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Cook Islands Travel Guide

Business and Finance

Since 1984 the Cook Islands has operated as an "international finance center" providing offshore banking facilities to foreign corporations and individuals attempting to avoid taxation and regulation in their home countries.

In contrast to local businesses, which are heavily taxed and regulated, more than 3,000 companies, trusts, banks, and insurance companies that don't operate in the Cooks are now registered in the Rarotonga "tax haven", bringing in about millions of dollars a year in banking and licensing fees. Offshore "banks" can be owned by a single person and it's believed that millions of illicit dollars have been laundered through Rarotonga. The number of Asian companies involved is significant.

Such arrangements allow individuals in other jurisdictions to transfer revenue to "asset protection trusts" in the Cook Islands that are safe from creditors in the event of a subsequent bankruptcy. Thus unscrupulous individuals can plunder their own companies elsewhere in order to build up tax-free nest eggs on Rarotonga. Profits can be routed through the Cook Islands to avoid taxation. Scams such as these helped generate the Asian financial crisis of 1997, and teams of highly paid lawyers and accountants based on Rarotonga and abroad facilitate the process.

In past, the 26-nation Financial Action Task Force of the Organization for Economic Cooperation and Development has had the Cook Islands on its blacklist of "uncooperative jurisdictions" with regulatory systems that make them attractive money laundering locations. Australia and New Zealand have revised their tax laws to restrict the use of tax havens by their citizens (penalties of up to 125 percent of the tax due and five years in prison). In 2003, the Cook Islands did revise its banking laws slightly under OECD pressure and 16 offshore banks withdrew from the country. A year later the Cook Islands was still on the blacklist.

The country has a multi-million-dollar national debt, much of it incurred during the administration of Sir Geoffrey Henry in the 1990s for tourism-related developments such as the Sheraton Hotel project, the National Cultural Center, power generation, and telecommunications. Much of the money is owed to the governments of Italy and Nauru, which foolishly guaranteed huge unsecured loans to this tiny country, but a good part of it came from the Asian Development Bank, which has had to intervene several times to save the Cook Islands from bankruptcy.

In mid-1994 local branches of the ANZ and Westpac banks began to severely restrict private credit after the government proved unable to service its heavy debt load. A few months later the banks stopped clearing checks drawn in the Cook Islands dollars through the New Zealand banking system and announced that these would have to be collected locally. Local businesses began moving money offshore, and in late 1994 the Reserve Bank of New Zealand confirmed that it no longer guaranteed the convertibility of the Cook Islands dollar. The threat of imminent financial collapse forced the government to withdraw the currency from circulation in 1995. New Zealand banknotes are presently used.

This financial crisis forced the government to reduce the number of employees on its payroll from 3,600 or 60 percent of the workforce to 1,200. Salaries were cut 65 percent and between 1996 and 1999, 3,969 Cook Islanders, a quarter of the population, voted with their feet and left for greener pastures in Australia and New Zealand. State assets (including four hotels and the telephone company) were hurriedly sold off and the number of government departments cut in half.

The Cook Islands runs a discount "flag of convenience" ship registry that allows foreign shipping companies to avoid the more stringent safety and labor regulations of industrialized countries. Because of unexplained sinkings and other costly mishaps, most insurance companies won't touch ships registered in the Cooks.

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