethe secret proceeds to government revenuefrom artificial withholding tax schemes (suchas that outlined in Parliament of New Zealand1994), that alone may have produced morerevenue than is indicated here for each ofthe years in the late 1980s. This means thatthe actual government revenues may besignificantly more than the reported


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amounts for these years. The former CookIslands Finance Minister Michael Fleming(who left the position in the middle of 1988),claimed that OFC deals were generatingmillions of dollars of secret revenues for theCook Islands government—as much asNZ$900,000 (US$530,000) a month in 1987that were not reported in public accounts(Cook Islands Press, 6 August 1995). The CookIslands Trustee Companies Associationestimates that these indirect benefits exceeddirect payments, so that in 1995 the OFCcontributed (directly and indirectly) a totalof NZ$4.5 million (US$3 million) to the

government or well over 6 per cent of itsreceipts (Cook Islands News, 5 July 1996).

The Registrar of International andForeign Companies of the Cook Islands issecretive (refusing to give figures even toOffshore Investment, a periodical orientedtoward OFC promoters and clients), but afragmentary understanding of the history ofoffshore registrations is available from othersources (Table 10). The early years were quiteslow for the Cook Islands OFC. In early 1986,only 176 offshore companies were registeredand most of them were from the United States.In New Zealand, however, a new élite of

Table 9 Vanuatu/Cook Islands offshore financial centre government receipts

Year Vanuatu Per cent of Cook Islands Per cent of Cook Islands/OFC taxes, government OFC taxes, Cook Island Vanuatulevies, fees receipts levies, fees government receipts

(US$ million) (US$ million) receipts (per cent)

1984 1.068 4.2 0.011 0.1 1.01985 1.122 4.0 0.055 0.4 4.91986 1.480 5.3 0.367 2.0 24.81987 1.508 4.6 0.671 2.6 44.51988 1.705 4.6 0.749 3.5 43.91989 2.628 7.3 0.752 2.7 28.61990 3.443 8.2 1.003 2.6 29.11991 5.758 13.7 1.067 3.1 18.51992 5.971 13.4 .. .. ..1993 4.688 11.3 .. .. ..1994 1.967 3.9 .. .. ..1995 2.908 5.5 .. .. ..1996 2.569 4.5 .. .. ..1997 1.942 3.5 1.256 4.5 64.71998 2.227 4.1 .. .. ..1999 1.666 .. .. .. ..2000 3.239 6.4 .. .. ..

Source: Asian Development Bank, 1990. National Accounts of the Cook Islands: technical assistance report, AsianDevelopment Bank, Manila; Asian Development Bank, 1995. Cook Islands: economic performance, issues andstrategies, Asian Development Bank, Manila:18; Parliament of Cook Islands, Cook Islands ParliamentaryDebates, Parliament of Cook Islands, Avarua, various years (1982–97); Asian Development Bank, KeyIndicators of Developing Countries, Asian Development Bank, Manila, various issues; National Business Review,18 March 1994; New Zealand Audit Office, 1991. Report of the Audit Office and Financial Statements of theGovernment of Cook Islands, New Zealand Audit Office, Wellington; New Zealand Audit Office, 1992. Reportof the Audit Office on the Accounts and Transactions of the Government of Niue, New Zealand Audit Office,Wellington; Parliament of the Cook Islands, Papers and Order Papers Presented, Government of the CookIslands, Avarua, various issues (1986–94); Reserve Bank of Vanuatu, Quarterly Economic Review, ReserveBank of Vanuatu, Port Vila, various issues (1988–2000); World Bank, World Tables, World Bank,Washington, DC, various issues (1993–98).


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financiers (who would become prominentclients or promoters of the Cook Islands taxhaven) was at this time rising to prominenceand influence in New Zealand power circles,and this group acted to encourage offshoredevelopment in the Cook Islands.

Spectacular growth occurred in 1986 and1987 and by the end of July 1987 about 1,600offshore companies had been registered—most of them with connections to NewZealand, Australia, Singapore, Hong Kong,the United States, and Europe. The CookIslands became an important centre for thebusiness of large corporations and thisencouraged the creation of branches by ANZand Westpac banks in 1988 and the purchaseof its largest trust company by StandardChartered Bank (in 1991) and then by theBank of Bermuda (in 1994). The OFC directlyaccounted for about 6.4 per cent of the CookIslands’ total GDP in 1994, compared to lessthan 1 per cent ten years before (AsianDevelopment Bank 1995, Cook Islands Press,23 July 1995).

