Nauru debates response to sanctions

Dwindling phosphate reserves have forced Nauru to look for other incomes

By CNN's Grant Holloway

YAREN, Nauru (CNN) -- The tiny Pacific nation of Nauru has become the first country to face international business sanctions over its suspected role in global money laundering.

The OECD's Financial Action Task Force announced Wednesday that its 29 member countries would take counter-measures against Nauru for its failure to sufficiently crackdown on the recycling of "dirty money".

"This decision is the result of the Nauru government's failure to enact by November 30, 2001 appropriate legislative amendments to its Anti-Money Laundering Act of August 28, 2001," the agency said in a statement.

Nauru's Parliament will now debate amendments to its Anti-Money Laundering Act introduced in August in a bid to forestall the sanctions.

"I expect the amendments will put to rest any concerns that Nauru did not have the tightest possible legislation against money laundering," Nauru Chief Secretary Mathew Batsiua told Reuters news service.

Batsiua said the sanctions were "premature and destructive".

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Nauru, which measures just 21 square kilometers (eight square miles) and has a population of 12,000, is also the commercial headquarters of about 400 banks.

The U.S. Treasury Department says $70 billion of illicit money left Russia destined for accounts in Nauru in 1990 alone.

Some Australian and U.S. banks and financial institutions are thought to have been implicated in the recycling of Russian crime money through Nauru, although no charges have ever been laid.

Nauru uses the highly traded Australian dollar as its unit of currency.

Nauru President Rene Harris announced in August that his government would ban money-laundering practises, saying "undesirable elements" had exploited Nauru's banking system.

The Nauru government also set up a regulatory body to supervise the banking sector.

However, these actions have not been sufficient to appease the task force.

The sanctions include not allowing Nauru banks or financial institutions to win any new banking licenses in task force countries, and government warnings to banks and firms on the risks of doing business in Nauru.

Russia and the Philippines got a similar ultimatum from the task force, but got off the hook after passing emergency laws to tighten up their rules and make it harder for banks to turn a blind eye to money from crime syndicates or tax evaders.

The task force is comprised of mainly industrialized countries and includes Australia, Canada, Britain, the United States, Hong Kong, Singapore and New Zealand.

Alternative income

A member of the United Nations since 1999, Nauru is the smallest independent republic in the world.

Prior to independence, the country, which lies north west of Papua New Guinea, was administered by Australia which seized the country from Germany during World War I.

Australian businesses developed and exploited Nauru's rich phosphate reserves which are used to make agricultural fertilizer.

However income from phosphate has been rapidly diminishing as the reserves dwindle, and Nauru has been forced to find alternative sources of income.

Most recently it has received financial assistance from Australia in return for housing in detention camps hundreds of asylum seekers originally bound for Australian shores.

Reuters contributed to this report.