Palau was initially settled over 4,000 years ago, probably by migrants from what today is Indonesia. British traders became prominent visitors in the 18th century, followed by expanding Spanish influence in the 19th century. Following its defeat in the Spanish-American War, Spain sold Palau and most of the rest of the Caroline Islands to Germany in 1899. Control passed to Japan in 1914 and during World War II the islands were taken by the United States in 1944, with the costly Battle of Peleliu between September 15 and November 25 with more than 2,000 Americans and 10,000 Japanese killed.
The islands passed formally to the United States under United Nations auspices in 1947 as part of the Trust Territory of the Pacific Islands. Four of the Trust Territory districts formed a single federated Micronesian state in 1979, but the districts of Palau and the Marshall Islands declined to participate.
Palau, the westernmost cluster of the Caroline Islands, instead opted for independent status in 1978, approved a new constitution and became the Republic of Palau in 1981, and signed a Compact of Free Association with the United States in 1982. After eight referendums and an amendment to the Palauan constitution, the Compact was ratified in 1993 and went into effect on October 1, 1994, marking Palau independent de jure (after Palau was independent de facto since May 25, 1994, when the trusteeship cancelled). Legislation making Palau an "offshore" financial center was passed by the Senate in 1998. In 2001, Palau passed its first bank regulation and anti-money laundering laws.