Cook Islands Offshore Finances: A Money Laundering Haven? US Financial Watchdog Warns of Risks
The Financial Crimes Enforcement Network (FinCEN), a part of the US Treasury Department, issued a strong warning to American banks and financial institutions in its Advisory (Issue 15) on July 2000. This advisory highlighted potential money laundering risks linked to the Cook Islands.
The Cook Islands: A Tax-Exempt and Deregulated Financial Hub
The Cook Islands, an internally self-governing country in the South Pacific, is home to approximately 14,000 people and multiple offshore financial entities [1]. This country, in free association with New Zealand, has been growing its offshore financial services sector. Some noteworthy statistics include:
- Over 6,000 International Business Companies (IBCs)
- Around 30 offshore banks (seven of which accept public deposits)
- 2,000 international trusts
The Cook Islands financial sector offers a largely tax-exempt environment and is free from regulatory responsibilities [1][2].
Drawbacks of the Deregulated Environment
Despite these advantages, the deregulated financial environment in the Cook Islands comes with several drawbacks, making it a concern for financial watchdogs.
Money laundering is legal: Money laundering remains a lawful activity in the Cook Islands [1].
Lack of identity checks and records: Financial institutions do not have to verify client identities, establish anonymous accounts, or retain customer identification or transaction records [1].
Failure to report suspicious transactions: These financial institutions are not required to report suspicious transactions [1].
Strict secrecy provisions: Confidentiality remains a top priority, limiting the disclosure of relevant data to the minimum [1].
Identified as non-cooperative: In the 1990s, the Financial Action Task Force on Money Laundering (FATF) identified the Cook Islands as non-cooperative in the fight against money laundering [1].
Efforts to Address the Issues
The Cook Islands have initiated steps to address some of these issues by:
- Establishing a domestic financial intelligence unit
- Proposing a regional financial intelligence unit in the South Pacific Forum
US Financial Institutions’ Response
The US financial institutions are being urged to exercise heightened scrutiny over any financial transactions originating from, routed to, or involving Cook Islands offshore entities and accounts. Financial institutions subject to the suspicious transaction reporting rules must carefully evaluate these transactions to prevent potential violations of applicable laws [1].
However, this advisory does not mean a complete halt to legitimate business dealings with the Cook Islands, but rather a call for increased diligence [1].
For more information, contact the Office of Communications, FinCEN, at their P.O. Box in Vienna, VA, or visit their website at www.fincen.gov.
[1]: Title: Cook Islands, US FINCEN Warns American Banks of Money Laundering Risks, International Financial Law Review, 13 July 2000 (Subscription required for full article) [2]: Title: Cook Islands, World Finance, 1 September 1997
[Additional References: The Financial Action Task Force on Money Laundering (FATF), Cook Islands Country Summary, accessed on April 17, 2023, https://www.fatf-gafi.org/countryreports/documents/cook-islands/CookIslands-2017.pdf]