Small island nations lacking in exploitable natural resources and industrial capacity often develop into financial hubs, tax havens or other offshore capital services to supplement national income derived mainly from tourism to their palm-dotted beaches and lagoons.

That holds true for independent islands in the Pacific Ocean and the West Indies — and those in the Indian Ocean region are no exceptions. A report compiled by the Consortium of Investigative Journalists (ICIJ) in 2014 quotes British money-laundering expert Euam Grant saying that many “new havens” have emerged in the Indian Ocean region.

“We are talking of Singapore, the United Arab Emirates and, increasingly, Mauritius and Seychelles,” he said. But offshore banking and shady transnational business deals often lead to political instability in what were already fragile island societies. And that instability in the Indian Ocean has in turn led to vulnerability to manipulation from powerful outside forces.

There are dirty deals aplenty flowing through the region. For instance, Maldives, a small independent island nation in the Indian Ocean highly reliant on international tourism, was in the early 2000s implicated in a US$800 million scheme to buy subsidized oil through its state trading organization in Singapore.

The illicit oil was sold on through an intermediary to Myanmar at black market rates at a time when its military regime was under strict United States and European Union sanctions.

Comoros, another independent small island nation in the Indian Ocean, has been left out of both the tourism and offshore banking boom and remains one of the world’s poorest countries. Since becoming independent from France in 1975, Comoros has experienced more than 20 coups, some involving foreign mercenaries.

Indian Ocean political map. Countries and borders. World's third largest ocean division, bounded by Africa, Asia, Antarctica and Australia. Named after India.  Illustration. English labeling. Vector.
The Indian Ocean is the world’s third largest, bounded by Africa, Asia, Antarctica and Australia. Image: iStock/Getty Images

Mauritius, often referred to as the “pearl” of the Indian Ocean, is a modern society with the highest living standards in Africa, to which it belongs geographically. Modern, high-rise buildings tower over well-preserved colonial mansions and merchant houses in the capital Port Louis. There was no native population on the island when the Portuguese as the first Europeans arrived there in the 16th century.

Mauritius then changed hands from the Dutch to the French and finally the British. Slightly more than half the population today of 1.3 million people is of Indian descent while the rest trace their ancestry to Africa, China and Europe. For historical, cultural and ethnic reasons, India became Mauritius’ closest economic partner and political ally when it achieved independence from Britain in 1968.

But three years prior to independence — and as a condition for Britain’s granting Mauritius independence — the Chagos Archipelago, a group of islands to the north in the Indian Ocean, was separated from the colony and turned into a new entity called the British Indian Ocean Territory. Usually referred to by its sinister sounding acronym BIOT, it is Britain’s only remaining possession east of the Suez.

At the same time, the entire population of about 2,000 people, a mixture of Africans, Indians and Malays, were forcibly moved to Mauritius — and, in 1971, Britain leased the main island, Diego Garcia, to the United States to build a military base. The strategically located Diego Garcia has since grown into the US’ most important military installation in the region.

In this October 18, 2015 US Navy handout photo, the aircraft carrier USS Theodore Roosevelt (CVN 71) and Japanese Maritime Self-defense Force Akizuki-class destroyer JS Fuyuzuki (DD-118)(L) transit alongside the Indian Deepak-class fleet tanker INS Shakti (A 57)(C) during a replenishment-at-sea exercise as a part of Exercise Malabar 2015. Malabar is a continuing series of complex, high-end war fighting exercises conducted to advance multi-national maritime relationships and mutual security.  AFP PHOTO / HANDOUT  / US NAVY / MCS CHAD M. TRUDEAU           == RESTRICTED TO EDITORIAL USE / MANDATORY CREDIT: "AFP PHOTO / HANDOUT / US NAVY / MCS CHAD M. TRUDEAU  "/ NO MARKETING / NO ADVERTISING CAMPAIGNS / DISTRIBUTED AS A SERVICE TO CLIENTS == / AFP PHOTO / US NAVY / MCS CHAD M. TRUDEAU
The USS Theodore Roosevelt (R) aircraft carrier, Japanese Maritime Self-Defense Force destroyer JS Fuyuzuki (L) alongside the Indian Deepak-class fleet tanker INS Shakti (C) during the Malabar Exercise 2015. Photo: AFP/ US Navy Handout

