COOK ISLANDS : LAW OF OFFSHORE

Cook Islands Table of Statutes

This is a non-exhaustive list of the main Cook Islands statutes affecting offshore and non-resident business. The statutes are listed in alphabetical order – click on the statute for a fuller description of the statute, the legal regime it forms part of, or in some cases the text of the law.

Banking Act 2003
Companies Act 1971-2
Development Investment Act 1977
Entry, Residence & Departure Act 1977
Financial Services Act 1998
Financial Supervisory Commission Act 2003
Financial Transactions Reporting Act 2003
Insurance Act 2008
International Companies Act 1981-2
International Trusts Act 1984
Investment Code 2003
Limited Liability Company Act 2008
Money Laundering Prevention Act 2000
Offshore Banking Act 1981
Offshore (Criminal Provisions) Act 1996
Offshore Financial Services Act 1984
Offshore Insurance Act 1981-2
Proceeds of Crime Act 2003
Trustees (Due Diligence) Regulations 1996

Under the Financial Supervisory Commission (FSC) Act, which was passed in May 2003, the FSC has responsibility for the regulation and supervision of licensed financial institutions and administers the following legislation:

• The Banking Act 2003;
• The Trustee Companies Act 1981–82;
• The Insurance Act 2008
• The Offshore Insurance Act 1981–82 (which is being replaced by the Insurance Act 2008),
• The Insurance Companies’ Deposits Act 1970–71;
• The International Companies Act 1981–82 (as amended);
• The International Companies Amendment Act 2003;
• The International Trusts Act 1984; and
• The International Partnerships Act 1984.

It additionally administers Regulations made under the following acts:

• Banking (Fees) Regulations
• Financial Supervisory Commission (Compliance Officers) Regulations
• International Companies (Evidence of Identity) Regulations
• International Companies (Prescribed Fees) Regulations
• Trustee Companies (Due Diligence) Regulations.

The FSC is headed by a Board of Directors comprised of a Chairman and four members. At the professional level, its executive staff is comprised of a Commissioner, a Deputy Commissioner, a senior supervisor, two supervisors, a registrar, and a deputy registrar. The FSC has taken over the role formerly carried out by the Office of the Commissioner of Offshore Financial Services.

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Cook Islands Money Laundering Law

In common with many other offshore jurisdictions, the Cook Islands 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 which have weak anti-money laundering legislation. In September 2000, the Cook Islands parliament passed the Money Laundering Prevention Act.

The Act, designed to get the country taken off the Financial Action Task Force (FATF) blacklist of uncooperative jurisdictions in the fight against money laundering, provided for the setting up of a Money Laundering Authority (MLA). The MLA consisted of the government's financial secretary, the commissioner for offshore financial services and the commissioner of police.

The powers and duties of the new body included receiving reports from financial instutions on any suspected criminal business transactions and the passing of such reports, if backed up by reasonable evidence, to the solicitor-general. The authority is also empowered to issue training guidelines to financial institutions in terms of anti-money laundering procedures.

The Money-Laundering Prevention Act has a section overriding any other secrecy provisions. It prevents illicit funds from being introduced into the financial system. The financial institutions which the new Act covers are wide ranging and include money-transmission services, those which issue and administer means of payment (such as credit cards, travellers' cheques and bankers' drafts), and gambling and other betting services incorporated in the Cook Islands.

Offences under the new legislation are punishable by up to a maximum fine of US$20,000 dollars or a jail term of up to five years, or even a combination of both.

After the 11 September, 2001, terrorist attacks in the United States, the Cook Islands reiterated its commitment to the prevention of money laundering activities set out in the Money Laundering Prevention Act 2000 by announcing the Money Laundering Prevention Regulations 2001.

In 2003 a series of nine new measures were introduced in the Cook Islands Parliament 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. However 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 an International Monetary Fund review in 2004, various regulations relating to anti-money laundering legislation were passed.

The IMF's 2004 mission had the following to say about the Proceeds of Crime Act 2003:

"With the enactment of the Proceeds of Crime Act 2003 (POCA), the Cook Islands has put in place a sound regime for the forfeiture of proceeds and taking provisional measures, but it does not cover the freezing of terrorist funds and is untested in practice."

"Under the POCA, tainted property and benefits derived from crime can be recovered through two different types of legal action, i.e., forfeiture orders and pecuniary penalty orders. Both are discretionary criminal penalties and require conviction of a serious offense. Forfeiture can be applied also against tainted property where the accused has absconded or died. Law enforcement authorities can use production orders, monitoring orders, and search warrants for tracing assets, and seizure and restraining orders can be used to secure them."

"To date, no property has been restrained, seized, or forfeited under the current legislation. As there exists no legislation providing for the freezing of funds or other property of terrorists, the authorities are currently not in a position to freeze such funds, etc as required by the UN SCRs relating to the prevention and suppression of FT. The mission recommended that forfeiture be made mandatory for any serious offense where proceeds are detected and that legislation be adopted as a matter of priority to provide for the freezing of terrorist funds."

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

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Cook Islands Trust Law

Cook Island trusts are known locally as International Trusts and are governed by the provisions of the International Trusts Act 1984 (as amended). All International Trusts must have non resident beneficiaries and a resident licensed trustee (unless they come within the custodian trustee exception cited below). In order to meet the requirement of having a resident licensed trustee the International Trust would be required to use one of the 5 registered trust companies which operate out of the Islands. To obtain the protection of the Islands' laws the trust must be registered by the registered trustee company within 45 days of its creation who at registration must certify that the trust is an International Trust under the International Trust Act 1984.

