COOK ISLANDS : OFFSHORE BUSINESS SECTORS

Although the Cook Islands offshore industry is relatively small in world terms, it is an important source of revenue to the Islands' Government, which actively encourages its development with tax incentives and concessions. The offshore industry now only rates second to tourism in terms of its contribution to Government finances.

However, it has been shrinking of recent years, and in February 2008, a committee set up by Finance Minister Sir Terepai Maoate was tasked with coming up with a rescue package for the offshore industry.

Marketing the Cook Islands as a safe and reputable jurisdiction for people to do business was immediately identified as a priority by the Committee. Committee member Puai Wichman stated at the time that he believed that such a goal could be achieved “quite quickly”.

“We have huge potential as a jurisdiction, I think we stand to produce the greatest source of diversification of income for the country if we do it right and now we have the opportunity to do it right,” observed Wichman.

Recognising that the industry has considerable potential for growth, Sir Terepai expressed concern that it had been shrinking in terms of its presence in the international market place and revenue contributions.

Sir Terepai did caution the Committee, however, that the offshore industry “needs to put more effort into this rather than relying on government to drive a marketing programme”.

The industry began in 1981 with the International Companies Act 1981-2, the Offshore Banking Act 1981, the Offshore Insurance Act 1981-2, and the Trustees Companies Act 1981-2. This legislation was then followed up with the enactment of the International Partnerships Act 1984 and the International Trusts Act 1984.

The Offshore Financial Services Act 1998 created the post of Commissioner of Offshore Financial Services who issued banking and insurance licences. Under the umbrella of the Commissioners office are the Registrars of Companies, Trusts and Partnerships who licenced and regulated their respective fields.

Most regulatory and supervisory functions were however transferred to the Financial Supervisory Commission after its establishment in 2004. The insurance sector came under the FSC's regulatory remit with the Insurance Act 2008. The Offshore Banking Act was replaced and modernized by the Banking Act 2003.

In common with many other offshore jurisdictions, the Cook Islands has responded to pressure from the OECD and FATF by tightening up its regulatory regime. Specifically, the Cook Islands responded to its inclusion on the FATF blacklist of jurisdictions with weak anti-money laundering legislation. In September 2000 the Cook Islands parliament passed the Money Laundering Prevention Act, which provided for the setting up of a Money Laundering Authority, to consist of the government's financial secretary, the commissioner for offshore financial services and the commissioner of police.

In 2003, a series of nine new laws were passed with regard to the regulation of domestic and offshore financial industries, after the cabinet approved the work of an Anti-Money Laundering/Counter Financing Terrorism Committee. The laws included a Financial Transactions Reporting Act, which required all banks to report local and international money transfers to a central financial intelligence unit. Since June 4, 2004, the operators of offshore companies, banks, trust accounts and insurance firms have been required to make full disclosure as a result of the updated legislation.

Disappointingly for the Islands, they were not removed from the list at the FATF's meeting in March, 2004. The issue of revised FATF regulations meant that the 2003 legislation had to be reviewed, including the Financial Transactions Reporting Act 2003, Proceeds of Crime Act 2003, Financial Transactions Reporting (Customer Identification) Regulations 2004, Financial Transactions Reporting (Offering Companies) Regulations 2004, and the International Companies (Evidence of Identity) Regulations 2004.

Following a review undertaken in 2004 by the Financial Supervisory Commission, amendments were also made to the International Trusts Act and the International Partnerships Act.

An IMF assessment report issued in December, 2004, was complimentary, stating that:

'In response to its listing under the FATF’s NCCT initiative, the Cook Islands has taken a number of measures to strengthen its financial sector regulation. New legislation was passed for the regulation of banking activity and a Financial Supervisory Commission (FSC) was established. A suite of anti-money laundering legislation was enacted in May 2003 with work ongoing in respect of legislation for combating the financing of terrorism. The new Banking Act and FSC Act provide a good basis for sound financial sector regulation. They provide the basic framework for authorization and effective supervision of licensed entities. The major challenges facing the FSC include the training and retention of appropriately qualified personnel and the development of an adequate range of regulations, guidance notes, and general supervisory tools.'

However, the IMF made a number of detailed recommendations for the improvement of training, transparency and supervision of the financial sector.

The Islands were finally removed from the FATF blacklist in February, 2005.

This section of the site describes the most important types of offshore business activity carried out from the Cook Islands.

Cook Islands Trust Management

Cook Island trusts are known locally as International Trusts and are governed by the provisions of the International Trusts Act 1984 (The Act), which has been substantially amended in 1989, 1991 1994, 1996 and 2004. See Forms of Company for a description of the legal basis and formation procedure for trusts, and see Law of Offshore for a more detailed analysis of Cook Islands trust law.

The Act provides for the licensing of trustee and trust management companies. All International Trusts must have a resident licensed trustee with management powers (unless they come within the custodian trustee exception cited below). Normally this means that the International Trust is required to use one of the 6 registered trust companies which operate out of the Islands. To obtain the protection of the Islands' laws the trust must be registered by the licensed trustee company within 45 days of its creation and they must certify that the trust is an International Trust under the Act.Trustee companies.

The non-resident settlor may appoint a licensed and resident Cook Islands trustee as a custodian trustee and is then free to appoint managing trustees within his own jurisdiction. The Act imposes strict confidentiality rules on trustees and the staff of licensed trustee companies, which can only be breached in the circumstances detailed below:

The Trustee Companies (Due Diligence) Regulations 1996 require the officers and employees of a registered trust company to take reasonable precautions to ensure that an International Trust is not being used to shelter assets derived from drug smuggling, money laundering or other serious crime.

