Nauru bows to US and shuts down its banks

Pacific tax haven acts after claims that terrorists have used its services.

The Pacific offshore haven of Nauru says it has closed down its notorious banking sector and stopped the sale of passports after President George Bush brought the full weight of US diplomatic pressure to bear on the tiny island.

The US claimed that both banks and passports from Nauru – the world's smallest independent republic and a member of the Commonwealth – have been used by al-Qa'ida-linked terrorist groups.

The Americans clearly remain suspicious that Nauru will renege on its promises. As a "big stick", the US Treasury announced on Friday that it is going to impose "special measures" against Nauru under the US Patriot Act. In a move that threatens to take the island to total economic collapse, American businesses will be banned from having any dealings with Nauru's offshore financial sector.

Details were also released last week that six suspected Islamic terrorists who have been arrested in South-East Asia and the US were carrying Nauruan passports.

Earlier this year, Secretary of State Colin Powell wrote to the island's then President, Bernard Dowiyogo, saying that "Nauru's offshore sector, consisting exclusively of shell banks, poses an unacceptable money-laundering risk.

"The indiscriminate sale of Nauru's passports to persons having no genuine allegiance or substantial ties to your state contradicts [a commitment to fight terrorism]," Mr Powell warned. "I strongly urge Nauru to stop immediately what is in effect the sale of Nauru passports to such individuals."

As a carrot, say Nauru politicians, the US offered the island a series of secret aid deals worth $250m (£160m). But, they say, the US is seeking other concessions from Nauru, including the setting up of a listening post to eavesdrop on neighbouring countries in the South Pacific, and a pledge from the island not to back any moves to haul Americans in front of the International Criminal Court.

With just 30km of coastline and a population of 12,000, Nauru is known for only two things: running one of the most lax offshore tax havens in the world; and offering to take 1,100 asylum-seekers rejected by Australia last year in return for a $26m aid package. The sight of Australian ships sailing to dump asylum-seekers on a tiny island in the Pacific made world headlines.

South of the Marshall Islands, Nauru is so isolated that when its phone system collap- sed in January, it took weeks for anyone outside to notice.

During World War I Australian forces occupied the island, but Nauru achieved independence in 1968 and joined the UN in 1999.

At one time the island had one of the highest per capita incomes in the developing world, due to the mining and export of phosphates, now expected to be completely exhausted within 10 years. Nauru has augmented its failing income through offshore banking and selling passports to anyone prepared to pay $30,000 a time.

Relations between the US and Nauruan leaders are tense. The Nauruans complain of blackmail and accuse Washington of in effect colonising their island. "The CIA has cornered the President and we have not had much choice but to do what we've done," former Nauruan president Rene Harris told the local media last week

"We have been given the riot act by the United States," said Nauru's former finance minister, Kinza Clodumar. "We feel our sovereignty has been compromised, no doubt about that."

Matters have been further confused by the death last month of the island's former president, Bernard Dowiyogo.