See Offshore Business Sectors for details of the confidentiality rules applied to licensed trust managers.

A Cook Islands International Trust has a number of distinct advantageous features:

• The International Trusts Act 1984 (as amended) abolished the perpetuity period rule in the Cook Islands and so enabled the "dynasty" trust to be established and administered in perpetuity;
• The details of the beneficiaries and settlor of the trust are not registered; the only information that must be filed with the Registrar of International Trusts is the name of the International Trust, the names of the trustees and the date of the trust deed. Offshore public registries in the Cook Islands are not open to the general public and may be searched only by persons showing to the Registrar a good and cogent reason for doing so. Fraud constitutes one such reason;
• The legislation specifically excludes the applicability of foreign inheritance laws. Thus if a foreign party from a civil law jurisdiction raised a legal challenge in the Islands courts against a disposition made by a settlor and cited foreign inheritance laws as the basis of a claim alleging that the disposition was invalid as it offended against the forced heirship rules that applied in his country, the action would fail since the Cook Island courts do not recognize foreign inheritance laws;
• Only the judgments of New Zealand courts can be enforced in the Cook Islands. Thus a foreign creditor wishing to set aside a disposition would have to commence an action in the courts of the Cook Islands and so put himself within the ambit of laws and procedures which are generally favourable to the settlors, trustees and beneficiaries of an International Trust. The foreign judgment could only be used in the Cook Islands courts as evidence (if any) of the strength of the litigants claim. Furthermore exemplary and punitive damages are rarely if ever available in the Cook Islands with the consequence that such categories of damages would be denied to a litigant who successfully obtained judgment in the local courts and would be excluded from any judgment obtained in the courts of New Zealand.
• The rule against accumulations has been abolished in the Cook Islands. In the Cook Islands the trustee of an International Trust can accumulate the income indefinitely.
• The common law rule against purpose trusts has been abolished in the Cook Islands which has provided a mechanism under which a purpose trust can be enforced by the court.
• The definition of what does and what does not constitute a charitable trust has been extended in the Cook Islands.
• Under Cook Islands law a disposition can only be set aside if: a)The disposition occurred within 2 years of the date of the act or omission which gave rise to the creditors cause of action and the creditor can prove fraud on the part of the settlor; or b) if the action to set aside the disposition is commenced within 3 years of the date of the act or omission which gave rise to the creditors cause of action . If an action has already commenced in a foreign court the time limit is frozen pending its conclusion.
• Under the International Trusts Act 1984 the rule requiring unanimity among trustees now only applies to an International Trust if the trust deed does not specify otherwise .The trust deed can now set out procedures for making of majority decisions by the trustees.Some doubt whether this is permitted under the rules of equity and it remains to be seen whether such changes bring any advantage to the jurisdiction given that these rules essentially exist for the protection of the beneficiaries.
• In the Cook Islands so long as the trust deed so provides a trustee can delegate all powers except dispositive powers. Dispositive powers are powers enabling the trustees to dispose of assets whether by way of sale or by way of distribution of income or capital in favour of the beneficiaries. Thus a Cook Islands trustee could now place all trust fund investment decisions in the hands of an investment company.
• A trust deed may now impose a different standard of care on a trustee making investments and can provide that he is to have the same powers of investment as a natural person.This might prove useful where the trustee is expected to manage a family business. Unless the trust deed otherwise specifies the standard of care expected of a trustee is that stated in the common law namely that which a prudent person would exercise in managing the affairs of another. Moreover under the common law if the trustee is a professional the standard of care expected is even higher.
• The law allows for trusts created in the Islands before these amendments came into being to have their trust deeds re-drafted so that they can take advantage of the new legal provisions. Thus a trust which under the previous law had to prescribe a perpetuity period of no longer than 100 years can now have its trust deed redrafted so as to take advantage of the abolition of the perpetuities rule.
• So long as the settlor appoints a licensed and resident Cook Islands trustee as a custodian trustee he is free to appoint managing trustees within his own jurisdiction. (This is the only exception to the rule that requires the trustees of a Cook Islands trust to be licensed and resident there).
• A new mechanism and procedure has been created whereby the trust deed can appoint a "nominated person" who has the power to obtain the consent of and represent all the beneficiaries including non sui juris and future beneficiaries, beneficiaries who cannot be found and beneficiaries who have yet to be ascertained.
• There are provisions allowing trusts to be redomiciled in and out of the Cook Islands. It was felt that the legislative changes (e.g. the abolition of the rule against perpetuitites) will make the Islands a particularly attractive jurisdiction in which to locate a trust and that accordingly there will be considerable interest in re-domiciliation. A trust re-domiciled in the Cook Islands is by the Islands' law deemed to be an International Trust formed under the International Trusts Act 1984 from the date of its inception and not just from the date of its re-domiciliation.
• Under Cook Islands law the trust deed can deem that different aspects of the trust can be governed by the laws of different jurisdictions. Furthermore the trust deed will also be able to provide for a change in the governing law on the happening of a specified event (otherwise known as a "flee clause").

The full text of the International Trusts Act (as amended) can be found here.

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