As I said yesterday, Vanuatu is a group of 80 islands in the South Pacific Ocean, about three-quarters of the way between Hawaii and Australia.

And most recently, this small tropic paradise is gaining a new reputation as a “tax haven.” But does this island chain deserve that title?

we review the laws, political stability, economic climate, available legal entities, the tax situation, financial privacy rules, and the overall financial reputation of a jurisdiction. (Our top favorites remain Switzerland, Panama, Liechtenstein, and Hong Kong.)

For almost 40 years, Vanuatu certainly has been known to some as a tax haven. That explains why so many accountants, bankers, and lawyers are clustered in this small island nation.

But the archipelago’s reputation as an offshore financial center has been highly questionable, to say the least.

In 2000, the Asia-Pacific Group on Money-Laundering claimed the Russian mafia was laundering billions of dollars through offshore banking systems in the Pacific, including Vanuatu. There are about 2,000 registered institutions offering a wide range of offshore banking, investment, legal, accounting, and insurance and trust company services. Vanuatu also maintains an international shipping register in New York City.

In an unprecedented action in December 1999, a group of leading international bankers, pressured by the U.S., placed a ban on U.S. dollar denominated transactions involving three Pacific island nations - Nauru, Palau, and Vanuatu. The bankers accused them of laundering money for the Russian mafia and the South American drug cartels. At the time Vanuatu had 63 licensed offshore banks.

These bankers put a banking ban on these three countries because they were concerned about a report issued by the OECD’s Financial Action Task Force. The report called Vanuatu a “jurisdiction of prime concern” for money laundering because of these same mafia and drug cartel concerns.

Perhaps this small country is eager to distance itself from this past history, because the Vanuatu Government now welcomes outside investment to help develop their country.

The lack of income tax, capital gains tax, death and estate tax is an obvious attraction for outside investors. Plus, the country has no exchange controls. In 2002, following increasing international concern over money laundering, Vanuatu increased oversight and reporting requirements for its offshore sector.

But it was not until 2008 that Vanuatu agreed to release account information to other governments or law enforcement agencies. International pressure, mainly from Australian tax collectors, influenced the Vanuatu government to move to increased transparency.

Tax police raids in Australia this year have spurred a debate on whether Vanuatu will remain a tax-free haven.

Bottom line: We don’t recommended Vanuatu as an appropriate offshore financial haven, because of the history and other reasons stated above. But we also steer clear of this haven because it has a less developed offshore professional sector than other havens. Also, the government is not stable at all.

We wish the Vanuatu islanders well, and we remain open to change our current opinion. But in the meantime, there are too many other well-established offshore financial centers to choose from that deserve more serious consideration.

Depending on who you believe (and how they define them), there are any number of “tax havens” in the world.

“Tax havens” are defined as financially attractive jurisdictions that impose low or no taxes. They also typically roll out the welcome mat for foreigners willing to invest, bank or do business there.

With all the pressure put on European tax havens such as Liechtenstein in recent years, , some folks seem to be looking for alternative havens - especially the ones you might call the “far-out tax havens.” Perhaps these adventuresome folks think they can run and hide, but my advice is to be very careful where you go.

For instance, in the last few months I’ve received several inquiries about the Republic of Vanuatu. My readers want to know if it could be a good place for their offshore banking, asset protection plans and estate planning.

I can hear you now — where in the world is Vanuatu? — assuming it is in this world.

Vanuatu is a tropical archipelago group of 80 islands (about 65 of them inhabited). These islands cover 12,200 sq km (slightly larger than Connecticut) in the South Pacific Ocean, about three-quarters of the way between Hawaii and Australia.

The capital city is Port-Vila (on the island of Efate). Some 215,446 people live there, split between English and French speakers.

The different languages reflect Vanuatu’s colonial heritage when it was known as The New Hebrides. Multiple waves of colonists migrated to the New Hebrides in the millennia preceding European exploration in the 18th century. The British and French, who settled there in the 19th century, agreed in 1906 to an Anglo-French Condominium, which administered the islands until independence in 1980. At that time, the new Republic of Vanuatu was born.

At its height, about 12,000 expatriates lived in the islands. But after Vanuatu declared its independence, only people of Vanuatu could own land there. Therefore the mainly French and British expat community shrank to less than 3000.

Today, the expat population is about 8000 and growing, with heavily taxed Australians and New Zealanders in particular finding the island’s lifestyle — and lack of taxes — to their liking.