Pacific Island countries are finding themselves under the shadow of financial misconduct accusations. While they work to clear their reputation, they are also trying to build up domestic industries. Kimberley Long reports. 

Vanuatu

The Pacific Islands have long battled with an image problem. The region has earned itself a reputation for money laundering and the nations as tax havens, thanks to low or even zero tax regimes. While the nations have been working hard to overthrow this reputation and gain recognition as legitimate financial and business centres, they are still coming up against hurdles as the international community imposes ever stricter rules. 

Of considerable concern is the recent blacklisting of several Pacific Island nations by the EU. In March 2019, the EU announced that Fiji, the Marshall Islands and Vanuatu would be joining Samoa, American Samoa and Guam on the EU tax haven list. 

Fiji fights back 

Aiyaz Sayed-Khaiyum, attorney-general and minister for economy for Fiji, has been a vocal critic of the blacklisting and raised the issue in Fiji’s parliament in April 2019. 

According to the parliamentary Hansard, Mr Sayed-Khaiyum stated that the blacklisting is “actually demonstrative of the fact that the EU is trying to undermine development aspirations for small countries”. He pointed to corporate tax policy in Fiji, which copies that of Singapore. While the EU has questioned Fiji’s corporate tax policy, it seems to have no problem with Singapore’s. 

Mr Sayed-Khaiyum added: “The blacklisting by the EU was largely attributed to our position to maintain tax incentives that have been introduced to support investment, exports and jobs for ordinary Fijians.’’ The incentives include: a 50% export income deduction for Fijian exporters, which about 200 companies currently take advantage of; a 17% corporate tax rate for companies that relocate their global or regional operations to Fiji (an offer that only Australian lender ANZ has taken advantage of); and giving a 13-year tax holiday for international IT companies that set up operations in Fiji, employ more than 50 people and export 60% of their products or services. He argued that all of these measures are necessary to boost industry and make Fiji a competitive place to do business. 

Finally, Mr Sayed-Khaiyum raised concerns over how the nations were told of the blacklisting. He said in parliament that the particulars of the blacklisting, including the EU’s guidelines and processes in its decision making, had not been discussed in a transparent way. Each nation added to the blacklist received written details from the EU of the specific policy changes they would need to implement to be removed from the blacklist, which Mr Sayed-Khaiyum said means there was no standardised approach to the rules.

Anger in paradise  

The lack of warning about the latest blacklisting has left the Pacific Island nations with an overarching feeling that the ruling is unjust, due to the amount of work that has already been done in bringing anti-money laundering (AML) and counter-terrorist financing (CTF) measures up to international standards. 

This work is seen on an individual country level. Vanuatu has a long history of working through tax and AML issues. The State Law Office of Vanuatu established the Financial Intelligence Unit (FIU) in 2000 in order to be removed from the Australian tax office blacklist. The FIU has the task of conducting compliance examinations for financial institutions based in Vanuatu. In 2017, Vanuatu enacted the UN Financial Sanctions Act with a view to preventing terrorist financing by freezing the assets of listed individuals. 

The level of work that is required of small countries to meet international requirements has also been criticised. Floyd Ray Mera, director of the FIU, says: “The EU requirements to be removed from the blacklist are considerable. They demand for there to be transparency and accountability in the economy. But Vanuatu is limited in its capacity to overhaul its operations quickly, and it is not allowed to participate in mutual assistance programmes to investigate possible illegal activity.” 

More bluntly, Martin St-Hilaire, resident director of Vanuatu-based Pacific Private Bank, believes the EU’s decision to blacklist Vanuatu was simply unfair. “It is perceived as a form of bullying and it could negatively affect foreign direct investment,” he says.

A collaborative approach 

Even if the Pacific Island nations do not agree with the EU’s decision, steps are in motion to meet the EU’s requirements. Mr Mera says: “The main interest is to get off the EU blacklist and to build the confidence of investors. The [Vanuatu] government hopes to be off the list by the end of 2019.” 

Nations across the Pacific Islands see the blacklisting as a regional issue, even if they were not named on the EU list. The blacklisting itself is not a sanction, and each EU member country is free to decide how to operate with blacklisted countries. But there are worries it could deter businesses from operating with the rest of the Pacific Islands, not just the nations named. Mark Brown, deputy prime minister of the Cook Islands, says: “The Pacific Islands as a whole need to make a collective stand against the EU blacklisting. The region will be left vulnerable without action.” 

The Cook Islands was on the inter-governmental Financial Action Task Force (FATF) blacklist in the early 2000s, but was able to work through the required changes. However, Mr Brown says: “The countries blacklisted were not consulted ahead of the announcement and had no time to prepare. They are left with the option of either changing their operations and cutting off their financial industry, or to stop correspondent business with Europe.” 

But the issues go beyond the EU. Razim Buksh, director of the FIU at the Reserve Bank of Fiji, has raised concerns that the evaluation process for compliance with FATF recommendations is the same for both large and micro economies. “The mutual evaluation process should in fact target larger economies that pose significant AML and CTF risks and larger financial systems that are key conduits for illicit financial flows,” he adds. 

The smaller nations have not been left entirely alone in working through the changes. International organisations have tried to help. Alison Stuart, chief of the small states division at the Asia-Pacific department of the International Monetary Fund (IMF), says the organisation has hosted workshops to discuss best practice in tax law. “The IMF stands ready to respond to requests from member countries to help improve the overall efficiency and transparency of tax systems, in line with international good practices and standards,” she says.