Despite these successes, a serious imageproblem arose in the 1990s. Documents fromthe largest trust company in the Cook Islands(outlining tax schemes for leading companiesin New Zealand, Australia, and Japan) foundtheir way (in a wine box) to Brian Henry, a

lawyer for Winston Peters, a maverick memberof the New Zealand parliament. Petersattempted to table them in the parliament on23 September 1992 and subsequentlysummarised their contents (not always verysuccessfully) under the protection ofparliamentary privilege. This set off the ‘WineBox Affair’ that dominated headlines in NewZealand and stigmatised the Cook Islands foryears (Davison 1997; Parliament of NewZealand 1994; Wishart 1995, 1999).

Yet the Cook Islands OFC still demon-strated long-term growth. In contrast toVanuatu’s legislature, the Cook Islandsparliament has constantly and speedilyintroduced, passed and amended legislationto attract new offshore business. This isconnected to the fact that some parliament-arians in Rarotonga have close connectionswith offshore promoters. Local indigenousCook Islands Maoris (particularly those whohave earned law degrees) are prominent inthe OFC. In March 1999 the offshore centreemployed about seventy people, includingeighteen expatriates and over fifty CookIslanders. Cook Islanders constituted almosthalf of the twenty-four professionals, withfour of the qualified accountants and sevenof the lawyers being indigenous. The CookIslands OFC tends to be lawyer-driven. This

Table 10 Registrations in the Cook Islands offshore financial centre

Companies Trusts Banks Partnerships Total

Early 1986 176 .. .. .. ..October 1986 325 .. 33 .. ..July 1987 1,600 .. .. .. ..1988 .. .. .. .. 1,500Late 1980s 855 266 24 5 ..1995 .. .. 12 .. 3,0651997 .. 500 .. .. ..2000 1,200 .. .. .. ..

Sources: Asian Development Bank, 1995. Cook Islands: economic performance, issues and strategies, AsianDevelopment Bank, Manila; Cook Islands Government Gazette, 8 September 1997; Cook Islands ParliamentaryDebates, 23 July 1987; Davison, R.K., 1997. Report of the Wine Box Inquiry: Commission of Inquiry Into CertainMatters Relating to Taxation, vol. 1, Department of Internal Affairs, Wellington; Los Angeles Times, 23 June 2000.


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contrasts with Vanuatu and most other OFCsin the world, where accountants are moresignificant, and makes the Cook Islands alegal laboratory (with important andinnovative offshore vehicles such as the assetprotection trust having been pioneered inRarotonga). Although the Cook Islands havebeen placed on international organisations’blacklists for not taking sufficient actionagainst tax evasion and money laundering,asset protection trusts (which are notprimarily oriented toward tax minimisationor money laundering) have accounted for asubstantial and growing proportion of thebusiness of Rarotonga’s OFC since theearly 1990s. The great importance of assetprotection trusts may make the Cook Islandsless vulnerable to possible sanctions by theOECD and the Financial Action Task Forcecompared with offshore centres that rely moreon tax minimisation structures and financialsecrecy. The ultimate threat to the Cook IslandsOFC may come from US courts that seek tooverturn the asset protection trusts, whichwere primarily designed for US clients seekingto escape the so-called ‘litigation explosion’.

Thwarted offshore centres in‘American Micronesia’

The OFCs of the Northern Marianas, Palau,and Marshall Islands rose but then fellquickly between 1982 and 1986. This erratictrajectory was the result of concerted pressurefrom the US government to halt theunregulated registration of offshore bankswithin its sphere of influence in the US dollarzone of Micronesia. A small number ofoffshore banks survived and a few new oneswere even registered after the campaign, butthe original offshore plans of all three stateswere effectively thwarted until Palau becameindependent in 1994 and the MarshallIslands OFC reinvented itself (primarily as aflag of convenience registry) in 1990. We shallconsider the reinvented Marshall Islandsoffshore centre later.