It was used as a supply base during the First Gulf War in 1990-1991, the invasions of Afghanistan in 2001 and Iraq in 2003, and in today’s ongoing conflicts in the Middle East and Afghanistan. It is also widely believed that prisoners taken in Afghanistan in late 2001 were taken to Diego Garcia — a secluded military base visited by few civilians — for interrogations.

In 2015, former US Secretary of State Colin Powell’s ex-chief of staff, Lawrence Wilkerson, alleged that Diego Garcia had been used by the US Central Intelligence Agency for undisclosed “nefarious activities.” The original inhabitants of the Chagos Archipelago, who are known as Chagossians, have fought several court battles for the right to return home, so far to no avail.

While BIOT will continue to be off limits to the Chagossians as well as anyone else who is not granted permission by the US military, Mauritius has become a top-notch tourist paradise. With its beautiful beaches, fancy golf courses and luxury hotels, South Africans, Europeans, North Americans and, increasingly, hordes of Chinese have flocked to the tropical island. Around 1.2 million people visit Mauritius annually, equivalent to the island’s entire population.

In recent years, both Chinese tourism and economic cooperation have grown in scale and significance. China recently funded the construction of a new terminal at Mauritius’ international airport through a generous loan from the Export-Import Bank of China. Chinese firms are now involved in more than 40 other projects on the island.

Reports have noted that China’s state-led approach to foreign investment is muscling India aside in its traditional backyard, including through a US$700m investment in a special economic zone that has serviced Beijing’s expansion in Africa. China combines business and government interests, which is in stark contrast to India’s more fragmented style that often has less backing from the state.

Mauritius, South, Bel Ombre domaine, Heritage resort, five stars Luxury Hotel Telfair, chinese tourists
Chinese tourists at a Mauritius beach resort. Photo: AFP Forum

This development has become a worry among some circles in Port Louis that appear to be more conscientious than the authorities. As the local Mauritian financial analyst Sadek Ruhmaly pointed out in an interview with a local newspaper: “Over the last few decades, Mauritius has been prey to shifts in its global financial image and goodwill on international financial markets: black-listed, then grey-listed as an offshore tax haven for tax evasion.”

Despite its somewhat sordid reputation as a tax haven and center for offshore banking, Mauritius remains the most prosperous and politically stable of the independent states in the Indian Ocean. But it is also there where India’s and China’s interests most openly collide. As such, Mauritius is bound to end up on the front lines of the new Cold War brewing in the Indian Ocean region.

Like Mauritius, Seychelles was also uninhabited before the Europeans arrived and brought slaves and laborers from Africa and Asia. It became independent in 1976, but soon became a socialist one-party state under France-Albert René, who struck up a friendship with the Soviets and even the North Koreans.

René eventually resigned voluntarily in 2004 and a more neutral government took over — and the islands have since become a favorite destination for wealthy honeymooners, film stars and assorted celebrities.

But the island paradise has also become a haven for dirty money — even more so than Mauritius. Despite the small population of Seychelles — less than 100,000 people — the income from tourism alone cannot sustain its economy. According to the ICIJ report: “Seychelles, a thousand miles from anywhere, is an offshore magnet for money launderers and tax dodgers.”

“In 2010, the government of Kazakhstan issued an arrest warrant for Mukhtar Ablyazov, a banking tycoon who has been accused of using Seychellois companies as part of a scheme that plundered billions of dollars from Kazakhstan’s BTA Bank,” the report noted.

The following year, a subsidiary of the Reserve Bank of Australia admitted that it had channeled millions of dollars in bribes intended for Nigerian officials through a shell company in Seychelles linked to a convicted white-collar criminal.

