EUGENE BINGHAM and JOHN ANDREWS look into a burgeoning industry that has tarnished the South Pacific and put four small nations on an international blacklist.
Push through the swing doors of Nauru's consulate in Melbourne and behold the horror of phosphate-coloured furnishings.
If you're not on guard, it could be enough to temporarily distract you from this tiny republic's problems.
Maybe that's the idea; a cunning plan drawn up by the Government PR-gun downstairs to divert attention from the allegations of corruption and money laundering that swirl around this 50th-floor office.
Or perhaps the choice of off-white furniture on cream carpet is just to remind the staff of home, the Pacific island nation 4400 km away that built its fortunes by hocking off phosphate for fertilizer.
If only things could have stayed that simple for Nauru, it would not now be in the excrement that it is. With the phosphate mines nearly depleted, the country of 11,000 turned to high finance as a source of income. It established an offshore financial centre that has made Nauru an international pariah.
In a matter of years, Nauru has gone from being a respected country with considerable investments around the world to a rogue nation with a reputation as an industrial-strength laundering machine for the criminal underworld.
A Weekend Herald investigation has uncovered evidence that overseas banks licensed by high-ranking members of the Government, including President Bernard Dowiyogo, have been used to launder the proceeds of large-scale white-collar crimes in Russia.
Documents the Herald obtained also show that the Government has also gone into the business of internet casinos, fast becoming the method of choice for fraudsters and drug-dealers looking to turn crime-soiled money into clean cash.
The hunt for money-laundering avenues is not confined to Nauru. Nor is it a new phenomenon in the South Pacific. United States crime-fighters and worldwide agencies, including the Organisation for Economic Cooperation and Development (OECD) and its affiliate, the Financial Action Task Force on Money Laundering (FATF), have made enough allegations in reports over the past five years to make money laundering as South Pacific as sandy beaches and palm trees.
In fact, mention the name Niue in the financial heart of New York and bankers will instantly conjure up images of Russian crooks rather than smiling Pacific peoples.
FATF last year declared Niue, Nauru, the Cook Islands and the Marshall Islands as Pacific nations that were being "non-cooperative" in the global fight against money-laundering, because of their offshore financial activities.
Being on the blacklist has become more than a cause for worldwide embarrassment. Niue, at least, is suffering fiscal fallout that may have repercussions for New Zealand.
Which is one reason you should care about the issue of money laundering. New Zealand has a close relationship with the Pacific, including constitutional relationships with Niue and the Cooks, as well as trade and aid links with much of the region. We have a vested interest in regional stability.
There's also the question of whether we want our backyard to become an easy one-stop-shop for those looking to exchange their ill-gotten gains so they will have the money to pay for the next deal or hit. Or luxury house.
A peek over New Zealand's back fence today reveals a clutch of nations desperately trying to beat a July deadline to have their houses in order before the OECD imposes harsh "counter-measures" on them.
The world has given notice that sanctions will be brought to bear on countries that fail to have adequate anti-money-laundering protections in place by then.
The threat has been like a cattle prod to Parliaments around the Pacific which have rushed to pass legislation enabling greater scrutiny of their financial sectors and the establishment of so-called Financial Intelligence Units. Serious concerns remain about how effective the oversight will be because of a lack of resources and expertise.
Nonetheless, Niue, the Cooks and the Marshall Islands have been praised for the laws they now have. It is accepted around the world that, of the blacklisted Pacific nations, these three have done significant work to get their affairs in order.
Then there's Nauru.
Cast alone in the middle of the Pacific Ocean, Nauru has no official capital, although the Government offices and Parliament lie in a cluster in the Yaren district on the south-west coast baking under the equatorial sun.
Much of the Government's work goes on in air-conditioned bliss in Melbourne, Nauru's de facto capital, where the Government owns a considerable property portfolio. Smack bang in the heart of the city is the jewel of this portfolio, a sky-scraper called Nauru House, topped by four blue 12-pointed stars representing the country's 12 tribes. It is here that President Dowiyogo spends much of his time, working out of the consular office on the 50th floor.
