GE Poised to Bankrupt Nauru, Island Stained by Money-Laundering

June 2 (Bloomberg) -- When the Pacific island of Nauru, the world's smallest republic by area, needed a $160 million mortgage in 1998 for its real estate holdings in Australia, it turned to the world's largest company by market value, General Electric Co.

In January, Nauru's government defaulted on the loan. And in April, General Electric's real-estate unit asked receivers to sell Nauru's Australian shopping center, office building and hotels. They are worth an estimated $200 million -- the most valuable asset for the island's 12,000 residents.

The enforced sale may be the final chapter in a riches-to- rags story of what was one of the world's wealthiest nations. Failed investments by Nauru's government-controlled trust, which included a London musical about Leonardo da Vinci that closed after five weeks, have cut gross domestic product to $5,000 per person from about $50,000 in the 1970s. The central bank is broke, according to the Manila-based Asian Development Bank.

``They've blown close to $2 billion,'' said Helen Hughes, 75, a former World Bank economist who helped Nauruans negotiate prices in the 1960s for phosphate deposits that made them rich. A mix of calcified bird droppings and marine fossils, the phosphate, used as fertilizer, is now mostly mined out.

Concerns are mounting that a bankrupt Nauru may resume selling banking licenses and passports. The 21-square-kilometer (8-square-mile) Polynesian island remains on the Organization for Economic Cooperation and Development's money-laundering blacklist after issuing 400 offshore banking licenses in the mid-1990s.

On May 20, Nauru's opposition party asked for a parliamentary probe into claims by a lawmaker, Fabian Ribauw, that passports are still being sold by ``high government functionaries and public servants'' for as much as $50,000 each.

Mafia `Laundered Billions'

Nauru's financial crisis could become a regional security issue, said Steve Vickers, president of International Risk Ltd, a Hong Kong-based consulting firm.

``Failed states become used by terrorists and criminals,'' Vickers said. ``When countries are desperate, they will do desperate things.''

The Russian mafia laundered billions through Nauru in the 1990s, said Hughes, now a senior fellow at the Centre for Independent Studies, a Sydney-based research group.

Even PPB Group, the Sydney-based receiver appointed to sell the properties by Stamford, Connecticut-based General Electric Real Estate, a unit of General Electric Commercial Finance, is proceeding ``cautiously,'' according to Steve Parbery, a partner. ``Nauru has a history of engaging with agents of curious background and credibility,'' said Parbery, 52.

Nauru President Rene Harris and Finance Minister Kinza Clodumar are trying to arrange refinancing of the loan, according to Helen Bogdan, 58, a Melbourne-based Nauru government spokeswoman.

Government Stalemated

Both men have been in Melbourne since April 29, when Harris concluded a state visit to China. They're working from offices in the country's consulate atop 51-story Nauru House -- one of the properties now in the hands of receivers, said Bogdan. Harris, 57, and Clodumar, 56, declined to be interviewed for this article.

``I wouldn't deny there has been corruption and bad management,'' Bogdan said. Some foreigners abused the offshore banking facility, though ``Nauru didn't benefit one iota,'' she said. The country no longer sells passports, according to Bogdan.

The situation is complicated by a political crisis. Nauru's 18-member parliament has been stalemated since March, when the speaker defected to the opposition, giving pro- and anti- government forces nine votes each. Since then, no budget bill has been passed.

Government worker salaries are 11 months and $17 million in arrears, said Kieren Keke, 33, an opposition lawmaker who is also the island's director of medical services.

Payment Date Extended

Only government payment from Australia, 3,000 kilometers away, is saving Nauru from collapse, according to the Asian Development Bank. Australia began paying Nauru $7 million a year in 2002 to temporarily house on the island asylum-seekers who had tried to enter Australia illegally on boats.

``The situation on Nauru is dire,'' Keke said. ``It's been caused by a combination of mismanagement, foolish investment, ignorance and corruption.''

The island's leaders are unlikely to gain refinancing for Nauru's Australian properties, said Parbery, the receiver. Asian Development Bank estimates show the properties are mortgaged to 83 percent of their value.

When the loan became due in January, General Electric agreed to extend payment by 120 days before appointing receivers, said Karen Donaldson, the company's Melbourne spokeswoman.

Company officials also met Nauru leaders Harris and Clodumar. ``GE has been working over an extended period of time with Nauru to resolve this matter,'' Donaldson said.

