FinCEN Warns US Banks of Money Laundering Risks in Nauru’s Offshore Financial Sector

The Financial Crimes Enforcement Network (FinCEN), a part of the United States Department of the Treasury, issued a warning this July for American financial institutions to exercise increased due diligence when processing transactions linked to the Republic of Nauru or involving entities based or registered there.

Background

Nauru, a small island nation in the South Pacific with a population of approximately 10,600, has been trying to establish itself as an offshore financial hub since the 1990s. Currently, around 400 licensed offshore banks operate under the Nauru Agency Corporation (NAC). However, concerns about the regulation and supervision of these banks have led to Nauru being identified as non-cooperative in the fight against money laundering by the Financial Action Task Force on Money Laundering (FATF).

Issues with Nauru’s Offshore Financial Sector

1. Lack of criminal penalties for money laundering in Nauru: The absence of criminal penalties makes it easier for money laundering activities to go unpunished.
2. Insufficient identification requirements for offshore banks: Inadequate identification procedures make it hard to verify the legitimacy of offshore banks, increasing the risk of dealing with illegal entities.
3. Inadequate customer identification and transaction record-keeping: Lackluster identification procedures and poor record-keeping exacerbate the risk of money laundering.
4. Lack of suspicious transaction reporting obligations: The absence of such obligations makes it harder to detect and prevent suspicious transactions.

Doubts About Nauru’s Ability to Supervise

The FATF expressed concerns about the NAC’s ability to effectively supervise the offshore sector and pointed to Nauru’s strong bank secrecy laws as creating risks for financial institutions.

Nauru’s Willingness to Address the Issues

Nauru has shown a willingness to address these issues, suspending licenses of several institutions and expressing interest in collaborating with foreign regulators and acquiring relevant technical assistance.

Recommendations from FinCEN

FinCEN strongly advises US financial institutions to scrutinize transactions involving Nauru, Nauruan offshore banks, or Nauruan entities with an increased focus. This does not mean preventing legitimate business with Nauru but rather ensuring regulatory compliance while minimizing the associated risks.

Institutions reporting transactions under the advisory will be treated as reports of suspicious transactions, securing protection from liability for reporting. US officials pledge to cooperate with Nauruan officials in remedying deficiencies in their counter-money laundering systems.

FinCEN is a part of the US Department of the Treasury, located at P.O. Box 39, Vienna VA 22183, with a phone number of (703) 905-3773. For more information, visit their web site at www.fincen.gov.