Nauru’s Offshore Sector Under Scrutiny: 59 Registries, Pending Removals, and Concerns Over Money Laundering

Compliance with International Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) Standards

A review of Nauru’s offshore sector has raised concerns over the country’s compliance with international AML/CFT standards. The tiny Pacific island nation has 59 registries, including operating corporations and trusts, although 15 of these are pending removal.

Residual Risks in the Sector

Experts say that while the low rate of company and trust formation may indicate a relatively low risk, the sector still poses residual risks. The Financial Action Task Force (FATF) has identified Nauru as having a “broadly commensurate” AML/CFT regime, but notes that additional controls are needed in the offshore sector.

Currency Transactions and Narcotics Trafficking

The report also highlights concerns over currency transactions related to international narcotics trafficking. While there is no evidence of financial institutions engaging in such activities, Nauru’s lack of records exchange mechanism with other governments/jurisdictions makes it difficult to track these transactions.

Reporting Requirements and Due Diligence

Nauru has a “list” approach to predicate crimes, covering all serious crimes, and criminalizes legal persons. Enhanced due diligence procedures are in place for Politically Exposed Persons (PEPs), but only domestically, not internationally. The country’s reporting requirements are limited, with zero Suspicious Transaction Reports (STRs) and Currency Transaction Reports (CTRs) received in 2012.

Government Efforts to Address AML/CFT Issues

The Government of Nauru (GON) has been working to address AML/CFT issues, including amending its legislation to include more predicate offenses and reducing restrictive conditions related to tax matters. The country is also prioritizing the ratification of UN Conventions, including the Convention against Corruption and the 1988 UN Drug Convention.

Remaining Weaknesses

However, Nauru still faces several weaknesses in its government legislation, according to the US State Department. These include not criminalizing money laundering beyond drug-related offenses and lacking arrangements for asset sharing with other jurisdictions. The country is also not a party to the EU’s White list of Equivalent Jurisdictions.

Recommendations for Improvement

To improve its AML/CFT regime, Nauru should:

• Focus efforts on providing AML/CFT controls in the offshore sector
• Strengthen due diligence procedures for PEPs and other high-risk individuals
• Increase reporting requirements and enhance monitoring of suspicious transactions
• Ratify UN Conventions and join international initiatives to combat money laundering and terrorist financing
• Develop a records exchange mechanism with other governments/jurisdictions