FATF Status

Micronesia is not on the FATF List of Countries that have been identified as having strategic AML deficiencies

Compliance with FATF Recommendations

Micronesia has not yet undertaken a Mutual Evaluation Report relating to the implementation of anti-money laundering and counter-terrorist financing standards.

US Department of State Money Laundering assessment (INCSR)

Micronesia was deemed a ‘Monitored’ Jurisdiction by the US Department of State 2016 International Narcotics Control Strategy Report (INCSR). Key Findings from the report are as follows: -

The Federated States of Micronesia (FSM) has a small population of 100,000 people spread over a million square miles of the western Pacific Ocean. The FSM was part of the U.S. Trust Territory of the Pacific after World War II, and is now associated with the United States by the Amended Compact of Free Association. The FSM uses the dollar as its only currency and has only two commercial banks operating in the country, the domestically-owned Bank of FSM and branches of the Bank of Guam. While the FSM’s lack of visibility and ease of moving dollars to and from the United States could potentially make it a back door for nefarious movements of currency, the small scale of its economy and regulatory oversight of the banks by U.S. regulators make the FSM historically a low risk for money laundering, terrorist financing, or smuggling.

Public corruption does exist in the area of public contracting and employment of unqualified companies or persons, but there are no accurate estimates of the proceeds derived from cronyism.

Rating                                                                           (100-Good / 0-Bad)

Transparency International Corruption Index                           N/A

World Governance Indicator – Control of Corruption              68

The Federated States of Micronesia (FSM) is a lower middle income island nation of 104,832 in 2021, an eight percent population decline from 2019. The inhabitants live on 607 islands with a total land area of 271 square miles and an exclusive economic zone (EEZ) of over one million square miles (2.6 million square km) in a remote area of the Western Pacific Ocean. The nation is composed of distinct, separate cultures and languages organized into four states under a weak national government. The FSM is part of the former U.S.-administered Trust Territory of the Pacific Islands, gaining independence in 1986. Since independence, the United States has provided over $100 million annually to the FSM under a Compact of Free Association (Compact or COFA) with the United States. FSM uses the funds for development under the administration of the U.S. Department of Interior’s Office of Insular Affairs (DOI). The World Bank estimates FSM’s 2021 Gross Domestic Income (GDI) at $3,950 per person, a trend reflecting no growth over the previous 10 years. The national currency is the U.S. dollar.

Commercial fishing remains the key economic sector in the FSM. The country’s primary sources of income are the sale of fishing rights ($70 million in FY2020), corporate income taxes, mainly from offshore corporate registrations for captive insurance ($10 million in FY 2020), and special revenue grants ($26 million in FY2020). The FSM continues largely as a subsistence economy, except in larger towns where the economy is centered on government employment and a small commercial sector. The cash economy is primarily fueled by government salaries paid by Compact funds (70 percent of employed adults work in the public sector) and, to a much lesser degree, by family remittances and Social Security benefits paid to FSM citizens who previously worked in the United States or who are the surviving spouse of an American citizen.

Compact funding was anticipated to change in 2023 from direct funding in the form of sector grants, to the use by the FSM of proceeds derived from a trust fund developed from U.S. contributions over 20 years. According to the Government Accounting Office, FSM relied on compact sector grants and a supplemental education grant (SEG) ending in FY 2023 for 28 percent of expenditures in FY 2019. GAO projected disbursements from FSM’s compact trust fund would not cover all the value of these grants, resulting in annual fiscal gaps. Because of rules governing the compact trust fund, FSM faced a 36 percent likelihood of zero disbursements from its compact trust fund in one or more years before FY 2034, even though the fund may have a substantial balance. (Note: The Compact of Free Association is in the final stages of renegotiation as of March 2023 and because of the projected short fall, the direct funding mechanism of sector grants will continue). As of November 2022, the balance of the Compact Fund stood at $911 million, reflecting a 11.5 percent drop in net asset value for 2022. FSM has also created its own trust fund with an overall balance of approximately $400 million in FY2022.

