Financial Fraud Detection Methods in Marshalls Islands: A Warning for Banks and Financial Institutions

The United States Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) has issued an advisory warning banks and financial institutions operating in the US to be on high alert for transactions involving the Republic of Marshall Islands. This advisory highlights serious systemic problems with the Marshall Islands’ counter-money laundering regime, making it a haven for financial fraud.

A Systemic Problem

The Marshall Islands, a group of atolls and reefs in the North Pacific Ocean, has been developing an offshore financial sector, including approximately 3,000 “non-resident companies.” However, its legal, supervisory, and regulatory systems suffer from significant deficiencies, allowing money laundering to go undetected.

Deficiencies in the System

• Money laundering is not a criminal offense in the Marshall Islands.
• Financial institutions are not required to identify their customers or maintain customer identification records.
• The country maintains strong bank secrecy laws that can only be lifted by an order of a Marshall Islands court.
• Offshore entities in the Marshall Islands are not required to disclose the names of officers, directors, and shareholders or beneficial owners, making it difficult to track the flow of funds.
• The country’s financial institutions are effectively unsupervised.

FATF Warning

The Financial Action Task Force on Money Laundering (FATF) has identified the Marshall Islands as non-cooperative in the fight against money laundering. In response, the country is drafting counter-money laundering legislation that would criminalize money laundering and create a counter-money laundering authority and financial intelligence unit.

Increased Risk

Despite these efforts, the Marshall Islands’ legal, supervisory, and regulatory systems continue to present significant opportunities for money laundering and fraud. The country’s commitment to bank secrecy and lack of supervisory or enforcement mechanisms aimed at preventing and detecting money laundering increase the risk that transactions involving Marshall Islands offshore entities and accounts will be used for illegal purposes.

Advisory for Banks and Financial Institutions

In light of these concerns, banks and financial institutions operating in the US are advised to give enhanced scrutiny to any transaction originating from or routed through the Marshall Islands, or involving entities organized or domiciled in the country. A financial institution subject to suspicious transaction reporting rules should carefully examine available facts relating to such transactions to determine if they require reporting.

Technical Assistance

The US government is willing to provide technical assistance to Marshall Islands officials as they work to remedy the deficiencies in their counter-money laundering systems. The advisory serves as a warning to financial institutions operating in the US to be vigilant when dealing with transactions involving the Marshall Islands, and to report any suspicious activity to the authorities.

Conclusion

The FinCEN advisory does not mean that US financial institutions should curtail legitimate business with the Marshall Islands. The Treasury Department will consider any report relating to a transaction described in this Advisory to constitute a report of a suspicious transaction relevant to a possible violation of law or regulation, for purposes of the prohibitions against disclosure and protection from liability for reporting of suspicious transactions.