Nauru’s Financial Crimes Problems Spark Warnings for US Banks

A recent advisory issued by the United States Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) has warned banks and financial institutions in the US to be vigilant when dealing with transactions involving Nauru, a small South Pacific island nation.

The Problem with Nauru’s Offshore Banking System

Nauru has been struggling to establish itself as an offshore financial center for over two decades, granting licenses to 400 so-called “offshore banks”. However, its legal, supervisory, and regulatory systems have serious systemic problems that make it vulnerable to money laundering and other financial crimes.

Lack of Effective Regulation and Supervision

• Money laundering is not a criminal offense in Nauru.
• Offshore banks licensed by the country are not required to obtain identification information from their customers or maintain customer identification records.
• Nauruan financial institutions are under no obligation to report suspicious transactions.

The FATF’s Warning

The Financial Action Task Force on Money Laundering (FATF) has identified Nauru as non-cooperative in the fight against money laundering, citing its lack of effective supervision and enforcement mechanisms.

Ongoing Efforts to Address the Issues

• Nauru has suspended licenses for several institutions.
• The country is considering legislative changes to address financial crime issues.

The Risk for US Banks

Despite these efforts, Nauru’s financial systems still create significant opportunities for criminal activity. The absence of supervisory or enforcement mechanisms aimed at preventing and detecting money laundering increases the risk that transactions involving Nauruan offshore entities and accounts will be used for illegal purposes.

Enhanced Scrutiny Required

As a result, US banks and financial institutions are advised to give enhanced scrutiny to any transaction originating in or routed through Nauru, or involving entities organized or domiciled, or persons maintaining accounts, in Nauru. This includes carefully examining available facts to determine if the transaction requires reporting under the Bank Secrecy Act.

Technical Assistance from the Treasury Department

The Treasury Department has emphasized that this advisory does not mean that US financial institutions should curtail legitimate business with Nauru. The department is willing to provide technical assistance to Nauruan officials as they work to address their country’s financial crime problems.