Source: 2005
Released by the Bureau for International Narcotics and Law Enforcement Affairs
The Cook Islands is a self-governing parliamentary democracy in free association with New Zealand and a member of the British Commonwealth. Cook Islanders are citizens of New Zealand. By passing nine new legislative acts on May 7, 2003 and additional legislation in 2004, the Cook Islands authorities strengthened its anti-money laundering/counterfinancing (AML/CFT) legal and institutional framework.
The new laws remedy several of the deficiencies identified by the Financial Action Task Force,s Non-Cooperative Countries and Territories initiative and the joint Asia/Pacific Group on Money Laundering/Offshore Group of Banking Supervisors (APG/OGBS) mutual evaluation report.
The Financial Transactions Reporting Act 2003 (FTRA 2003) imposes certain reporting obligations on financial and non-bank financial institutions such as banks, offshore banking businesses, offshore insurance businesses, casinos, and gambling services. Financial institutions are required to make currency transaction reports and suspicious transaction reports. Financial institutions are required to retain all records related to the opening of accounts and financial transactions for a minimum of six years. The records must include sufficient documentary evidence to prove the identity of the customer. In addition, financial institutions are required to develop and apply internal policies, procedures, and controls to combat money laundering, and to develop audit functions to evaluate such policies, procedures, and controls. Financial institutions must comply with any guidelines and training requirements issued under the FTRA 2003.
The Financial Transactions Reporting Act 2004 (FTRA) redefined obligations and procedures relating to customer identification, record keeping, internal controls and reporting of suspicious or other types of transactions. It also reorganized the supervisory structure, by allocating compliance checking functions for licensed entities to the Financial Supervisory Commission (FSC). The FTRA addresses confidentiality/secrecy of financial transactions, and provides authority that supersedes other related legislation in Sections 35 and 36. These sections compel financial institutions to comply with the reporting and other requirements of the FTRA, and to provide transaction information to the Cook Islands Financial Intelligence Unit (FIU), established under the law.
The FTRA mandates due diligence, ongoing monitoring of customers and transactions, suspicious activity reporting, development and maintenance of internal procedures for compliance, audit and record keeping. Furthermore, the FTRA establishes the supervision and authority of the FIU, including cooperation with supervisors, and provides for administrative and penal sanctions for noncompliance.
The FIU became legally established pursuant to Section 20 of the FTRA. With the assistance of a Government of New Zealand technical advisor, the FIU became fully operational. The FIU is the competent authority responsible for receiving, suspicious transaction reports (STRs). The FIU also receives currency transaction reports, as well as reports of telegraphic transfers over NZD$10,000. If the Financial Intelligence Unit (FIU), after analyzing these reports determines that a money laundering offense has been, or is being committed, the FIU must refer the matter to law enforcement for investigation. The 2003 FTRA also authorizes the FIU to request information from any law enforcement agency and supervisory body. The FIU is required to destroy a suspicious transaction report received or collected after six years since the receipt of the report, if there has not been activity or information relating to the report or the person named in the report. Covered institutions obligated to file STRs to the FIU are banks, insurers, financial advisors, bureaux de change, solicitors/attorneys, accountants, financial regulators, casinos, lotteries, money remitters, and pawn shops. Administrative oversight is vested with the Minister of Finance, who appoints the Head of the FIU. FIU has the authority to require reporting parties to supplement reports, and has broad powers to obtain relevant information needed to combat money laundering and the financing of terrorism. The FIU does not have an investigative mandate.
The FIU has delegated responsibility for assessing AML compliance by licensed financial institutions to the FSC. The resulting reports and relevant documentation are to be provided to the FIU. However, the FIU retains responsibility for assessing compliance by non-licensed reporting institutions. In 2004, it did not conduct any on-site compliance visits, as it is still in the process of hiring a compliance officer and of identifying the non-licensed reporting institutions.
In May 2003 the Government enacted legislation to establish the Financial Supervisory Commission (FSC) as the sole regulator of the licensed financial sector. The FSC is empowered to license, regulate, and supervise the business of banking, and serves as the administrator of the legislation that regulates the offshore financial sector. Its policy is to seek to respond to requests from overseas counterparts to the utmost extent possible. The Board has also taken a broad interpretation of the concept of "counterpart," and does not need to establish general equivalence of function before being able to co-operate.
The only known request to the FSC in 2004 was a request from the New Zealand Securities Commission. The FSC advised the Securities Commission that, owing to the requirements of Cook Islands law, the information requested could be provided only if there were appropriate confidentiality arrangements in place. The Securities Commission developed confidentiality orders, advised the FSC of this in June 2004, and received the information sought in August 2004. The Securities Commission reports that it found the FSC willing to assist, and that it received all the information it sought.