Financial Center

The property holdings comprise three Australian hotels, the Royal Randwick Shopping Centre in Sydney and the flagship Nauru House in Melbourne's financial center, which Nauru built in 1977.

The interest rate agreed was 8.985 percent over five years, with General Electric also receiving 20 percent of the increased value of the properties -- $12 million on top of the principal, Nauru spokeswoman Bogdan said. Nauru always hoped to be able to repay in full, she said. An Asian Development Bank report in April described the properties as ``relatively expensively mortgaged.''

General Electric's Donaldson declined to discuss the loan terms, citing client confidentiality.

``It's very disappointing that a big American corporation like GE can bring so much difficulty to a small island state,'' Bogdan said.

Lunar Landscape

General Electric dwarfs Nauru in terms of financial and human resources.

The parent company's $133.6 billion in sales last year are 2,217 times greater than Nauru's $60 million gross domestic product. It has 25 times more employees than Nauru has people.

``GE has been more than patient,'' said Parbery. ``And our instructions are that we must work to achieve the best outcome not just for GE, but also for the Nauruans.''

For a century, Nauru survived on sales of phosphate that once covered 80 percent of the island. Profits were handled by the government-run Nauru Phosphate Royalties Trust, which also took out the General Electric loan.

Today, strip mining has left Nauru resembling a lunar landscape. The islanders live on a coastal corridor 150 meters to 300 meters wide that encircles the barren interior.

Post-Independence Millionaires

It's a far cry from the lush tropical sight that greeted 18th-century European whalers, who named it Pleasant Island.

In 1888, Nauru was annexed by Germany. After World War I, a League of Nations mandate put it under the joint administration of Britain, Australia and New Zealand, which mined and exported the phosphate. During World War II, Nauru was occupied by Japan before reverting to the joint administration.

When Nauruans were granted independence in 1968, each man, woman and child was worth $2.4 million in today's dollars, according to economist Hughes.

The islanders spent tens of millions of Australian dollars to create national air and shipping lines, said Robert Keith- Reid, publisher of Fiji-based Islands Business magazine. By the 1970s, Air Nauru had seven planes flying to Japan, the U.S. and Australia, and two ships carrying phosphate and general trading materials.

For its citizens, the government provided free housing, education and health care, and tax-free jobs. Workers imported from other Polynesian islands such as Kiribati and Tuvalu did the phosphate mining.

Houston Properties

Millions more went on real estate, said Bogdan, Nauru's spokeswoman. Investments were spread over Washington; Portland, Oregon; Houston, Hawaii, Guam, the Philippines, Marshall Islands, Australia and New Zealand. Only the Australian portfolio, the Raytheon Building in Houston and a house in Houston remain.

``Leonardo: A Portrait of Love,'' a musical that opened at the Strand Theatre in London's West End on June 3, 1993, and closed on July 10 the same year, cost an additional $3.5 million, Bogdan said.

No longer able to grow taro, papaya and breadfruit, the islanders have grown fat on a diet of imported processed food, said lawmaker Keke.

Almost half the population over 50 has diabetes -- the second-highest incidence in the world -- according to Paul Zimmet, director of the Melbourne-based International Diabetes Institute. If 70 kilograms (154 pounds) is the ideal body weight, the average Nauruan weighs 40 percent to 50 percent more, he said. ``It's a quite horrific situation,'' Zimmet said.

Life expectancy is 58 for men and 66 for women. The last president, Bernard Dowiyogo, a diabetic, died last year at 57 while visiting the U.S. The present incumbent, Harris, is also a sufferer, according to Bogdan.

International Protest

To raise extra funds, Nauru started selling passports and banking licenses. After both programs drew international criticism, according to the U.S. State Department's Bureau of East Asian and Pacific Affairs Web site, Nauru's government agreed to shut them down.

The island remains on the OECD's money-laundering list because the government has failed to provide necessary information, said Helen Fisher, a Paris-based spokeswoman for the OECD's Financial Action Task Force on Money Laundering.

Australia refused to bail out Nauru over the General Electric loan. Foreign Minister Alexander Downer last month promised to send a treasury official at a date to be fixed to try to bring order to the island's finances.

One bright spot: With government salaries on hold, Nauruans are returning to their traditional lifestyle of living off the sea, Keke said. ``The prevalence of diabetes may fall dramatically over the next decade,'' said Zimmet of the Diabetes Institute.