Where In The World is Vanuatu?

Depending on who you believe (and how they define them), there are any number of "tax havens" in the world -- financially attractive jurisdictions that impose low or no taxes and gave the welcome mat out for foreigners willing to invest, bank or do business there.

With all the pressure in recent years, and especially this year, on European tax havens such as Liechtenstein, and major financial centers such as Switzerland, some folks seem to be looking for what might be called "far-out tax havens" as an alternative. Perhaps these adventuresome folks think they can run and hide, but my advice is be very careful where you go.

Which brings me to the fact that in the last few months I've received several inquiries about the viability of the Republic of Vanuatu as a potential place to base your offshore banking, asset protection plans and estate planning.

Way Out There

I can hear you now -- where in the world is Vanuatu? -- assuming it is in this world.

Vanuatu is a tropical archipelago group of 80 islands (about 65 of them inhabited) covering 12,200 sq km (slightly larger than Connecticut) in the South Pacific Ocean, about three-quarters of the way between Hawaii and Australia. The capital city is Port-Vila (on the island of Efate). Some 215,446 people live there, split between English and French speakers, reflecting their colonial heritage when Vanuatu was known as The New Hebrides.

Multiple waves of colonizers migrated to the New Hebrides in the millennia preceding European exploration in the 18th century. This accounts for the complex linguistic diversity found on the archipelago today. The British and French, who settled there in the 19th century, agreed in 1906 to an Anglo-French Condominium, which administered the islands until independence in 1980, when the new Republic of Vanuatu was born.

At its height, about 12,000 expatriates lived in the islands, but after independence land could only be owned by the people of Vanuatu, and the mainly French and British community shrank to less than 3000. Today, the expat population is about 8000 and growing, with heavily taxed Australians and New Zealanders in particular finding the islands lifestyle -- and no taxes -- to their liking. This migration recently has made the news in both countries.

Testing Tax Havens

Whenever we at the Sovereign Society rank offshore havens, we review the laws, political stability, economic climate, available legal entities, the tax situation, financial privacy rules and the overall financial reputation of a jurisdiction. (Our top favorites remain Switzerland, Panama, Liechtenstein, and Hong Kong).

For almost 40 years Vanuatu certainly has been known to some as a tax haven, which explains the high number of accountants, bankers and lawyers clustered in this small island nation. But the archipelago's reputation as an offshore financial center has been highly questionable, to say the least.

In 2000, the Asia-Pacific Group on Money-Laundering charged that Russian mafia syndicates were laundering billions of dollars through offshore banking systems in the Pacific, including Vanuatu. There about 2,000 registered institutions offer a wide range of offshore banking, investment, legal, accounting, and insurance and trust company services. Vanuatu also maintains an international shipping register in New York City.

Banking Boycott

In an unprecedented action in December 1999, a group of leading international bankers, pressured by the U.S., placed a ban on U.S. dollar denominated transactions involving three Pacific island nations - Nauru, Palau and Vanuatu. The bankers accused them of laundering money for the Russian mafia and the South American drug cartels. At the time Vanuatu had 63 licensed offshore banks.

The banking ban was a result of western concerns over a report issued by the OECD's Financial Action Task Force which said that Vanuatu is a "jurisdiction of prime concern" for money laundering based on allegations by the U.S. Government that there was a heavy concentration of financial activity linked to Russian crime syndicates in the South Pacific.

Recent Clean Up

Perhaps eager to distance itself from this past history, the Vanuatu Government now welcomes outside investment to help develop the small country. An obvious attraction to investors is the lack of income tax, capital gains tax and death estate tax, and no exchange controls. In 2002, following increasing international concern over money laundering, Vanuatu increased oversight and reporting requirements for its off-shore sector.

But it was not until 2008 that Vanuatu agreed to release account information to other governments or law enforcement agencies. International pressure, mainly from Australian tax collectors, influenced the Vanuatu government to move to increased transparency. Tax police raids in Australia this year during an investigation for alleged offshore tax evasion have spurred debate on the wisdom of Vanuatu remaining a tax-free haven.

Wait and See

We don't recommended Vanuatu as an appropriate offshore financial haven, because of the history and other reasons stated above, but also because of its less developed offshore professional sector and government's political instability, (another important subject that would require a lengthy discussion).

We wish the Vanuatu islanders well, and we remain open to change our current opinion, but there are too many other well established offshore financial centers to chose from that deserve more serious consideration.

* I can tell you all about those other suitable and useful offshore financial centers in my book, Tax Havens of the World: Where to Stash Your Cash. Click here.