Source: 2008
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. The Cook Islands’ offshore sector makes it vulnerable to money laundering. The sector offers banking, insurance, international trusts, and formation of international business companies and trusts. However, due to recent legislative and regulatory changes, the Cook Islands complies with current international standards.
The domestic banking system is comprised of branches of two major Australian banks and the local Bank of the Cook Islands (BCI). Domestic banks are primarily involved in 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 Financial Supervisory Commission (FSC). In addition, nonperforming loans made by the Cook Islands Development Bank have been transferred to another affiliated company. In addition to the three domestic banks, the Cook Islands financial sector also consists of four international banks, seven trustee companies, and six offshore and three domestic insurance companies. The domestic insurance companies are not regulated by the FSC, but legislation is being drafted to allow regulation to take place in 2008.
The Cook Islands has an offshore financial sector that licenses international banks and offshore insurance companies and registers international business companies (IBCs). The offshore sector also consists of company services and trusts, including asset protection trusts (APTs). APTs protect the assets of individuals from civil judgments in their home countries and are able to contain a “flee clause.” One of the purposes of a “flee clause,” is to evade law enforcement. If a foreign law enforcement agency makes an inquiry regarding the trust, the trust will be transferred automatically to another offshore center. According to officials of the Government of the Cook Islands (GOCI), the “flee clause” exists to transfer APTs in times of emergency, such as a natural disaster, but they may also incorporate clauses designed to avoid the courts of the jurisdiction they are in or investigations by regulatory authorities. In practice they are rarely used as they are difficult to implement without the trustee finding itself in breach of the law.
The Cook Islands was placed on the Financial Action Task Force (FATF) list of Non-Cooperative Countries and Territories (NCCT) in 2000. After the GOCI addressed deficiencies in its anti-money laundering regime by enacting legislative reforms, the FATF removed the Cook Islands from its NCCT list in February 2005. The FATF conducted a year-long monitoring program, which concluded in June 2006, to closely monitor the islands.
The Banking Act 2003 and the Financial Supervisory Commission Act (FSCA) 2004 established a new framework for licensing and prudential supervision of domestic and offshore financial institutions in the Cook Islands. The legislation requires international offshore banks to have a physical presence in the Cook Islands, transparent financial statements, and adequate records prepared in accordance with consistent accounting systems. The physical presence requirement is intended to prohibit shell banks. All banks are subject to a vigorous and comprehensive regulatory process, including on-site examinations and supervision of activities.
The FSCA established the Financial Supervisory Commission as the licensed financial sector’s sole regulator. The FSC is empowered to license, regulate, and supervise the business of banking. It serves as the administrator of the legislation that regulates the offshore financial sector. The FSC can license international banks and offshore insurance companies and register international companies. It also supervises trust and company service providers. Its policy is to respond to requests from overseas counterparts to the utmost extent possible. The FSC has taken a broad interpretation of the concept of “counterpart” and does not need to establish general equivalence of function before being able to cooperate.
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.
By enacting the Financial Transactions Reporting Act (FTRA) 2003, which replaced a similar Act passed a year earlier, the Cook Islands authorities strengthened its anti-money laundering and counter-terrorist financing (AML/CTF) legal and institutional framework. Reviews are underway to consider how the AML/CTF legislation affects other domestic laws. The Financial Supervisory Commission (FSC), regulator of the licensed financial sector is drafting new insurance legislation. The legislation will regulate the small domestic insurance sector and update supervision of the offshore insurance sector. Insurance intermediaries will also be regulated under the proposed legislation.
The FTRA imposes certain reporting obligations on 26 different types of institutions, including banks, offshore banking businesses, offshore insurance businesses, casinos, gambling services, insurers, financial advisors, solicitors/attorneys, accountants, financial regulators, lotteries and money remitters. The Minister of Finance can extend the reporting obligation to other businesses when required. Reporting 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 verify the customer’s identity. In addition, reporting 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. Reporting institutions must comply with any guidelines and training requirements issued under the FTRA, as amended, and must provide internal training on all anti-money laundering matters. The FTRA provides for administrative and financial sanctions on institutions for noncompliance.
