Getting off the grey list

Listen:

In 1989 the G-7 group of countries decided it was time to act together to address the increasingly serious problem of money laundering. They created what became known as the Financial Action Task Force on Money Laundering, or FATF. Prompted as they were by the extraordinary boom in illicit cash brought about by America’s love affair with cocaine, the measures weren’t taken particularly seriously by tiny tax-haven nations such as Vanuatu.

Then came September 11th, 2001. What had been seen as a first-world problem suddenly became a global concern. No longer just a pastime for drug lords and tax cheats, money laundering was identified by the USA as a prime source of financing for terrorism. In the months immediately after the terror attacks on New York, a series of measures were brought into play that made it clear that the world was going to play along to the anti-money laundering tune.

In 2002, Vanuatu was faced with a choice. It could either clean up its act, or it could lose the ability to trade in US dollars. The consequences of failure were dire, to say the least. Within months, a number of offices with dozens of nameplates on their door disappeared.

In fairly short order, Vanuatu drafted a legislative and law enforcement framework that quelled the international community’s worst fears, and got the country moved from the infamous grey list of ‘non-compliant and uncooperative jurisdictions’. In fact, Vanuatu went above and beyond the call of duty, and drafted a regime that would prove onerous actually to implement.

This decision would come back to haunt the country.

Officials, administrators, business owners and the public in general didn’t see much of this until 2006, when an assessment of progress on the country’s commitments showed severe shortcomings. These were listed, and some progress was made.

Vanuatu showed willing, too, to a cooperative programme with the Australian Tax Office. The resulting raids and arrests caused a furore locally, as local investors discovered that at least some of their records were subject to ATO scrutiny. Most notably, Equity Group principal Robert Agius was convicted to nine years imprisonment for his role in a tax evasion scheme involving international transfers and allegedly false loans.

But progress stalled. People close to the process attributed the lack of progress primarily to an inability among key stakeholders to grasp the nature of the issue and the severity of the consequences. One person who had worked assiduously on the issue for years said that people were simply waiting for someone else to come and fix their problem.

Others noted that there were—and still are—capable, engaged and informed professionals able and willing to drive the process, but that they were denied the mandate. This was partially attributed to internecine rivalries and an inability to coordinate across departments, institutions and sectors.

Unlike many of Vanuatu’s international obligations, lip-service and a few external consultancies weren’t going to suffice.

Stalling and delays continued until the Asia Pacific Group of the FATF, which is responsible for monitoring Vanuatu, sent notice that there was no more string to play out. In 2014, it was made clear that unless concerted, substantive and immediate progress was made to counter money laundering and terrorist financing, steps would be taken.

Once again, officials embarked on a flurry of activity, then slid back into torpor. In spite of warnings from technocrats within the government, little substantial movement was made. A 2015 review made it clear that grey listing was likely inevitable, and sanctions would come into play in short order.

In spite of this, private and public sectors continued to disagree about how to progress. Law enforcement officials remained largely ignorant of the nature of financial crime, let alone how to police it.

Late in 2015, in the face of growing certainty that Vanuatu would soon count itself among a motley crew that includes Afghanistan, Syria, Yemen and Laos, Acting Prime Minister Moana Carcasses wrote to the APG, reiterating Vanuatu’s intention to play along.

This might have been enough to avoid a ‘call for action’, bureaucratese for cutting financial ties, but unless meaningful progress is made, Vanuatu is still in the proverbial soup.

Through no fault of its own, Charlot Salwai’s government has inherited a headache that is going to require strong medicine to cure. A spokesman for the PM assured the Daily Post that funds had been allocated for the task, and that it is a top priority for the government.

In practical terms, even staying on the grey list for any length of time has deep and dangerous consequences. The most worrisome of these is loss of access to what are known as correspondent accounts. These are the means by which banks transfer funds between countries. Without a correspondent account, a bank is hamstrung in important ways.

Without access to foreign accounts, businesses are paralysed. Importers cannot pay for the goods they order. Even in the best case scenario, a middleman is required to conduct the actual exchange, causing significant increases in the cost of every transaction.

The great difficulty that Vanuatu faces in extracting itself from the grey list is that concerted, cooperative action is required. That has never been numbered among the country’s strengths.

The Financial Intelligence Unit, which is responsible for monitoring and reporting financial crime, needs to be given teeth. It will have to find a place within the law enforcement hierarchy. That means moving into an institution that has been riven by political infighting, and has virtually no knowledge or understanding of the nature of the challenge.

Slightly easier to achieve, legislative reform is needed. Some of the people who drafted the initial legal framework are still available, so its possible that the amendments and new laws required could be produced in relatively short order.

Most of all, though, Vanuatu has to be seen to actually be doing something. Almost certainly, that means getting tough on financial crime. And that will almost certainly upset the apple cart for some people here. Only when—or if—the first prosecutions begin, will we see for certain whether the country is serious about combating financial crime.