Even after the virtual demise of theNorthern Marianas’ offshore bankingoperations in 1982–83, the Commonwealthcontinued to assert some sovereignty bymaintaining a registrar for a few offshorebanks, conflicting with the US FederalGovernment over its tax regime, and servingas a place of tax exile for rich US citizens.Planners in the Northern Marianas continueto give high priority to the development ofoffshore financial services (NorthernMarianas College 1999), despite the fact thatonly two offshore banks were registered therein 1998 (Annual Report of the Director ofBanking 1998).

Palau defiantly reinstated its 1982offshore banking laws (which had beenemasculated by US diktat) soon after itsindependence in 1994, although doubts wereexpressed about whether Palau could developa full OFC if it remained part of the USmonetary system (Government of Palau1994). In late 1999, four large internationalbanks suspended US dollar transactionswith Palau, contending that the country hadnot taken adequate precautions againstmoney laundering. The Palau governmentinitially protested with vehemence, and suedthe Bank of New York, which was itselfembroiled in a major Russian money-laundering scandal. The Bank of New Yorkreplied that there were a number of question-able banks registered in Palau and that oneof them had handled over US$1.7 billion intransactions over an eighteen month period(Palau Horizon, 9 June 2000). Despite thecontroversy and the fact that Palau registeredfour new banks during 2000 (Guam Business,April 2001), including one particularlydubious institution that was developingstrong ties to local politicians, Palau was noton the money laundering blacklists of theFinancial Action Task Force. The contributionof the international banking sector to the localeconomy is not clear in official statistics and(as in Tonga) many offshore activities seemto take place on a rather secretive and


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informal basis. Since Palau has no corporateincome taxation and weak banking regulation(with low capitalisation requirements), somede facto offshore operations have beenorganised according to its domestic laws.

Samoa

A very different process of OFC developmentcontinued in the New Zealand-orientedzones of Polynesia. In Samoa (formerlyWestern Samoa, the first independentcountry in the Pacific islands), there has beensome growth in the number of registeredentities since the offshore centre was foundedin 1988. Samoa (unlike other Pacific islandOFCs such as Vanuatu and the Cook Islands)lists cumulative, rather than current,registrations (Table 11).

At the end of 1999, Samoa’s OFC registerheld 3,329 live international and long-termcompanies, 161 trusts, 11 offshore banks, and6 insurance companies (Central Bank ofSamoa 1999). These figures are comparableto those supplied by other Pacific islandOFCs.

Table 12 presents the growth of govern-mental receipts from the Samoan OFC.Although the total direct and indirectcontributions of the Samoan OFC to thecountry’s economy from 1988 to 1998 wereestimated to be US$9.3 million and itemployed 55 people in 1999 (Pacific IslandsMonthly, April 1999), there is disappointmentamong many politicians that the economicbenefits for the country have not been as greatas promised or anticipated, especially asthere was more state assistance for earlyoffshore development in Samoa than in theCook Islands.

This attitude has a history—governmentofficials had been convinced as early as 1983that enormous benefits would accrue if theyperformed one-off licensing of the Inter-national Pacific Bank, wholly owned by theHong Kong-based Erylmore Co. Ltd. (IslandsBusiness, March 1983). After great promises,it never really started operating—temporarily discouraging local officials whohad previously contemplated creating anOFC in the early 1970s but had abandonedthe idea because they felt the country’s

Table 11 Registrations in Samoa’s offshore financial centre

Year International Long-term International Offshore OFC Trusteecompanies companies trusts banks insurance companies

companies

1989 126 - 5 4 1 31990 232 - 22 4 3 31991 404 - 65 7 4 31992 622 - 67 10 6 31993 877 14 73 13 7 41994 1,487 34 204 17 8 41995 2,127 69 215 20 12 51996 2,930 91 235 23 14 51997 3,878 113 262 25 14 51998 4,736 124 275 25 16 61999 5,876 147 303 25 16 62000 7,300 .. .. .. .. ..

Source: Asiamoney, September 1995; Central Bank of Samoa, various years (1989–99). Annual Report,Central Bank of Samoa, Apia; Offshore Investment, March 2001.


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infrastructure was not sufficientlysophisticated. Plans for the current offshorecentre developed soon after the famous NewZealand ‘entrepreneur’ Ron Brierley (whosecompany, Brierley Investments, had a largestake in the largest trust company in the CookIslands) joined the board of directors of thecountry’s largest bank, the Bank of WesternSamoa, in 1987. The Western Samoan parlia-ment passed the enabling legislation inJanuary 1988, less than one year afterBrierley’s appearance in local financial circles.

