LABUAN — The book Izzam Shah Ariff is holding oozes opulence. The paintings reproduced in it are originally from the collection of Bank Negara Malaysia. They are by renowned local artists on the Malaysian island Labuan, and their images stretch over double pages on beautiful, high-quality paper.

On the terrace of the Financial Park, the building where banks, legal offices and insular financial intermediaries can all be found, Ariff shows the book to each visitor. “What’s missing in Labuan is an international reputation,” says the assistant director of Labuan’s Financial Supervisory Authority (FSA). “But we’re trying to change that.”

It is nearly 6 p.m. in this tropical region close to the equator. Off the coast of Borneo, the setting sun bounces off the oil rigs’ supply ships, scattered around Labuan’s bay. The central mosque’s loudspeakers sound out calls to prayer. The financial sector here dreams of competing with Singapore or Hong Kong, but this place looks a lot more like a sleepy seaside village than a Far Eastern “dragon.”

Labuan is “offshore” in more ways than one. There is oil here — lots of it — in the Brunei Gulf, the sultanate considered to be one of the world’s richest states. Labuan is also a member of the despised family of tax havens that the Organization for Economic Cooperation and Development (OECD) is trying to bridle.

It all began in 2010, when the Malaysian government decided to attract capital from rich Muslim countries so that it could develop a sort of Islamic finance industry. But capital influx has given way to legal shelters and discretion. “We have made changes to our legislation and allow, since 2010, the creation of trusts and foundations specially designed for high-net-worth individuals,” says Normala Mat Som, a 30-year-old lawyer specializing in creating the kind of paperwork behind which nomadic capital from all over the world hides when its owners want to avoid tax authorities.

Som, whose office is on the third floor of the Lazenda Commercial Center, summarizes what a tax haven is in this “palm tree jurisdiction.” Her office is a 10-minute walk from the ferry terminal in the sticky Asian heat. In the streets, electronic cigarettes and duty-free liquor stores compete for customers who come from the continent. Further along, at the bottom of the stairs of his building, a dozen plaques with exotic company names set the tone. Upstairs are four legal experts, all young women with their hair tucked under elegant headscarves. There are three computers, two printers and piles of paperwork. And, on the wall, law diplomas from Kuala Lumpur and Kota Kinabalu, the neighboring Malaysian state Sabah’s capital.

Labuan's Financial Park — Photo: CEphoto, Uwe Aranas

Som’s firm, Labua Ins International Trust, is one of the latest to join the list of 35 trust companies to be accredited by the FSA and authorized to create structures to receive the non-residents’ finances. Except that, unlike her competitors, the lawyer — who, moreover, is married to an FSA official — specialized in another kind of legal instrument: foundations. As in Liechtenstein, they allow capital holders to name the administrators of their wealth themselves, instead of entrusting lawyers to handle it.

“Our goal is to attract Europeans as well. Those who, today, have placed their money in Liechtenstein, Switzerland and Luxembourg,” the lawyer says. Foundations have the advantage of being easily passed by inheritance. The name and address of the ultimate beneficiary appear in a separate notarized register — an additional guarantee of confidentiality.

In Labuan, the register for these is also decentralized, so it’s inaccessible in the case of a classic exchange of information between tax authorities. Better still, a foundation can be opened by a company registered in Singapore, Hong Kong or Panama. “The procedure to follow is simple,’ says Som adds. It costs about $2,000 to open one. “We then open a currency account for you at CIMB — Malaysia’s main bank — or at HSBC. Then you provide this foundation with any capital you want.” She then adds, without a single trace of sarcasm, “You know, a lot of my customers use these foundations for charitable purposes.”

Labuan looks nothing like the typical hectic financial center. Its strong point is that it's not under the OECD’s microscope anymore. In June 2009, during the G20 summit in London, the small Malaysian island found itself on the blacklist of states “that did not commit to comply with international standards.” But because Kuala Lumpur’s authorities have since then signed the required number of bilateral conventions, the pressure eased. As an emerging country with an important middle class, Malaysia even managed to make everyone forget that it still has not signed the OECD’s Multilateral Agreement, the international cooperation’s cornerstone. It is true that its specialty, Islamic finance, is not the primary concern of the West, which prefers to keep an eye on Jersey, the Seychelles, Panama or the Virgin Islands.

This strategic rock, which the Japanese occupied during the Pacific war, is making the most of being in a grey zone. With great success. Zizina Sahmat, one the Financial Park’s directors, is particularly proud of the annual offshore finance dinner that gathers the elite of Asian banks here. She is also proud of the tenants she has attracted to her 20-story complex facing the South China Sea: Crédit Suisse, UBS, BNP Paribas, JP Morgan and Deutsche Bank, among them. They are all here, mostly represented by Asian executives.

The official line is that they are here to support the numerous oil companies. Another excuse has something to do with aeronautics. These are “screens,” according to Charles Santiago, a Malaysian Parliament member. “Labuan is becoming a tropical safe haven where the money it guards isn’t always clean,” he worries. Meanwhile, fiscal tracking is escalating in Singapore, the region’s financial hub. According to the FSA, between January and May 2013, more than 540 billion dollars have passed through Luban’s foundations or trusts. That's already more than during the whole of 2012.