Plenty of his work for the past few months has involved defending himself against calls for an inquiry into allegations of misappropriation of millions of dollars in public money and the facilitation of money laundering. The Herald has obtained documents that show that Mr Dowiyogo was involved in licensing an offshore bank subsequently used by a Russian con-man.
The Russian connection is not unusual. Russia's central bank claimed that in 1998, $US70 billion ($161.8 billion) washed through Nauru's shonky offshore banking system. The problem banks in Nauru exist only on paper. Anyone can pay a $US4000 licence fee to have the shell bank set up. The attraction is that, under Nauru's laws, it is impossible for investigators, or anyone else, to demand to know who owns the bank. Nor is there a requirement to keep records of any sorts.
Russian justice authorities came face to face with this secrecy problem during their investigation into a $2 million fraud last year. Interpol documents show that Russian officials appealed for help after they discovered that most of the money had been wired to two offshore banks registered in Nauru. The bulk of that money went to Forpost Investment Bank, an outfit approved for licence by Mr Dowiyogo. The remainder passed through Omega Bank, licensed by another cabinet minister, Vassal Gadoengin.
Having followed the trail of money that far, the Russians wanted help from the Nauruans to find out who owned Forpost and Omega. After failing to get such help, the Russians approached Australian police through Interpol. The Australian Interpol officer who handled the case, Tim Gulliver, refused to comment when contacted this week. But it is understood that he had as much luck as the Russians getting information from Nauru.
It is not known what happened to the money once it left Nauru. But the modus operandi for money launderers is to wire the money on to accounts set up by the shell banks with legitimate banks in other parts of the world. These accounts are called correspondent accounts.
Deep in suburban Melbourne, Mr Dowiyogo's political nemesis has been plotting the President's downfall over this and other foul-smelling deals. Anthony Audoa, a member of the Dowiyogo cabinet until he resigned in December, wants to take the top job. But first he wants Mr Dowiyogo to answer questions in Parliament.
With a master of laws degree from Monash University, Mr Audoa is careful about what he says. Rather than make accusations, he simply asks that Mr Dowiyogo face an investigation. "Let's make him accountable," says Mr Audoa.
He is unequivocal on one thing: Nauru needs to smarten up its act to protect itself from crooks and stop being at risk of money laundering. "If someone wants to register a bank in Nauru, they come along and pay their money. We need to tie them down with the law."
Mr Audoa believes Nauru can run an offshore financial centre that has integrity. "But you have to have the right legislation in place. At the moment we don't."
Mr Dowiyogo has remained silent on the claims. He refused repeated Herald requests for an interview, although his Government issued a statement via its hired PR consultant, Helen Bogdan, whose office is on the 49th floor of Nauru House.
The Secretary of Justice, Hudson Ramatlap, said the offshore applications were vetted closely through the Nauru Agency Corporation, the organisation that administers the licences. "The agency's processing of applications includes thorough background checks to verify information submitted by clients. As minister directly responsible for the agency, President Dowiyogo has signed licences for companies of good repute, but only after receiving the recommendations of the Secretary of Justice as Registrar of Corporations," said Mr Ramatlap.
"President Dowiyogo's Government has not hesitated to cancel licences for non-compliance with licence conditions, and has co-operated with foreign law enforcement agencies in efforts to combat money laundering."
Money-laundering watchdogs do not agree. Of the 15 countries blacklisted by the FATF, Nauru is top of the list. It is the only country that has so far refused to cooperate and introduce more stringent checks and balances. One United States official told the Herald this week that if Nauru kept going down its current path, the world would have no choice but to shut the country down. Governments would order banks and firms to stop doing business with Nauru altogether, a move that would be catastrophic for the island nation.
It is not just Nauru that is facing economic sanctions. Niue has already been winded by a jab from two US banks. Last month, the Bank of New York and Chase Manhattan said they would no longer handle money generated by the registration of offshore companies in Niue. The country's Premier, Sani Lakatani, says the banks have withheld payments of $US100,000 due to Niue. If it carries on, functions of government will grind to a halt or be cut back.
