AGANA, Guam -- The territory of Guam is hoping to stimulate its offshore banking industry by dropping out of the American tax system while retaining the protective umbrella of the U.S. flag.

"We want to have our cake and eat it too," said Dave Santos, Guam's former banking commissioner and revenue director.

"Everybody wants to maintain U.S. ties, but we want to have more flexibility - more autonomy in dealing with these things so the flow of capital is not restricted," Mr. Santos said in an interview.

Commonwealth Status Sought

Guam government officials are battling for the island to be turned into a U.S. commonwealth so that it can design its own tax system. The main selling point of commonwealth status, similar to Puerto Rico's, would be that investments would be considered safe because on American soil.

Restrictive federal laws on currency transactions would be abolished if Guam were removed from the U.S. federal tax system, Mr. Santos said.

Guam, officials are looking hungrily at opportunities to attract business after Hong Kong is handed over to China's control in 1997.

"If the Chinese national government does not keep their promises, those guys will be looking for places to put their capital," Mr. Santos said. Guam has a lot to offer because it is "not going to be subject to coups d'etat - the government is not going to be changed overnight."

Overly Optimistic?

But William Williams, a lawyer who handles offshore banking accounts on Guam, said turning the U.S. territory into a haven for capital fleeing Chinese rule might just be a lot of wishful thinking.

Turning Guam into a tax haven "would not be acceptable for the federal government in Washington," Mr. Williams said. "Offshore banking has to operate in a tax-free environment. We can never be a tax haven."

The main attractions of the island are "low country risk and an excellent communications system," the banking lawyer added. "Unless there's some political change, I don't see any particular revival" of offshore banking on Guam.

But he conceded Washington might agree to a modified tax system, which would "allow foreign companies to stash cash on Guam."

Banks May Guard Turf

Offshore banking activity on Guam has declined over the past few years, officials said, and local banks such as the Bank of Guam could hamper efforts to encourage offshore banking.

"Some of the locally chartered banks might want protectionist legislation even if offshore banking will not affect them," Mr. Santos said.

He said the island should be allowed to determine its own rules. "Laws worked out 9,000 miles away in Washington are worthless here," he said. People living on Guam are "more concerned about what the Japanese think because if the Japanese say no more tourism, we're dead meat out here."

Guam's economy is less affected by recession on the U.S. mainland than by an estimated $ 1 billion pumped into the economy by free-spending Japanese tourists.

"Guam is willing to do [offshore banking], the ex-regulator said. "I think it's just a matter of government policy, but we just want to become the U.S. version of Hong Kong."

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