Pacific islands harbor U.S. funds

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AVARUA, Cook Islands -- The tiny South Pacific nations of Nauru, Vanuatu and the Cook Islands aren't household words in the United States. Yet, in Congress, the focus is increasing on them, along with Samoa and 30 other juris-dictions around the world.

Although the islands are romantic getaways, Internal Revenue Service court filings show they also are probable tax havens.

They are among the places where it's suspected that U.S. citizens are hiding possibly trillions of dollars a year, resulting in an estimated annual loss to the U.S. Treasury of more than $100 billion -- up to $70 billion of that reportedly hidden by individuals.

According to two bills making their way through the House and Senate, the money is being hidden or used in bank accounts, phony trusts, shell corporations, and stock and patent activities that have no purpose other than to avoid U.S. taxes. The complexity of the transactions and the secrecy provided by these foreign jurisdictions make it difficult to tally the amounts involved and trace the money flow.

The proposed legislation suggests changes in U.S. tax laws to make U.S. investors more accountable and to pave the way for sanctions, under the USA Patriot Act, against nations providing such secrecy in their corporate, bank and tax laws that U.S. tax authorities can't access needed information. Penalties against the U.S. peddlers of foreign tax shelters -- unethical bankers, tax accountants, lawyers and investment advisers -- also are proposed.

These South Pacific countries and two more, Niue and Tonga, are targeted for the same reasons by the international Organization for Economic Cooperation and Development. As a result of an OECD report on harmful tax practices in 2000, the islands have given the United States and other members more transparency of their services.

In February, the Stop Tax Haven Abuse Act was introduced by Sen. Carl Levin, Michigan Democrat and chairman of the Homeland Security and Governmental Affairs investigations panel. The bill was co-sponsored by Sens. Norm Coleman, Minnesota Republican, and Barack Obama, Illinois Democrat and 2008 presidential hopeful. The bill has been referred to the Senate Finance Committee.

A related House bill was introduced May 3 by Rep. Lloyd Doggett, Texas Democrat, with 42 co-sponsors. It's now in the Ways and Means, Financial Services, and Judiciary committees.

The income levels and sources in these tiny nations give insight into why tax shelters are aggressively marketed to U.S. investors. The Cook Islands narrowly avoided bankruptcy a few years ago. Financial services for foreigners have become the second highest source of national income, with seven trust companies there paying millions of dollars in annual fees to the local government.

In most of these island countries, the people are living a traditional subsistence lifestyle. They rely heavily on foreign aid, mostly from New Zealand, and on money sent by family members who have found better opportunities elsewhere. Some of the islands lack the means to fully operate their public services. They have a low standard of education, a lack of skilled workers, a population draining to Australia and New Zealand, high unemployment, huge trade imbalances and massive foreign debt. Every few years, their homes, schools and agriculture are wiped out by tropical storms.