FATF Status

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

Compliance with FATF Recommendations

The last Mutual Evaluation Report relating to the implementation of anti-money laundering and counter-terrorist financing standards in Palau was undertaken by the Financial Action Task Force (FATF) in 2008. According to that Evaluation, Palau was deemed Compliant for 4 and Largely Compliant for 10 of the FATF 40 + 9 Recommendations. It was Partially Compliant or Non-Compliant for 5 of the 6 Core Recommendations.

US Department of State Money Laundering assessment (INCSR)

Palau 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: -

Palau is not a regional or offshore financial center. The primary sources of illegal proceeds are illegal drugs and prostitution. Corruption in the governmental sector includes the misuse of government funds and cronyism, in part due to Palau’s small size and extensive family networks.  Palau is a low-risk jurisdiction for organized crime and terrorism financing.

Palau has one free trade zone, the Ngardmau Free Trade Zone (NFTZ). A public corporation, Ngardmau Free Trade Zone Authority, oversees the development of the NFTZ and issues licenses for businesses to operate there. NFTZ licensing exempts businesses from Foreign Investment Act requirements and certain import and export taxes. To date, no development has taken place within the designated free trade zone area, and the NFTZ directors continue to search for developers and investors.

EU Tax Blacklist

Palau is on the EU list of non-cooperative jurisdictions for tax purposes

Rating                                                                           (100-Good / 0-Bad)

Transparency International Corruption Index                           N/A

World Governance Indicator – Control of Corruption              72

The Republic of Palau is a small island nation of about 350 islands in the western Pacific Ocean, with an estimated population of about 18,000 people. The government is the country’s largest employer, with approximately 30 percent of the workforce, and the tourism sector was Palau’s biggest economic driver, contributing an estimated 40 percent to GDP. GDP in 2021 was $257 million, approximately $14,243 per capita. Palau’s official currency is the U.S. dollar, and the country has three FDIC–insured U.S. banks. Apart from tourism, commercial industries include wholesale/retail trade, business services, local commercial fisheries, and construction. Fish, coconuts, breadfruit, bananas, and taro cultivation constitute the subsistence sector, though the country’s agricultural base is small. Palau has a limited export base and production capacity, thus highly vulnerable to external shock. The limited exports hit bottom with the implementation of the Palau Marine Sanctuary, as foreign companies were prohibited from fishing in the Palau Exclusive Economic Zone. Alternative revenue from mid-year 2022 to the present came from U.S. military exercises which supported the economy through the purchase of fuel, hotel rooms, car and boats rentals, and some diving activities. Assistance from the U.S. Workforce Innovation and Opportunity Act (IOA) went to eligible individuals in the tourism industry. The Palau Coronavirus Relief One-Stop Shop (Act funded by an Asian Development Bank (ADB) loan of $41 million in 2020 provided aid to laid-off foreign workers from companies in the tourism industry that had to close or minimize operations from 2022-2023. The country continues to rely heavily on imports and continues to run trade deficits. It is affected by weakening global demand and supply. The country exports to the United States were $500,000 in 2021.

The government is reshaping its priorities, plans, and policies for investment in infrastructure affecting the economy, education, health, environment, and human resources. Limited resources require public/public; public/private; and private/private collaboration and partnership to improve standards of living the business environment.

Palau’s economy remains dependent on donor funding. Since independence, Palau has operated under a Compact of Free Association (COFA) with the United States. The COFA is currently under negotiation and will provide about $120 million in grants through Palau receives additional aid from Australia, Japan, Taiwan, and other countries with which it has diplomatic relations. It also receives funding from international organizations such as the World Bank, ADB, and UDP toward energy security, urban planning and management, water and sanitation, public financial management, and private sector development. Additionally, Australia awarded $22 million to a U.S. based company to build a solar photovoltaic facility and battery energy storage which provides supplementary efforts for renewal energy and opening job opportunities for residents.

According to the ADB’s Outlook, it forecasted for r2023 GDP growth rate is anticipated to be 3.8%, compared to 2022 at 1.0%, and 2021 at -17.1%. Tax revenue remained low at 16.8% of GDP in FY 2022.

The Foreign Investment Act guides the foreign investment process in Palau, and Foreign Investment Regulations restrict some sectors to Palauan citizens, including wholesale or retail sale of goods, all land and water transportation, travel and tour agencies, and commercial fishing. Other sectors are semi-restricted, requiring a Palauan partner. While the government welcomes foreign investors, Palau’s investment climate poses challenges. Some U.S. investors have made allegations of corrupt practices when seeking government permits, doing business with local partners, and in public procurement processes. Establishing secure land title may be complicated due to the complexity of Palau’s traditional land ownership system and occasional over-lapping claims. Foreigners cannot own land in Palau, but they can lease land and own buildings on leased land. But leased lands cannot be released or transferred from the lessee to a potential new lessee. Leased land must be returned to the State Government unless it was with a private landowner.

Palau is not a member of the World Intellectual Property Organization, the WTO, or any other organization or convention protecting intellectual property rights. Palau has no bilateral investment protection agreements and is not a member of any free trade association. Human resource constraints are a challenge for foreign investors and, third country nationals from Bangladesh and the Philippines comprise a large proportion of the labor force.

An overview of the World Bank indicated that by the end of 2021 Foreign Direct Investment (FDI) flows accounted for $14.9 million, compared to $22 million in 2020. The stock of FDI grew to $488 million in 2020. Traditionally, FDI is mostly directed towards the tourism and real estate sectors. Main investment partners include China, Taiwan, and Singapore.

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