By world standards, the parliament isrelatively responsive to the desires of offshorepromoters, although they occasionallycomplain of delays in passing legislation(Offshore Investment, October 1999). Therefusal of Malietoa Tanumafili II, the Headof State, to sign an offshore bill in 1993 (partsof which were to facilitate deals similar tothose found in the ‘wine box’), after the NewZealand government put pressure on him,tends to consolidate the impression that OFCpromoters have less influence than theywould like to have.

Unlike the Cook Islands, which initiallygained its stature as an important inter-

national OFC primarily through US, NewZealand and Australian clients, Samoa hasfrom the start been oriented primarily towardHong Kong, China (with which Samoa haslong had strong diplomatic relations),Singapore, and (after the disintegration of theSoviet Empire) Eastern Europe (particularlyRussia and the Ukraine). In some ways it issurprising that Samoa’s growth has not beengreater, since much of the business of theBritish Virgin Islands comes from Chinesein Asia (particularly Hong Kong)—the singlemost important source of Samoa’s clients.However, the British Virgin Islands (likeBermuda, another Hong Kong favourite)have become institutionalised as a brandname for this clientele (which also appearsto value their British colonial status). Samoa’spromotional strategy has emphasised thedisadvantages of the colonial link and theweak sovereignty of the British Virgin Islandsand Bermuda, as well as the uncertaintiesentailed by Britain’s taxation policies andits integration into the European Community(Powell 1997). Samoa proclaims its fullsovereignty and sees this as the key to itsoffshore development, but recently it has been

Table 12 Governmental OFC receipts and total governmental receipts

Year Governmental OFC OFC/total governmental(July–June) receipts (US$) current revenue (per cent)

1992 0.082E 0.21993 0.096E 0.21994 .. ..1995 .. ..1996 0.803 1.21997 0.925 1.51998 1.021 1.81999 1.297 2.1

E EstimateSource: Asian Development Bank, 2000. Key Indicators of Developing Asian and Pacific Countries, AsianDevelopment Bank, Manila; Central Bank of Samoa, Annual Report, Central Bank of Samoa, Apia, variousissues; Legislative Assembly of Western Samoa, 1992. Approved Estimates of Receipts and Payments,Legislative Assembly of Western Samoa 1992, 1997, Legislative Assembly of Western Samoa, 1997.Approved Estimates of Receipts and Payments, Legislative Assembly of Western Samoa, Apia.


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under pressure from the OECD to ‘harmonise’its system of taxation or risk possiblesanctions if it remains on the OECD list ofnon-cooperative countries. Significantly,Samoa (like Vanuatu and Palau) was not onthe money laundering blacklists of theFinancial Action Task Force, giving it a betterreputation than the Pacific islandscompetitors that remained on the list—Nauru, Niue, the Cook Islands, and theMarshall Islands.

The reinvented Marshall Islands

The reinvented Marshall Islands OFC wasset in place in 1990 by International RegistriesInc. (IRI) of Reston, Virginia. IRI was also thepromoter and administrator of the Liberianoffshore centre. It wanted a less politicallyturbulent jurisdiction in the Pacific, whichwould enact the innovations it had desiredin offshore law in Liberia, where the legislaturewas immobilised by the civil war (Grundy1993:63). It acquired the Marshall Islandsflag of convenience registry that had beenfounded a short time before by Howard Zeder,the son of Fred Zeder, the chief confidant offormer US President George Bush. The initialsuccess of the reinvented Marshall IslandsOFC was at the expense of Panama, whichwas beset by crisis around the time that Bushordered the 1990 US invasion (van Fossen1992).

The OFC has grown and quickly becomethe ninth largest shipping registry in theworld. The Marshall Islands OFC generatedUS$500,000 in annual revenues for thegovernment there in 1996 (1.6 per cent of theMarshalls’ total government revenue ofUS$30.5 million for that year), but consider-ably less than the US$9,977,255 (32.4 per centof total revenue) that the government receivedin 1996 from offshore passport sales, whichwere unrelated to IRI (Marshall Islands Journal,7 November 1997).

