In Vanuatu, a remote archipelago in the South Pacific, a popular tourist attraction is something called land diving. Villagers on the lush outer island of Pentecost jump headfirst from a tall wooden tower with tree vines tied to their ankles to break their fall. For the divers, the rite of passage is a plunge into the unknown—and that’s not a bad metaphor for where this secretive tax haven is headed these days.


Anchored in the deep seas between Australia and Fiji, this exotic microstate has faced sanctions since last year for not complying with stricter anti-money-laundering standards established by the Financial Action Task Force. The FATF, an intergovernmental body created by the Group of Seven leading industrial countries, has placed the former Anglo-French colony on its “gray list,” which also includes Iraq, Syria, and Yemen. The action effectively turned Vanuatu banks into financial pariahs.

Then in November the island state suffered another hit to its reputation with the unmasking of its offshore corporate clients’ hidden wealth in the leakedParadise Papers. By then, the nation’s important banking sector was already limping. Vanuatu regulators and local bankers say that France’s central bank had ordered the institutions it regulates to steer clear of the country, while Germany’s Commerzbank AG and New York-based Citibank had dialed back on their correspondent bank relationships with lenders in Port Vila, the nation’s capital and offshore financial center. “It’s much more difficult to do funds transfers in and out of Vanuatu than probably anywhere in the world,” says Martin St-Hilaire, a managing director of AJC, an accounting and advisory firm, and chairman of the Vanuatu Financial Centre Association.

Vanuatu and its 270,000 or so citizens already face 21st century vulnerabilities typical of a remote and tiny island chain in this age of rising sea levels and superstorms. It’s a less-developed country that relies heavily on international aid to survive. Now a key industry is threatened by the regulatory aftershocks of a global crackdown on tax havens.

The nation is a bit player among tax refuges such as the English Channel island of Jersey and the Cayman Islands in the Caribbean. But singling it out for gray-listing poses grave economic consequences, according to Prime Minister Charlot Salwai. “Its effect,” he told Vanuatu legislators in June, “will be felt on imported food, such as rice, and fuel.”

Amid this uncertainty, a debate is raging in Port Vila about the country’s economic destiny. On one side there’s Salwai, a French-trained accountant and ambitious economic reformer, who backs the introduction of an income and corporate tax to generate revenue that can be used to invest in the country’s future. On the other side there are Thomas Bayer, an American banker turned ni-Vanuatu, as local citizens are called, and a gaggle of expat bankers, lawyers, and financial advisers who’ve made nice livings helping the world’s moneyed elite protect their wealth.

Neither side questions the urgent need for investment in some form to sustain the economy of this necklace of 80-odd islands. Vanuatu is one of the world’s poorest countries, with a per-capita gross domestic product of $2,860, according to the World Bank. Only 10 percent of the nation’s population earns more than $40 a month, according to data compiled by the ­Vanuatu National Provident Fund, the country’s national pension plan. Education ­levels—about 6.8 years on average—are well below the global average. Severe weather and climate change are a constant threat to health and food ­security on the low-slung islands. In 2015, Cyclone Pam left 75,000 homeless and wrecked buildings across the capital.


To pay the bills, the Vanuatu government relies primarily on import duties and a value-added consumption tax. There are no personal or corporate income taxes, no estate or capital gains taxes. Until recently the government has been relaxed about requiring companies to disclose ownership details.

The offshore financial sector kicks in only about 4 percent of the country’s annual output of roughly $800 million, but its existence requires an ultralow tax environment that deprives the government of some revenue. The gray-listing by the FATF raises questions about the sector’s future, says Johnson Naviti, a Salwai policy adviser and director general of the Prime Minister’s Office: “Do we need the offshore sector? Are we better off without it? That’s a possibility.” READ MORE