The FSM GDP for 2021 was $404 million, a slight decrease from 2020. The World Bank’ February 2023 Pacific Economic Update ( Pacific Island Update ) shows a slight contraction in GDP for the FSM in each of the COVID-19 years, including a projected .6 percent decline in 2022. However, it projects healthy growth of 3.0 percent in 2023 and another 2.5 percent in 2024. The economy recorded a trade deficit of $190 million in goods and services for 2021, a 9.25 percent increase from the previous year. FSM government debt at $59.3 million as of December 2022 was extremely low, giving FSM a low 14.75 percent debt/GDP ratio, one of the lowest in the Pacific. Major creditors are the Asian Development Bank (63.75 percent of debt) and the U.S. Rural Utility Services (18.5 percent of debt). Despite the low levels of debt in absolute terms, the International Monetary Fund deemed FSM to be at a high level of debt stress due to the uncertainty created by looming Compact Funding reductions in 2023 and the possible need to borrow to maintain operations of state governments.

Foreign direct investment (FDI) is almost nonexistent due to prohibitions on foreign ownership of land and businesses (in specified industries), difficulties in registering companies (the process requires approvals from the state governments as well as the national government), poor private sector contract enforcement, poor protection of minority (foreign) investors’ rights, weak courts, and weak bankruptcy processes. In addition, lack of infrastructure, poor health and education systems, the scarcity of commercial flights, and high costs of energy, imported goods and various business services also contribute to the lack of FDI.

Pohnpei State’s Legislature amended its laws in September 2018 to reduce requirements on foreign investment. The law specified the business sectors that permit FDI, with the remaining sectors available for Pohnpei citizens only. Domestic capital formation is very low. Commercial banks are classified as foreign entities and their ability to provide commercial loans, especially secured by real estate, is very limited. Banks view all credit to FSM borrowers as essentially unsecured.

Most national political power is delegated to the four states by the FSM Constitution, including regulation of foreign investment and restrictions on leases. Thus, investors must navigate nationwide between five different sets of regulations and licenses. U.S. citizens can live and work in the FSM indefinitely without visas under the Compact but cannot own property on most FSM islands.

FSM voters select national legislators (senators). The national senators then caucus to select the president and vice-president from among the four at-large senators. There are no political parties. On March 7, 2023, President David W. Panuelo lost his bid for the at-large seat for Pohnpei in the FSM Congress, which eliminated his ability to be reelected president for another four-year term. Senators will select a president and vice-president May 11, 2023.

The FSM federal government closed its borders in March 2020 in response to the COVID-19 pandemic and did not allow any repatriations until May 2021. After one and one-half years of intermittent repatriations of one flight per month per island and a subsequent waive of COVID-19 cases, the FSM government re-opened its borders without restrictions. The reopening has boosted the FSM’s tourism industry and jump-started the implementation of infrastructure programs by international organizations

The FSM developed Energy Master Plans ( FSM Energy Master Plans (2018) ) for each of the states to support efforts to increase renewable energy and increase access to affordable power. The Asian Development Bank provided a grant to the FSM for its Renewable Energy Development Project. The project is financing investment in renewable energy generation facilities in the FSM states of Kosrae and Yap, bolstering energy security and to reduce the reliance on fossil fuels for power generation in those states. Project investments include (i) solar photovoltaic capacity and mini grid and solar home system investments for Kosrae Utilities Authority (KUA) in Kosrae and (ii) the installation and integration of photovoltaic capacity and a battery energy storage system (BESS) for Yap State Public Service Corporation (YSPSC) in Yap. The project also supports institutional strengthening and capacity building in KUA and YSPSC, as well as for Pohnpei Utilities Corporation (PUC) in the FSM state of Pohnpei.

One of the key problems with integrating additional renewable energy has been antiquated power grids in each of the four states. For example, Pohnpei Utility Corporation has only been able to integrate one-third of the installed capacity of solar power due the instability of its antiquated grid. USTD is proposing technical assistance to increase renewable energy integration and provide grid modernization and capacity building assistance to the four state utilities in the FSM, including the Chuuk Public Utility Corporation, Kosrae Utilities Authority, Pohnpei Utilities Corporation, and the Yap State Public Service Corporation.

Country Links

FSM Development Bank: FSMDB