Adapt and modify 

With the international community changing the rules around them, the Pacific Island nations can choose how to react. In some cases, the decision has been made to bring operations in line with other jurisdictions to future proof against further international demands. 

For example, Saud Abdul Minam, country head for Fiji and head of commercial, Pacific, at ANZ, says: “The Australian Prudential Regulation Authority is giving greater oversight to financial operations in Fiji. ANZ Fiji is adopting the same policy and ethics used by the bank in Australia. Change is coming our way and we will embrace this new change.” 

In other cases, the nations are adapting to fit in the demands of new markets. Mr Mera has seen the background of the companies operating in Vanuatu shifting over time. “There are changes to the clientele we see in the financial centre, with Asia becoming more important [and fewer companies coming] from Australia, New Zealand and the US.” 

Some of the newcomers seen in Vanuatu have been attracted by the ability to acquire an international passport. Mr St-Hilaire says: “Vanuatu offers citizenship through investment. Investors provide a donation to the government in order to receive citizenship and that citizenship allows them to apply for a passport, at the cost of $130,000 for an individual and $200,000 for a family of four.” 

Mr Mera adds that offering citizenship through investment “increases the investment in the country and supports the government”. The financial donations are a significant way for the government to raise funds, as the country does not charge any income tax. 

However, these operations have come under scrutiny from Organisation for Economic Co-operation and Development. At the end of 2018 the organisation stated that Vanuatu was one of 21 countries that offered so-called golden passport schemes which could be misused to hide assets abroad. 

Modernising tourism 

While the financial sector is taking up a significant amount of time and energy, tourism remains the biggest industry for many of the Pacific Island countries. At present almost 50% of Fiji’s gross domestic product comes from tourism. In its Pacific Possible report, the World Bank forecasts that by 2040 the whole of the Pacific Islands tourism sector will have seen an additional 1 million tourists with an extra $1.6bn in spending, and the creation of 110,000 jobs. 

Mr Minam reports that ANZ has seen a rise in clients from the tourism sector. “Tour operators, food suppliers, as well as the international airlines and hotel brands, make up a significant portion of our portfolio,” he says. 

Supporting a modern tourist industry also means having business owners who are internet savvy, from airlines down to family-run businesses. Pacific Trade Invest (PTI) Australia has looked to boost this by working with online tourism aggregators to provide support to the smallest operations in getting online. 

Caleb Jarvis, trade and investment commissioner at PTI Australia, says: “Our digital tourism programme has provided training and supported small tourism operators in the Pacific to build their own booking capable websites and grow their international reach by connecting to platforms such as Booking.com and TripAdvisor.” 

Furthermore, PTI hosted workshops in Samoa, Vanuatu and the Cook Islands alongside Airbnb to educate homeowners about the possibilities of generating income through home sharing. “Our partnership with Airbnb in the Pacific has also helped to support the development of new micro-enterprises and support women in business to find new revenue streams, with 60% of hosts being female,” adds Mr Jarvis. 

Economic diversification 

This recognition of the power of digital come as part of moves to widen the region’s economies away from a dependence on tourism. Mr Jarvis believes the region could boost its economy by focusing on its smallest companies. “While Pacific nations such as Fiji are doing well, it is important that they continue to build resilience for the future, through further developing their services industry, small and medium-sized enterprises [SMEs] and the informal sector.” 

Mr Jarvis believes impact investing holds strong possibilities as investors look to put their money into projects that will have a strong social and environmental benefit, as well as delivering returns. On an even smaller scale is crowdfunding. Mr Jarvis says: “Microfinancing and crowdlending sites such as Kiva provide Pacific SMEs, who can’t access traditional investment sources or loans, an opportunity to raise capital.” Users can request loans that are then funded by individuals globally. 

Improving job creation is a key priority for the IMF in the region, says Ms Stuart, and the organisation sees a future in digital industries. It is a view backed by ANZ’s Mr Minam, who says Fiji’s information and communications technology sector and call centre industry is on the increase. 

In addition, the region’s climate has made it an attractive retirement prospect for older people in Australia and New Zealand. 

“Medical tourism is a growing sector,” says Mr Minam. “There is a joint operation with Australia in the administration of a hospital. Some health companies are also expanding into the retirement homes sector. This has the knock-on effect of more places being needed in nursing colleges and medical schools.” 

Ocean industry 

Throughout the Pacific Islands, fisheries is a growing business, following the implementation of the Parties to the Nauru Agreement (PNA) Vessel Day Scheme. The Vessel Day Scheme limits the number of fishing days each year, with these days allocated between the member countries. The efforts have made fishing sustainable, and earned certification from the Marine Stewardship Council. The PNA covers around 50% of the global supply of skipjack tuna.

While fishing has managed to earn recognition for its sustainability, other ocean operations being carried out by Pacific Island nations have come under scrutiny. The Cook Islands is moving forward with plans to grant licences for the mining of polymetallic nodules, which comprise of manganese and iron hydroxides and are refined for further industrial use, and cobalt, which is widely in demand for use in batteries. However, environmentalists have voiced concerns over the impact it may have on ocean habitats. 

Cook Islands deputy prime minister Mr Brown says: “We will begin granting exploration licences at the end of the year. The process of obtaining a licence takes five years, so we will be able to control the number of companies involved. We have to be sensitive to the possible environmental impact.” 

As the Pacific Islands try to lessen their dependence on the tourism industry, they must continue to live up to the expectations of the international community, whether that is in regulatory compliance or environmental management. 

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