Seychelles and China have had diplomatic relations since 1976 and ties today are known to be close and cordial. In 2011, the Seychelles government even offered China the possibility of establishing a naval presence on the island, ostensibly to fight piracy off the coast of Somalia. The offer was apparently not followed up, but it raised alarm bells in India.

Chinese President Hu Jintao (L) and his Seychelles counterpart James Michel wave 10 February 2007 ad they tour a housing estate in Victoria. Hu ended his eight-nation tour of Africa with a pledge of 12 million dollars in aid for the Seychelles, part of China's efforts to build economic and political ties with resource-rich Africa to fuel China's fast-growing economy. AFP PHOTO/STRINGER / AFP PHOTO
Chinese President Hu Jintao (L) and his Seychelles counterpart James Michel during a February 2007 visit to Victoria. Photo: AFP/Stringer

Seychelles had been of little interest to China until 2007, when then Chinese president Hu Jintao visited as part of a tour of Africa. Five bilateral agreements were signed for economic and technical cooperation as well as investment. According to the Indian strategic think-tank the Institute for Defense Studies and Analysis: “Hu’s visit signaled China’s strategic interest in the region for the first time.”

In December 2011, China’s then defense minister general Liang Guanglie led a 40-member military delegation to Seychelles, a country with only a 500-man strong defense force of its own. After the military came the tourists. Last year, more than 14,000 Chinese tourists visited Seychelles, still fewer than from European countries but the numbers are fast rising.

Maldives, another Indian Ocean island paradise, has also become a favorite destination for Chinese tourism. In 2015, 1.2 million tourists visited Maldives, of whom 360,000, or nearly 30%, came from China. Fewer Chinese arrived last year, but they still accounted for far more than from any other global country.

While tourism may seem innocuous, it also means the Maldives has become economically dependent on China. Tourism accounts for 28% of Maldives’ gross domestic product (GDP) and more than 60% of its foreign exchange, much more than fishing, the second largest sector of the economy.

Chinese President Xi Jinping (2nd L) and his wife are welcomed by Maldives President Abdulla Yameen (3rd R, front) at the Male jetty on September 15, 2014. China's President Xi Jinping enlisted the Maldives' backing for a "21st century maritime silk road" on Monday as he began a tour of South Asia in the strategically located Indian Ocean island chain. AFP PHOTO/ HAVEERU / MOHAMED SHARUHAAN WAHEED / AFP PHOTO / HAVEERU / MOHAMED SHARUHAAN WAHEED
Chinese President Xi Jinping (2nd L) and his wife are welcomed by Maldives President Abdulla Yameen (3rd R, front) at the Male jetty on September 15, 2014. Photo: AFP/ Mohamed Sharuhaan Waheed 

But the wealth is unevenly distributed and Maldives has recently been wrecked by political instability and popular discontent with increasingly heavy-handed rule.

Like Comoros but unlike Mauritius and Seychelles, Maldives has a homogenous population of Muslims. In recent years, hundreds, some sources claim as many as 800, young Maldivians have gone to Iraq and Syria to fight alongside Islamic State.

Considering that the total population of the Maldives is only 345,000, that’s a remarkably high number. Not even India, where 14% of the country’s 1.2 billion people are Muslims, has sent that many fighters to the Middle East.

Given the diversity and complexities of the Indian Ocean territories, it is reasonable to assume that more severe conflicts may be on the horizon.

The reason could be that the Maldives is a conservative, Muslim society where unemployment, especially among the young, is rampant — and the islands, like other Indian Ocean territories, have become a playground for jet-set tourism from the West. Rich, and often scantily clad, Westerners and now Chinese roam the beaches and shopping centers while poor locals stand by and watch.

Given the diversity and complexities of the Indian Ocean territories, it is reasonable to assume that more severe conflicts may be on the horizon.

All the ingredients for instability are in place: a rising China whose strategic interests are colliding with those of India and its American and Japanese allies, a major US military base on an island leased from Britain, the Australians watching developments from their island outposts, the French with a huge but little known presence in the region, and small island nations susceptible to the influence of everyone from China’s military to Kazakh bankers to Islamic extremists.