‘Follow the money ^[1]’ to disrupt criminal and terrorist networks is a central tenet of law enforcement and counterterrorism policymaking. For decades, this thinking has driven the global development and implementation of ever more sophisticated anti-money-laundering and counterterrorism financing ^[2] (AML/CTF) rules. There ought to be no doubt that AML/CTF controls, when effectively implemented, make it difficult for criminal and terrorist groups to conceal and use their illicit money.

The downside is that AML/CTF controls often unintentionally have a negative impact on the world’s least developed nations ^[3]. The effects are particularly evident ^[4] in the Pacific islands, where increasing numbers of islanders are at risk of becoming estranged from financial services. Financial regulations like AML/CTF controls can have the paradoxical and perverse effect that they actually weaken the region’s global banking relationships ^[5] at a macro level. In the process, financial transparency decreases and new money-laundering vulnerabilities—and opportunities for criminal groups—emerge.

In the Pacific, many nations are at the early stage of developing their financial infrastructure, and the continued development of these systems is reliant on assistance from the international private and public sectors.

Assistance from Australia and New Zealand, among others, has contributed to developing the region’s regulatory and compliance regime. Organisations like Australia’s AUSTRAC ^[6] have played a role in capability development for the financial intelligence units ^[7] that are so critical to AML/CTF measures.

Relationships between international financial institutions (including Australia’s banks) and local and regional banks have been essential to the region’s financial infrastructure. These corresponding banking relationships ^[3] allow for international payments, currency trading, investment and remittances. Remittances from overseas workers are a significant feature of Pacific island economies that ensures a balance-of-payments surplus in most receiving countries. In short, banking relationships with international financial institutions provide the connective tissue needed to support domestic banks in the Pacific.

The increasingly stringent global AML/CTF regime and associated financial penalties are forcing international banks to intensify their scrutiny of customers and transactions. These developments are, of course, resulting in positive AML/CTF outcomes. However, there have been other, unintended effects.

The Pacific’s domestic banks, concerned about losing their international relationships, are implementing these measures. However, while banking customers in Australia can usually quickly meet ‘know your customer ^[8]’ and due-diligence banking requirements, that is often not possible in Pacific island nations. A central challenge has been the capacity of Pacific islanders to prove their identities. The region’s expansive cash economy often makes navigating due diligence almost impossible. In the end, financial institutions’ de-risking efforts unintentionally remove or exclude Pacific islanders from the region’s formal financial system. So, the policy intention to increase the rate of financial inclusion produces the reverse—more exclusion.

Mitigating AML/CTF risks appears to be a clear commercial imperative, and financial institutions that operate in the region are withdrawing because they have deemed the risks to be too great. Of the ‘big four’ Australian banks (ANZ, the Commonwealth Bank of Australia, NAB and Westpac), ANZ is now the only financial institution that maintains a physical presence in many of the Pacific islands. Australia’s other banks have opted to de-risk their financial footprint in the region. The net result of policy—again—produces the reverse of its intent. A monopoly structure of the banking sector increases the cost to the consumer, potentially excluding Pacific islanders from the ability to save and borrow to increase economic productivity.

The small market and its inherent regulatory and compliance risks—including foreign bribery, money laundering and weak regulatory structures and arrangements—make the region particularly unattractive to Australian financial institutions.

This exodus of major financial institutions from the Pacific island nations has led to a growing reliance on new financial institutions that have a far less rigorous commitment to regulatory compliance, especially with respect to anti-money laundering and foreign bribery. Some new institutions are reportedly ^[9] insufficiently cautious about customer due-diligence regimes and policies. In the wake of the major banks’ departure, however, Pacific island nations have little choice but to use these institutions for personal and commercial banking services.

This situation is creating all-new vulnerabilities, including opening avenues for foreign interference and heightening the risk of serious organised crime in the Pacific. Increased reliance on foreign financial institutions, especially state-owned ones, could provide opportunities to use passive and active economic influence across the Pacific. Of more immediate concern are the economic and social impacts of a decreasingly regulated financial system that’s open to exploitation by local and transnational organised crime groups. There’s a genuine possibility that some Pacific nations could become global money-laundering hotspots if further de-banking of individuals and nations occurs.

Significant and collaborative policy work is needed to ensure that Pacific island nations have access to banking services while mitigating the threat from money laundering. The first step in addressing this is ensuring that the region’s regulators and police have access to financial intelligence and forensics capabilities. AUSTRAC, as part of Australia’s Pacific step-up policy, is already providing analytical training ^[10], but that won’t be enough.

In many Pacific nations, securing the tools and know-how to conduct forensic accounting investigations is a tricky proposition. Here, policymakers can learn much from the Pacific Transnational Crime Network ^[11] and its Pacific Transnational Crime Coordination Centre (PTCCC). Coordination, intelligence sharing, collaboration and capability development through the framework of the PTCCC has proven invaluable in combating transnational crime in the region.

While each Pacific nation has an obligation to establish its own financial intelligence unit, efforts to pool capabilities, like forensic accounting, to support investigations might be the answer. A collaborative effort from like-minded countries—including Australia, New Zealand and the US—could establish a mechanism to support the Pacific: perhaps a brick-and-mortar facility with international mentors and subject-matter experts partnered with Pacific island staff in the Samoan capital Apia, like the PTCCC.

Also like the PTCCC, any such facility should be owned and operated by Pacific island nations. This kind of arrangement would go a long way to providing the kind of support that is needed. A collaborative centre like this could provide the much-needed specialist investigations, compliance and policy support to de-risk AML/CTF in the Pacific. The US-led Indo-Pacific Economic Framework for Prosperity flagged explicit action in the Pacific on both capability building and technical assistance, including collaborative efforts to strengthen taxation and anti-corruption regimes. This might be one more way that Australia and its allies can help develop programs that speak to the interests of the region.