Cook Islands: International Pressure – How Does A Jurisdiction Respond

Last Updated: 8 October 2001

In 1965, New Zealand relinquished its dominion over the Cook Islands to the islanders themselves. In June 2001 the Cook Islands saw fit to celebrate this occasion with a host of festivities. While this may seem relatively normal to most, the fact the New Zealand Prime Minister was the guest of honor at these celebrations may make one stop and think why the people of the Cook Islands would want to commemorate such a juncture by inviting their former ruler back to the dinner table.

The reason? The Cook Islands has over the past 35 years enjoyed a unique relationship with New Zealand founded upon mutual respect for each countries position. That mutual respect has served the Cook Islands well with New Zealand but the Cook Islands is equally concerned about its relationship with other nations. These include the "big boys" of its global neighborhood, those countries that in turn have determined that the Cook Islands should appear on the black lists produced by the OECD and the FATF.

Much has already been written about the OECD and FATF initiatives and its not intended to revisit all that material here. Like it or not, the Cook Islands is on the lists and must now contemplate its response to the threat of international sanctions, no small feat for a country with a population of a mere 14,000.

Of the 15 islands that make up the Cook Islands, only its capital Rarotonga is home to trustee companies and domestic banks. There are six trustee companies in total and only two banking institutions that offer domestic retail banking facilities, all very reputable and only one of those banks offers accounts in offshore denominations. Each of the trustee companies must be licensed by the Commissioner of Offshore Financial Services ("the Commissioner") and in doing so, must provide evidence that shows it is financially substantial, of sound character, experienced in the provision of offshore services and will carry out its business dealings in a professional manner. The two domestic retail banks are both branches of large institutions that have earned glowing reputations throughout New Zealand, Australia and the Asia Pacific region.

The publication of the lists had an immediate detrimental effect on nations such as the Cook Islands. Now with its reputation tarnished, it must set about rebuilding the same. So how does the government of a small South Pacific nation react when faced with international pressure from organizations such as the FATF and OECD.

Many would perhaps expect either a head in the sand approach or a complete acquiescence to the threat of international sanctions. The Cook Islands has taken neither of these extreme positions but has adopted a responsible middle ground.

Conscious of the need to rid the world of those who launder money, be it the proceeds of gun running, drug dealing or other forms of serious criminal activity, the Cook Islands immediately reacted to the allegation it did not meet the standards required by the FATF by enacting the Money Laundering Prevention Act 2000 ("MLA"), a statute based on the same piece of legislation that existed at the time in Samoa (which was not on the FATF list), which in turn was based on the model provided by the Commonwealth Secretariat Technical Assistance Program. Perhaps the FATF viewed the rushed enactment as merely reactive window dressing and not deserving of removal from the list. However, this is clearly not so.

The Cook Islands already had in existence the Offshore Industry (Criminal Provisions) Act 1995-96 ("OIA"). The OIA provides that where an officer or employee of a trustee company has cause to suspect that an entity such as an international company or international trust is involved in drug trafficking or that a person related to or involved with the entity has been convicted of serious criminal activity, the trustee company is to refer the suspicion to the Commissioner, who is empowered to act on the same.

The MLA is not an isolated reaction but rather a reinforcement of a legislative and political program the Cook Islands commenced back in the mid 1990’s. This is not a new stance by the Cook Islands but one that it adopted long before many of the so-called "onshore jurisdictions" had taken any action at all. Both Acts give a clear indication of the Cook Islands awareness of global concerns over money laundering and its determination to be part of the international team to stamp out such corrupt activity at its root.

That commitment goes further than the mere passing of legislation. The Money Laundering Prevention Act 2000 created a Money Laundering Authority, a body comprising the Commissioner, the Financial Secretary and the Commissioner of Police, set up to act on reports of suspicious activity. The government has seen fit to ensure that the Commissioner herself attends programs specifically conceived by nations such as the United States of America to become educated in combatting money laundering. Such knowledge is then passed down through the industry to all levels, from the Commissioner to the bank teller, ensuring conformity on nation wide basis.

But what about the allegations made by the Paris based OECD and its Harmful Tax Practices Committee. This committee has concluded that the Cook Islands offshore industry plays host to harmful tax practices. It is both interesting and somewhat ironic that by far the most common offshore planning tool used in the Cook Islands is the asset protection trust. Recognised by numerous offshore professionals as the premier jurisdiction for such trusts, the asset protection trust in almost all cases does not offer any reduction of tax liability for the individual in their home jurisdiction.

Still, the Cook Islands must come to terms with the fact it appears on the list and may be subject to whatever sanctions the OECD deem appropriate should it not be removed. The Cook Islands government’s response has been a considered and careful one unlike the reactive approach of some jurisdictions. It did not move to compromise its right to determine its own tax structure by immediately agreeing to all of the OECD requirements. Nor was it arrogantly intransigent. The government was and is still determined to find some common middle ground that will ensure its sovereign rights are not infringed whilst at the same time trying to allay some of the concerns of the OECD Committee. The Cook Islands has been conspicuous at the majority of meetings held by the OECD in numerous countries represented by either the Prime Minister or the Commissioner. Its approach has been one of constructive dialogue aimed at finding that middle ground. The Cook Islands in attending these meetings has shown responsiveness and maturity. The government has never proffered arguments such as it is wholly dependent upon its offshore industry for much needed income. This and other such arguments are not relied upon by the Cook Islands in the defense of the position it has chosen to take. The cornerstone for its stance is based upon a principle most would be familiar with that is its sovereign right to determine its own taxation system without reference to the often inconsistent and inequitable standards provided by the OECD Committee.

Determined not to be undermined in its progress as a nation, the Cook Islands continues talks with both the OECD and the FATF in the hope that agreement will soon be reached. The deadlines are fast approaching and despite the Cook Islands long standing and reinforced position on money laundering, an updated list by the FATF has failed to take this into consideration and halt the Cook Islands being tarred with the same brush as those countries who have chosen to do nothing. It is difficult to fathom the reasoning. One can only speculate at what will happen when the OECD deadline passes. Will the OECD seek to punish those nations who are in the middle of fruitful discussion or will they see logic, sense and reason and listen not only to the arguments of nations such as the Cook Islands but also to the numerous commentators who believe that a number of their principles are flawed.

Discussion must continue to produce an acceptable result. Only with the continued support of organizations such as the OECD and FATF and not overbearing pressure to conform can the Cook Islands be assured of meeting its international responsibilities yet still retain its sovereign integrity.

It can be clearly seen that subsequent to its independence from New Zealand, the Cook Islands has at all times attempted to live up to the expectations of its peers in the international community. It has strived to meet a balance between the beliefs of other countries on tax issues and the protection of its sovereignty as a nation. Despite a sometimes inflexible stance on the part of those other countries, the Cook Islands continues sailing through international waters, mapping a course of accountability and responsibility.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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