Will Vanuatu, the "Paradise" of Offshore Jurisdiction, Fall in Tightening Regulation?

Vanuatu has long been a popular offshore jurisdiction for FX brokers, dealers and asset managers. The nation offers a variety of tax benefits, as it has no income tax, no capital gains tax nor inheritance tax. It is therefore no surprise that Vanuatu is regarded as a "Tax haven" for those financial companies. Furthermore, for those companies that intend to start a financial services business and want to be regulated to increases trust among traders and improves their reputation in a short time, the island country located in the western Pacific Ocean is an ideal choice. 

However, brokers and dealers are changing their attitudes to the jurisdiction as regulation tightens and regulatory maintenance costs increase...

Vanuatu Listed in FATF's "Grey List"

In October 2015,the Financial Action Task Force (FATF) published Vanuatu's mutual evaluation report, which showed that teh jurisdiction did not take effective measures to adequately address the deficiencies relating to the criminalization of money laundering and terrorist financing. In February 2016, the FATF added Vanuatu to its list of high-risk and other monitored jurisdictions, known also as the "grey list".

For areas listed in the FATF's "grey list", international transfer, foreign direct investment and correspondent banking operations will be complicated as other financial centers around the world may impose blockades on them. For example, National Australia Bank, once a close business partner of Vanuatu, had ended its correspondent bank relationship with the the National Bank of Vanuatu.

To be removed from the "grey list" as soon as possible, Vanuatu has enacted or amended dozens of laws in just 2 years, including Dealers in Securities (Licensing) Amendment Act No 11 of 2017, VFSC-Remittance-Instructions, Company and Trust Services Providers (Amendment) Act No 8 of 2017, etc.

In June 2018, the FATF recognised that Vanuatu had made significant progress in improving their AML/CFT regime and therefore no longer be listed in its "grey list". But that does not mean that Vanuatu can rest easy and return to its status as an offshore regulatory "utopia". On the contrary, in order to meet the changing regulatory requirements of the international community and respond to the increasing financial crimes, and to ensure its legal economic status, Vanuatu needs to continue to tighten regulations.

Regulatory Tightens in Vanuatu, Offshore Brokers' Enthusiasm Wanes

Earlier this year, the VFSC beefed up the requirements for its Financial Dealer License (FDL) holders, including the physical presence of at least one direct employee who matches a 'fit and proper' definition. Furthermore, all securities brokers would have to move onshore and make tangible investments in the Southwest Pacific island nation by the end of 2022. Digital asset service provider, on the other hand, need to have three people onshore, one of whom is the CTO, along with a minimum capital of US$500,000, a custodianship license from another jurisdiction and an established track record.

On September 6, the jurisdiction required FDL holders to establish a physical presence​ on the island, along with the appointment of a local manager and director, effective from October 16. To date, only four forex and contracts for differences (CFDs) brokers: FXPrimus​, Titan FX​, TradeNext and MFM Securities, are meeting the new regulations of the Vanuatu Regulator.

The impact of the tightening of the regulations on Vanuatu is obvious. In 2017, Vanuatu attracted more than 600 brokers at the peak of 2017. However, the stricter regulation brought down the Vanuatu-licensed brokers to around 150 by 2020 and now this number is expected to shrink further due to the increased cost of maintaining a Vanuatu license.

Meanwhile, strengthening regulatory will also allow Vanuatu to better adapt to international AML requirements and improve the reputation of licenses from the nation, thereby attracting more high-quality financial service providers to register locally.

Vanuatu Still at Risk

Although Vanuatu has been successfully removed from the "grey list" of FAFT , the Council of the European Union has recently added the country to the EU list of "non-cooperative jurisdictions for tax purposes", commonly known as the "The European Union tax haven blacklist", for several consecutive years. Companies will try to avoid trading through the tax havens on the "blacklist" to ensure their business in Europe, an important economic center in the world, which will definitely affect the development of the financial industry of the island country.

Conclusion

The tightening regulatory in Vanuatu will inevitably raise the registration threshold of financial institutions and reduce the enthusiasm of enterprises for local offshore supervision. However, improving the quality of registered financial enterprises may open a sustainable development way for Vanuatu. We will wait and see how Vanuatu will get rid of the regulation risk and how it will balance the number and quality of registered financial services institutions in the region.