After IRI refused to accede to Liberia’sdemand that it end its relationship with the

Marshall Islands, IRI was stripped of its rightto operate the African country’s offshoreregister in 2000. This intensified itsconcentration on developing the MarshallIslands OFC—as foreshadowed in February1999 with its completion of a new US$1.3million two-storey office building at Ajetakon Majuro atoll near the capital, althoughmost of the Marshall’s increasing offshorework is done in Reston, Virginia and IRI’snumerous offices in other metropolitancountries.

Niue

Most impressive has been the growth ofoffshore company registrations in Niue,oriented particularly toward the growingChinese markets (Table 13). In 1993, thegovernment was cautious about creating anOFC on Niue in view of the gatheringcrusade that the New Zealand parliament-arian Winston Peters was leading against theCook Islands OFC in relation to the ‘winebox’ documents. Niue has a very similar ‘freeassociation’ relationship with New Zealandand Peters was calling for the termination ofaid to the Cook Islands in retaliation againstits offshore activities which, he said,deprived the New Zealand government ofhundreds of millions of dollars of taxrevenue.

However, Peter’s threat to cut off aid tothe Cook Islands seemed increasinglyhollow. Raising the issue also highlightedthe series of cuts in New Zealand aid thathad already occurred in both the CookIslands and Niue and the fact that Niue, oneof the most aid-dependent countries in theworld, needed new sources of revenue. Thewealthy against whom Peters wasfulminating had more influence over the NewZealand government than at any time in theprevious one hundred years (Eldred-Grigg1996) and the New Zealand state took noeffective action against the creation of theOFC in Niue.


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The success of Niue in such a short timeseems to indicate the desirability of new Pacificislands offshore centres becoming a (highlypromoted) part of a pre-existing global multi-OFC marketing strategy. Like the MarshallIslands, another jurisdiction withoutextensive local infrastructure, Niue hasentered into a franchising agreement with amultinational offshore promoter head-quartered in another country. The earlyexclusivity of the powerful Mossack Fonseca& Company’s promotional contract with Niueis also connected to the great effort this legalfirm spent in promoting Niue to its existingand prospective clients from its headquartersin Panama and its many offices in the OFCsand onshore financial centres around the

world. While Mossack Fonseca maintainedits monopoly on Niue company registrations,some of the responsibilities for registering andadministering Niue offshore banks were spunoff to a complementary trustee companycreated in 1997 which began to promote Niue’soffshore banks actively in 1999.

Despite the success of the Niue OFC,there is disappointment among legislators,who were apparently told at one point that itwould be a panacea for the country’s extremedependency on foreign aid (particularly fromNew Zealand), which amounted to 171 percent of GDP in 1993. Nevertheless, Niue’sOFC started auspiciously (Table 14).

Niue’s offshore promoters have also hadsome influence over the Niue government’s

Table 14 OFC contributions to government revenue in Niue

OFC fees Per cent of(US$) total government

revenues

1994-95 320,001 3.11995-96 142,155 1.61996-97 300,945 3.01997-98 381,970 4.21998-99 447,865 6.5

Sources: Far Eastern Economic Review, 4 July 2000, New Zealand Audit Office, Report of the Audit Office on theAccounts and Transactions of the Government of Niue, New Zealand Audit Office, Wellington, various years(1997–2001).

Table 13 Niue offshore company registrations

Registered Niue offshore companies

1994 1411995 5561996 (30 November) 1,4051997 (15 November) 2,3961998 3,6621999 5,5502000 7,262

Source: Offshore Investment, 1995–2001.


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proposed policy of becoming a pure taxhaven (like Vanuatu and Nauru) through adeliberate effort to eliminate all onshore andoffshore corporate and personal incometaxation (Niue Star, 26 June 1998). Since 1999,however, Niue, like many other PacificIslands OFCs, has been threatened withsanctions by international organisationscombating money laundering and taxevasion. In January 2001, the JP MorganChase Bank and the Bank of New Yorkbanned transactions with Niue, citing itsvulnerability to money laundering.

A comparative view

OFCs tend to emerge in microstates, usuallyconcentrated in the capital cities, and theiractives have a tendency to dominate the hoststate’s economic activity. Nevertheless,Pacific island OFCs’ payments intogovernment revenues are not particularlyhigh when compared to some offshorecentres in other parts of the world. Forexample, 60 per cent of Jersey’s governmentrevenue in 1998 was generated by its OFC(Financial Times, 22 February 2000). The

figures in Table 16 exclude the proceeds ofepisodic offshore passport sales.