The Offshore Criminal Provisions Act 1996 provides that where an officer or employee of a registered trust company has cause to suspect that an International Trust is being used to shelter the proceeds of drug trafficking or that a person related to or involved with the entity has been convicted of serious criminal activity, that matter is to be referred to the appropriate Government regulatory body. Furthermore the registered trust company is to provide such reasonable assistance , documentation and other information as may be required by the Government regulatory body under the law.

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Cook Islands Banking

The law relating to banking, the obtaining of a banking licence and banking confidentiality is contained in the Offshore Banking Act 1981 (now repealed) and the Banking Act 2003 (as amended).

The Banking Act 2003 provides for the following categories of licenses:

• Domestic Authorizes licensees to carry on domestic banking business in and from within the Cook Islands.
• International Authorizes licensees to carry on international banking business in or from within the Cook Islands.
• Restricted International Authorizes licensees to carry on international banking business of a type and nature specified in the license and approved by the FSC.

With the passing of the Financial Supervisory Commission Act 2003 all applications for licences now go before the FSC.

Licensed banks must submit audited accounts each year.

At the time of writing, there are 3 domestic banks licensed in the Cook Islands and 5 international banks.

Domestic banks with a presence are:

• ANZ Banking Group Limited
• Bank of the Cook Islands Limited
• Westpac Banking Corporation

International Banks in the Cook Islands are:

• ANZ Banking Group
• Banktec (Cook Islands) Limited
• Capital Security Bank Ltd
• Pacific Trade Bank Ltd
• WSBC Bank (although the bank's licence is to be revoked on December 31, 2009, see below).

In March 2009, the FSC announced that a settlement had been reached in legal proceedings involving WSBC Bank. In a statement, the FSC said:

"The enforcement action taken by the FSC against WSBC Bank demonstrates that the FSC is not prepared to tolerate financial institutions operating in the Cook Islands that fail to comply with the regulatory legislation. Despite being a small agency, the FSC aims to ensure that global regulatory standards apply to banks and other financial institutions operating in the Cook Islands."

"The Cook Islands Government recently announced measures to raise the profile of the country’s offshore industry and having a well regulated financial sector is a fundamental step towards achieving this."

Banking licence fees as at June 2007 were as follows:

Application fees:

• Domestic Bank licence USD1,000
• International bank licence USD1,000
• Restricted bank licence USD500

Annual Fees:

• Domestic bank USD5,000
• International bank USD5,000 on share capital up to USD2m and USD6,000 on share capital over USD2m
• Restricted bank USD6,000

For details of the taxation regime applying to licensed banks, see Offshore Legal and Tax Regimes.

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Cook Islands Insurance

See Offshore Business Review – Insurance for a more general treatment of captive insurance companies.

New legislation in the form of the Insurance Act 2008 came into effect on 1 January 2009. The Act bring domestic insurance and insurance intermediaries under the Financial Services Commission's regulatory umbrella. It also updates the supervisory regime for offshore insurers. In August 2009, the FSC is finalizing an Insurance Code to underpin the new legislation.

Under the Insurance Act 2008, it is an offence to provide insurance unless the company is either licensed by the FSC or is approved as an external insurer under section 11 of the Act. Where there is insufficient market capacity in the Cook Islands to write a specific policy an exemption may be obtained from the Commission under section 7 of the Act for the insurance to be provided by an unlicensed insurer. It is also an offence to act as an insurance agent or broker unless licensed by the FSC.

Transitional provisions apply for those companies, agents and brokers that were conducting business in the Cook Islands as at 31 December 2008.

An insurance licence shall be issued in one of the following categories:

• Category A which may only be issues to a company incorporated under the Companies Act and entitles the holder to carry on insurance business, including domestic business.
• Category B, which may only be issued to an external insurer that carries on insurance business in the Cook Islands from and branch office in the Cook Islands and entitles the holder to carry on domestic insurance business.
• Category C, which may only be issued to a company incorporated under the International Companies Act, and which entitles the holder to carry on international business only.

Prior to the Insurance Act 2008, the law relating to insurance and the licensing of insurance companies was contained in the Offshore Insurance Act 1981 and in the Offshore Financial Services Act 1998.

Only an International Company or a Foreign Company incorporated under the International Companies Act 1981-2 (see Forms of Company) could be authorized to carry out insurance business under the older legislation. A licensee could not therefore deal with the local market and was restricted to offshore insurance business transactions such that all policy beneficiaries had to reside outside the Cook Islands.

Under the Offshore Insurance Act 1981, the licensing fee, payable annually, is $3,000 (2007) and the minimum capital requirement is US$2m and the company's tangible assets must exceed its liabilities by US$100,000. Regulations under the Insurance Act2008 are still being finalized. Audited accounts must be filed every year.

Legislation is pending with regard to protected cell companies.

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Cook Islands Shipping

The passing in 2008 of the Cook Islands Maritime and Transport Bill in Parliament repealed the Shipping Act 1998, which had a number of serious drawbacks.

It also brought the Cook Islands maritime legislation into line with International Maritime Organisation (IMO) requirements.

While the Cook Islands has applied for admission to IMO, the current Bill contains a "suite" of modern maritime legislation that reflects the full extent of international commitments and obligations.

The Bill is based on New Zealand's Maritime Transport Act which is consistent with IMO obligations but has been simplified significantly to avoid domestic considerations in the NZ legislation.

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