The FTRA requires the FSC to assess the compliance by licensed financial institutions with customer due diligence and record keeping requirements. Resulting reports and documentation from annual inspections are provided to the Cook Islands Financial Intelligence Unit (CIFIU). The CIFIU is also responsible for assessing compliance by nonlicensed institutions.
The CIFIU is the central unit responsible for processing disclosures of financial information in accordance with anti-money laundering and antiterrorist financing legislation. It became fully operational with the assistance of a Government of New Zealand technical advisor. The FTRA grants supervisory authority to the CIFIU, allowing it to cooperate with other regulators and supervisors, require reporting institutions to supplement reports, and obtain information from any law enforcement agency and supervisory body.
Obligated institutions are required to report any attempted or completed large currency transactions and suspicious transactions to the CIFIU. The currency reporting requirements apply to all currency transactions of NZ $10,000 (approximately U.S. $6870) and above, electronic funds transfers of NZ$10,000 and above, and transfers of currency in excess of NZ $10,000 into and out of the Cook Islands. Failure to declare such transactions could incur penalties. The CIFIU is required to destroy a suspicious transaction report if there has been no activity or information related to the report or to a person named in the report for six years. The CIFIU does not have an investigative mandate. If it determines that a money laundering offense, serious offense or terrorist financing offense has been or is being committed, it must refer the matter to law enforcement for investigation. The Minister of Finance, who is responsible for administrative oversight, appoints the head of the CIFIU.
The CIFIU is participating in the Pacific FIU database project (PFIUDP) provided by AUSTRAC, the Australian FIU. The CIFIU received a prototype of the database and is now testing the reporting and analysis capacity. The Pacific FIU Database Project includes other jurisdictions that will receive versions of the same database framework.
Since June 2004 the Cook Islands had made further progress in implementing its AML/CTF regime. The head of the CIFIU chairs the Coordinating Committee of Agencies and Ministries, which promotes, formalizes and maintains coordination among relevant government agencies; assists the GOCI in the formulation of policies related to AML/CTF issues; and enables government agencies to share information and training resources gathered from their regional and international networks. The AML/CTF consultative group of stakeholders facilitates consultation between government and the private sector, and ensures all financial sector players are involved in the decision making and problem solving process regarding AML/CTF regulations and reporting. The CIFIU is also a member of the Anti-Corruption Committee, along with the Office of the Prime Minister, Police, Crown Law, Audit Office, and the Financial Secretary.
The Terrorism Suppression Act 2004, based on the model law drafted by an expert group established under the auspices of the Pacific Islands Forum Secretariat, criminalizes the commission and financing of terrorism. The United Nations (Security Council Resolutions) Act 2003 allows the Cook Islands, by way of regulations, to give effect to the Security Council resolutions concerning international peace and security.
The GOCI is a party to the 1988 UN Drug Convention, the UN Convention against Transnational Organized Crime, and the UN International Convention for the Suppression of the Financing of Terrorism. The Cook Islands is an active member of the Asia/Pacific Group on Money Laundering (APG), an associate member of the FATF. The CIFIU became a member of the Egmont Group in June 2004, has bilateral agreements allowing the exchange of financial intelligence with Australia, and is negotiating a memorandum of understanding (MOU) with Thailand. The Cook Islands plans to become a member of the Offshore Group of Banking Supervisors (OGBS), once it has qualified by undergoing further evaluation. The GOCI is also an active member of the Association of Financial Supervisors of Pacific Countries and draws on the resources of this association and Pacific Financial Technical Assistance Centre for capacity building for FSC staff. The Cook Islands has received nine requests for mutual legal assistance since the Mutual Assistance in Criminal Matters Act came into force in 2003. Five have been answered, and four are pending. The Cook Islands has not received any extradition requests from foreign countries, but successfully extradited one person from New Zealand.
The Cook Islands should continue to implement legislation designed to strengthen its nascent AML/CTF institutions. The Government of the Cook Islands should maintain vigilant regulation of its offshore financial sector, including its asset protection trusts, to ensure that its offshore sector comports with international standards.