While OFCs may supply a number ofclerical jobs, most of the professionalsworking at the highest levels of PacificIslands OFCs are expatriates (although thereare significant numbers of indigenousoffshore professionals in the Cook Islandsand Samoa). In the Pacific islands this‘foreign domination’ has not created theunrest which has characterised some otheroffshore centres, such as the anti-OFC protestmovement on the Isle of Man, where activistsfighting rent increases and evictions havegone as far as committing arson (OffshoreAdviser, October 1989).

The strongest development links in thePacific islands have been with up-markettourism, construction, and the channellingof local people into clerical, accounting,financial, and legal careers, as well as growthin telecommunications, air links andfinancial services. Up-market tourism isassisted by offshore development. Vanuatuhas gone the furthest in the region inestablishing this synergy—including a greatdeal of advertising for its OFC in local

Table 16 Contributions of major Pacific island offshore centres to government revenues

Government Per cent ofYear revenues from total

the OFC (US$) governmentrevenues

Vanuatu 2000 3,239,000 6.4Cook Islands 1997 1,256,000 4.5Samoa 1999 1,297,000 2.1Marshall Islands 1996 500,000 1.6Nauru 1999 500,000 2.0Niue 1999 447,865 6.5Guam 1994 150,000 0.2

Source: Central Bank of Samoa, 1999. Annual Report 1999, Central Bank of Samoa, Apia; Government ofGuam, 1997. Guam Code Annotated, Government of Guam, Agana; Marshall Islands Journal, 7 November1997; New York Times Magazine, 10 December 2000; New Zealand Audit Office, 2001. Report of the AuditOffice on the Accounts and Transactions of the Government of Niue, New Zealand Audit Office, Wellington;Parliament of the Cook Islands, 1997. Cook Islands Parliamentary Debates, Parliament of the Cook Islands,Avanua; Reserve Bank of Vanuatu, 2000. Quarterly Economic Review, Reserve Bank of Vanuatu, Port Vila.


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tourism promotional literature. The successof the Vanuatu and the Cook Islands; thecurrent limitations of the Marshall Islandsand Niue; the unattractiveness of Nauru; theunrealised potential of Samoa and Tonga;and the significant opportunities for offshoredevelopment on Guam, the NorthernMarianas, and Palau are related to theirappeal as destinations for the sorts ofwealthy visitors who use offshore facilities.

Local élites often find the potential fees,commissions and benefits generated by OFCsan attractive prospect. Furthermore, offshorecentres can be relatively cheap for a nationto create. There may also be relatively fewethical qualms about tax haven development,since some Pacific island states deriverelatively little (or, in some cases, no) revenuefrom direct taxation. Nevertheless, offshorepromoters generally ‘oversell’ the OFC to getit established by local politicians, who arethen generally disappointed after few of thepromised benefits materialise.

Only one Pacific island state, Tuvalu, hasrejected concerted pressure by promoters todevelop an OFC, and this rejection was basedon particular factors rather than a general orabstract opposition to offshore developmentthere. The defeat of the first Prime Minister,Toalipi Lauti, in 1981 was attributed to hisinvesting most of the government’s funds ina Californian business that was (among otherthings) promoting offshore development.Although this firm reportedly returned themoney (with interest) in 1984, it remainedhighly unpopular within Tuvalu and itsassociation with the idea of building an OFCthere created substantial antagonism to theidea.

Offshore development may be seen inrelation to a typology of its likely effects onthe political economic development of itssociety. There is a continuum between thebooking, paper, or brass-plate OFCs (that dolittle more than paperwork), on one hand,and functional offshore centres where banks,lawyers, accountants, and other financial

personnel have a physical presence and arelikely to have a greater local impact on theother. On Norfolk Island, Guam, and theNorthern Marianas, booking OFCs havebeen stifled by pressures from hostilemetropolitan parent states, although theresidential tax havens (and local tax exiles)on Norfolk and Saipan continue to haveimportant influences on the political economyof these islands. The booking centres in Tongaand Palau display erratic patterns. In Nauruand the Marshall Islands, booking centreshave emerged, but only the Marshall Islandsshow some initial signs of maturing into amore functional centre that might be able tomake important contributions to shaping thelocal society. In Samoa and Niue, successfulbooking centres have developed rapidly(generating locally significant fees for thegovernments of these countries) along withthe possibility (given these OFCs’ highgrowth rates) of their becoming increasinglyfunctional, although there may be some locallimitations on this in Niue. The Cook Islandshave successfully developed importantfunctional aspects, which has had aconsiderable impact on the country’s politicaleconomy. Vanuatu’s functional operations aremore mature and have for years exercised asignificant influence on the archipelago’spolitical economic structure (for example, insuccessfully lobbying against the intro-duction of income taxation on residents).Nevertheless, all Pacific Islands havens areprimarily involved in booking regardless ofhow large their functional operations mayhave become (see also Hampton 1996).