The Cook Islands reporting requirements apply to all currency transaction reports (CTRs) of NZ$10,000 ($7,100) and above, electronic funds transfer reports (EFTR) of NZ$10,000 ($7,100) and above, as well as all suspicious transactions. Currency taken in and out of the Cook Islands in excess of NZ$10,000 must be reported, as well. The FIU received 14 STRs in 2004. In 2004, the FIU received 862 CTRs, 2,613 EFTRs, and 11 border currency reports (BCRs). To date, 30 of the 36 suspicious transaction reports have related to non-residents.
Under Sections 10 and 11 of the FTRA banks and a broad range of non-bank financial institutions are required to report telegraphic transfers above NZ$10,000 (approximately $7,100). CTRs must be filed when NZ$10,000 and above is transported over the border.
The domestic banking system is comprised of branches of two major Australian banks, and the local Bank of the Cook Islands (BCI). The latter is the result of a 2001 merger of the government-owned Cook Islands Development Bank and the Post Office Savings Bank. The primary business of the domestic banks operating in the Cook Islands is traditional deposit taking and lending. The BCI operates as a stand-alone institution competing against the two Australian banks, and is no longer engaged in development lending. Legislation allows for development lending to be undertaken in the future by a separate company not subject to supervision by the FSC. In addition, non-performing loans made by the Cook Islands Development Bank have been transferred to another affiliated company.
Licensing requirements, as set out in the legislation, are comprehensive. The Banking Act 2003 and a Prudential Statement on Licensing issued in February 2004 contain detailed licensing criteria for both locally incorporated and foreign banks, including "fit and proper" criteria for shareholders and officers, satisfactory risk management, accounting and management control systems, and minimum capital requirements. The Banking Act 2003 defines banking business, prohibits the unauthorized use of the word "bank" in a company name, and requires prior approval for changes in significant shareholding.
The Cook Islands has an offshore financial sector that licenses international banks and offshore insurance companies and registers international business companies. It also offers company services and trusts-particularly asset protection trusts that contain a "flee clause". Flee clauses state that if an inquiry is made by a foreign law enforcement agency regarding the trust, the trust will be automatically transferred to another jurisdiction.
The Banking Act 2003 and the Financial Supervisory Commission Act 2003 (FSCA 2003) established a new framework for licensing and prudential supervision of domestic and offshore financial institutions in the Cook Islands. The FSCA required all banks, onshore and offshore, to reapply for a license within 12 months of the commencement of the FSCA --- May 2004. All offshore banks that had been licensed under the previous legislation were required to re-apply for an international banking license under the Banking Act 2003.
The effect of the legislation is to require offshore banks to have a tangible physical presence in the Cook Islands (the "mind and management" principle), transparent financial statements, and adequate records prepared in accordance with consistent accounting systems. All banks are subject to a vigorous and comprehensive regulatory process, including on-site examinations and supervision of activities on a consolidated basis. This physical presence requirement was intended to ensure that the Cook Islands would have no "shell banks" by June 2004.
Nine applications were received by the FSC for international banking licenses. Seven of the pre-existing banks decided not to re-apply. Two licenses were granted on May 28, 2004, and three on July 1, 2004. Four applications were declined: three on the grounds that the shareholders and/or directors were not fit and proper, and the fourth on the grounds that the ownership structure included bearer shares. One of the four banks refused a license appealed to the courts, and an interim injunction instructing the Commission to issue a license was granted. The FSC is challenging the decision, and is hopeful that the matter will be resolved by March 2005.
The FIU may, with the approval of Cabinet, enter into negotiations, orally or in writing, relating to an agreement or arrangement, with an institution or agency of a foreign state or an international organization. The Cabinet must approve final agreements or arrangements. In regard to disclosure of information to foreign agencies, the FIU may share information with foreign institutions or international organizations that have powers similar to the FIU after the signing of an information exchange agreement.The GOCI is a party to the UN Convention against Transnational Organized Crime and the UN International Convention for the Suppression of the Financing of Terrorism. The Terrorism Suppression Act 2004 is based on the model law drafted by an expert group established under the auspices of the Pacific Islands Forum Secretariat. The Act criminalizes the commission and financing of terrorism.
The GOCI is a member of the Asia/Pacific Group on Money Laundering. The FIU became a member of the Egmont Group in June 2004, and has bilateral agreements allowing the exchange of financial intelligence with Australia. It is currently in negotiations with Thailand.
The United Nations (Security Council Resolutions) Bill is currently in Parliament. The Bill will allow the Cook Islands, by way of regulations, to give effect to the Security Council Resolutions concerning international peace and security. The GOCI is also finalizing regulations to give effect to UN Security Council Resolution 1373.
The Financial Action Task Force (FATF) placed the Cook Islands on its Non-Cooperative Countries and Territories (NCCT) list in 2000. In the interim, the Government of the Cook Islands has remedied the deficiencies of its anti-money laundering regime A FATF Review Group conducted an on-site visit in November 2004 to determine the effectiveness of those remedies. The Cook Islands should continue to implement legislation designed to strengthen its nascent institutions and should maintain vigilant regulation of its offshore financial sector to ensure that it comports with international standards.