Cook Islands Still an Offshore Financial Center Leader

Bob Bauman (January 6, 2012)

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In a recent article about the Cook Islands as a leading offshore jurisdiction for trusts and asset protection planning in general, I praised that country’s strict financial privacy laws as one of the world’s toughest.

I also noted that, as do all tax havens, the Cook Islands now applies Article 26 of the OECD Model Tax Convention that allows the sharing of tax information among countries.

A confused reader of my article wrote to say: “You claim the Cook Islands to be a great place for an offshore account, yet you state that CI Government agreed to Article 26!?  Can you please clarify?”

Since I often get questions about how to square OECD Article 26 and financial laws in tax haven nations, I herewith share my response with you as follows:

Strict Privacy Still Available

If you are not familiar with the current state of rules governing bank secrecy and financial privacy in offshore financial centers it is easy to be confused by the now universal acceptance of the standards embodied in Article 26 of the OECD model convention on tax information exchange.

Banking secrecy still does exist in tax havens such as the Cook Islands, Panama, Nevis, Belize, Andorra, Singapore and Monaco where there is officially imposed financial privacy by law.

These laws waive this protection only in criminal situations and usually only under court order. Unlike the U.S., where bank employees have been turned into surrogate government spies, these offshore nations impose fines and prison sentences on bank employees who violate the privacy of account holders.

Nevertheless, all of the above offshore banking jurisdictions, also including Switzerland and Austria, now have signed numerous tax information exchange treaties (TIEAs) with the United States and with scores of other nations. These agreements allow the offshore jurisdiction to share tax information with other governments upon a showing of probable cause that a tax violation may have occurred in the case of an account holder who is from the requesting country.

Blacklisting Threat

Since 2009 there has been a major change in privacy policies of offshore banks occurred under the threat of “blacklisting” from major nations led by the U.S. government and the U.S. Internal Revenue Service.

All tax havens, including the Cook Islands, have accepted “tax evasion” as a valid basis for foreign tax agency inquiries concerning their citizens with accounts in an offshore financial center. The current standard is that set by the Organization for Economic Cooperation and Development (OECD), based on Article 26 of the “OECD Model Tax Convention.”

Under this OECD procedure, foreign tax authorities wishing to take advantage of tax information exchange agreements need to supply hard evidence of their suspicions (names, facts, alleged tax offenses, offshore bank account numbers) to the requested government. If the requesting country has no “smoking gun,” they won’t be able to get information.

Cook Islands a Privacy Leader

Among all offshore financial centers, the Cook Islands still has one of the strongest financial privacy laws, but they do apply Article 26 when sufficient evidence is presented to their government.

Thousands of foreign trusts, corporations and partnerships are registered in the Cook Islands. This strong financial privacy law protects every one of them, despite the adoption by the Cook Islands of OECD Article 26 standards.

By the end of 2011, the Cook Islands government had signed mutual tax information exchange agreements (TIEAs) with Mexico, France, Denmark, Faroe Islands, Finland, Greenland, Iceland, Norway, Sweden, Ireland, the Netherlands, Australia, and New Zealand.

However, the Cook Islands’ law provides legal due process before any information can be released to any other government. If the IRS wants any information on your business in the Cook Islands, it must make a formal request to the Financial Intelligence Unit (FIU). And it must show reasonable grounds to believe that the accused person is laundering money or doing something criminal.

Disclosure Only with a Court Order

This guaranteed procedure ensures that any information a trust or banking institution or Cook Islands’ government agency discloses is done through proper channels with legal justification. If you’re not doing anything illegal with your offshore asset protection efforts in the Cook Islands, then you’re guaranteed your financial privacy.

Strong financial and banking secrecy provisions require government officials, trust company and bank employees to observe strict secrecy. If they don’t, they face criminal sanctions. The official registrar records of foreign companies and of international trusts are not open for general search (although there are a few defined exceptions). Thus all parties’ information is kept private unless a local court orders the release of the information.

U.S. Loses

In a major American legal challenge to the Cook Islands’ trust law, the U.S. government tried to force the repatriation of funds held in a Cook Islands’ trust. It lost.

Even though the Americans who created the trust for a time were jailed for contempt of court, not even a federal court could crack the Cook Islands’ trust laws. See the decision known as the “Anderson case” (FTC vs. Affordable Media, LLC, 179 F. 3rd 1228, U.S. Ct. of Appeals, 9th Cir. 1999).

In this case a husband and wife defendants defrauded investors in a telemarketing scheme. The U.S. Federal Trade Commission filed charges against them and the U.S. District Court in Nevada ordered them to transfer to the court any assets under their control.

The defendants claimed they were unable to access their funds that were in a Cook Islands trust. The defendants faxed a letter to AsiaCiti Bank in the Cook Islands instructing them to repatriate the assets to the control of the district court.

AsiaCiti notified the defendants that the court order was a “term of duress” under Cook Islands’ trust law. It refused to transfer the funds and removed the defendants as co-trustees. Eventually a compromise solution was reached, but the U.S. court and government was not able to waive or suspend the Cook Islands’ anti-duress law. Not even a U.S. federal court could crack the Cook Islands’ trust laws.

Other Posts from the Author

• Are You Among the 23% Entitled to a Second Passport? - May 14th, 2012
• The Real Problem With the French Elections - May 4th, 2012
• The Life of a “Sovereign Individual” - April 24th, 2012

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