The reasons for the banks' actions remain unclear. A spokesman for the Bank of New York confirmed that the sanction had been imposed but refused to give reasons.
But a banking source in the US said the banking community had become increasingly nervous about dealing with countries on the FATF blacklist. They were particularly spooked by a congressional committee's investigation into the role correspondent bank accounts played in the money-laundering process. The committee's report concluded that US banks were helping the owners and clients of poorly regulated and sometimes corrupt offshore banks access the US financial system.
No sooner had the report been released than the Bank of New York and Chase Manhattan moved. While they probably did not have direct evidence of Niue being used by money launderers, they may have calculated the risk of dealing with a blacklisted country was not worth it.
The ban has affected money generated through the registration of Niuean offshore companies by a Panama law firm, Mossack Fonseca. Mr Lakatani said about 8000 companies had been registered so far, generating about $US50,000 a month for Niue in licence fees.
Companies are only one arm of the Niue offshore operation. It also offers bank registrations via the Melbourne office of accounting firm PKF. Only six banks have been registered since the late 90s. Mr Lakatani said he did not hold records of who the owners were, though he believed at least one was Russian.
Mr Lakatani said he did not understand why Niue had been picked out by the US banks. The Government had passed the Financial Transactions Reporting Bill last December to tighten reporting and record-keeping obligations. He believed that Mossack Fonseca and PKF did a good job in vetting applications. "We asked them to check and check and check again to see if there was any criminal activity."
Noel May, the PKF partner delegated to process Niue applications, said his company and Mr Lakatani's Government set high standards, asking for passports and police certificates to verify the identity and integrity of bank owners and directors.
Mr May said more than 40 applications had been knocked back for various reasons. He was satisfied the company could prevent less-than-reputable applicants from operating banks, although he was concerned on one front.
"The legislation limits us a little bit in that it does not require a monthly report or anything like that. One of the little bugbears, in my mind, is that, having been granted a licence, what they do after that ... it could be a few months before we found out," said Mr May.
A US Government official said he was not comfortable with the fact the vetting was left up to the companies that carried out the registrations for Niue. He would prefer another level of independence. It is an issue Niue has gone some way to addressing, but it has been hampered by lack of expertise. The Government set up a Financial Intelligence Unit last year, but it has no one to run it.
The Cook Islands is in a similar position. It enacted legislation last year, but sources with a close knowledge of the Cooks worry they have not gone far enough. An Offshore Financial Services Commissioner has been appointed but she is stretched with other work too.
"For the size of the [offshore finance] industry in the Cooks, there should be more than one person," said one observer. "The important question is where is this money coming from? The issue for the Cook Islands is sovereignty, because it regards itself as a sovereign country and it has the right to do as it wants."
One source said that while there had never been any evidence of money laundering in the Cooks, banks and trust companies did not have to disclose vital information. "So how can the Government say there is no money laundering?" the source said.
New Zealand wants the Governments of the region to ensure they can answer that question with certainty. Last year, the Ministry of Foreign Affairs hosted a workshop in Auckland to give Pacific countries practical advice about anti-money-laundering techniques.
And New Zealand's expert in the area, Pat O'Sullivan, of the police's financial intelligence unit in Wellington, has been working on ways to help. He has been assisting on a project spearheaded by the Pacific Forum Secretariat, which is considering establishing a region-wide unit. "The project is all about putting people on the ground to help ... and also setting up a regional structure."
But the problem for Pacific nations is that they in a race against time. The OECD has said that it is about to get even tougher on countries that have not conformed by July. The Pacific Forum has pleaded for an extension to the deadline. Nauru just plain refuses to budge. Niue claims it is clean and has been tarred with the same brush as Nauru because of its Pacific proximity. So far, the OECD is standing firm.
A showdown looms.
Doing the washing for the world under a Pacific sun
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