In one of the few general considerationsof the impact of offshore development on theeconomy of its host country, McCarthy (1979)finds that, while the benefits exceed the costs,the net benefits are not likely to be very greatfor new OFCs, particularly as they areentering a very crowded, competitive andperhaps stagnant global market for tax havenservices. According to him, ‘new papercenters are not likely to succeed [and]...even


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existing centers might become less importantand less profitable’ (1979:48). In a similarspirit, Johnson (1976) is only slightly lesspessimistic when he observes that anygrowth in Panama’s offshore centre isunlikely to make a great contribution to thecountry’s economy. Francis (1985) isconsiderably more optimistic about thepossibilities for offshore development, bothgenerally and in relation to the Bahamas. Herview is that the offshore market is continuingto grow and that there is a tendency for OFCsto move from booking to functionaloperations. Although Francis’s work is morehelpful in explaining how Pacific islandoffshore centres have emerged in the 1980sand 1990s, all three of these studies arenarrow cost–benefit analyses.

Caulfield’s (1978) interpretation of theCayman Islands is unusual in showing howthe centrality of the offshore centre in thatsmall Caribbean country (and its synergieswith up-market tourism) have led to apolitical, economic and social metamorphosis—the transformation from one type of life(more independent and subsistence-oriented)to another kind of life based on intensemonetisation, commodification, and growingdependency on the vagaries of internationalfinancial markets and taxation regimes. Yetthere are reasons to doubt that the OFC(rather than non-OFC-related tourism) hasbeen as decisive in the Caymans as Caulfieldsuggests.

There are, however, some generalconclusions that may be drawn from survey-ing Pacific islands tax haven development.The OFC may move the Pacific island hostfurther toward a MIRAB-style rentiereconomy (Bertram 1999, Bertram and Watters1985) dependent on volatile transnationalfinancial flows and ever-changingmetropolitan political-economic agendas.Offshore centres help to bring countries intothe world’s financial and banking systems,make them more recognisable to financiers,and make it easier for them to borrow money.

In addition to reputable banks, however,OFCs also attract criminals. The loans for thedisastrous Cook Islands Sheraton hotelproject (associated with Mafia interests) andthe fraudulent letters of guarantee thatthreatened to bankrupt the Cook Islands andVanuatu in 1996 were all deals negotiatedwith people attracted to or associated withthese countries’ offshore centres.

The creation of new offshore centresobviously increases competition. It does notnecessarily follow that in the long term thisdiminishes the opportunities available toolder OFCs. The proliferation of offshorecentres creates many new opportunities forcapital to escape taxation and regulation.Offshore development has dramaticallyincreased the global pool of hot, statelessmoney (Wachtel 1990). Even the traditionalhavens are still growing, despite competitionfrom new OFCs.

New offshore centres are not justcompetitors. Their entities and services areused by older havens to make their taxminimisation and other strategies moreopaque and effective. The amount of moneyavailable to OFCs is not fixed. The moreavenues that international finance capital isoffered for exiting from costly responsibilitiesin metropolitan states, the more capital islikely to flow into a growing pool of offshorefunds.

It is clear that the revenues to the OFCs’host countries are a small proportion of therevenues lost by the governments of metro-politan countries. It is also in the interest ofmetropolitan states and offshore govern-ments to agree to trade the abolition of OFCsfor higher levels of economic assistance. Theproliferation of countries offering offshorecentres and the intensified competitionbetween them, however, make bilateralagreements difficult. Any OFC entering intosuch negotiations is extremely vulnerable(Irish 1982). The new multilateral strategiesof international organisations (involving‘black lists’ and threats against OFCs) may


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be more effective than the older bilateraltactics and they may continue to pose achallenge to Pacific islands countries thathope to increase revenues through offshoredevelopment.

References

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